“The issue is always the same: the government or the market. There is no third solution.” ~Ludwig von Mises

During recent years, China’s cheap industrial products have overwhelmed the global market, distorted price mechanisms, and caused massive disruptions. What stands out as the most disruptive is a wide array of green tech products that include electric vehicles, batteries, solar panels, and wind turbines. What lies behind these disruptions is China’s huge volume of industrial subsides from both national and local governments. The CCP regime’s lack of transparency and accountability makes it a daunting task to identify the subsidized targets and to evaluate the size of these subsidies. Undaunted by such difficulties, Kiel Institute for the World Economy published a policy brief that seeks to unveil the secrecy of China’s industrial subsidy mechanisms.

In the beginning, the report makes an overview of China’s industrial subsidies. As for the targets, in 2022 more than 99% of public-listed Chinese firms benefited from government subsidies. As for the size, it is estimated that government support amounts to 4.5% of revenue for China’s industrial firms. Even by conservative estimate, China spent 1.73% of its GDP on industrial subsidies in 2019. Subsidies cover both the demand-side and the supply-side, and may take on various forms of preferential treatment in administrative procedures, privileged accesses to critical materials, government procurement with domestic preference, and forced technology transfer from foreign companies to local ones. Besides, there has been a rising trend of direct grants to favored green-tech giants. For example, in 2020 the EV maker BYD received 0.2 billion euro of direct subsidies, which increased to 2.1 billion euro in 2022.

The report uses three specific industries to grasp the reality of China’s industrial subsidies: battery electric vehicles (BEV), wind turbines, and railroad rolling stock. These three industries are chosen because of their critical role in “Made in China 2025 Strategy”, high relevance to green transformation, and deep involvement in the European Commission’s official investigation. All three industries follow similar patterns.  The early stage features supply-side and demand-side government support. The growth stage features protective requirements in local contents, joint venture, and procurement procedures. All these requirements aim to promote corporate scaling-up and maintain dominance in the home market.

Government subsidies have been the key factor in turning China into the world’s largest producer and the greatest consumer of BEV. Though China is the not the only country that subsidizes BEV, the China model pays directly to manufacturers and targets only the domestic BEV producers. Though being phased out in 2022, purchase subsidies had been critical in shaping the market of New Energy Vehicles (NEV), which include the likes of BEV and PHEV (plug-in hybrid vehicles). In 2022, the total amount of purchase subsidies reached 4.2 billion euro and covered 3.2 million NEVs. The largest recipient was BYD (1.6 billion euro), followed by Tesla (0.4 billion euro) and many other Chinese firms as well as three joint ventures with Volkswagen and General Motors. Even as purchase subsidies phased out, BEV makers still received exemption from purchase tax, which amounted to 3,920 euros per car. Besides direct monetary support, other forms of government support for BEV makers include lower equity requirement, purchase subsidies for intermediate goods, and discriminatory government procurement.

China’s wind turbine industry’s early development relied on government’s purchase guarantee in wind energy, and local contents requirements for wind farms. These measures, along with discriminatory treatment in award procedures, virtually drove Western turbine makers out of China’s domestic market. The Western makers who manage to stay in China, such as Siemens Gamesa and Vestas, produce wind turbines only for foreign markets. Direct monetary grants to wind turbine manufacturers account for the major part of government support. The top two turbine makers, Goldwind and Mingyang, received 0.14 billion euro respectively in subsidy from 2018 to 2022. Considering the size of revenue, in 2022 subsidy for Mingyang equated to 1.3% of its annual revenue, while subsidy for Goldwind equated to 0.5%. Besides direct grants, other forms of indirect support include preferential land procurement, below-market financing arrangements, and subsidies for key inputs, particularly steel and rare earth minerals, as well as shipping and shipbuilding.

China’s railway rolling stock industry also benefits from huge government subsidies. The major players are China Railway Rolling Stock Corporation (CRRC) and China Railway Signal & Communication Corporation (CRSC). From 2016 to 2020, 2.2% of CRRC’s revenue and 1.6% of CRSC’s revenue came from government’s monetary grants. CRRC and CRSC also receive indirect support such as export credits, preferred bank loans, facilitation in land acquisition, preference in government procurement, foreign makers’ forced technology transfer, and selective enforcement of competition policy.

What should EU do to counter China’s industrial subsidies? The report evaluates the possible effects of EU’s countervailing measures. Tariffs on subsidized imports may lead to higher costs of green technology products, thus raising the price of EU’s green transition. Tariffs might backfire and hurt European makers in China. Moreover, tariffs focus on the EU market, and neglect third-country markets, where exported European products still need to compete with subsidized Chinese products.

On the other side, tariffs may accelerate the “de-risking” process that reduces EU’s dependence on China for green technology products, set up EU’s early-mover advantages in GPT (general purpose technology), and strengthen EU countries’ national security. At the same time, EU must take into account China’s retaliatory power in imposing export restrictions on key inputs for EU manufacturers, who serve not only the European market but also the other continents. With all these considerations in mind, the authors suggest EU officials initiate trade negotiations with China, and urge China to scrap public subsidies, especially in green technology products. As China is grappling with slowdown in economy and showdown with the U.S., the authors think there stands a fair chance that EU and China find a way to address the problems that matter the most to each of them.

For the last decade, Europe’s economic growth has been largely driven by Russia’s stable energy supply and China’s huge market demand. As EU’s reliance on China increases, its bargaining power with China decreases, making EU more vulnerable to China’s retaliatory actions. EU may need to rethink its strategic priority and strengthen its economic resilience so that Europe will not be deterred by China’s unwarranted market power obtained not through competence but through preference.

The article is based on KIEL Institute’s “Foul Play? On the Scale and Scope of Industrial Subsidies in China”, authored by Frank Bickenbach, Dirk Dohse, Rolf J. Langhammer, and Wan-Hsin Liu. Read the full report