Green technologies are increasingly at the center of international trade and technology policy. The Chinese government has recognized the future importance of such technologies and the related industries early on and is particularly active in this area. China has become a world leader in photovoltaics and battery cell production and is trying to do the same in electric vehicles, railway rolling stock and wind power. Subsidies are a key instrument in the Chinese government’s strategy to support the development of these industries. The massive subsidization of Chinese companies has led to fierce criticism in the West, however.
The European Commission accuses the Chinese government of distorting competition with subsidies for electric cars and has launched an investigation into public support for electric cars in China. The President of the European Commission Ursula von der Leyen said in her “State of the Union Address” that global markets were being “flooded with cheaper Chinese electric cars,” posing a possible threat to the European Union’s fledgling and promising electric car industry. The anti-subsidy investigation is therefore intended to determine whether manufacturers of battery electric vehicles (BEV) in China benefit from countervailable—i.e., specific and advantageous to the receiving companies—subsidies and whether these are causing or threatening to cause economic damage to BEV manufacturers in the European Union (EU).
Similar discussions have been held regarding subsidies to Chinese producers of railway rolling stock and of wind turbines. In February 2024, the European Commission had launched an investigation into China Railway Rolling Stock Corporation (CRRC) for allegedly using subsidies to undercut European competitors in a public procurement procedure. With respect to wind turbines, no official anti-subsidy investigation has been launched so far. However, leading EU officials have argued that massive subsidies to Chinese manufacturers are encouraging cheap imports from China into the EU, driving European wind turbine manufacturers to the brink of ruin.
Even though these allegations are to be taken seriously, the data situation is currently highly unsatisfactory and the requirements for legally secure interventions by the European Commission, i.e., the imposition of countervailing duties on Chinese imports, are high. And even if the requirements for legally secure interventions were met, the question still arises as to whether import restrictions would actually be in the long-term interests of the European (and especially the German) industry and consumers.
The central prerequisite for an adequate analysis and adequate policy measures is reliable data on the scale and structure of Chinese subsidies in the areas mentioned. The available data is currently scarce, partly misleading and even contradictory. Tracking Chinese subsidies is a tough and challenging task for researchers because the Chinese subsidy system is highly complex and intransparent.
The current paper assembles data on overall industrial subsidies in China from different sources and provides some new data based on the analysis of the Chinese government’s most recent final reviews of purchase subsidies for new energy vehicles and the annual reports of the most important Chinese companies in the electric car and wind energy sectors.
The data shows that overall industrial subsidies in China are significantly higher than those in large EU/OECD countries. Depending on the type of subsidies covered and the data sources and methods used, the estimates vary greatly between the different studies, however. For 2019, even according to a very conservative estimate, Chinese industrial subsidies amount to about Euro 221 bn or 1.73% of Chinese GDP. Relative to GDP, industrial subsidies in China would thus be at least three to four times higher than in large EU/OECD countries. According to a more encompassing study, the ratio could be as high as nine (relative to company sales). And this does still not include several forms of particularly hard to quantify government support measures which are arguably also of importance particularly in China. The Chinese government heavily subsidizes companies in the fields of electromobility, rolling stock and wind power, and makes the payment of subsidies conditional on production in China. With BYD (electric cars), CRRC (rolling stock) and Mingyang (offshore wind turbines), Chinese companies have got to dominate the Chinese home market for their products and are increasingly penetrating export markets as well. And even as the Chinese central government has recently abolished some of the large demand-side subsidies in these sectors— such as purchase subsidies for BEV or preferential feed-in tariffs in wind power—central and regional governments continue to support these industries through various other forms of direct and indirect subsidies. Direct subsidies to some of the dominant Chinese companies in these sectors, such as BYD for BEV or Mingyang for offshore wind turbines, have even been increased recently, helping these companies in their attempts to expand beyond China and gain a presence in EU markets.
We attempt to quantify Chinese industrial subsidies in Section 2 and discuss the challenges and potential policy response of Chinese industrial subsidies for the EU in Section 3.
DISCUSSION AND POLICY RECOMMENDATIONS
The empirical evidence presented in this paper confirms concerns and allegations raised by many trading partners against China: China strongly subsidizes those manufacturing industries which rank highly on its economic policy agenda, including many green tech industries. Here industrial policies are targeted to win and defend superiority in green technology, to convert superiority into a leading position as global supplier of key manufactured products, and to become independent of foreign technology. This policy has allowed Chinese green manufacturing industries to scale up rapidly and to start dominating the Chinese home market and increasingly also foreign markets. This is true, e.g., for solar panels or batteries for EVs, where Chinese companies have dominated the EU markets for several years now. And it is increasingly true also for BEV and wind turbines where Chinese companies are only just starting to penetrate EU markets.
The very comprehensive and opaque Chinese subsidy system blurs the difference between domestic subsidies which do not distort trade and subsidies intended to help domestic companies to conquer export markets and thus are trade distortive. Two trading partners stand out, here, as the most important export markets for China, the US and the EU. Each of the two has its own agenda when it comes to dealing with China. The US has set the agenda with a plethora of legislative acts to enforce the “produce in America” strategy. The Inflation Reduction Act is the quantitatively largest one and supports the rise of local content in US non-fossil manufacturing through producer and consumer tax credits. In addition, BEV imported from China face a hefty import tariff of 27.5%. Hence, a trade and tech war with China trying to decouple the country from state-of-the-art IT technology is envisaged by the US through, e.g. restricting high tech exports to China and screening US foreign direct investment in China on risks of losing technology superiority.
So far, the EU has no trade or tech war on its agenda. The European Commission has made clear, however, that is prepared to take stronger actions against subsidized imports from China. In line with this, it has officially launched an anti-subsidy investigation into the import of BEV from China in October 2023. And in February 2024, it had launched an investigation into Chinese rolling stock manufacturer CRRC for allegedly using subsidies to undercut European competitors in a public procurement procedure in Bulgaria, applying for the first time the EU’s newly enacted “Foreign Subsidies Regulation”. In the BEV case, the European Commission argues to have found sufficient evidence demonstrating that imports of BEV from China benefit from subsidies that allow them to rapidly increase their market share in the EU thus posing an imminent threat of injury to the EU domestic industry and de-motivating domestic investment into badly needed full electrification. If these allegations are confirmed in the investigation, the EU could impose retroactive countervailing tariffs against BEV from China.
Pros and cons of an EU intervention
Seen from the textbook lens, there is a strong case against the introduction of such tariffs (restrictions) on subsidized imports. This is substantiated by the view that subsidies are ‘gifts of the donor’ which raise the real income of recipients of gifts (the European consumers) while strengthening their comparative advantages in other non-subsidized sectors. An increase of tariffs/import restrictions on BEV or other imports of green technology products from China would likely lead at least in the short term to higher costs for green technology products in the EU and could make the green transition of the EU economy more expensive and also slow it down. This applies even more to import restrictions on those green technology products for which the EU industry currently has too little capacity to meet the increasing domestic demand such as EV batteries or wind turbines.
Yet, the textbook lens may neglect a dynamic perspective including geopolitical externalities, path dependencies, and the issue of technology control in key industries. Battery cell technology, for example, is not only one of the key technologies in the energy transition, but also qualifies as a general purpose technology (GPT). Early mover advantages and spillovers into related sectors (aviation, underwater shipbuilding, medicine) could make it beneficial to push such technologies and to avoid one-sided dependencies on systemic competitors like China. From a geoeconomic perspective, import restrictions reducing the (increase in) imports from China of products vital for the green transition may, in addition, be considered a welcome contribution to reducing the EU’s reliance on China (‘de-risking’). Or it may even be considered necessary for strengthening national security given the espionage or sabotage risks which are currently being put up against the imports of wind turbines or connected cars (BEV) from China especially in the US.
On the other hand, we also need to consider that the EU has much higher stakes in the Chinese economy than the US as witnessed by the much higher share of EU investment in China and the far greater reliance on imports from China of the EU as compared to the US. Due to China’s strong position as a production base for European firms and as a source of many critical products for the EU market, its retaliatory power against the EU is higher than against the US.33 Hence, the costs for EU industries and consumers of import restrictions on subsidized Chinese goods could increase considerably if the Chinese government were to respond to with countermeasures such as export restrictions on inputs on which the (green tech) industries in the EU are heavily reliant, such as refined rare earths. Such export restrictions would harm the EU industry not just on the internal EU market but also with respect to its exports to China or third-country markets. And export restrictions on necessary inputs are just one of a myriad of possible countermeasures through which China could harm EU companies in the industry directly affected by EU measures or indeed any other EU companies trading with or producing in China. This is likely one reason for why German automobile manufacturers which are heavily engaged in trading, production and R&D in China are rather skeptical about the EU’s investigation into BEV imports from China.
But even without considering possible Chinese retaliatory measures it is far from clear, whether and to what extent EU industry would actually benefit from restrictions on Chinese imports. Take again the case of EU import duties on BEV from China, for example. First, these tariffs would also affect imports of BEV manufactured by European (German) companies in China.
Second, the (direct) effect of EU import tariffs on BEV from China would be restricted to the EU market, only. On third country markets (and in China itself) BEV produced in the EU would still have to compete against subsidized BEV from China without countervailing duties. Third, the effects of import restrictions and thus less intense competition on EU industries’ incentives to invest in R&D and in cost efficient production facilities are ambiguous (from a theoretical point of view).
From a purely industrial economics point of view tariff protection or subsidies for the EU industry could be justified if subsidized imports from China would hinder the EU industry to scale up and achieve the economies of scale necessary to compete internationally. In our view, it seems likely, however, that the industry will be able to substantially increase production in the EU despite increasing Chinese imports. Given the strong increase in demand and the comparatively high transport costs for BEV (or for other heavy and large green energy products such as wind turbines) we would expect that manufacturers will expand production near consumers to reduce shipping costs, as technologies mature. At least in the medium term we would thus expect companies producing in Europe to have a substantial advantage in serving EU customers (the more so as import tariffs for BEV into the EU now stand at 10% even without additional countervailing duties). We would thus also expect Chinese BEV manufacturers to build up production capacities in Europe to serve the EU market (as we have already observed for Chinese producers of EV batteries).
What should the EU do?
In our view, there is a case in favor of driving forward the current EU proceeding against BEV imports from China, and to use the information obtained in this proceeding and the pending decision to enter into negotiations with the Chinese government and to try to persuade it to abolish some the Chinese support measures that are particularly harmful to the EU industry. Given the current weak macroeconomic situation in China, the focus of China’s government on its political conflicts with the US and, at the same time, the relative strength of China’s green product industries, we believe that there is currently a realistic chance for such negotiation to be successful.
bc6aff38-abfc-424a-b631-6d789e992cf9-KPB173_enTo read the abstract published by the Kiel Institute for the World Economy, click here.
To read the full policy brief, click here.