Ducking the issues

David Dodwell says rather than targeting China over subsidies, the US and Europe should examine the effectiveness of their own economic strategies A thoughtful man performs a double take in a mirror at Tsim Sha Tsui. Photo: Eugene Lee

If US President Joe Biden and European Commission President Ursula von der Leyen are to be believed, China’s exporters are trade cheats bent on subverting critically important sectors of their economies and jeopardising American and European national security. At the heart of this devious strategy are subsidies, comprehensively deployed across the Chinese economy, with state-owned enterprises (SOEs) at the core.

Talking to US steelworkers in Pittsburgh recently, Biden was unabashed. “For too long, the Chinese government has poured state money into Chinese steel companies, pushing them to make so much steel …” he said. “They’re not competing. They’re cheating.”

Von der Leyen is also unequivocal, though her primary concern is the threat of China’s electric vehicles (EVs). “Global markets are now flooded with cheaper Chinese electric cars. And their price is kept artificially low by huge state subsidies. This is distorting our market,” she said in her annual state of the union address in September, before announcing an investigation into the scale of the problem.

There is no disputing China’s strategic use of subsidies to shape its economy. They sit at the heart of the “Made in China 2025” industry policy, unveiled in 2015. There is also probably no disputing the threat that this set of policies poses for many leading industries in the United States and Europe.

China’s decade-long focus on reducing fossil fuel consumption and greening its economy has made it a world-leading producer of low-cost solar and windpower equipment, EVs and batteries, creating severe competitive challenges for companies and workers across the US and Europe.

My bet is that the next “big threat” will come from China’s development of hydrogen power and hydrogen-powered vehicles, where estimated subsidies of about US$10 billion are being used to drive competition between 28 private-sector enterprises and four SOEs across the country, and where prices for “green hydrogen” produced by renewable energy is now on a par with the cheapest in Europe.

Manufacturers in the US and Europe are baying for protection. The argument is that protection is needed not just to save jobs, but to ensure national security: that economies cannot afford to have strategically important sectors at the mercy of Chinese manufacturers, even if that means paying more for cars, energy and a wide range of consumer goods.

There are valid concerns about national security – and about “de-risking” economies by ensuring healthy competition and diversity of supply along manufacturing chains – even if the security narrative has in recent years been stretched to preposterous and paranoid extremes. But before resorting to costly and controversial trade protections, a number of questions should be addressed.

Is China distinct in resorting to subsidies as an industrial weapon? What are China’s excuses for the extensive use of subsidies, and is there evidence of malevolent intent? However powerful the temptation to deploy retaliatory protections, would such a response be in the best interests of our economies?

After all, for many small and medium-sized economies that can’t afford subsidies, the temptation is strong to decide that if someone is foolish enough to offer you something at an artificially low price, then you would be foolish not to take it.

Let’s look at these questions separately. The argument that China is a distinctly pernicious user of subsidies sits on weak foundations. Subsidies have been endemic worldwide for decades. Privileged “national champions” are commonly subsidised, often because of their political influence. Farmers are famously cosseted worldwide.

Globally, farm support in 54 countries added up to US$851 billion per year between 2020 and 2022, according to the Organisation for Economic

Cooperation and Development (OECD). Last year, the International Monetary Fund calculated that subsidies for fossil fuels worldwide amounted to US$7 trillion, jumping by US$2 trillion after Russia’s invasion of Ukraine cut oil and gas supplies.

A 2022 report by the IMF, World Bank, World Trade Organization and OECD, drawing on data from Global Trade Alert, identified around 18,000 subsidy programmes worldwide since 2008 – with the number split almost equally between the US, the European Union and China.

The Centre for Strategic and International Studies, an American think tank, estimates that China’s manufacturing subsidies amounted to US$248 billion in 2019, three times more than America’s (US$84 billion) and over 15 times more than Germany’s.

This predated the US Chips and Science Act, which provides hi-tech subsidies worth US$280 billion, and the Inflation Reduction Act, estimated to offer as much as US$1.2 trillion in incentives. Clearly, different methodologies lead to very different calculations of subsidies and their impact.

Such studies also duck the issue of whether subsidies are automatically bad. Subsidies for research and development can be seen as good in stimulating innovation. China’s subsidies aimed at curbing fossil fuel use and encouraging green technologies have been widely regarded as helpful, making EVs cheaper and speeding up the energy transition.

The reality is that China’s subsidies have been more effective than in most parts of the world because they are embedded as an intrinsic part of a distinct economic model. As with differing tax rules or currency policies, subsidies are a natural part of any government’s fiscal tool box. They are good when implemented well, and bad when directed wastefully.

Biden or von der Leyen might do well to examine the effectiveness of their economic strategies instead of building walls that benefit no one.