China's Export Prowess: A Result of Industrial Subsidies or Better Incentives?

Concerns Over China's Export Dominance

Western nations are expressing growing concerns about China's export dominance, particularly in green and high-tech industries. U.S. Treasury Secretary Janet Yellen recently accused China of industrial overcapacity, suggesting that the country is flooding international markets with cheap, high-quality products due to industrial subsidies. In response, the U.S. and its allies are implementing protectionist measures such as punitive tariffs and technology controls, as well as strengthening their own industrial policies. However, some question whether China's success is simply due to better incentives for work, saving, and investment.

China's EV Exports: A Case of Overcapacity?

Chinese electric vehicle sales in Europe have seen a significant increase, expected to account for a quarter of the market in 2024. The U.S. and EU have imposed high tariffs on China's EV exports, accusing the country of industrial overcapacity. However, this claim is disputed, as Chinese EVs sell at considerably higher prices on Western markets, suggesting healthy profit margins even after tariffs.

Subsidies and Industrial Policy

Claims have also been made that China's EV sector's overcapacity is due to industrial policy and generous subsidies. However, when compared to the U.S. and EU, China's EV purchase subsidies have been less generous and have been gradually decreasing. Meanwhile, the U.S. plans to further increase its aid to the EV sector, potentially resulting in subsidies three times higher than those offered by China.

Industrial Subsidies: How Significant Are They?

While China's industrial subsidies are often highlighted, it's important to note that the U.S. and EU also provide substantial subsidies. In fact, in terms of GDP percentage, the EU's industrial subsidies are almost at the same level as China's. Furthermore, while China's subsidies primarily go to state-owned enterprises, these enterprises only account for about 10% of exports, suggesting that industrial subsidies are not the key determinant of China's competitiveness.

Industrial Policy: A Double-Edged Sword?

Industrial policy is currently in vogue worldwide, with a significant increase in interventions in recent years. However, arguments against industrial policy include the lack of market knowledge by bureaucratic decision-makers, the potential for decision capture by special interest groups, and high costs. Moreover, China's industrial policy, which heavily favors state-owned enterprises, has not necessarily benefited productivity growth and has led to numerous failures.

China's Dominance in Clean Tech Manufacturing

Despite the mixed results of its industrial policy, China has managed to dominate the global clean tech manufacturing sector, including wind turbines, solar panels, and car batteries. This dominance is not solely due to subsidies and industrial policy, but also to more fundamental factors such as high savings and investment ratios, rapid capital accumulation, and significant progress in innovation.

Low Taxes and Rapid Capital Accumulation: The Real Key?

China's impressive economic performance since the acceleration of market-oriented reforms and World Trade Organization accession in 2001 is largely due to rapid capital accumulation and high savings and investment ratios. Furthermore, China's limited welfare state, low tax burden, and strong labor force participation have encouraged long working hours and high savings. In contrast, Western economies' progressive taxation of incomes has potentially reduced work incentives and discouraged savings and investment.

Bottom Line

In conclusion, the argument that China's export dominance is due to industrial policy and subsidies may be a distraction from the real issue: the inefficiencies of large-scale government redistribution in the West. Replicating China's industrial policies will not necessarily solve this problem and may even exacerbate it. What are your thoughts on this matter? Share this article with your friends and sign up for the Daily Briefing, available every day at 6pm.