Special Report – The subsidies controversy

It’s the most divisive topic between China and the US and its allies: the WTO prohibits subsidization, but one way or another nearly everyone does it…

MB October 2021 Special Report | China at the WTO


Beyond occasional disputes over certain products, the main cause of friction between the US-led bloc and China is the subsidies that Beijing injects into hundreds of companies directly or indirectly linked to the state.

Despite the World Trade Organization’s prohibition of subsidies designed to promote exports or expand domestic production, China has never refrained from the practice – not least because the WTO doesn’t forbid all subsidies, and it’s always difficult to know why the money is injected.

While some cases might be difficult to prove, there are others in China that could not be more transparent: last year for instance, Xinhuapublished a piece stating that more than 100 companies received significant subsidies from the government.

According to the article, “Listed companies revealed that the subsidies they received this year [2020] from the government increased significantly [over previous years]. At least 102 listed companies have received huge sums in government subsidies since March this year. A number of them received subsidies of more than 100 million yuan ($15.5 million).”

The listed companies China National Petroleum Corporation and Sinopec are among the most profitable state-owned enterprises in China. Both revealed the subsidies granted to them in their annual reports. 

Meanwhile, “China has been using subsidies, along with low-interest loans, to nurture domestic industries,” a Nikkeiarticle reports. “State-backed companies, which account for just a third of listed businesses, collected roughly 60 per cent of the money, indicating an uneven playing field,” the report adds.

“The [Chinese] central government has yet to grasp the scope of subsidies by local governments,” Shinichi Seki, a senior economist specializing in China at the Japan Research Institute, told Nikkei Asia. “That lack of transparency could end up allowing excess capacity just to maintain employment and economic momentum.”

The Singapore-based scholar Henry Gao, in a recently published work, refers to the existence of a “US-led coalition” which “has been arguing that the existing WTO rules are insufficient in dealing with the problems created by China’s state capitalism.”

This “US-led coalition” with the European Union and Japan issued a joint statement condemning “severe excess capacity in key sectors exacerbated by government financed and supported capacity expansion, unfair competitive conditions caused by large market-distorting subsidies and state-owned enterprises, forced technology transfer, and local content requirements and preferences” as “serious concerns for the proper functioning of international trade.”

Washington and its allies even suggested “strengthening the notification requirements [and] proposed some rather drastic measures, such as naming and shaming the delinquent Member by designating it as ‘a Member with notification delay’,” Professor Gao elaborates.

Earlier this year, the Washington-based Information Technology and Innovation Foundation (ITIF), “one of the most authoritative science and technology policy think tanks in the world,” published a report detailing “two decades of false promises” made by China since joining the WTO. The ITIF argues that China’s “massive subsidization creates overcapacity,” with several of their industries maintaining programs that are in “direct violation of WTO subsidies rules”. The report also cites the United States Trade Representative (USTR) as saying that “since joining the WTO, China has not submitted a complete notification of subsidies maintained by the central government and did not notify a single sub-central government subsidy until July 2016.”

It must be said, though, that all countries, to a greater or lesser degree, use state subsidies to help companies in certain sectors: efforts by the United States and the European Union to legitimize subsidies granted to Boeing and Airbus since 2004 are well known; and Japan, for example, provided almost $500 million to Mitsubishi Heavy Industries for the development of its SpaceJet.

In the opinion of many, the Biden Administration’s project to award $50 billion in subsidies to expand domestic chip production is not much different from what China regularly does.

For this reason, China “opposes special and discriminatory disciplines against state-owned enterprises in the name of WTO reform,” a position given in a statement from the Chinese Ministry of Commerce in 2018.

“[China] opposes special and discriminatory disciplines against state-owned enterprises in the name of WTO reform” – Chinese Ministry of Commerce

“The [Chinese] central government has yet to grasp the scope of subsidies by local governments,” Shinichi Seki, a senior economist specializing in China at the Japan Research Institute, told Nikkei Asia. “That lack of transparency could end up allowing excess capacity just to maintain employment and economic momentum.”

The Singapore-based scholar Henry Gao, in a recently published work, refers to the existence of a “US-led coalition” which “has been arguing that the existing WTO rules are insufficient in dealing with the problems created by China’s state capitalism.”

This “US-led coalition” with the European Union and Japan issued a joint statement condemning “severe excess capacity in key sectors exacerbated by government financed and supported capacity expansion, unfair competitive conditions caused by large market-distorting subsidies and state-owned enterprises, forced technology transfer, and local content requirements and preferences” as “serious concerns for the proper functioning of international trade.”

Washington and its allies even suggested “strengthening the notification requirements [and] proposed some rather drastic measures, such as naming and shaming the delinquent Member by designating it as ‘a Member with notification delay’,” Professor Gao elaborates.

Earlier this year, the Washington-based Information Technology and Innovation Foundation (ITIF), “one of the most authoritative science and technology policy think tanks in the world,” published a report detailing “two decades of false promises” made by China since joining the WTO. The ITIF argues that China’s “massive subsidization creates overcapacity,” with several of their industries maintaining programs that are in “direct violation of WTO subsidies rules”. The report also cites the United States Trade Representative (USTR) as saying that “since joining the WTO, China has not submitted a complete notification of subsidies maintained by the central government and did not notify a single sub-central government subsidy until July 2016.”

It must be said, though, that all countries, to a greater or lesser degree, use state subsidies to help companies in certain sectors: efforts by the United States and the European Union to legitimize subsidies granted to Boeing and Airbus since 2004 are well known; and Japan, for example, provided almost $500 million to Mitsubishi Heavy Industries for the development of its SpaceJet.

In the opinion of many, the Biden Administration’s project to award $50 billion in subsidies to expand domestic chip production is not much different from what China regularly does.

For this reason, China “opposes special and discriminatory disciplines against state-owned enterprises in the name of WTO reform,” a position given in a statement from the Chinese Ministry of Commerce in 2018.

Previous | Trade frictions