- Governments are pouring record amounts into strategic industries, with global subsidies reaching $108 billion as countries try to secure supply chains.
- China is outspending the West by a wide margin, providing firms with 3–8 times more state support than OECD peers and helping Chinese companies dominate sectors such as semiconductors and solar panels.
- The result is a growing global subsidy race, as Western countries respond with tariffs and incentives while debating whether free-market capitalism can compete against China’s state-backed industrial strategy.
The COVID-19 pandemic and the geopolitical conflicts to follow exposed severe weaknesses in global supply networks, prompting governments, caught off guard and complacent, to pour money into critical sectors like semiconductors, critical minerals, and pharmaceuticals to prevent future shortages and reduce dependence on geopolitical rivals. Consequently, governments across the globe have increasingly been doling out state subsidies to local firms in a bid to secure supply chains, accelerate the transition to green energy, and protect domestic manufacturing against aggressive foreign competitors.
A landmark report by the Organisation for Economic Co-operation and Development (OECD) has revealed that global state subsidies have surged to a total of $108 billion, good for an average of 1.3% of company revenues across 15 key industrial sectors and the highest level since the 2008-2009 financial crisis. But China takes this game far more seriously, giving the state natural resource power the West only dreams of, and making this the onset of what could be a subsidy race that changes the rules of capitalism in order to compete with Beijing.
According to the OECD, Chinese firms in strategic sectors received between three and eight times more state support than competitors in OECD countries over the past 20 years, giving Chinese firms a huge leg up in highly competitive markets. Indeed, OECD estimates that this massive government aid–spanning direct grants and below-market loans– drove roughly 60% of Chinese companies’ global market share gains over the past two decades. Chinese companies receive subsidies equivalent to roughly 2.5% of their revenue, compared to just 0.3% seen by firms in peer nations like Japan and South Korea.
According to the OECD, Chinese firms in strategic sectors received between three and eight times more state support than competitors in OECD countries over the past 20 years, giving Chinese firms a huge leg up in highly competitive markets. Indeed, OECD estimates that this massive government aid–spanning direct grants and below-market loans– drove roughly 60% of Chinese companies’ global market share gains over the past two decades. Chinese companies receive subsidies equivalent to roughly 2.5% of their revenue, compared to just 0.3% seen by firms in peer nations like Japan and South Korea.
And overly generous government subsidies have backfired on Chinese companies before. Whereas the overcapacity and subsequent price cuts have made solar energy highly affordable globally and driven historic deployment records in emerging markets (such as a 176% jump in Chinese module exports to Africa), it has also resulted in severe financial distress, declining profitability and heavy domestic consolidation for Chinese solar companies. To address those problems and maintain some balance, Beijing has begun to phase out support. For instance, the Chinese government reduced and fully abolished the 9% Value Added Tax (VAT) export rebate on photovoltaic products, while battery energy storage systems saw their export tax rebates reduced from 9% to 6%, with a full phase-out expected by 2027.
Meanwhile, Western nations and trading blocs are increasingly trying to come up with ways to keep China’s clean energy hegemony in check with its own incentives. But more often, with retaliation. Most recently, the U.S. unveiled significant levies across China’s renewable sector products, including 50% tariffs on solar cells (whether or not assembled into modules) and strict actions against Chinese steel, aluminum, and advanced batteries. The Trump administration has also announced a 100% punitive tariff on Chinese EVs, making entry into the American market prohibitive. Additionally, the European Commission has adopted definitive countervailing duties of up to 35.3% on BEVs from China, valid for five years. These are applied on top of the standard 10% vehicle import duty.
The uncomfortable reality is that Western economies assumed for decades that private capital, comparative advantage, and open markets would determine the industrial winner. However, China has spent that time building national champions with patient state capital, cheap financing, protected domestic markets, and long-term strategic planning. Tariffs can slow the flow of Chinese products across borders, but little else. The West’s biggest economies now face the choice of whether to try to compete with China on similar terms or whether there is still faith in a private market free-for-all to operate in the national interest.
By Alex Kimani for Oilprice.com
