Industrial subsidies and impact on exports of trading partners: Case of China

• Published date: 01 August 2022
• Author: Dessie Tarko Ambaw,Shandre Mugan Thangavelu
• Date: 01 August 2022
• DOI: http://doi.org/10.1111/rode.12878

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         Rev Dev Econ. 2022;26:1310–1337.

wileyonlinelibrary.com/journal/rode

Received: 13 January 2021 

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  Revised: 13 February 2022 

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  Accepted: 14 February 2022

DOI: 10.1111/rode.12878  

REGULAR ARTICLE

Industrial subsidies and impact on exports of

trading partners: Case of China

Dessie TarkoAmbaw1

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ShandreMugan Thangavelu2,3

This is an open access article under the terms of the Creative Commons Attribution- NonCommercial- NoDerivs License, which permits 

use and distribution in any medium, provided the original work is properly cited, the use is non- commercial and no modifications or 

adaptations are made.

© 2022 The Authors. Review of Development Economics published by John Wiley & Sons Ltd.

1UniSA Business School, University 

of South Australia, Adelaide, South 

Australia, Australia

2Jeffrey Cheah Institute for Southeast 

Asia, Sunway University, Malaysia

3Institute for International Trade, 

University of Adelaide, South Australia, 

Australia

Correspondence

Dessie Tarko Ambaw, UniSA Business 

School, University of South Australia, 

Adelaide, SA, Australia.

Email: dessie.ambaw@unisa.edu.au

[Correction added on 06 May 2022, after 

first online publication: The middle 

name and affiliation of the second author 

have been added in this version.]

Abstract

This paper  explores the  impact of  Chinese subsidy  in-

terventions in  the upstream sector  on the competitive-

ness of the  downstream sector. In particular,  the paper 

investigates  the  causal  effect  of  Chinese  subsidies  on 

base  metal  products  on  the  export  competitiveness  of 

downstream  sectors  in  other  major  trading  countries. 

To explore  the impact  of  base metal  subsidy interven-

tions  on  the  downstream  sector  of  a  trading  partner, 

we exploit both temporal variation  in subsidy interven-

tions and  base- metal consumption  by the  downstream 

sector. Using  a  panel data  for 137  sectors in  40  major 

trading  partners  of  the  Chinese  economy,  the  results 

of the  paper reveal that a  one- unit increase  in Chinese 

subsidies decreases  competitors’ exports by  an average 

of 16.6%.  This indicates  that an  increase in  one stand-

ard  deviation  of  Chinese  subsidies  in  the  base  metals 

sector decreases  exports in  the other  major economies 

by 0.17 percentage points. The  findings of the paper re-

veal that  the impacts  of Chinese subsidy  interventions 

are larger and  statistically significant for  the exports of 

developed  countries  and  metal- intensive  users  in  the 

downstream  sectors.  Production  relocation  to  China, 

absorption  of  larger  inexpensive  base  metals  input  by 

domestic Chinese  firms, and  subsidy complementarity 

in the Chinese upstream and downstream sectors could 

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AMBAW and THANGAVELU

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INTRODUCTION

In the past  decade, we have observed an increase  in government subsidies to domestic  firms to 

enhance their  competitiveness in  the  global economy. Since  the global  financial crisis  (GFC), 

both emerging  and developed  economies have significantly  increased their  subsidy support to 

certain targeted domestic manufacturing industries such as steel, aluminum, semiconductor, au-

tomotive, glass,  and  paper (Hoekman, 2015). Predominantly, governments  justify  the subsidy 

intervention to promote competitiveness of domestic  firms and to increase employment and in-

vestment in  certain domestic sectors,  where high  entry and sunk  cost exist for  domestic firms 

(Roberts & Tybout, 1997). In addition, subsidies are provided to create high- productivity jobs and 

to promote  innovation- enhancing investment,  which can  help domestic  firms to  move up the 

regional and global value chain (Hoekman,2015). However, several concerns were raised when 

subsidies and soft budgets were  provided to state- owned enterprises (SOEs) that  give unfair ad-

vantages to domestic firms in international markets, as in the case of  subsidies to Chinese SOEs 

that are believed to have distortionary effects on global trade and investment. The United States, 

for example, argues that Chinese subsidies to the steel and aluminum sectors create unfair com-

petitive advantage by distorting global markets and price mechanisms (USTR, 2020). Particularly, 

subsidies tend to  intervene in the  tradeable intermediate products that  engage in a  wide range 

of  supply  chains,  easily  propagate,  and  disrupt  multiple  downstream  sectors  that  are  related 

through the global  value chain (Mattera &  Silva,2018). While this  anecdotal evidence tends to 

demonstrate the  distortionary  effect  of   China's subsidy  policy  for  key  intermediate  inputs  on 

global commerce, the causal effect of subsidies on the competitiveness of the downstream sector 

is not yet explored.

This paper  investigates the  causal effect of  Chinese subsidies to  base metal products  on the 

performance of downstream sectors in other major trading countries. Base metal products, which 

include steel,  iron, aluminum, copper, nickel,  lead, zinc, tin,  precious metals (e.g., silver,  gold, 

and platinum), and  other nonferrous metals and  articles thereof, are among  the major govern-

ment support recipients in China. For example, Chinese energy subsidies to the steel sector alone 

reached $15.7 billion in 2007, registering a 3800% increase from 2000. In the same year, Chinese 

steel production and  export showed 289% and  1276% growth, respectively, from their  2000 val-

ues, suggesting  the potentially  significant role  of  subsidies to  Chinese dominance in the steel 

sector (Haley & Haley,2013). A recent study by the Organisation for Economic Co- operation and 

Development (OECD) has also documented that government subsidies reached up to $70 billion 

for the largest  17 global firms operating in  the aluminum value chain  in the 2013– 2017 period, 

where more than  half of the  support is provided to  Chinese firms (OECD,2019). Similarly, the 

be some of the potential drivers for the negative impact 

of Chinese  subsidy interventions  on the  export perfor-

mance of foreign downstream firms.

KEYWORDS

downstream industries, subsidies, trade distortions

JEL CLASSIFICATION

F13; F14