Measuring the extent of industry subsidies: what do we know?
As the IMF, WTO, OECD, and World Bank have pointed out, it is difficult to present credible policies to constrain subsidies unless we know how big they are, and where they are applied. The overall level of subsidisation in the global economy is difficult to estimate, and so is the presence of subsidies in some industries and not others. The task is complicated by the different structures of economies, and particularly the United States compared to China.
The Global Trade Alert (GTA) survey of industry subsidies was released on 25 October 2021.
Its estimate of 18 137 corporate subsidy schemes and awards implemented in China, the United States, and Europe between November 2008 and October 2021 is, the authors report, probably an underestimate.
The top three trading economies — China, the United States, and the European Union — together accounted for more than half of the total number of global subsidies.
The European Union and China implemented roughly the same number of industry subsidy programs, with the United States implementing slightly fewer.
Challenging the notion that industrial subsidies are unique to China, the GTA reported that “Since the European Union and the United States were together responsible for 12 629 entries in our inventory of corporate subsidies, claims that extensive resort to subsidies is found only in state dominated economic development models should be discounted. Resort to extensive subsidisation is also a common feature of policy in more market-based systems of economic governance.”
The report calculated a cost of subsidies for China but not for the United States or the European Union.
It estimates that subsidies paid by Chinese governments increased from US$6.5 billion in 2009 to US$29 billion in 2020, with the total split roughly equally between private and state-owned enterprises.
Separately, GTA quotes IMF estimates that government subsidy payments to companies in the European Union totalled US$262 billion in 2019, and in the United States US$74 billion.
On these numbers, the level of subsidisation in the United States was in 2019 two-and-a-half times that in China, and in the European Union nine times the level of industry subsidisation in China.
In its 2022 report, by contrast, CSIS estimates Chinese subsidies in 2019 at US$248 billion, more than eight times the GTA estimate. It is considerably more than the CSIS number for the United States or any other national economy, though below the IMF estimate for the European Union.
The difference between the two estimates for China arises because CSIS includes a lot more elements in its definition of subsidies.
The GTA estimate is based on subsidies reported by listed businesses in China, whether privately or publicly owned. Chinese-listed businesses are required to report government subsidies, and do. The GTA report confines itself to what is available in these reports.
The CSIS report is an estimate of subsidies that goes well beyond those reported by listed companies in China. CSIS estimate begins with the disclosed government subsidies to listed businesses and builds on it. For listed businesses in 2019, CSIS finds the total reported government subsidies were US$41 billion. It assumes that unlisted state-owned enterprises (SOEs) are subsidised to the same extent as listed SOEs, when scaled by revenue.
That brings the total up by US$20 billion (or a total so far of US$53.8 billion by moving research and development subsidies to another column).
Listed businesses also disclose all tax concessions and refunds received from government. CSIS assumes these are all subsidies and adds them to the total. As with reported subsidies, it assumes that all unlisted SOEs are given equivalent tax concessions and refunds when scaled by business revenue. These elements together add US$54.7 billion to the total.
The CSIS report then comes to the biggest addition — concessional lending. CSIS argues, as does the OECD, that China’s SOEs can borrow for less than private businesses because of a market belief in government backing for SOEs’ debts. It assumes that because of this market belief, SOEs borrow from banks at half a percentage point less than private business, and from bond markets at 1.4 percentage points less. CSIS takes half a percentage point of all SOE borrowing and 1.4 percentage points of all SOE bond issuance and adds that to the subsidy total. That adds US$73.6 billion to the total.
There are a couple of other contributions to the “stack” of subsidies. SOEs have outstanding net invoices to pay. CSIS argues that these outstandings reflect the favoured position of SOEs, which are able to pay bills slowly but demand their own invoices be paid promptly. CSIS says this is equivalent to a bank borrowing. It applies a bank lending rate to the net outstandings and adds that to the total of subsidies.
With a few other assumed subsidies, CSIS gets to its total of US$247.7 billion in Chinese government subsidies to industry in 2019. CSIS does not disguise the fact that its procedure is based on a series of assumptions rather than actual data. Some of these assumptions seem to me to require a bit more evidence or a more robust rationale.
For example, are all the reported tax concessions and refunds subsidies? Like the economies of the European Union, the United Kingdom, Australia, and many other countries — but not the United States — China imposes significant consumption taxes. In China, the standard rate is 13 per cent. Since they are domestic consumption taxes, the tax paid by corporations is refunded to exporters on the product exported. The United States regards these refunds as export subsidies, a position not accepted by the rest of the world. It is not clear in the report whether reported refunds includes this element.
Many corporations in the United States and Australia pay less than the nominal corporate profits tax rate, one of the reasons the United States and Europe attempted to negotiate a corporate minimum tax. There are plenty of deductions available, some of them industry-specific. Are US subsidies equivalently estimated?
Are unlisted SOEs paid subsidies equivalent to listed SOEs when scaled by business revenue? I don’t know, and CSIS does not know.
China’s SOEs do indeed borrow at a lower rate than privately owned businesses and are able to issue bonds at a lower rate not only in China but on world capital markets. This reflects some belief on the part of lenders that the debt is guaranteed by government. If SOEs get better lending rates because their debt is believed to be backed by government, is this a subsidy? It is not after all a “below market” rate, since for US$ bonds it is the rate paid in global markets. It is not or does not need to be directed by the state since a commercial lender would make the same decision without government direction. In the United States for example, government-backed businesses such as banks and the big government-owned mortgage lenders are able to borrow at lower rates than businesses without actual or implied government support. Chinese state-owned businesses owned by the central government have a wider credit spread to privately owned businesses than state-owned businesses owned by provincial government, further evidence that that differences depend on market pricing of risk.
This suggests that the lower interest rate paid by SOEs is a market rate for a security or a bank credit widely believed to be backed by government. Banks in the United States, Australia, and Europe borrow on the same terms. The market belief that their obligations are backed by government was confirmed in 2008, when governments announced guarantees. Government-owned corporations in the United States, such as the giant home lending institutions, have similarly discounted access to funds markets. The discount to the interest rate offered to private businesses might be regarded as a reflection of the greater role of the state and of state-owned businesses in China, an issue larger than subsidies.
Complicating the issue, although the rates assumed to be paid by China’s SOEs are lower than the rate paid by privately owned enterprises in China, interest rates are usually higher in China than the United States and have been for more than 30 years.
China’s SOEs pay less for finance than China’s privately owned enterprises usually do, but more than US corporations usually do.
And then there are the net payables balances. Are the net payables balances of China’s SOEs remarkably different to the net payables balances of big businesses, whether publicly or privately owned and whether Chinese or American?
CSIS does a good job of making its assumptions clear, and in pointing out the ways in which subsidies might be higher than the total of listed corporations disclosures. It asks good questions. But its results mainly arise from hypotheses and assumptions, not actual data, and some of the assumptions seem to me highly debatable.
Another approach is to look at China subsidies for the specific industry now at the heart of the competition between China and the United States — the design and manufacture of semiconductors or chips. This is not only a strategic industry for both, but also now a heavily subsidised industry for both.
In a 2019 report, the OECD looked specifically at the semiconductor value chain.
Unsurprisingly, it found that “government involvement (ownership or investment by the state in semiconductor firms) to be especially large in one jurisdiction” — that is, China. This and the creation of a national semiconductor fund suggest “non-market forces to be considerably stronger in China than in the other economies studied”.
It also found, however, that government support for the semiconductor industry was universal. For the sample of 21 large semiconductor firms studied, it found “total government support to have exceeded US$50 billion over the period 2014–18”. This includes support provided through “government budgets (e.g. R&D, precompetitive and competitive grants and tax concessions), and also that provided by state enterprises through the financial system in the form of below-market borrowings and below-market equity.”
The OECD found China’s support for the semiconductor industry substantial. It reported that “support through below-market equity appears to be particularly large in the context of the semiconductor industry and concentrated in one jurisdiction. Such support amounted to US$5–15 billion for just six government-invested firms in the sample, four of which are from China.”
Almost all government subsidies attributed to the semiconductor industry in China (or to the identified large corporations) were through either below-market equity or below-market lending. The OECD report does not put a number on total China government support. Supposing that it is US$15 billion to each of four China semiconductor firms or US$60 billion all up over five years, that would come in at an average of US$12 billion a year total for the biggest firms in the highest priority industry for government support. That is a very big number but less than five per cent of the CSIS calculation of all China subsidies to all industries. It is more consistent with the US$60 billion total found by GTA. Depending on the period over which it is spent, it might be somewhat more or somewhat less than the US$52 billion provided for semiconductor industry support in the recent US bill, but of the same order of magnitude. On subsidies for advanced technology industries, the United States has caught up.
