Measuring the Scope of Industrial Subsidies: What Do We Know?
As the IMF, WTO, OECD and World Bank have pointed out, it is difficult to come up with credible policies to curb subsidies unless we know how much and where they apply. . The overall level of subsidies in the global economy is difficult to estimate, as is the presence of subsidies in some industries and not in others. This issue is complicated by differences in economic structures, particularly between the United States and China.
A Global Trade Alert (GTA) study on industry subsidies was released on October 25, 2021. It estimates that between November 2008 and October 2021, there were 18,137 business subsidy schemes and subsidies implemented in China, the United States and Europe. Probably underrated. Together, the top three trading economies – China, the United States and the European Union – accounted for more than half of total global subsidies. The European Union and China have about the same number of industrial subsidy programs, with slightly fewer in the United States.
Disputing the notion that industrial subsidies are unique to China, the GTA reported: “The European Union and the United States were jointly responsible for 12,629 items in the corporate subsidies inventory, so they argue that widespread reliance on subsidies can only be found in state-led regions.” Economic development model discounted? Should be. Reliance on widespread subsidies is also a common feature of policies in more market-based economic governance systems. ”
The report calculates the cost of subsidies to China, but not to the US or the European Union. According to the report, subsidies paid by the Chinese government increased from US$6.5 billion in 2009 to US$29 billion in 2020, with the total amount distributed almost evenly between private and state-owned enterprises. Separately, the GTA cites IMF estimates that total government subsidy payments to companies in the European Union were US$262 billion in 2019, compared to US$74 billion in the United States.
Based on these figures, the US subsidy level in 2019 was 2.5 times that of China, and nine times that of China’s industrial subsidy level in the European Union.
In contrast, CSIS, in its 2022 report, estimated China’s subsidies in 2019 at US$248 billion, more than eight times the GTA’s estimate. This is significantly higher than his CSIS figures for the US and other national economies, but below the IMF’s estimates for the European Union. The difference between the two estimates for China is due to the inclusion of more elements in the CSIS definition of subsidies.
GTA’s estimates are based on reported subsidies by listed companies in China, whether privately or publicly owned. Companies listed in China are required to report government subsidies, and they do. GTA reports are limited to what is available in these reports.
The CSIS report is an estimate of subsidies that far exceeds those reported by listed companies in China. CSIS estimates start and build on government subsidies to publicly traded companies. CSIS found that the total reported government subsidies for listed companies in 2019 was US$41 billion. This is based on the assumption that unlisted state-owned enterprises (SOEs) receive the same level of subsidies as listed state-owned enterprises when adjusted according to their earnings. This increases the total by US$20 billion (moving R&D grants to another column brings the total to date to US$53.8 billion).
Listed companies also disclose any tax incentives or refunds received from the government. CSIS assumes these are all grants and adds them to the total. Similar to the reported subsidies, we assume that all unlisted state-owned enterprises will be given equal tax incentives and rebates according to their business income. These factors add up to a total of US$54.7 billion.
The CSIS report also includes the biggest addition: concessional lending. The CSIS, like the OECD, argues that China’s state-owned enterprises can borrow less than private companies because the market believes that the government supports their debt. With this market belief, we assume that state-owned enterprises will borrow 0.5 percentage points less from banks and 1.4 percentage points less from the bond market than private companies. CSIS receives 0.5 percentage points of total SOE borrowing and 1.4 percentage points of total SOE bond issuance and adds them to total subsidies. This adds $73.6 billion to the total.
There are several other contributions to the grant “stack”. The SOE has an outstanding net invoice. CSIS argues that these arrears reflect the favorable position of state-owned enterprises, which can pay their bills slowly but require their own bills to be paid promptly. ing. CSIS equates this to bank borrowing. Apply the bank loan interest rate to the net balance and add it to the total amount of the subsidy.
With several other subsidies envisioned, CSIS will reach $247.7 billion in total Chinese government subsidies to industry in 2019. CSIS makes no secret of the fact that its procedures are based on a set of assumptions rather than actual data. It seems to me that some of these assumptions require a little more evidence and more solid grounds.
For example, are all reported tax incentives and refunds subsidized? Like the economies of the European Union, the United Kingdom, Australia, and many other countries (with the exception of the United States), China imposes a large sales tax. doing. The standard tax rate in China is 13 percent. Being a domestic excise tax, the tax paid by the company is refunded to the exporter on the exported products. The United States views these refunds as export subsidies, a position not accepted by the rest of the world. It is not clear from the report whether the refunds reported included this element.
Many companies in the US and Australia pay lower than nominal corporate income tax rates, which is one reason the US and Europe have attempted to negotiate a minimum corporate tax. There are many deductions available, some of which are industry specific. Are U.S. subsidies equally priced?
Will non-listed SOEs be paid the same subsidies as listed SOEs based on their business revenue? I don’t know, neither do CSIS.
It is true that Chinese state-owned enterprises borrow at lower interest rates than private enterprises, allowing them to issue bonds at lower interest rates not only in China but also in global capital markets. This reflects the belief of some lenders that their debts are guaranteed by the government. If SOE lending rates increase, will this be a subsidy, as SOE debt is believed to be backed by the government? , so this is not a “below market” rate after all. There is no government mandate or need, as commercial lenders make the same decisions without government mandate. For example, in the United States, government-backed businesses, such as banks and large government-owned mortgage lenders, can borrow at lower interest rates than businesses without actual or implied government support. China’s state-owned enterprises owned by the central government have wider credit spreads to private companies than state-owned enterprises owned by provincial governments, further evidence that the difference depends on the market pricing of risk. .
This suggests that the low interest rates paid by state-owned enterprises are the market rates for securities and bank credit that are widely believed to be government-backed. US, Australian and European banks are borrowing on the same terms. The market’s belief that their obligations are backed by the government was confirmed in 2008 when the government announced a guarantee. U.S. state-owned companies, such as giant mortgage lenders, are similarly discounting access to the fund market. Interest rate discounts offered to private companies may be viewed as reflecting the greater role of the state and state-owned enterprises in China, a bigger issue than subsidies.
Complicating matters is that even though the interest rate that China’s state-owned enterprises are supposed to pay is lower than that paid by Chinese private enterprises, China’s interest rates are usually higher than those in the United States and have been around for more than 30 years. That trend is continuing. Chinese state-owned enterprises pay less to finance than Chinese private enterprises, but more than U.S. companies.
And then there is the net accounts payable balance. Are the net accounts payable balances of China’s state-owned enterprises significantly different from those of large corporations, whether public or private, made in China or made in the United States?
CSIS does an excellent job of clarifying its assumptions and pointing out ways in which subsidies can be higher than the disclosed totals of listed companies. They ask good questions. However, the results stem primarily from hypotheses and assumptions, and it seems to me that some of the assumptions, rather than the actual data, are highly debatable.
Another approach is to look at Chinese subsidies for the specific industries that are currently at the center of China-US competition: semiconductor and chip design and manufacturing. This is not only a strategic industry for both sides, but it is also a heavily subsidized industry for both sides today.
In its 2019 report, the OECD paid particular attention to the semiconductor value chain. Not surprisingly, the report found that “government involvement (state ownership or investment in semiconductor companies) is particularly high in one jurisdiction: China.” This, along with the creation of a national semiconductor fund, suggests that “the non-market forces are considerably stronger in China than in other economies studied.”
But it also turned out that government support for the semiconductor industry was universal. A sample of 21 large semiconductor companies surveyed found that “total government support exceeded US$50 billion in the period 2014-2018.” This includes “support provided through the government budget (research and development, pre-competitive subsidies, competitive subsidies, tax incentives, etc.), as well as support provided through the financial system by state-owned enterprises in the form of under-market borrowing and under-market equity. It also includes “support”.
The OECD has determined that China’s support for the semiconductor industry is substantial. “Market-valued equity support is particularly large in the context of the semiconductor industry and appears to be concentrated in one jurisdiction,” the paper reported. Such support amounted to between US$5 billion and US$15 billion for just six government-funded companies in the sample, four of which were Chinese companies. “
Most of the government subsidies attributed to China’s semiconductor industry (or certain large corporations) have been through undervalued stocks or undervalued loans. The OECD report does not provide figures for the total amount of Chinese government aid. Assuming $15 billion for each of China’s four semiconductor companies, or a total of $60 billion over five years, the largest government-backed top-priority industries would be paid an average of $12 billion annually in aggregate. . . That’s a huge number, but it’s less than 5% of the CSIS-calculated subsidies for all Chinese industries. This is more in line with the US$60 billion total examined by the GTA. Depending on the time spent, it may be slightly more or less than the US$52 billion provided to support the semiconductor industry in recent US bills, but on a similar scale. The United States has caught up when it comes to subsidizing high-tech industries.
