1) Red Ink: Estimating Chinese Industrial Policy Spending in Comparative Perspective (news release)
A new report by the CSIS Economics Program and the Trustee Chair in Chinese Business and Economics quantifies the size of total industrial policy spending by China and compares it to seven other major economies: Brazil, France, Germany, Japan, South Korea, Taiwan, and the United States. Much of the existing research on industrial policy focuses on its effects, but there are few, if any, published studies that attempt a systematic comparison and quantification of overall industrial policy spending. The heart of the report is the careful calculation of total industrial policy spending by China and the other economies, combining estimates from multiple tools, among them direct subsidies, tax breaks, below-market credit, and state investment funds.
The report provides additional context by examining the historical trajectory of industrial policy of these economies and the evolution of industrial policy across these economies for three industries—aluminum, semiconductors, and electric vehicles. The historical and sectoral analyses point to some similarities across economies, but they also demonstrate how distinctive China has been in terms of both quantifiable spending and non-quantifiable policy tools. Finally, this report discusses several important policy implications, including greater transparency and more harmonized reporting about industrial policy spending and the potential ways in which policymakers could employ these data to more effectively limit industrial policy spending by China and other economies.
This report is made possible by generous funding from the U.S. Department of State.
2) Report Executive Summary
As the international debate over the use of industrial policies intensifies, reliable data are more important than ever. This project aims to quantify the size of total industrial policy spending in China and compare it to other economies. Much of the existing research on industrial policy focuses on its effects, but there are few, if any, published studies that attempt a systematic comparison and quantification of overall industrial policy spending. This project does not seek to assess whether industrial policies are helpful or harmful. Instead, the primary goal is to demonstrate what estimations are possible given available data and identify areas for more reporting or research.
Measuring industrial policy spending is challenging. First, the definition of “industrial policy” is contested. Second, data are difficult to acquire and reported inconsistently across economies; this is especially a problem when it comes to China. Third, many instruments of industrial policy are unquantifiable. To address these challenges, this study uses a distinct methodology that is conservative in its approach, especially regarding its estimates of China’s industrial policy spending. The methodology in this study excludes unquantifiable instruments of industrial policy and may underestimate measures where data are unavailable or incomplete. Therefore, total industrial policy spending in China may be significantly higher.
To put China’s industrial policy spending in perspective, this study also analyzes the following economies: Brazil, France, Germany, Japan, South Korea, Taiwan, and the United States. The study compares spending in these economies during 2019 and not more recent years because of data limitations and concerns about large distortions from pandemic-related policies. To guard against the potential distinctiveness of any individual year, spending for China is estimated from 2017 to 2019.
The data collected for this report yield three core findings:
▪ Even using a conservative methodology, China’s industrial policy spending is enormous, totaling at least 1.73 percent of GDP in 2019. This is equivalent to more than $248 billion at nominal exchange rates and $407 billion at purchasing power parity exchange rates. This is higher than China’s defense spending for 2019, which the Stockholm International Peace Research Institute (SIPRI) estimated at $240 billion at nominal exchange rates. Alternative data and assumptions, including for China’s below-market credit, subsidies to non-listed private firms, government guidance funds, and state-owned enterprise net payables, would result in larger aggregate estimates.
▪ Even with such a low-end estimate, China is an outlier; it spends far more on supporting its industries than any other economy in this study. As a share of GDP, China spends over twice as much as South Korea, which is the second-largest relative spender in the sample. In dollar terms, China spends more than twice as much as the United States.
▪ From a historical perspective, China’s approach to industrial policy is exceptional, as Beijing is sustaining or increasing vertical industrial policy at a level of development when other economies have dialed back. Three industry case studies—aluminum, semiconductors, and electric vehicles—show how China stands out in terms of both quantifiable spending as well as non-quantifiable policy tools.
This exercise yields several important policy implications. Greater transparency and more harmonized reporting about industrial policy spending is vital. Governments and international institutions that govern economic activity need to broaden the scope of tools they use to calculate the total value of industrial policy. It is also important to require governments to consistently provide more comprehensive and detailed data about the ways in which they support their companies and industries.
The report takes no position on how data on industrial policy spending should be utilized. There are strengths and weaknesses to using data to shape policy at various levels of governance (from unilateral to multilateral) and with different levels of constraining authority (e.g., as a source of transparency or as a tool for imposing penalties). Policymakers need to determine how best to employ this new information, keeping in mind the potential trade-offs between speed, legitimacy, and effectiveness when responding to China and other countries’ industrial policies.