This Letter IEDI discusses the effects of Chinese subsidies on international trade flows in the period between 2009 and 2022, based on the analysis made by IMF researchers in the recent study “Trade Implications of China's Subsidies,” by Lorenzo Rotunno and Michele Ruta.

The IMF researchers' analysis complements and updates the evidence from the series of studies on Brazil-China trade that the IEDI has been releasing in recent weeks: Letter n. 1292 “Brazil-China trade and the loss of Brazilian economic complexity,” Letter n. 1294 “Complexity of Brazilian exports and competition from China” and Letter “The China effect on the increase in Brazilian imports,” to be released soon.

The IMF's research on the impacts of subsidies on world trade, at the product and sector levels, comes at an opportune time, given the growing use of different industrial policy instruments by a wide range of countries, such as China, the United States and European countries, amid a clear technological dispute in strategic areas.

According to a previous IMF study, discussed in Letter IEDI n. 1254, in 2023 alone, governments around the world adopted about 2,500 new industrial policy measures, 71% of which had the potential to affect international trade. 

Among them, subsidies stand out as an instrument in several policies, such as the Inflation Reduction Act and the Chips and Science Act in the United States, the European Green Deal and the Digital Europe Program, as well as the Made in China 2025 program. Information on subsidies and other industrial policy instruments adopted by different countries was obtained from the Global Trade Alert (GTA) database.

The study in question reaches important results that raise the national and international debate on the effects of the Chinese strategy on international trade flows, summarized below.

• IMF researchers found empirical evidence that subsidies adopted by China increased its exports and reduced its imports, in aggregate.

•  As a direct effect, Chinese exports of subsidized products were 0.9% higher than exports of non-subsidized products, after the adoption of subsidies.

•  Although small at first glance, these percentage effects are of economic importance. On the exports side, the estimated increase in subsidized versus non-subsidized products is equivalent to one-sixth of the average annual percentage rise in Chinese exports at the product level. In addition, the estimated effects apply to a large part of China's trade (77% of the country's exports).

•  This effect, however, varies greatly across sectors. In electric machines, for example, which is one of the strategic sectors in the Made in China program, the effect estimated in the IMF study reaches +7%.

•  The direct impact of the subsidies was more pronounced in the case of the emerging economies of the G20, of which Brazil is a part. Chinese exports of subsidized goods to these countries were 2.1% higher.

•  Estimates of direct impacts on advanced economies were not statistically significant, probably due to trade defense measures taken by these countries, according to the authors.

• The IMF researchers also estimated the effect of subsidies for exports from the United States and the European Union. In these cases, the impact found was +0.8% and +2.7%, respectively. That is, China is not an isolated case.

• Chinese imports, in turn, still taking into account only the direct effects of subsidies, tended to decrease. The researchers found a -0.9% effect on imports of subsidized versus non-subsidized goods. 

•  For Chinese imports, the negative result of the adoption of subsidies was concentrated on sales from advanced economies, members of the G20 (-3%) or not (-4.8%), indicating the Chinese strategy has a trait of import substitution of more sophisticated goods.

•  The study also contemplated the indirect effects of Chinese subsidies, that is, those derived from the links existing in supply chains, which proved to be more expressive than the direct effects.

•  Subsidies granted to upstream sectors (that is, those  at the beginning of supply chains) expanded exports from downstream sectors (that is, those closer to the end of the chains and associated with final goods). In other words, subsidies on inputs give rise to higher competitiveness of products along the chains.

•  For example, subsidies to the Chinese steel sector were associated with a 3.5% increase in China's auto exports, according to the IMF's estimates.

•  Regarding the phenomenon of Chinese overcapacity, the IMF researchers found no statistically significant evidence either on prices or on quantities exported by China, at least in aggregate. There is more robust evidence of the positive impact of subsidies to upstream sectors on the volume exported by the final links of supply chains.

•  This general conclusion, however, tends to hide important sectoral differences. It was found that Chinese subsidies contributed to the reduction of prices of exported products and the increase of quantities sold by some sectors, such as metal products, furniture and communication equipment, but not by others, such as electrical equipment.

In summary, the IMF study found more significant direct effects of Chinese subsidies on China's trade with emerging G20 economies, while the indirect effects are more pronounced in the case of trade with the advanced G20 economies. Subsidies granted to production of inputs tend to improve exports from sectors at the end of supply chains.

In addition, although no significant evidence was found that, in aggregate, Chinese subsidies have an effect on exported prices and quantities, there are relevant sectoral differences indicating productive overcapacity in some cases.

The full text is available in Portuguese