A study by the Kiel Institute indicates that Beijing heavily subsidizes its domestic industries. These are in sectors such as green technologies like electric mobility or wind power. Estimates suggest that China's overall subsidies range between three to nine times that of other OECD countries. According to the analysis of new data, one of the major beneficiaries is the electric car manufacturer BYD. This reflects BYD's significant expansion in both technological and production capacities, as well as its increasing competitiveness.
Government subsidies (by China) cover over 99 percent of listed companies receiving direct government subsidies (in 2022). These subsidies are strategic to advance key technologies to market readiness.
https://en.wikipedia.org
In addition, preferential access to critical raw materials, “forced” technology transfers from foreign investors, and favourable treatment in public procurement and administrative procedures, Chinese companies have rapidly expanded in various green technology sectors. They dominate the Chinese market and are penetrating EU markets.
China has emerged as the leading global producer of photovoltaic systems and battery cells. The country clearly aims to achieve similar leadership in other green technology sectors, including electric vehicles and wind turbines.
The electric car manufacturer BYD receives particularly high subsidies. Direct subsidies amounted to approximately EUR 220 million in 2020, rising to EUR 2.1 billion in 2022. In terms of business revenues, direct subsidies increased from 1.1 percent in 2020 to 3.5 percent in 2022. Additionally, BYD receives significantly more purchase premiums for electric cars in China compared to other domestic manufacturers like GAC or foreign companies producing locally, such as Tesla or VW's joint ventures.
Leading Chinese wind turbine suppliers, such as Goldwing and Mingyang, also benefit significantly from government subsidies. In the case of Mingyang, subsidies increased from EUR 20 million in 2020 to EUR 52 million in 2022. Relative to revenue, recent subsidies were comparable to car manufacturer GAC and amounted to approximately 1.2 percent in 2022.
Targeted demand subsidies are justified, because they speed up EV adoption. While success of Chinese EVs has spooked Western car manufacturers, some of the pain is self-inflicted. Having bet on massive ICE for too long, they delayed the all-but-inevitable switch to EVs. But that’s not all, Chinese EVs are cheaper for the same reason that most everything manufactured in China tends to be cheaper than American or European products.
Introducing EV tariffs in response to intense lobbying by Western car manufacturers might make for good election-year politics. A much better idea is to subsidise domestic manufacturing. This approach is reflected in the US Inflation Reduction Act and Bipartisan Infrastructure Law, and in targeted EU subsidies. Some of these subsides can be justified simply as a politically feasible, second-best alternative to carbon pricing, including as a stepping stone toward pricing policies.
Tariffs may be preferred on “public finance” grounds: they generate government revenues, while subsidies cost taxpayers money. But that calculus is short-sighted. Early analyses of the Inflation Reduction Act shows that its hundreds of billions of dollars’ worth of subsidies raise economic output in the US and elsewhere, both during and after the initial decade of government spending.
European car manufacturers have realised this and are themselves now calling for further subsidies in lieu of tariffs, seeking an Airbus-like, cross-country alliance to subsidise European EV manufacturing. While any subsidy scheme is messy and raises a hot of thorny political-economy and economic-efficiency questions, such subsidies are surely preferable to EV tariffs. A subsidy race, together with stronger efforts at pricing carbon dioxide emissions, is vastly superior to a tariff war. The world will be both richer and cleaner for it.
References:
China’s massive subsidies for green technologies, Kiel Institute, 10 April 2024
The right response to China’s electric-vehicle subsidies, Gernot Wagner and Shang-Jin Wei, Project Syndicate, 5April 2024
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