Why has China’s subsidy policy become the focus of the trade war?

It lies in its scale, industry targeting and impact on the global trade pattern. The following is a key analysis:

1. The characteristics of China’s subsidy policy have caused controversy

Large scale and diverse forms
China supports key industries (such as semiconductors, new energy, steel, etc.) through direct fiscal grants, low-interest loans, tax exemptions, land concessions and other means. According to OECD data, the proportion of Chinese government subsidies to enterprises in GDP is significantly higher than that of most developed countries. This scale is likely to arouse the vigilance of trading partners.

Focus on high-tech and strategic industries
China explicitly subsidizes semiconductors, electric vehicles, artificial intelligence and other industries in policies such as “Made in China 2025” to achieve technological autonomy. Such subsidies are regarded by Europe and the United States as “distorting the market” and threatening their technological advantage.

State-owned enterprises are preferred
A large number of subsidies flow to state-owned enterprises or government-related enterprises, which puts foreign and private enterprises at a disadvantage in competition, violating the WTO’s “competitive neutrality” principle.

2. The core conflict points in the trade war

Overcapacity and global market impact
Excess capacity driven by subsidies (such as steel and photovoltaics) is exported at low prices, crushing foreign competitors. For example, China accounts for more than half of the world’s steel production, triggering anti-dumping lawsuits from Europe and the United States.

Technology competition and security anxiety
The West believes that subsidies accelerate China’s rise in high-tech fields (such as 5G and chips), which may reshape the global supply chain and threaten its national security. The US sanctions on Huawei and SMIC are based on this logic.

WTO rule disputes
When China joined the WTO, it promised to gradually reduce subsidies, but Europe and the United States accused it of circumventing the rules through “hidden subsidies” (such as local government support). The WTO dispute settlement mechanism has long failed to effectively constrain China.

3. International community’s response and game

Pressure led by the United States
The 301 investigation of tariffs on China during the Trump era directly pointed to “unfair subsidies”. Biden continued this position and joined allies (such as the European Union) to ask China to reform its subsidy policy.

The EU’s balancing strategy
On the one hand, the EU imposes anti-subsidy duties on Chinese electric vehicles (up to 38% in 2024), and on the other hand, it introduces local subsidy policies such as the “European Chip Act” to cope with competition.

Differentiation among developing countries
Some countries (such as Vietnam and India) benefit from the transfer of China’s industrial chain, but Latin American and African countries complain about the impact of cheap Chinese goods on local industries.

IV. China’s response and future direction

Defense and partial adjustment
China claims that subsidies are in line with the rights of “developing countries” in the WTO, and will gradually cancel some export subsidies (such as stopping local subsidies for new energy vehicles in 2019), but emphasizes “industrial policy sovereignty”.

Dual circulation strategy reduces dependence
Reduce dependence on export subsidies by expanding domestic demand, while accelerating technological autonomy (such as localization of chips) and reducing the risk of external sanctions.

Multilateral negotiation deadlock
WTO reform has stagnated, the United States and Europe have turned to “club-style” rules (such as the anti-subsidy clauses in the Indo-Pacific Economic Framework), and China has promoted regional cooperation such as RCEP to hedge pressure.

Conclusion: The embodiment of structural contradictions
The essence of the subsidy dispute is the conflict between state capitalism and the free market model in the context of globalization. China regards subsidies as a right to development, while Europe and the United States regard them as unfair competition. In the short term, technological blockades and countermeasures will continue, and in the long term it depends on the game results of WTO reform or new trade rules.