China’s Unfair Trade Practices: Subsidies, Cheap Credit, Tax Rebates

China heavily subsidizes industries that align with its economic priorities. These subsidies—ranging from direct financial support to tax rebates, cheap credit, and discounted raw materials—are designed to secure China’s position as a leading export nation, achieve global dominance in green manufacturing, reduce reliance on foreign technology, and establish the country as a key global supplier. As a result, Chinese companies have rapidly expanded, dominating the domestic market and increasingly penetrating foreign markets, such as the European Union, in sectors like solar panels, electric vehicle (EV) batteries, battery electric vehicles (BEVs), and wind energy.

A recent study by the Center for Strategic and International Studies (CSIS) found that China’s state support for industry amounted to at least $238 billion in 2019, representing 1.73 percent of its GDP. This level of industrial subsidies far surpasses those of other leading economies, both in absolute terms and as a share of GDP. China’s subsidies are about three times higher than France’s (0.55 percent of GDP) and four times higher than Germany’s (0.41 percent) and the United States’ (0.39 percent). Estimates further suggest that China’s subsidies are three to nine times greater than those of member countries of the EU and the Organization for Economic Cooperation and Development (OECD), highlighting the significant role of state intervention in its industrial sectors.

In 2023 alone, 99 percent of listed Chinese companies received a total of $34 billion in direct subsidies. While direct subsidies are substantial and easier for the United States, EU, and other trading partners to detect, China has increasingly relied on hidden subsidies, such as tax rebates, which often exceed the amounts provided through direct support. Between 2013 and 2023, tax rebates to major Chinese companies surged by 400 percent. For instance, BYD collected $1.27 billion in direct subsidies while receiving $5.08 billion in tax rebates. Similarly, BOE benefited from $8.2 billion in value-added tax (VAT) refunds over five years.

Below-market credit is another form of indirect subsidy, particularly to state-owned enterprises (SOEs). In fact, below-market credit to SOEs amounted to 0.52 percent of China’s GDP, according to the CSIS. A study by the OECD covering 2005–2019 found that Chinese industrial firms receive significantly more government support than firms in other countries, totaling about 4.5 percent of their revenues—primarily through below-market borrowing. This level of support is nearly nine times greater than that provided to comparable companies in the OECD.

Beijing also provides support through various other methods, including cheaper inputs and raw materials from state-owned companies, subsidized energy, forced technology transfers, and preferential treatment in public procurement. While these practices are not exclusive to China, their scale and frequency are unparalleled, greatly boosting the global competitiveness of Chinese industries. As a result of these unfair subsidies, China has become a global leader in photovoltaics and battery cell production and is pursuing similar dominance in other green-tech sectors, such as EVs, wind turbines, and railway rolling stock.

The most significant controversy among China’s trading partners, such as the United States and EU, centers around EVs, in which China’s rapid rise as the world’s largest market and production hub for BEVs has been driven by extensive government subsidies. Unlike many Western countries, where subsidies often go directly to consumers, in China, BEV purchase subsidies are paid directly to manufacturers but only for domestically produced vehicles, effectively discriminating against imports. These subsidies were crucial during the industry’s growth phase. Between 2010 and 2022, China allocated approximately $5.67 billion to support new energy vehicles (NEVs). Prior to 2020, the average subsidy per vehicle was $2,461, which was reduced to $1,391 by 2022 when the subsidies were phased out.

The World Trade Organization (WTO) has criticized China for its lack of transparency in industrial subsidy programs, particularly in key sectors like EVs, semiconductors, and steel. Although the WTO prohibits certain subsidies, it does not classify tax rebates as such, allowing China to bypass these rules. This opacity in China’s subsidy system makes it difficult to differentiate between domestic support and subsidies designed to distort trade by promoting exports.

In response, the United States, EU, and Canada have raised tariffs on Chinese imports, especially EVs, arguing that these subsidies distort global competition. The EU has introduced up to 45 percent tariffs, while the United States and Canada have imposed 100 percent tariffs, effectively blocking Chinese EVs from their markets. This escalation has raised concerns about China’s growing influence in global markets and the potential for a trade war.