What's Happening?
A new IMF working paper, analyzed by Professor Richard Baldwin, indicates that China's industrial subsidies have successfully boosted its exports in strategic sectors, leading to significant scale-induced productivity gains. China's direct subsidies to goods
sectors rose from approximately 1% of value added in 2015 to 2.7% in 2023, with a strong focus on strategic sectors like electrical equipment, electronics, and pharmaceuticals. In contrast, the U.S. primarily subsidized older economy sectors such as agriculture and mineral products, where scale economies do not significantly enhance productivity. The study found that while U.S. tariffs on China, implemented in two rounds (2018-19 and 2025-26), severely impacted bilateral trade, they failed to increase U.S. exports in strategic sectors. Instead, the world market share China conceded went to the EU and other countries, not the U.S.
Why It's Important?
This analysis challenges the effectiveness of U.S. tariff policies as a tool to counter foreign industrial subsidies and boost domestic exports. For U.S. industries, the findings suggest that tariffs alone may not achieve desired outcomes, potentially leading to higher import costs without a corresponding increase in export competitiveness. The study highlights a strategic mismatch in subsidy allocation: China's targeted investments in high-growth, scale-intensive sectors have yielded significant export gains, while U.S. subsidies have largely gone to sectors with limited productivity growth. This could exacerbate trade imbalances and impact the long-term competitiveness of U.S. strategic industries. The 'beggar-thy-neighbor' effect, where China's subsidies lowered U.S., EU, and other countries' exports in strategic sectors, underscores the global economic implications of such policies.
What's Next?
The study's findings suggest that the current U.S. approach of using tariffs to counter China's subsidies is not achieving its intended goal of boosting U.S. exports. This could prompt a re-evaluation of U.S. trade policy, potentially leading to a shift from broad tariffs to more targeted industrial policies or a renewed focus on international agreements to address subsidy practices. Professor Baldwin suggests the need for an 'arms-control pact for industrial subsidies' to prevent a 'subsidy-tariff-export-control spiral.' Without such an agreement, the negative-sum game of subsidy and tariff wars is likely to continue, leading to a global reduction in real income. The U.S. may need to consider how its own subsidy programs are allocated to maximize economic performance rather than political objectives.
Beyond the Headlines
The deeper implication of this study is the economic inefficiency and global welfare loss associated with uncoordinated industrial policies and trade wars. While China's subsidies achieved its political goal of boosting strategic exports, the economic cost, including a reduction in its own real income, was significant. The U.S. tariffs, while impacting bilateral trade, did not lead to a recovery of U.S. market share in strategic sectors, indicating a failure to achieve economic rebalancing. This situation highlights the limitations of unilateral trade actions in a globally integrated economy and the potential for unintended consequences. The ethical dimension arises from the 'beggar-thy-neighbor' effect, where one country's policies negatively impact others. The long-term shift could be towards a more collaborative approach to industrial policy and trade, recognizing that a global 'race to the bottom' in subsidies and tariffs ultimately harms all participants.
