For the past decade, western governments have wrestled with how to respond to the threat of cheap Chinese imports. The issue of “predatory competition” was once again high on the agenda at this week’s G7 summit in Evian-les-Bains, and is set to feature prominently when EU leaders meet on Thursday. Increasingly, the response from Washington and Brussels has been to leverage the might of the state to provide subsidies and protections for industry. According to Global Trade Alert, more than 9,500 subsidy measures have been introduced across the EU and US over the past ten years. In other words, to counter Beijing’s state-led economic model, the rich world has increasingly borrowed elements of it.Today, there is growing acceptance in the west that the state should play a greater role in the economy, despite the costs and distortions this may bring. Recent shocks, from Covid-19 to conflicts in Ukraine and the Middle East, have exposed the fragility of global supply chains when left to markets alone. Rising geopolitical tensions have also highlighted how dependencies can be weaponised, while years of reliance on low-cost Chinese imports have eroded domestic manufacturing capacity in sectors deemed critical to national security and emerging technologies. Few now dispute that interventions — be they subsidies, procurement rules or trade protections — can help build resilience in strategic industries.
But governments must guard against interventions expanding beyond these narrowly defined purposes. China’s industrial strength now spans from low-end goods to advanced sectors including electric vehicles, solar panels and wind turbines. Western governments lack the fiscal and bureaucratic capacity to prop up industries across the board, particularly as Beijing has spent decades building vertically integrated supply chains. An OECD report this month found Chinese companies receive, on average, up to eight times more state support — including subsidies and cheap loans — than their rich-world counterparts.
Once governments accept a larger role in directing economic activity, however, boundaries become harder to maintain. Industries across the economy can argue they are strategically important and deserve protection from Chinese competition. Support, once granted, is also politically difficult to withdraw, while new subsidies offer an easy win for sectors under pressure. EU state aid surged during the pandemic and still remains above pre-Covid levels.