The European Central Bank (ECB) released an analysis on August 14, which showed that government subsidies from the Chinese government in industries such as automobiles, solar panels, wind turbines, and semiconductors have contributed to the export growth of businesses by 4 to 14 times the overall sample average. The ECB pointed out that when government subsidies push exports beyond what basic economic conditions can explain, it can impose significant adjustment costs on trading partners.
On August 14, the ECB published a blog post titled “Do government subsidies drive global imbalances?” The post utilized data from the Organization for Economic Cooperation and Development’s (OECD) Manufacturing Groups and Industrial Corporations (MAGIC) database to compare the government support received by large enterprises in the United States, China, and the Eurozone. Additionally, it analyzed the relationship between subsidies and export performance, as well as the potential impact on global trade imbalances.
The ECB expressed concern over global imbalances as they could exacerbate trade tensions and protectionist reactions, and potentially lead to financial vulnerabilities. The analysis revealed that while Chinese government subsidies may not significantly contribute to overall export growth for Chinese firms, their impact on strategic industry exports is much greater. In industries like automobiles, solar panels, wind turbines, and semiconductors, subsidies were estimated to contribute 4 to 14 times more to export growth compared to the overall sample average.
Although industry subsidies alone may not drive global imbalances significantly, the ECB’s research suggests that subsidies could substantially reshape trade in strategically important industries. Especially when subsidies push exports beyond what basic economic conditions can explain, these subsidies may impose significant adjustment costs on trading partners, potentially leading to increased unemployment or deindustrialization, which could ultimately trigger trade tensions.
Two weeks prior to the ECB’s viewpoint publication, the International Monetary Fund (IMF) emphasized the worsening state of global imbalances. On July 30, the IMF released an article titled “Rising Global Imbalances Underscore Need to Confront Domestic Distortions.”
According to the IMF, China’s role in expanding global current account balances has been pivotal. China’s current account surplus increased by approximately $300 billion last year, marking the largest annual increase in at least 25 years, with the surplus reaching 0.6% of global GDP. In contrast, the United States saw its current account deficit shrink by $69 billion but still maintains the largest deficit globally, approximately 0.9% of global GDP, exceeding the combined surplus of China and the Eurozone.
As global current account balances rise, global trade tensions remain high. Countries with persistent surpluses and deficits reflect global current account imbalances, indicating some nations continually earn while others consume, with the disparity worsening.
The IMF warns that persistently large and prolonged current account imbalances could lead to inefficient resource allocation, increase financial system fragility, and elevate the risk of disorderly adjustments, such as economic slowdowns.
Additionally, massive and prolonged excessive current account imbalances could reveal unbalanced economic growth patterns, generating negative cross-border spillover effects and amplifying risks of trade tensions and global economic fragmentation. Cross-border spillover effects occur when one country’s economic or policy changes influence other nations through trade, funds, exchange rates, etc.
The IMF attributes China’s expanded surplus since 2023 partly to weakened investment – initially marked by decreasing real estate investments and recent slowdowns in manufacturing and infrastructure investments. A structural factor contributing to this surplus is China’s persistently high private savings rate driven by weak social security provisions, prompting increased precautionary savings among citizens.
In the United States, the sizable ongoing current account deficit reflects consistently low savings rates and severe government fiscal deficits.
The ECB’s analysis highlighted that compared to other countries, China’s enterprises stand out in terms of both the amount of government support they receive and the number of supported industries, with Chinese firms receiving more support often exhibiting higher export amounts. This interplay is significantly weaker in the United States and the Eurozone.
After benefiting from government subsidies, Chinese enterprises experience increased domestic revenues and exports (with overseas revenues as a proxy metric). This effect is most pronounced in the two to three years following subsidy reception and gradually diminishes thereafter. While subsidies may not significantly contribute to overall export growth for Chinese firms, their impact on strategic industry exports is considerable.
Specifically in industries like automobiles, solar panels, wind turbines, and semiconductors, the ECB estimates that Chinese government subsidies contribute 4 to 14 times more to export growth compared to the overall sample average. The ECB emphasizes the importance of examining this relationship at the industry level, as imbalances in strategically crucial sectors like solar technology, semiconductors, and automobiles could stress employment and industrial capacity for trading partners.
Regarding the solar energy industry, substantial exports of low-cost Chinese solar panels have led to the closure of similar EU and US manufacturers. In July this year, French solar module manufacturer Reden announced the closure of its only solar module assembly plant in France due to increased competition from predominantly Chinese Asian manufacturers and heightened cost pressures. By 2026, China has captured over 80% of the global solar component supply chain, if not more.
Former EU Trade Commissioner Karel De Gucht recently advocated for the EU to actively limit the entry of Chinese goods into European markets. De Gucht, who served as the EU Trade Commissioner from 2010 to 2014, oversaw cases such as the investigation into Chinese solar panel dumping and Chinese telecom equipment (Huawei, ZTE). De Gucht believes that had the EU rigorously enforced anti-dumping measures in 2013, the European solar industry might not have nearly disappeared. The EU’s current share of the global solar market has dropped to about 0.2%.