China's Trade

China’s Export Policy

China has largely reduced the scope of its production and innovation subsidies at the firm level, but some still remain. Recent research shows that such production subsidies do, on average, boost firm-level exports especially in more innovative and capital-intensive industries and especially for firms with previous export experience.

China’s exports are booming and – somewhat surprisingly – not just in labour-intensive goods. As Yale trade economist Peter Schott writes in his recent Vox column, China exports an astonishingly wide range of goods – including many in high-tech sectors (Schott 2008).

Although some economists argue that this is an illusion – that China’s sophisticated exports are just assembled from sophisticated imported components (Branstetter and Lardy 2006) – it is difficult to deny that some Chinese firms are making their mark in high-tech industries. According to the WTO 2007 report, China’s export unit value index for manufactured goods rose by 3.6% in 2006, signalling a move away from reliance on the cheap exports.

Pushing its industry up the value-added change is a clear goal of the Chinese government at both the central and local levels. Tax incentives and other policies, like production subsidies, are used to actively upgrade companies’ product structure. But have these policies had any effect? For example, Görg, Henry and Strobl (2008) provide firm-level evidence that Irish production subsidies boosted the exports of already existing exporters but found no evidence that subsidies induced firms to begin exporting.

Our recent study addresses this question for China by examining firm-level data encompassing nearly a half million firms (more than 1.3 million observations) over a six year period from 1999 to 2005 (Girma et al. 2008). Critically, we have rare information on production subsidies received by Chinese firms.1

An overview of subsidies in China

Subsidies are aimed at encouraging activities that would otherwise not take place. Given the importance of exports in China’s economic growth, it is not unreasonable to assume that there might be a link between the substantial amount of subsides that the Chinese government provides and China’s remarkable export performance.

To the best of our best knowledge, there is no public information on direct export subsidies in China. However, data on subsidies for encouraging innovation or high-tech products and subsidies flowing into State-owned Enterprises (SOEs) are available from the China Fiscal Yearbooks. Table 1 shows the figures.

 Source: China fiscal yearbook, China statistical yearbook.

Among the three government budget expenditures located to firms, only the innovation and science & technology promotion funds are shared between state- and non-state owned enterprises. The two other resources (columns 2 and 3) are for SOEs only. The key facts in Table 1 are:

· Between 1985 and 2005 subsidies amount to a total of $310 billion, $151 billion of which are directed at SOEs, with a whopping 95% of these loss-making SOE. 

· Over half of total subsidies are allocated to innovation and science & technology promotion funds. This is one indicator that the government is promoting innovation activities and focusing on developing firms with high-tech products with hope that it might help upgrade the industry structure and therefore enhance export performance. 

As part of its WTO accession deal, the Chinese government committed to eliminating or substantially reducing subsidies, in particular, subsidies for loss-making state owned enterprises. The Table figures show a clear decline in the nominal value of such subsidies since China’s 2001 WTO membership – a decline that is even more marked as a share of value added, given the explosive growth of Chinese industrial production. Nevertheless, for 2005 $2.4 billion of such subsidies were reported.2

Research findings on production subsidies and export in China

Our research draws on a rich Chinese firm-level dataset from the manufacturing sector, which contains firms that account for about 85-90% of total output in most industries. Around 14% of the firms received production subsidies at some stage during the sample period. We find that export growth in privately owned firms has been remarkably strong in almost all sectors over the sample period – not just in labour-intensive sectors but also in high-tech sectors such as machinery and electronics.

· Over the same period China has seen a recent shift in the nature of its exports towards more sophisticated products – in 1999 subsidies were highest in the textiles and ordinary machinery sectors. By 2005, firms in the instruments and measurement industry received by far the highest levels of subsidies 

· The results show that a doubling of production subsidies leads, on average, to a 2.1% increase in the level of exports. 

· The export-effect of production subsidies is more pronounced in more innovative and capital-intensive industries, especially for firms with previous export experience. 

· The firms that benefit most from subsidies are the innovative and profitable ones.