182. Is China’s industrial policy working?

Episode Summary

Executive Summary: The episode examines China’s industrial policy from Mao-era dirigisme to Made in China 2025, arguing that while subsidies are often justified by market failures and strategic goals, Lee Branstetter’s research finds Chinese subsidies have not systematically raised productivity, patenting, or innovation. Instead, they often support larger or declining firms, creating trade frictions, retaliation, and a global industrial-policy arms race.

Main Topics: Why governments subsidize (Priority: 5/5): The discussion opens with economic theory: governments may subsidize R&D, training, public goods, strategic industries, or politically important sectors because markets underinvest or because policymakers want to shift rents or stabilize coalitions. How China subsidizes differently (Priority: 5/5): China’s state-owned banks, state-owned land system, SOE procurement power, tax breaks, direct cash, and technology-access conditions give the government more channels to subsidize than typical market economies. China’s industrial policy evolution (Priority: 4/5): China moved from Mao-era central planning to market liberalization within industries in the reform era, then returned to more deliberate cross-industry guidance as easy liberalization gains faded in the 2000s. Empirical findings on subsidies before MIC2025 (Priority: 5/5): Using mandatory subsidy disclosure starting in 2007, Branstetter’s research finds subsidies are not going to the most productive firms and do not measurably increase productivity even for R&D- or equipment-related subsidies. Made in China 2025 and targeted industrial upgrading (Priority: 5/5): MIC2025 introduced explicit market-share targets, heavy spending, and a clear push to build national champions in sectors like EVs, robots, and medical devices, but the study finds no clear gains in patents or productivity. Policy and geopolitical implications (Priority: 5/5): The episode argues that even ineffective subsidies can distort trade, suppress global innovation, fuel sanctions and decoupling, and trigger imitation by the U.S., Europe, Japan, and others.

Key Arguments: Market failures justify some subsidies, especially in R&D and human capital, because firms cannot capture all returns from innovation and training. China has more intervention channels than most countries because of state control over banks, land, SOEs, and market access rules. Before MIC2025, Chinese subsidies were broadly distributed and often supported less-productive or larger firms rather than obvious winners. Even subsidies explicitly meant for innovation or equipment upgrading show no statistically significant productivity effect. Firms linked to MIC2025 were somewhat more innovative at baseline, but the program still produced no measurable increase in patents, labor productivity, or total factor productivity. China’s subsidies often serve non-productivity goals such as employment stabilization and support for declining sectors like mining. The trade conflict is not only about U.S. protectionism; the explicit market-share targets in MIC2025 made the policy look like premeditated import substitution. Industrial policy is hard for all countries, not just China; Japan, the U.S., and Europe have faced similar difficulties and mixed results. Even if subsidies do not improve firm productivity, they can still distort global competition, suppress innovation, and reduce welfare for China and its trading partners. A better long-run strategy would be to shift spending upstream toward education, training, and basic research rather than output-stage subsidy races.

Data Points: Year Made in China 2025 announced: 2015 - Chinese leadership unveiled the industrial policy that became a focal point of global trade tensions. Year firms had to disclose subsidies on Chinese exchanges: 2007 - The regulatory change enabled firm-level empirical analysis of subsidy receipt and outcomes. Tariffs affected: more than half of U.S.-China trade - The trade war triggered by MIC2025-related tensions led to tariffs and retaliatory tariffs across a huge share of bilateral commerce. China’s population referenced: 1.3 billion people - Used to stress why other countries cannot simply wish China’s development ambitions away. Market share targets in MIC2025: 80% / 70% - The policy set explicit domestic supply targets for certain products and sectors. Policy spending estimate: hundreds of billions of dollars - Referenced as an external estimate of the scale of support behind MIC2025, though exact totals are unclear. Data window in study: through 2018 - The paper’s core dataset ends in 2018, with some robustness checks extending into the early 2020s. Finding on initial productivity: negative statistical association - Subsidies were, on average, directed toward less productive firms rather than more productive ones. Finding on productivity impact: no statistically significant positive impact - Reported for labor productivity, total factor productivity, and patenting among MIC2025-linked firms. Finding on patents: no statistically significant positive impact in China or the United States - Even with patent incentives and time for effects to emerge, the program showed no patenting boost in either place.

Pivotal Quotes: "the Chinese government is not giving subsidies to initially more productive firms" — Lee Branstetter: Core empirical finding from the firm-level subsidy analysis. "Made in China 2025 has not really worked at making Chinese firms more productive or innovative" — Chad Bowne: Episode’s summary judgment on the effectiveness of the program. "if China wants to improve productivity and increase innovation, this does not seem to be a particularly effective way to do it" — Lee Branstetter: Policy takeaway from the research and broader discussion.

Implications: Listeners should view industrial policy as risky and hard to execute: subsidies can be politically useful yet economically weak, while still distorting trade. The better path may be upstream investment in education and basic research rather than subsidy-driven rivalry.