China’s industrial policy has long been a cornerstone of its economic rise, marked by heavy state intervention, targeted subsidies, and strategic investments in key sectors. While these measures have propelled growth in industries such as electronics, renewable energy, and advanced manufacturing, they also carry less visible but significant economic and structural drawbacks. One major consequence is market distortion, both domestically and internationally. By shielding certain firms from competition and flooding global markets with subsidized goods, Chinese policies can undermine fair trade and discourage innovation in other countries. This has led to repeated trade disputes, particularly with the United States and the European Union, over allegations of dumping and unfair advantages.
Moreover, the reliance on top-down planning risks misallocating capital. Billions of dollars are directed toward sectors deemed strategically important, sometimes resulting in overcapacity and inefficient use of resources. For instance, overproduction in solar panels and steel has led to price collapses and idle factories, creating financial strain on local governments and banks. Additionally, the dominance of state-backed enterprises may crowd out private-sector innovation, limiting entrepreneurial dynamism and long-term productivity gains.
Another concern is the burden placed on households and consumers. Industrial subsidies are often financed through mechanisms like suppressed interest rates and undervalued currency, which reduce returns on savings and increase import costs. This effectively transfers wealth from individuals to state-supported industries, potentially exacerbating inequality.
While China’s model has delivered rapid industrialization, the long-term sustainability of such an approach remains questionable. As global scrutiny intensifies and domestic imbalances grow, the hidden costs of this strategy may begin to outweigh its benefits.
— news from CEPR
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The hidden costs of China’s industrial policy – CEPR
The hidden costs of China’s industrial policy CEPR