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Industrial policy and retaliatory protection under the WTO: Lessons from China
Feng, Y; Li, H; Wang, S; Zhu, M (2025) Industrial policy and retaliatory protection under the WTO: Lessons from China, Centre for Inclusive Trade Policy, Working Paper 030
Published 13 January 2026
CITP Working Paper 030
Abstract
Using Chinese firm-level trade data combined with global anti-dumping (AD) and countervailing duty (CVD) investigations, we uncover a previously overlooked cost of industrial policy under WTO agreements. At every stage of AD/CVD investigation, subsidies significantly raise the probability of affirmative rulings and lead to higher imposed duties. Firms that received larger subsidies are also less likely to be granted firm-specific duties, which are lower than the product-level duties applied to all other firms exporting the investigated product. While AD/CVD duties create a moderate trade barrier that an average Chinese firm expects to face, they represent a significant cost of subsidy for those heavily subsidized and those potentially receiving firm-specific duties. The intended benefits of industrial subsidies are partially offset by increased foreign trade protection: AD/CVD duties induced by subsidies reduced the subsidy effect on firm revenue growth by 22%.
Non Technical Summary
Governments worldwide are increasingly turning to industrial policies to boost strategic sectors, accelerate innovation, and build domestic production capacity. China stands out in this global trend, having extensively supported industries such as renewable energy, steel, and electric vehicles. While these policies help firms scale up and improve competitiveness, this new research uncovers a significant hidden cost: domestic subsidies directly expose firms to severe foreign trade penalties.
Over the past two decades, China has become the primary target of antidumping and countervailing duty actions worldwide. Under the rules of the World Trade Organization, these measures are used by many countries to protect their domestic industries from subsidised or unfairly priced imports. By 2020, roughly 15% of Chinese exports to the United States and 12% to G7 countries were subject to antidumping and countervailing duties. Trading partners have adopted these measures amid rapid growth in China’s exports, recurring concerns about industrial overcapacity, and extensive Chinese state support in key sectors.
This study provides the first systematic evidence on how domestic subsidies shape foreign trade protection. Using detailed data on Chinese industrial firms linked to every antidumping and countervailing duty case against China between 2000 and 2016, the authors examine how subsidies affect outcomes at each stage of an investigation.
Antidumping and countervailing duty cases are filed against specific products exported to a foreign market. For each case, exporters may receive either a lower, firm-specific duty if they fully cooperate and demonstrate independence from government influence, or a much higher product-wide duty if they do not. This two-tier system creates substantial variation in duty rates among firms exporting the same product to the same country at the same time.
Across thousands of investigations, the researchers find three consistent patterns. First, products exported by more heavily subsidised Chinese firms are more likely to receive affirmative rulings that result in duties. Second, when duties are imposed, the rates are higher for firms receiving larger subsidies. Third, firms with high subsidy levels are much less likely to obtain the more favourable firm-specific duty. Even among those that do, higher subsidies still lead to higher firm-specific duty rates. These findings show that subsidies strongly affect how severely firms are treated once a case begins.
The authors also look beyond individual investigations to assess how subsidies affect firms across the Chinese economy. On average, the impact is modest: a small increase in a firm’s subsidy only slightly raises the chance of facing a foreign duty. This is because most firms never become involved in an antidumping and countervailing duty case. But the picture changes sharply for the small group of firms that receive very large subsidies. Since subsidies in China are highly uneven, most firms get little, while a few receive extremely high levels. These heavily supported firms face much steeper penalties abroad. Policymakers should consider the effectiveness of subsidies in relation to the potential extent of foreign trade retaliation they may trigger.
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