Q：How do you view this current landscape of increasing use of sectoral policies with climate objectives, and what have been the main benefits and drawbacks so far from your country’s perspective?

A: Historically, European countries during the Industrial Revolution, the United States of America after independence, and Japan after World War II all implemented specific policies to develop their industries in the course of economic development. This is how industrial policy got its name. Specifically, the objectives of industrial policy include promoting industrial restructuring, optimizing industrial organization, enhancing industrial technological innovation etc.

IMF report shows that the use of industrial policy has risen in recent years. Climate change mitigation is an important motive for recent industrial policy. In terms of policy objectives, this is good for global green transition.

A key rationale for industrial policy is to correct market failures. This is particularly relevant in the context of the green transition of the economy. Positive externalities are often associated with the development of green industries. However, the traditional market, whether energy market or product market, has a structure which is unfavorable to the development of green industry. Therefore, the green transition cannot be achieved by market forces alone, and a range of supportive government policies are needed to address different types of market failures.

Subsidies are one of the tools of industrial policy. However, over-reliance on subsidies in policy implementation may magnify the negative spillover effects of industrial policy. As the IMF mentioned in their presentation, resources mis-allocation and fiscal waste. In addition, if the relevant measures are implemented in a way that violates WTO rules and principles, especially non-discrimination, national treatment, trade restriction discipline, etc., it will distort international trade and investment, and weaken the multilateral trading system with the WTO at its core. If this leads to “race to the bottom ”, such as “tariff wars” or “subsidy wars”, it will seriously disrupt the global economic order, and undermine the green transition efforts of developing countries .

China’s government has always stressed the need to give full play to the decisive role of the market in resource allocation and enable the government to play a better role. Ideally, industrial policy is supposed to combine “efficient market” with “responsive government”. Climate change is a global challenge that requires global responses. However, there are no existing policy recipes, and all countries are exploring. On China's green industrial policy, we have the following four aspects to share:

First, set firm targets and consistent expectations. As early as the 1980s, China first established environmental protection as a fundamental national policy. In the 1990s, most of China's major cities experienced severe air pollution, forcing the government to take decisive and sustained action on the green transition. In 2005, China explicitly proposed mandatory targets for "energy conservation and emission reduction." And since then, the government has continuously introduced relevant laws and policies. Such consistent policy statements and measures provide clear targets and set market expectations.

Second, address market failures and ensure fair competition. The traditional market structure of the power sector or the auto industries is characterized by huge-entry cost, oligopoly or monopoly, which is not conducive to the development of industries such as EVs or renewable energy. The Chinese Government has introduced a number of supportive policies to cultivate the market for new energy products, including lowering the entry threshold for new energy vehicle manufacturing, building infrastructure such as public charging stations, giving priority to EVs in licensing, and unlimited weekly driving on the road; and supporting the construction of power-transmission facilities as well as distributed power generation or storage, to promote the integration and consumption of renewable energy.

Third, all types of market entities are treated equally, including domestic and foreign enterprises. Favorable policies in the EV sector apply to imported cars and those made by foreign-invested companies in China. Currently, China's EV industry is led not only by Chinese companies, but also by foreign companies such as Tesla. In 2023, Tesla ranked first in the number of new energy vehicle exports in China.

Fourth, make good use of subsidies. Number 1, we use subsides on the consumption side to create more demand, such as purchase tax breaks and cash subsidies for consumers. Number 2, subsidies have been rationally designed, including continuously improving the technical threshold, and a gradual phase-out scheme to avoid over-reliance on subsidies. Number 3, ensue the compliance of subsidies with the WTO rules. We do this through the WTO compliance assessment mechanism for trade policies in China.

From my introduction, it is not difficult to see that it is a misunderstanding to regard China's industrial policy as merely subsides. It is even more of a misperception to attribute the development of China's new energy industry to subsidies. The development of China's new energy industry is the result of openness, free trade and respect for WTO rules, not as a result of protection. The relevant policies have created a fair and dynamic market environment for the development of new energy in China, and stimulated innovation vitality of the industry.

What is a good green industrial policy? The world is still trying to figure it out. I agree with the five basic principles shared by IMF colleagues. I noticed a recent commentary by Raghuram Rajan, former chief economist of the IMF and now Professor at the University of Chicago, that industrial policy is seen as a way to achieve better public management, but it becomes very dangerous when it interferes too much with the private sector. In my opinion, a good green industry policy should be of guiding nature, and do not distort or destroy market competition, but rather help create better conditions for fair competition and correct market failures.

Q: The multilateral trading system has been faced with the paradigm shift towards unilateralism with the increasing use of industrial policies with subsidies by large economies. Subsidy rules are a key topic of WTO reform negotiations, and members have committed to restoring dispute settlement by end of 2024. In which areas are existing subsidy rules inadequate to deal with the rise of green subsidies? How could the multilateral trading system do more to promote much needed investment in green sectors?

A: The current WTO rules on subsidies were agreed 30 years ago, and climate change has become an increasingly pressing challenge in the recent 10 years. In this new context, we should rethink the disciplines on subsidies. I have a few thoughts to share.

First and foremost, we need to comply with the existing rules on subsidies and trade remedies, including transparency, non-discrimination, and so on. A full and well-functioning WTO dispute settlement mechanism is of particular importance.

Second, can we consider bringing back some non-actionable subsidies in the ASCM, such as subsidies for the environment, R&D, etc., so as to provide a stable and predictable multilateral rule framework for the implementation of such subsidies by members?

Third, we are open to the development of new rules on subsidies, and members need to learn from each other and have constructive dialogue. Trade and environment is a cross-cutting issue involving WTO rules on subsidies, standards, tariffs, services, etc. As the next step, members should be encouraged to strengthen thematic discussions on issues related to green trade, and to conduct discussions and analyses on subsidies, standards, environmental products, etc. in order to promote the understanding of related issues. On subsidies, China supports the five guiding principles proposed by the IMF.

Fourth, the Investment Facilitation for Development Agreement. It is concluded by nearly 130 member parties, more than three-fourths of the WTO membership. This Agreement is intended to streamline administrative procedures, increase transparency and create a conducive environment for developing countries to attract foreign investment. The DG once remarked, that the IFD is the kind of industrial policy needed by developing countries. The IFDA is open and non-discriminative, does not create obligations or diminish rights of non-participant, and its implementation could equally benefit all WTO members, including the non-participants. The entry into force and implementation of this Agreement will be a public good offered by the WTO and play a key role in the promotion of global cross-border investment in the Green Industry.

I want to emphasize, in any case, members should avoid unilateralism and protectionism measures in the name of climate change, which would not only hinder one’s own green transition, but also drags down global efforts to combat climate change.