The global economy is increasingly confronted with unfair subsidies

Unfair subsidies: How China and the USA are challenging Europe's competition

The global economy is increasingly confronted with unfair subsidies, particularly through government support programs in China (“Made in China 2025”) and the USA (Inflation Reduction Act, CHIPS and Science Act). These measures distort competition and jeopardize the technological leadership of European companies. In response, the EU and Germany are developing a multi-stage system of regulatory, financial, and strategic instruments.

EU regulatory countermeasures

1. New subsidy controls

In 2023, the European Commission introduced the Regulation on Subsidies from Third Countries to prohibit or sanction anti-competitive financial aid from non-EU countries. This closes gaps in previous competition law, which only regulated subsidies within the EU.

2. Trade policy protection instruments

Modernized anti-dumping methods and the International Procurement Instrument (IPI) make it possible to disadvantage foreign bidders in EU tenders if their home countries do not grant fair market access.

Direct support for domestic innovations

Germany relies on a combination of industry-agnostic funding programs and strategic priorities:

• ZIM (Central Innovation Programme for SMEs): Up to 50% grants for R&D projects, especially for SMEs and start-ups. The programme was reformed in 2025 to make it easier for first-time applicants to access the program.
• High-tech strategy 2025: The goal is to invest 3.5% of GDP in research, with a focus on AI, quantum technologies and green hydrogen.
• Tax incentives for research: Since 2020, the Research Allowance Act has enabled tax breaks of up to €4 million per year for private sector R&D activities.

European coordination against subsidy races

To avoid internal market distortions, the EU relies on:

• Strict state aid rules: Relaxations in EU state aid law are viewed critically, as they could lead to inefficient subsidy competition.
• Joint industrial projects: Initiatives such as the European Battery Alliance or Hydrogen IPCEIs pool resources and prevent double funding.

International strategies and technology partnerships

• Multilateral WTO reforms: Germany is pushing for stricter subsidy rules and more transparent reporting procedures to address Chinese practices such as special tax deductions for R&D.
• Climate partnerships: The EU Border Adjustment Mechanism (CBAM) is intended to tax CO₂-intensive imports from 2026 onwards, thereby indirectly offsetting subsidized competition from third countries.

Support for market entry and scaling

• Young Innovators Programme: Subsidized joint stands at trade fairs such as ISH 2025 reduce costs for start-ups by 60%.
• ERP Digitalization and Innovation Loan: Low-interest loans of up to €25 million for digital transformation projects, especially for SMEs.

Challenges and critical points

• Relocation pressure: US subsidies amounting to $1.2 trillion (IRA) and $280 billion (CHIPS Act) are tempting companies like Northvolt to relocate production facilities.
• Lack of scalability: Despite programs like ZIM, only 15% of SMEs achieve international market penetration, mainly due to bureaucratic hurdles.

The balance between protectionist measures and open markets remains crucial: While defensive instruments such as the Foreign Subsidies Regulation offer short-term protection, long-term success depends on innovation – supported by targeted R&D funding and European technology alliances.

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The global economic landscape is changing

The global economic landscape is undergoing profound change, characterized by increasing competition for technological supremacy. A crucial factor in this power struggle is government subsidies, which have reached unprecedented levels in recent years. In particular, the “Made in China 2025” support programs and US initiatives such as the Inflation Reduction Act and the CHIPS and Science Act have significantly distorted global competition. These measures, specifically designed to support domestic industries, pose a serious threat to the technological leadership of European companies. The resulting distortion of competition not only jeopardizes jobs but also undermines the long-term innovative capacity of the European economic area.

Reaction of the European Union and Germany

The European Union and Germany have recognized this development and are responding with a multifaceted approach that includes regulatory, financial, and strategic instruments. The aim is not to get caught up in an unproductive subsidy race, but rather to create fair competitive conditions and strengthen the innovative capacity of the European economy.

Regulatory measures

At the regulatory level, the EU has taken important steps to curb the impact of unfair subsidies from third countries. The Regulation on Subsidies from Third Countries, which entered into force in 2023, is a crucial element in this framework. It closes a significant gap in previous competition law, which focused primarily on subsidies within the EU. This regulation now allows the European Commission to prohibit or sanction anti-competitive financial aid from non-EU countries. EU trade policy has also modernized important safeguards. Anti-dumping measures and the International Procurement Instrument (IPI) make it possible to disadvantage foreign bidders in public tenders if their home countries do not provide fair market access. These instruments are designed to ensure that European companies operate in a fair and transparent competitive environment.

Direct funding and investment in future technologies

In addition to these regulatory measures, Germany relies on a combination of direct innovation funding and strategic investments in future-oriented technologies. The Central Innovation Programme for SMEs (ZIM) is a key pillar of this strategy. It offers grants of up to 50% for research and development projects, particularly to small and medium-sized enterprises (SMEs) and startups. The 2025 reform of ZIM facilitated access for first-time applicants and aims to ensure that innovative ideas do not fail due to financial barriers. The High-Tech Strategy 2025 is another example of Germany's commitment to research and development. It aims to invest 3.5% of gross domestic product (GDP) in research. These investments focus on key technologies such as artificial intelligence (AI), quantum technologies, and green hydrogen. Furthermore, the Research Allowance Act supports private companies with tax breaks of up to €4 million per year for their research and development activities.

Strengthening fair competition in the EU

To avoid internal market distortions, the EU relies on strict state aid rules and joint industrial projects. Relaxing EU state aid rules is viewed critically, as it could lead to inefficient subsidy competition within the Union. Instead, the EU focuses on initiatives such as the European Battery Alliance and hydrogen IPCEIs (Important Projects of Common European Interest). These projects pool resources and prevent duplicate and misallocated funding.

Germany's goals at the international level

At the international level, Germany pursues the goal of establishing fair competition even outside the EU. Within the framework of the World Trade Organization (WTO), Germany advocates for stricter subsidy rules and more transparent reporting procedures to address practices such as China's special tax deductions for research and development. The EU Border Adjustment Mechanism (CBAM), scheduled to come into force in 2026, is a further measure to offset indirectly subsidized competition from third countries. By taxing carbon-intensive imports, CBAM aims to ensure fair competition for companies striving for sustainable production methods.

Promoting market entry and scaling

In addition to promoting research and development, support for market entry and scaling is crucial. The “Young Innovators” program offers startups subsidized joint booths at trade fairs to reduce the costs of presenting their products and services. The ERP Digitalization and Innovation Loan provides low-interest loans for digital transformation projects, particularly for small and medium-sized enterprises (SMEs).

Challenges for the EU and Germany

Despite all these efforts, the EU and Germany face significant challenges. The pressure on companies to relocate to the US due to generous subsidies is a growing problem. US subsidies totaling $1.2 trillion (IRA) and $280 billion (CHIPS Act) are enticing companies to move production facilities. The lack of scaling innovation is another obstacle. Despite support programs like ZIM, only 15% of SMEs achieve international market penetration, often due to bureaucratic hurdles. It is crucial to acknowledge these challenges and develop measures that not only provide short-term protection but also strengthen the innovative capacity of the European economy in the long term. Striking a balance between protectionist measures and open markets is of paramount importance. Policymakers must ensure that protection against unfair competition does not lead to isolationism but rather prioritizes the development of domestic strengths and capacities.

Future of European competitiveness

Ultimately, the long-term competitiveness of the European economy will depend on its innovative capacity. This innovative capacity must be strengthened through targeted support for research and development, strong European cooperation, and the creation of a business-friendly environment. It is a complex interplay of regulatory measures, financial incentives, and strategic partnerships that will enable Europe to successfully meet the challenges of the global economic landscape.

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