“Carrot and Stick”: Do US Entity List Sanctions Increase the Effectiveness of Chinese Government Subsidy?

Han Hu, Yunshi Cao () and Yanzhen Wang
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Han Hu: Jinan University
Yunshi Cao: Jinan University
Yanzhen Wang: Jinan University

Journal of the Knowledge Economy, 2025, vol. 16, issue 5, No 39, 16670-16697

Abstract: Abstract This study investigates the impact of US export control sanctions during the US-China trade conflict on the effectiveness of Chinese government subsidy. We treat US sanctions against Chinese firms as a signal containing valuable information and develop a signaling game model involving government and firms. The theoretical analysis reveals that sanctions mitigate adverse selection and moral hazard in the process of the Chinese government subsidizing firms. Furthermore, utilizing the matched data from the export control entities lists published by the Bureau of Industry and Security (BIS) of the US and China manufacturing listed companies, we empirically find that sanctions significantly improve the effectiveness of Chinese government subsidy by releasing signals to alleviate firms’ financing constraints and enhance external supervision. Heterogeneity tests indicate that the promotional effect is particularly pronounced for private-owned enterprises (POEs), firms in the maturity stage, and firms in Railroads, Ships & Aerospace sector, and Computers & Communications sector. Additionally, we find that sanctions adversely affect firms’ R&D outputs, resulting in a less efficient transformation of R&D inputs into outputs. Our study contributes to a more comprehensive understanding of the outcomes of the trade war and provides insights into subsidy policy.

Keywords: Trade war; Government subsidies; R&D; Information asymmetry (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s13132-024-02544-1

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