How China Responded to the Trade War: Evidence from Subsidies and Public Procurement

This paper investigates how the Chinese government reallocated public resources to mitigate the effects of the U.S.–China trade war. Using a novel firm-level dataset linking tariff exposure with subsidies and procurement contracts between 2015 and 2020, we identify exogenous variation through a Bartik (shift–share) design based on pre-war trade patterns. In the first step, focusing on listed firms, we show that those more exposed to U.S. tariffs received significantly higher direct subsidies—about 7.7% more for a one-standard-deviation increase in exposure. Yet, support primarily targeted politically connected rather than productive firms, suggesting allocation distortions. In the second step, we extend the analysis to a broader panel including small and medium-sized firms using public procurement data. Local favoritism dominates: firms operating within their own jurisdiction received contracts roughly three times larger, especially when exposed to U.S. tariffs. Together, these findings reveal that both national and local authorities cushioned the trade shock through politically and territorially selective interventions.