On 22 April 2022 a joint report issued was issued by the WTO with the IMF, OECD and World Bank, examining the need for international cooperation in combating harmful trade subsidies.
The drive by the G20 to strengthen the multilateral trading system requires measures to deal with the issue of subsidies in international trade. The use of distortive subsidies distorts flows of investments and trade, makes market access commitments less meaningful, and reduces public support for more open trade.
Unilateral measures, known as trade defence measures, are taken by countries in response to actions by their trading partners but they have only a limited effect. As countries emerge from the pandemic, they are framing revised industrial policies to promote strategic sectors. They may however take measures that have the effect of distorting international competition, at the expense of developing countries. The use of distortive subsidies is increasing and must be dealt with by international cooperation.
The use of subsidies is common in all industrial sectors by countries at all stages of development. Most trade in merchandise is carried on in products and markets where at least one subsidized firm is operating. Subsidies are provided in the form of direct grants, tax incentives and favourable terms for financing, land, energy or other inputs. Although some subsidies are introduced to correct market failures, others do not fulfil their stated goal or only achieve their objective at a high cost or with harmful effects on other countries. International cooperation is needed to reduce the use of subsidies and ensure they are better designed.
There are gaps in the international rules in relation to subsidies. In many cases countries are still allowed to grant significant distorting domestic farm subsidies. The WTO member countries have not yet agreed rules to combat harmful fisheries subsidies that are contributing to the problem of overfishing.
Recent international developments make the tighter control of subsidies more urgent. These developments include the emergence of global value chains; the growing digital markets; and the rising power of state-owned enterprises and of economies where the State is performing a central role. In the urgent economic and health situations in recent years subsidies have been an important part of the response.
Investment incentives are used widely and are often given by regional or local governments where they are difficult to monitor. International cooperation could improve the rules on subsidies; increase business certainty; and reduce trade frictions. This would be more effective than unilateral actions, and would mean that such unilateral actions are no longer necessary.
Governments can progress the reform of their own subsidies by better information, more objective analysis and regular dialogue. High-quality economic analysis can show to what extent subsidy programs are meeting domestic policy objectives, how much they are costing, and their effects on international markets and international policy goals such as climate mitigation.
This information and analysis can be the basis of inter-governmental dialogue, that can lead to agreement on the appropriate role of subsidies and can promote the development of updated norms and standards. Improved transparency and analysis combined with international consultation could reduce the use of harmful subsidies and lead to improvements in their design.
The international organisations are considering their contribution to the process which could involve collecting and sharing data; helping to develop methodologies to assess the effects of various types of subsidies; or supporting international consultation.
