Redefining the Rules
The Future of WTO Subsidies Reform
In recent years, we have witnessed an increase in the scale, reach and sophistication of subsidies creating distortions for international trade. Non-market economies, particularly China, have been channeling unprecedented amounts of subsidies and financial assistance into its economy. The COVID-19 pandemic and economic recovery efforts by many governments have also focused on government spending to spur growth. The World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures, which was established in 1995 to govern the use of government subsidies and other forms of financial assistance, has not been updated to reflect these complex realities of today’s global economy.
The World Trade Organization (WTO) Subsidies Agreement defines subsidies as: “(i) a financial contribution (ii) by a government or any public body within the territory of a Member (iii) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist.” Additionally, subsidies must fulfill requirements of proof of benefit and specificity of the beneficiary (e.g. - specific enterprise, industry, region, or goods). The agreement also includes multilateral rules that: (1) categorize subsidies into prohibited and actional subsidies and determine rules and procedures for each respectively; and (2) establish requirements and procedures that must be met before WTO members can apply countervailing measures against subsidized imports.
The disciplines of the WTO subsidies agreement were first constructed with a traditional market economy in mind. However, since then, with the growth in economic power of non-market economies, including but not limited to China, we have since seen significantly increased levels of state support and an evolution of new subsidization techniques that call into question the current definition of a “subsidy” as well as that of a “public body,” among other concerns. Procedural issues around burden of proof and transparency also require updating, which are critical for setting a level playing field for members. As a result, current subsidy rules do not adequately capture and regulate these levels of market distortions.
Building consensus among the 164 members of the WTO is challenging on any matter, and particularly on an issue as complex and far-reaching as subsidies. Nevertheless, given the urgency of the situation, certain countries have undertaken work to build momentum around this issue. A prime example of this work is the EU-Japan-U.S. trilateral process, which was launched in December 2017. The trilateral group has developed proposals to strengthen and update existing WTO rules on industrial subsidies, including: expanding the list of prohibited subsidies, enforcing proper notification of subsidies, and updating the definition of “public body.” However, this work has not been finalized and is yet to be submitted for consideration by other WTO members and there are some questions as to whether the trilateral work goes far enough in disciplining the magnitude and types of subsides and financial assistance arising in non-market economies.
Against this backdrop, the Asia Society Policy Institute (ASPI) convened a public event on April 14th 2021 to discuss how best to approach updating subsidies rules, including those that distort trade and result in overcapacity in global markets. ASPI Vice-President Wendy Cutler was joined by Clarisse Morgan, Director of the Rules Division of the WTO Secretariat in Geneva, Switzerland; Hosuk Lee-Makiyama, Director of the European Centre for International Political Economy (ECIPE) and former Senior Adviser to the Swedish Ministry of Foreign Affairs to the WTO and the UN; Ron Lorentzen, Senior International Trade Advisor at Kelley Drye & Warren LLP and former Deputy Assistant U.S. Trade Representative for WTO and Multilateral Affairs; and Clete Willems, Partner at Akin Gump Strauss Hauer & Feld and former Deputy Assistant to the President for International Economics, trade negotiator and WTO litigator at USTR, to discuss these matters. The panelists weighed in with possible solutions, which included:
- Negotiating new and updated rules in the WTO around implementing new prohibitions, reversing burden of proof on certain subsidies, enforcing a proper notification mechanism, and expanding the definition of “public body,” among others;
- Finalizing the EU-Japan-U.S. trilateral agreement and broadening membership to help build potential support at the WTO;
- Engaging in plurilateral negotiations outside of the WTO between like-minded economies;
- Strengthening and expanding domestic countervailing duty laws;
- Looking to domestic policies for alternative solutions (e.g.- competition policy) as part of a larger tool box to help diminish distorting policies;
- Considering an interim “managed trade agreement” for countries responsible for adverse trade impacts, which would allow for the implementation of temporary measures (e.g.- production controls, export restraints) in order to manage distortions in the global economy. This would be important particularly for sectors already experiencing significant overcapacity, considering discussions around subsidies reform may take years.
- Incorporating subsidies rules in broader discussions around global challenges, including climate change and future pandemic coordination, in order to build consensus. Governments will need to consider how such policies may support or conflict with current subsidy rules.
Panelists agreed that there is no simple solution to these questions, while there are substantial challenges to overcome. First, reaching consensus in the WTO has become increasingly difficult and can potentially take years, as witnessed by ongoing negotiations around fisheries subsidies, which were first launched in 2001. Second, there are divergent views among member countries on when to engage China on this work– some members believe including China prematurely in discussions may result in weaker rules, whereas if included too late Beijing may be less interested in engaging. Third, as illustrated by the OECD’s recent report, “Measuring Distortions in International Markets: Below-Market Finance,” we are witnessing the prevalence of new types of subsidies and financial assistance, which are more difficult to identify, quantify and draft effective rules around. These difficulties stem from the lack of proper notification mechanisms, market benchmarks, and the emergence of government-owned or invested firms acting both as the provider and beneficiary of financial assistance. Lastly, due to increased global expenditures around COVID-19 pandemic recovery efforts, and incentives to spur economic and innovative competitiveness, subsidies rules formation may become even more difficult.
The growing use of market distorting subsidies and financial assistance, continues to present a significant challenge in today’s global economy. Nevertheless it is a serious and urgent problem that needs to be addressed if the multilateral trading system is to remain relevant. On an optimistic note, panelists noted some recent signs of renewed interest by governments and international organizations and groupings in subsidies reform. On March 31, 2021, the USTR published its annual National Trade Estimate Report, which places a spotlight on unfair subsidies, particularly those leading to overcapacity. Additionally, immediately after taking office, the new WTO Director General, Dr. Ngozi Okonjo-Iweala emphasized the importance of putting forward and prioritizing a subsidies work program both on domestic support and industrial subsidies. Furthermore, the G7, under UK leadership, released a Trade Ministers’ Meeting Chair Statement on March 31st, signaling its prioritization of addressing harmful industrial subsidies and excess capacity.
This project is made possible by a generous grant from the Alcoa Foundation.