Overview Paper

Industrial Policy and the WTO Rules-Based System

September 2016
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The important issue of policy space and whether World Trade Organization (WTO) provisions act as binding constraints on a country’s ability to grow has been a matter of debate for some time. Given the resurgence in the use of industrial policies, this issue will most certainly be revisited in the near future.

Against this background, this paper takes into account various approaches in examining the overlap between new industrial policies and the legal disciplines of the WTO to assess the extent of policy space available. Specifically, it reviews the constraints imposed by WTO rules and disciplines when implementing border and behind-the-border measures often used to meet the objectives of industrial policies. The paper examines the nature of effective constraints due to the different types of WTO disciplines. The paper also considers the operational constraint in terms of the extent to which policies are similarly available to all nations. It shows that most measures are allowed under the WTO provided they do not cause adverse effects on trade of other partners. In general, this aspect is determined through WTO dispute settlement. The paper evaluates the effect of the WTO dispute settlement system and whether this imposes effective constraints on policy space. The paper finds that for most countries, especially the low income economies, effective constraints on policy space due to the WTO are not very significant. In a comparatively few cases, the system does however impose constraints on policy space, but not in general as such. Interestingly, for some measures such as standards, anti-dumping and countervailing measures, there appears to be a case for reducing the available policy space and imposing more disciplines.

The paper then shows that there is an objective basis to consider increasing the policy space available for a few measures such as local content, while at the same time making the applicable WTO disciplines more comprehensive to address a number of prevailing gaps within the WTO agreements. It then examines the ways in which some changes in the WTO regime and processes may be achieved, including ways to improve the WTO’s monitoring mechanisms and identifying ways in which countries could enhance policy effectiveness.

In this context, the paper considers the likely impact on policy space resulting from ongoing large plurilateral negotiations, such as the Trans-Atlantic Trade Partnership, and the possibility of achieving some negotiated results within the WTO to increase policy space for a few measures where this may be required.

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