Subsidies

Subsidies are a critical instrument that governments use to influence consumption or production patterns, income distribution or the use of resources in the pursuit of different policy goals. Critics often point to the inefficiencies and economic distortions they create, their perverse distributive consequences, and the negative impact they can have on the environment. On the other hand, subsidies may represent sensible policy responses to a range of market failures and play a useful role in advancing certain public policy objectives (e.g. reducing income inequality or delivering essential public goods). In an increasingly integrated and interdependent world, addressing the negative externalities generated by subsidies, while maintaining their possibly positive function, inevitably calls for some form of international cooperation.

The WTO Agreement on Subsidies and Countervailing Measures (SCM) represents the first attempt at crafting multilateral disciplines on subsidies, backed by a binding dispute settlement mechanism. Since its entry into force, however, the world has evolved, as have government practices and in some cases domestic legislation, prompting a growing number of stakeholders to question the adequacy of current disciplines. At the heart of the matter is the concern that such disciplines – essentially drafted in the late 80’s and early 90’s – are increasingly at odds with today’s realities and need to be re-assessed in the light of new global challenges and future needs.

A good example is the bailout packages provided after the 2008 financial crisis, when governments from several OECD countries rescued their economies by injecting trillions of dollars into their financial and manufacturing sectors. Similarly, the revival of industrial policies in a number of developed and emerging economies has generated further frictions as governments re-established measures such as local content requirements or government aids for infant industry in key sectors. Others point to the aggressive use of trade remedies on clean energy products such as solar panels or wind turbines and push to resuscitate the notion of non-actionable subsidies for environmental purposes to prevent WTO action on those programmes. Finally, some have raised concerns around various forms of subsidies affecting natural resources, ranging from fish and fish products to fossil fuels, minerals or extractive industries, in a world increasingly confronted with resource scarcity. Here, environmentalists point to significant market failures, as government interventions affect production and consumption decisions without addressing environmental externalities.

As a contribution to this debate, ICTSD and the WEF convened a tasks force of 20 experts led by Gary Horlick to review existing rules, identify loopholes and suggest reform opportunities. In doing so, the task force examined government practices in the area of subsidies; assessed the adequacy of existing international subsidy disciplines in the new global environment; and identified possible improvements in international subsidies disciplines.