Think Piece

The Limited Economic Case for Subsidies Regulation

March 2015
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A compelling case can be made for the principle, originally developed in the non-violation cases and now in Article 5 of the Agreement on Subsidies and Countervailing Measures (ASCM), that a new and unanticipated subsidy program to import-competing firms nullifies or impairs tariff bindings negotiated on competing products. The other existing rules of general applicability in the ASCM are highly flawed from an economic standpoint. The specificity test is quite imperfect, as industrial targeting is a weak marker for inefficient government support for industry, and governments can often achieve identical economic results with programs that pass muster under the specificity test by altering their form and not their substance. The “automatic specificity” of export subsidies and import substitution subsidies is questionable. The standards for tax subsidies are arbitrary and incoherent. It is not realistically possible to fashion rules that distinguish government programs that are an efficient expression of other-regarding citizen preferences from programs that distort resource allocation. The expired safe harbor rules are problematic because of the fungibility of money. Subsidy rules cannot identify the net inefficiencies caused by government tax and regulatory policies as a practical matter, and inevitably look myopically at programs in isolation, masking or ignoring the net effects of government on industrial competitiveness and efficiency. Enforcement is also highly problematic in a system such as the WTO that depends on member states to bring complaints, as the private incentive to bring complaints may bear little or no relation to the social value of complaints.

There are no simple solutions to these problems. Distortions are easy to isolate in economic models of industries that start from a position of competitive or imperfectly competitive equilibrium without any role for government, and are then altered by some single government intervention that either creates or remedies some market inefficiency. But once the myriad functions of government are taken into consideration and understood to operate in the background of any real-world industry, it is a difficult task in any given case to determine whether the net effect of government is to distort industry price and output and, if so, in what direction. It is unlikely that panels of legal experts can undertake this task successfully under any imaginable set of generally applicable rules. And without a completely new approach to enforcement, there is no reason to believe that the cases brought by WTO members under any set of rules will be economically productive from a global standpoint.

A case can be made for additional sector- or industry-specific negotiations on subsidies where a global consensus exists that government support is excessive or inadequate. This avenue seems more promising in many respects but is not without its own potential pitfalls.

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