Subsidies, Trade and the WTO

1. Subsidies, Trade and the WTO World Trade Report 2006 Presented at WTO Public Forum, 26 September 2006

2. World Trade Report 2006 • A comprehensive overview of use and impact of government subsidies: • definitions of subsidies • predictions of economic theory about the effects of subsidies • reasons governments give for using subsidies • incidence of subsidies across countries and sectors • WTO rules on subsidies

3. The legal, statistical and economic definitions of subsidies differ • 1. Economic definition may involve: • -budgetary outlays • -regulatory intervention • -public provision of good and services at less than market price • -any government intervention that affects relative prices • 2. National accounts statistics only include • - direct payments to resident enterprises • 3. WTO legal definition • Broad range of forms of subsidies (direct payments, tax concessions, provision of goods and services) • BUT EXCUDES public infrastructure, regulation • “specificity” • Need studies based on legal definition

4. Report emphasises need for more and “better” data on subsidies • Data from international sources that allow for cross-country comparability only exist • at a highly aggregated level • or are available for a limited number of • (sub) sectors (agriculture, fisheries, coal) • instruments (export credit support) • Very few data exist on services subsidies.

5. Lack of transparency on the use of subsidies • Significant discrepancies exist between value of subsidies according to • different statistical sources • (inter)national statistics and WTO notifications • World Trade Report raises serious questions about • the completeness of WTO notifications ... • ... and therefore about the achievements of the WTO with respect to transparency

6. Subsidies (bil.$, averages 98-02)

7. Fishery subsidies reported to WTO, OECD and APEC (mil $)

8. How much do countries subsidize? • According to national accounts statistics • 69 countries spent around $300 billion on subsidies in 2003 • of which 21 developed countries spent $250 billion. • The average ratio of subsidies to GDP was: • 1.4 per cent for developed countries • 0.6 per cent for developing countries

9. How much do countries subsidize at the sectoral level? • Large variation in the sectoral distribution across countries (yet, differences across data sources in composition by industry and instrument used) • Agricultural subsidies in OECD countries show a downward trend • There is no solid information on trends in industry and services subsidies • There seems to be a tendency to redirect subsidies towards “horizontal” objectives • Who benefits from these subsidies? • Are horizontal subsidies de facto less trade distortive?

10. Stated objectives of governments for using subsidies • Governments extend subsidies to ... • pursue industrial development • support the creation of new knowledge through R&D • attain distributional objectives • protect the environment. • Economic theory: Subsidies • Can be effective instruments to pursue these objectives • Can distort trade by giving artificial competitive advantage to beneficiaries

11. Subsidies as a policy tool • Compared to other policy instruments, subsidies tend to: • represent a relatively transparent form of government intervention at national level • have less undesirable side effects than some other policies if well-designed • Can be more easily afforded by higher income countries, a disadvantage for some • But they make governments prone to capture by recipient groups • Need more empirical studies to assess the relevance of market failure and the effectiveness/design of subsidization policies

12. The Trade and Welfare Effects of Subsidies • A systematic analysis of trade and welfare effects of subsidies has only been carried out in the economic literature for agricultural subsidies • Economic simulation models suggest that agricultural subsidies • create welfare losses ... • ... that are borne primarily by the major providers of subsidies, although they still distort trade • Their removal may hurt net food importers

13. Disciplining the Use of Subsidies at the WTO • The WTO disciplines the use of specific subsidies, i.e. subsidies that are explicitly limited to a particular set of beneficiaries. • The WTO thus seeks to ensure that eligibility for subsidies is based on objective criteria and neutral conditions (so “targeted” subsidies may differ from “specific” subsidies). • Export subsidies prohibited in manufacturing. In Agriculture they will be eliminated by 2013 (HK 2005). S&D treatment for developing countries. • Question: Should developing countries be permitted to apply export subsidies to manufacturing?

14. WTR 2006 concludes • More reliable and more comprehensive data sets that are comparable across countries are necessary in order to increase transparency on the use of subsidies

15. WTR 2006 concludes • Need of more studies to answer some questions: • Are market failures relevant to justify subsidies? • How “effectively” are subsidies used for governments stated objectives? • What is the impact of subsidies on income and welfare? (studies limited to agriculture) • What is the impact of subsidies in developing countries? • Who are the actual beneficiaries of the subsidies? (Eg. Approx. 5% recipients receive 50% agriculture subsidies in the EU) • How theoretical predictions and empirical evidence relate to the legal definition of subsidies?