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Subsidies, Trade and the WTO

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Title: 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)
  National Accounts WTO
Data notifications
     
Canada 7.7 0.9
EU (15) - total 109.0 96.3
Australia 4.7 0.3
Japan 34.3 4.2
Norway 4.1 2.9
Switzerland 10.8 0.7
United States 43.5 16.3
Brazil 2.0 1.7
India 12.2 ...
Republic of Korea 1.0 1.3
South Africa 0.9 ...
     
7
Fishery subsidies reported to WTO, OECD and APEC
(mil )
Country WTO notifications WTO notifications   OECD GFT OECD GFT   APEC
Country 1996-99 2000-03   1996-99 2000-03   1997

Canada ... 71.1 490 498 646.1
Mexico ... ... 16 ... 6.9
United States 30.7 79 976 1156 158
EUa 675.9 529.8 1089 1033 ...
Russia ... ... ... ... 633.0
Australia ... ... 21 83 15.9
Japan 35.2 62.4 2720 2526 2165.0
Korea, Rep. of 57.7 62.3 339 463 351.0
Taipei, Chinese 4.8 13.5 ... ... 187.7
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 RD
  • 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). SD 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?
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