Monday, October 29, 2012

Trade distorting subsidies

I had written earlier (with Srikar) about China's extensive use of trade distorting producer subsidies, governed by the WTO's Subsidies and Countervailing Measures (SCM) framework, which disadvantaged exporters competing with China. We had written that the definition of "actionable" subsidies benefited Chinese companies,
The WTO agreement that governs the subsidies framework is SCM. It defines two basic categories of subsidies—“prohibited” and “actionable”. The former prohibits all local content subsidies which favour the use of domestic over imported goods. The latter, though not prohibited, can be challenged either through multilateral dispute settlement or through countervailing duties if the imports cause “serious prejudice to the interests of another member”.
A subsidy is “actionable” under the context of SCM only if it is “specific” to an enterprise or industry or group of enterprises or industries. Further, a subsidy is defined as a “financial contribution” that involves a “charge on the public account”. Alternatively, a subsidy which is “widely available within an economy” is excluded from SCM. 
This means that “subsidies” are restricted to grants, loans, equity infusions, loan guarantees, fiscal incentives, the provision of goods or services, and the purchase of goods. They do not include any indirect and trade-distorting structural subsidy by way of “revenues forgone”—lower (than cost recovery) utility tariffs, low land prices, repressed labour market, artificially cheap capital and so on—which are universal in nature.
Now an FT article by Alan Beattie has documented the increased use of such subsidies by many countries to protect their domestic producers. Concurrently there has been a sharp increase in the number of subsidy related litigation in WTO seeking the imposition of countervailing duties on such subsidized imports. Renewable energy sectors - biofuels, solar, and wind power - are the beneficiary sectors. He writes,
Since the global financial crisis struck in 2008, worldwide increases in import tariffs of the type seen during the Depression have been largely absent. But governments, richer with cash and regulatory power than in the 1930s, have found other ways to back their struggling producers at a time of deficient global demand. Disputes over state subsidies are spreading, the trade law to constrain them is not easy to use, and few governments can throw stones without worrying about the glass in their own houses. 
I am not too worried about such producer subsidies for atleast two reasons. One, given the weak fiscal position of most developed economies and their dismal short to medium term prospects, there is limited scope for such subsidies. They are therefore most certain to remain marginal. Second, in any case, sunrise sectors, especially those like renewables with important positive externalities, have traditionally received government subsidies in their nascent stages. In its absence, given the politics of oil, their emergence will be considerably delayed. I would be more concerned if the same subsidies were instead channeled into traditional sectors, similar to the subsidies given to airline industry on both sides of the Atlantic.

However, the particular case of Chinese subsidies are disturbing in both its breadth and depth. They are mostly subsidies "widely available within the economy" and therefore exempted under the SCM. This means that it benefits all the sectors. Further, the apparently deep pockets of the Chinese government means that it can sustain this support for a long time. Taken together, and given the fact that Chinese exports directly compete with those of emerging economies like India, this forms a serious concern for policy makers in these countries.

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