Transparency, Analysis, Cooperation Key to address Trade Impacts of Subsidies — Report

· Transparency is an essential first step to understanding how government subsidies impact international trade and how to minimize any negative effects

· New debates about the role of subsidies. These issues include: the emergence of global value chains; digital markets; the global importance of economies in which the state plays a central role, and of international state-owned enterprises; the urgent challenge of climate change; and the recognition that well-crafted subsidies can be an important part of the public response to economic and health emergencies

· Subsidies may take the form of direct government spending, tax incentives such as tax credits or reduced tax rates, equity infusions, concessional loans, the provision of goods and services on favourable terms, and price support policies

· Chad Bown (Peterson Institute for International Economics), André Sapir (Université Libre de Bruxelles and Bruegel), Tu Xinquan (China Institute for WTO Studies, University of International Business and Economics) and Trudi Hartzenberg (tralac - Trade Law Centre)

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Transparency is an essential first step to understanding how government subsidies impact international trade and how to minimize any negative effects. The authors of a new report outlined this and other key findings of the study at a 5 May online event jointly organized by the International Monetary Fund (IMF), the Organisation for Economic Cooperation and Development (OECD), the World Bank Group and the WTO.

In her opening remarks to the event, WTO Deputy Director-General Anabel González noted the significant impact subsidies can have on trade and trade policy. Subsidies can distort trade and investment flows, undermine the predictability and stability created by trade commitments, and erode public support for open trade.

In addition, important issues have emerged which have prompted new debates about the role of subsidies. These issues include: the emergence of global value chains; digital markets; the global importance of economies in which the state plays a central role, and of international state-owned enterprises; the urgent challenge of climate change; and the recognition that well-crafted subsidies can be an important part of the public response to economic and health emergencies.

"So, there are many pressing reasons why subsidies need to be addressed, and why they need to be addressed now," DDG González added. "Dealing constructively with subsidies could go a long way to ease the pressures weighing on the WTO and revitalize global trade."

The report, prepared by staff teams from the IMF, OECD, World Bank Group and the WTO, was first presented by the heads of the four organizations at an event in Washington DC on 22 April. The online event brought the report's authors together with the Geneva trade policy community as well as trade experts in governments, international organizations and academia from around the world to discuss the key findings.

Brad McDonald, Deputy Chief for Trade Policy at the IMF, said that while the issue of subsidies and their impact on trade is longstanding, it has become "more complex and more urgent".

"There are several important new issues and challenges but also importantly there are sharp differences over subsidies today that are contributing to global trade tensions and harming growth," he noted. "That is having a material effect on living standards."

The joint report focuses on subsidies with possible harmful international effects - in particular, those that have the potential to distort trade or investment, including by eroding the value of existing tariff bindings or other market access commitments, or those that have the potential to distort the global commons, such as by promoting subsidies harmful to the global environment.

These subsidies may take the form of direct government spending, tax incentives such as tax credits or reduced tax rates, equity infusions, concessional loans, the provision of goods and services on favourable terms, and price support policies, among other measures.

The increasing use of subsidies has also led to increasing resort to anti-subsidy actions, most notably countervailing duty measures, the use of which has increased sharply in recent years.

The report's authors highlighted a key message from the report, namely that existing information on subsidies overall is weak and that greater international cooperation on subsidies is needed to bring greater openness and predictability to global trade.

World Bank Senior Economist Jose Signoret noted that subsidies represent the most frequent form of intervention used by governments after the financial crisis of 2008, surpassing measures such as tariffs and other non-tariff measures.

“Most recorded subsidy programmes are implemented by the largest trading economies that have the potential to influence global markets," Mr Signoret said. However, "unlike in agriculture, evidence on the scope and scale of government support in industrial sectors remains relatively scarce."

“Improving transparency is a fundamental first step in addressing subsidies,” said Julia Nielson Deputy Director of the OECD's Trade and Agriculture Directorate. "Subsidies are notoriously hard to reform, it's easier when others are doing it as well."

Stepping up international cooperation on subsidies "is absolutely essential," she added. "You can learn from the experience of others in terms of how to design subsidies, but also how to reform them in the most appropriate way."

Alex Keck, head of Global Economic Analysis with the WTO's Economic Research and Statistics Division, said existing international rules, including the WTO's Agreement on Subsidies and Countervailing Measures, provide a strong basis for regulating subsidies. Nevertheless, there are long-standing and more recently exposed gaps in the rules that have "given the impression that there is room for more precision or maybe for some additions".

"Experience has also shown that improved transparency, analysis and dialogue has helped to develop better rules. This also applies in going forward," he added.

During the event, a panel of experts provided comments on the joint report and shared perspectives on how the four organizations could deepen cooperation on subsidies. The panel was composed of Chad Bown (Peterson Institute for International Economics), André Sapir (Université Libre de Bruxelles and Bruegel), Tu Xinquan (China Institute for WTO Studies, University of International Business and Economics) and Trudi Hartzenberg (tralac - Trade Law Centre).