WTO Anti-subsidy and Countervailing Measures Agreement

Governments around the world are often tempted to offer support to specific domestic businesses to help them to survive or compete more effectively with international rivals. But these sorts of subsidies can risk undermining global trade and precipitate self-defeating, ‘beggar-thy-neighbour’ retaliation from other countries. For this reason, since 1995 global trade has been underpinned by the World Trade Organization (WTO) Anti-subsidy and Countervailing Measures Agreement – which stipulates that countries will not engage in these sorts of actions.

In addition to these WTO rules, some smaller groups of nations or trading blocs – most notably the European Union with its state aid regime – apply more stringent sets of rules to constrain their members’ use of government subsidies.

How does the WTO define a subsidy?

The WTO defines a subsidy as a financial contribution by a government or public body to an individual or business. This financial contribution can be in many forms – such as grants, loans, loan guarantees or tax breaks.

For a payment to constitute a subsidy – and thus potentially to fall within the scope of WTO constraints – it must provide a “selective advantage” to only some of those engaged in economic or business activity. That means nationwide tax measures – such as a uniformly low rate of corporation tax – do not count, but specific tax measures targeted at a select set of companies do.

What are the pros and cons of targeted subsidies?

There can be benefits to subsidies, which the WTO recognises. Subsidies can achieve important objectives like correcting regional imbalances, providing seed funding for early-stage technologies or providing pubic goods where the market would fail to do so. They can also be crucial during big economic crises – the coronavirus pandemic has led most governments to provide large subsidies to support businesses during the downturn, including some targeted on specific industries (such as the fishing industry in the UK).

However, subsidies are often economically wasteful. Using state resource to prop up a failing company could come at the expense of consumers who would benefit if another company could provide a better service without the support of taxpayers’ money. Supporting failing businesses also prevents workers and capital moving to other more productive activities, making the economy less dynamic and less efficient. It can also be inefficient for the state to subsidise something that would have attracted private investment anyway.

What are the restrictions imposed on state subsidies in most countries?

All 164 members of the WTO are bound by the Anti-subsidy and Countervailing Measures Agreement, which sets out the steps members can take against other states if they believe subsidies have harmed competition. These measures only cover trade in goods, not trade in services.

In general, the WTO only prohibits governments offering subsidies if those subsidies can be shown to have harmed another WTO member’s trade. However, subsidies whose explicit purpose is to distort international trade – that is, subsidies offered to firms on condition they increase their exports or policies that provide financial incentives to buy domestically produced goods rather than imports – are banned outright; these are termed ‘prohibited’ subsidies by the WTO.

If one member suspects another member is offering harmful subsidies, it can raise a dispute at the WTO. Once a dispute has been raised, the two governments party to the dispute enter a consultation process to try to establish the facts. The case is then referred to an expert panel (appointed by WTO members) to make a ruling. If a breach is found, the offending government is usually given at least 15 months to adjust their policies to conform with the rules. The exception is in cases of prohibited subsidies; here, a faster ruling is provided and if a subsidy is in breach it must be removed immediately. If the offending government fails to act within the allotted time, the WTO panel can authorise the affected member to impose retaliatory duties.

Do the rules on subsidies need updating?

Many countries argue that the definition of ‘subsidy’ is too narrow to fully capture the range of state support that China, in particular, provides to businesses. For example, a recent OECD study (which used aluminium production as an example) illustrated how Chinese state-owned enterprise – such as energy companies and banks – provide cheap inputs and credit to private sector firms, allowing those firms to produce output more cheaply than international rivals.^[1] This gives those Chinese companies a clear advantage, but the practice is not currently captured by the WTO’s anti-subsidy agreement.

China is far from the only WTO member to use state-owned enterprises – but the boundaries between private and state involvement in companies are uniquely blurred in the Chinese economy leading to difficulties in using the existing WTO anti-subsidy system for tackling instances of harmful subsidies.

In December 2017, the US, EU and Japanese trade ministers announced they would “enhance trilateral co-operation” to try to address state-owned enterprises and other forms of subsidy currently not captured by the rules. So far they have proposed reversing the burden of proof for certain subsidies if a case is brought (so it would be incumbent on the party accused to prove it did not harm trade). In addition the group wish to expand the definition of subsidies that are prohibited – for example to include unlimited financial loan guarantees. For the proposals to be adopted by the WTO as a whole, they need to be consented to by all WTO members. Failing that, they could be adopted by a select number of WTO members in a separate agreement.

However, the prospect of WTO reforms such as this is likely to be hampered^[2] by US actions aimed at undermining the existing system. The US has, for example, blocked the appointment of members to the appellate body of the WTO, which hears appeals against rulings on subsidies.