The Economics of WTO Rules on Subsidies and Countervailing Measures
26/08/2008

Subsidies present thorny problems for the international trading system. The legitimate activities of governments inevitably affect the economic position of firms within their jurisdictions, yet the perception sometimes arises that government programs confer an unacceptable advantage on those firms. The controversial task of determining which sorts of government activities create unacceptable advantages, and what to do about them, has occupied an important place on the agenda of the WTO/GATT system since its inception.

The Uruguay Round of GATT negotiations produced an important new WTO Agreement on Subsidies and Countervailing Measures (“SCM”). It also established separate rules for agricultural subsidies in the WTO Agreement on Agriculture, and took some minimal steps toward addressing subsidies issues in services industries within the General Agreement on Trade in Services (“GATS”). Because the rules on subsidies within GATS are so undeveloped, I will concentrate here on trade in goods, with primary emphasis on the SCM agreement and only a few words to say about agriculture.

In brief, I suggest that some of the WTO disciplines on subsidies are useful and sensible from an economic perspective, particularly (a) the nonviolation nullification and impairment doctrine that protects the market access expectations associated with particular trade commitments from frustration due to the introduction of unexpected subsidy programs; and (b) the general prohibition on export subsidies (outside of agriculture). The treatment of domestic subsidies under WTO law is far more problematic, in substantial measure because of the conceptual and practical difficulties in determining what constitutes an undesirable "subsidy." Further, the opportunity for importing nations to employ countervailing duties in the WTO system is likely a source of more harm than good. From the standpoint of welfare economics, a strong argument can be made that the WTO system should give up on its efforts to discipline domestic subsidies through general rules, and concentrate on the few sectors (such as agriculture) where a consensus arises that pressures for competitive subsidization are a source of economic waste. Likewise, global welfare would likely increase if general authority for the use of countervailing duties were eliminated.

Part I of this chapter provides an introduction to the economic issues that bear on the regulation of subsidies and countervailing measures. Part II then provides some legal background, beginning with the treatment of subsidies and countervailing measures in the GATT system prior to the Uruguay Round, and proceeding to consider the important developments in the law of the WTO. Part III is an economic discussion of what has been accomplished within the WTO/GATT system and what has not, while Part IV provides a brief conclusion.

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