Subsidy disciplines

Responding to a comment received on yesterday’s post, WTO subsidy disciplines — an update and coordination across areas is long overdue

Earlier today I received a comment from a well respected trade attorney in Washington, D.C., on my post of yesterday calling for an update of subsidy disciplines including exploring the logic of how subsidies are treated in different areas and whether distortions caused by subsidies from actors not presently covered should be covered in the update. As I haven’t sought permission to identify the commenter, I simply provide the comment below as it is one that may be shared by other readers of the post.

“A review of the big picture of WTO subsidy control efforts ought to at least mention the damage done, through DSB-adopted decisions, to the fairly decent set of disciplines the ASCM appeared to have when it was first brought live in 1995.  Today’s need for better ASCM rules is in substantial part the result of 25 years of bad interpretations of ASCM Art. 1, most of them rendered in pursuit of gutting the United States’ CVD remedy.

“To the extent Azevedo was suggesting that merely the passage of time is to blame for the current inadequate state of WTO subsidy rules, he is wrong.  Purposeful shredding has played a role too.”

Here is my response to the thoughtful comment provided. First, there is no doubt that some dispute settlement decisions have undermined the disciplines that exist in the Agreement on Subsidies and Countervailing Measures (“ASCM”). The U.S. Trade Representative’s Office paper on concerns with the WTO’s Appellate Body present various examples of egregious overreach by the Appellate Body, including a number of cases involving interpretations of the ASCM. See USTR, Report on the Appellate Body of the World Trade Organization, February 2020, pages 81-89 (public body), 105-109 (use of out of country benchmarks), https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf; February 14, 2020, USTR’s Report on the WTO Appellate Body – An Impressive Critique of the Appellate Body’s Deviation from Its Proper Role, https://currentthoughtsontrade.com/2020/02/14/ustrs-report-on-the-wto-appellate-body-an-impressive-critique-of-the-appellate-bodys-deviation-from-its-proper-role/.

I have written extensively over the years on the problem of overreach by the Appellate Body, and the damage caused to the balance of rights and obligations that the United States and others negotiated in the Uruguay Round. The problem has been most obvious in the trade defense agreements (antidumping, subsidies and safeguards), but exist in decisions involving other agreements as well as is reviewed in the USTR report. I have also suggested ways for the WTO, in addressing the impasse on the Appellate Body, to clarify DSU language and address specific instances of claimed overreach. See, e.g., July 12, 2020, WTO Appellate Body reform – revisiting thoughts on how to address U.S. concerns, https://currentthoughtsontrade.com/2020/07/12/wtos-appellate-body-reform-revisiting-thoughts-on-how-to-address-u-s-concerns/; November 12, 2019, Background Materials on WTO Appellate Body Reform Challenges – The Critical Issue of “Overreach”, https://currentthoughtsontrade.com/2019/11/12/background-materials-on-wto-appellate-body-reform-challenges-the-critical-issue-of-overreach/; November 4, 2019, WTO’s Appellate Body Reform – The Draft General Council Decision on Functioning of the Appellate Body, https://currentthoughtsontrade.com/2019/11/04/wtos-appellate-body-reform-the-draft-general-council-decision-on-functioning-of-the-appellate-body/.

So while I agree with the comment that the ASCM is less robust because of erroneous WTO Appellate Body reports, that fact does not change the intended message of the post. There is significantly different treatment of subsidies between industrial goods, agricultural goods and services that are not logical or justifiable. There have been major changes in the world economy and who the major trading nations are in the last twenty-five years which raise questions about a range of topics that are not specifically covered by the ASCM, the Agreement on Agriculture, GATS (where there are no subsidy disciplines at present) or other agreements. While the U.S., EU and Japan are concerned (rightly so) about the extreme damage being caused by massive industrial subsidies from economies with non-market economic systems and hence the need for enhanced rules, lack of coverage of services, more restrictive subsidy rules on agriculture than on industrial goods are issues that can and should be examined as well as the areas not covered by the existing ASCM.

My second point would be that if I suggested in my earlier note that former Director-General Roberto Azevedo was suggesting the problems with the ASCM were due to the passage of time, that was not the intention. Mr. Azevedo’s interview for the 25th anniversary program and the comment quoted was focused on a much broader question — where had the WTO not accomplished what was originally envisioned. Mr. Azevedo’s comment reflected his understanding that a properly functioning WTO would have Members engaged in negotiations on issues on an ongoing basis to ensure the WTO was maintaining its relevance to Members in the light of evolving global commerce and technology. The fact that there are no rules on ecommerce decades after the rise of ecommerce is an obvious case in point where the WTO has not been able to update the rulebook in a timely manner. I was using Mr. Azevedo’s general statement to undergird the propriety of examining the important topic of where distortions are caused by the subsidy actions of governments (and possibly private parties). Such an examination is needed as part of the WTO reform efforts that should be occurring going forward. But examining subsidy disciplines in the reform effort is not intended to excuse the problem of overreach by the Appellate Body that has resulted in the temporary shut down of the Appellate Body at the WTO. The WTO Members need to find a way in resolving the Appellate Body impasse to restore the rights of Members that had been agreed as part of the Uruguay Round but undermined by panel or Appellate Body reports.

For ease of reference for readers, yesterday’s post is copied below. I hope the above eliminates any confusion that my post yesterday may have caused.

Yesterday’s post

When the WTO came into being at the beginning of 1995, subsidy disciplines were fragmented. Agricultural subsidies were largely addressed under the Agreement on Agriculture although also subject to the ASCM. Industrial subsidies were covered by the Agreement on Subsidies and Countervailing Measures (ASCM). The General Agreement on Trade in Services has no disciplines on subsidies although negotiations on a possible article dealing with subsidies was one of the open issues where negotiations were supposed to continue after the WTO started up. And there was the separate plurilateral agreement on civil aircraft which had rules on subsidies as well.

While export subsidies were prohibited on industrial goods from the beginning, there are only loose controls on domestic subsidies. As the U.S., EU and Japan have articulated at the WTO, the changing make up of WTO Members and the rise in trade importance of Members with a state-directed economy have created increased challenges from state subsidies where existing disciplines are not viewed as adequate.

In agriculture, export subsidies were originally capped and being reduced but have now been eliminated by developed countries. Agriculture faces many more vagaries of nature that directly affect growing conditions (climate change, increased severe storms, increased flooding, increased draughts, etc.) than do industrial goods. Despite this reality, domestic supports in agriculture are capped and are facing increased calls for reductions by some Members.

While the GATS was originally driven by developed country service providers who were unconcerned with the need for trade remedies, the changing make-up of the WTO Membership, the changing technologies used by many service providers, and the growth of state-owned or state-invested service providers competing internationally have all raised the specter of significant government supports being provided to service providers that distort economic outcomes between competing service providers but which are not presently addressable under WTO rules.

In addition, the ongoing COVID-19 pandemic has created enormous economic dislocations for many WTO Members and has led many countries to provide unprecedented stimulus packages to minimize the economic fallout within their countries or territories. The WTO hasn’t explored how, if at all, such stimulus efforts can or should be evaluated under WTO rules.

Similarly, subsidy disciplines basically apply simply to subsidies provided by a government or a private party at government direction within the economy of the government in question. There are issues of whether subsidized loans from intergovernmental entities should be addressable if causing distortion with other entities. There are similarly questions about whether subsidies into inputs in one country which are then exported and used in a second country for export to other countries can or should be addressable when a country is investigating the second country’s product. Similarly, while the WTO ASCM deals with subsidies from governments or private parties at the direction of governments, the distortions to international competition are not necessarily more distortive than private sector subsidies between or within companies may be. Just as the Agreement on Antidumping deals with private market distortions, it isn’t clear why subsidy disciplines should root out distortions whether coming from governments or private parties. And, of course, when the GATT came into existence in the late 1940s, there were concerns about dual exchange rates causing distortions and permission to handle those distortions under either the antidumping or countervailing duty provisions of Article VI of the GATT. When currencies become significantly undervalued there can be significant distortions in economic outcomes. While at least the United States is addressing such distortions under its countervailing duty law at the moment, there is no agreed updated rules in the WTO.

Last week, the WTO on November 19 celebrated its first 25 years with both various panels and with a video of the last three Directors-General being interviewed about the first 25 years. Former Director-General Roberto Azevedo who stepped down at the end of August this year was asked a question of where the WTO had fallen short in his view in the first 25 years. His answer was as follows (according to my notes): “The WTO has to be constantly updating itself. For example, tariff negotiations or disciplines or rules we negotiated thirty years ago are completely out of date.” WTO at 25: Conversations with former Directors-General of the WTO, 19 November 2020 (video). He added that when the WTO came into existence in 1995, it was clear that the WTO would need to update itself continuously without requiring big rounds, but that has not occurred.

There is no area where a review of the existing rules and disciplines is needed more urgently than the area of subsidies. But unlike in the past, there should be greater evaluation of all subsidy areas to be sure that distortions in any area of economic activity internationally can be addressed while actions which simply address emergency situations flowing from pandemics or weather events are not addressable if not adding to capacity. Such a review obviously needn’t slow down the important efforts to reach agreement on Fisheries Subsidies which has dragged on for roughly 19 years and is tied now to the UN Sustainable Development Goal 14.6.

Past Directors-General, the candidates for the position in 2020 and most Members readily agree that for negotiations to advance there has to be items of interest to all Members. A broad subsidy review should provide exactly that broad potential interest while at the same time permitting the rules and disciplines on subsidies to be updated to address the commercial realities of today.

WTO subsidy disciplines — an update and coordination across areas is long overdue

When the WTO came into being at the beginning of 1995, subsidy disciplines were fragmented. Agricultural subsidies were largely addressed under the Agreement on Agriculture although also subject to the ASCM. Industrial subsidies were covered by the Agreement on Subsidies and Countervailing Measures (ASCM). The General Agreement on Trade in Services has no disciplines on subsidies although negotiations on a possible article dealing with subsidies was one of the open issues where negotiations were supposed to continue after the WTO started up. And there was the separate plurilateral agreement on civil aircraft which had rules on subsidies as well.

While export subsidies were prohibited on industrial goods from the beginning, there are only loose controls on domestic subsidies. As the U.S., EU and Japan have articulated at the WTO, the changing make up of WTO Members and the rise in trade importance of Members with a state-directed economy have created increased challenges from state subsidies where existing disciplines are not viewed as adequate.

In agriculture, export subsidies were originally capped and being reduced but have now been eliminated by developed countries. Agriculture faces many more vagaries of nature that directly affect growing conditions (climate change, increased severe storms, increased flooding, increased draughts, etc.) than do industrial goods. Despite this reality, domestic supports in agriculture are capped and are facing increased calls for reductions by some Members.

While the GATS was originally driven by developed country service providers who were unconcerned with the need for trade remedies, the changing make-up of the WTO Membership, the changing technologies used by many service providers, and the growth of state-owned or state-invested service providers competing internationally have all raised the specter of significant government supports being provided to service providers that distort economic outcomes between competing service providers but which are not presently addressable under WTO rules.

In addition, the ongoing COVID-19 pandemic has created enormous economic dislocations for many WTO Members and has led many countries to provide unprecedented stimulus packages to minimize the economic fallout within their countries or territories. The WTO hasn’t explored how, if at all, such stimulus efforts can or should be evaluated under WTO rules.

Similarly, subsidy disciplines basically apply simply to subsidies provided by a government or a private party at government direction within the economy of the government in question. There are issues of whether subsidized loans from intergovernmental entities should be addressable if causing distortion with other entities. There are similarly questions about whether subsidies into inputs in one country which are then exported and used in a second country for export to other countries can or should be addressable when a country is investigating the second country’s product. Similarly, while the WTO ASCM deals with subsidies from governments or private parties at the direction of governments, the distortions to international competition are not necessarily more distortive than private sector subsidies between or within companies may be. Just as the Agreement on Antidumping deals with private market distortions, it isn’t clear why subsidy disciplines should root out distortions whether coming from governments or private parties. And, of course, when the GATT came into existence in the late 1940s, there were concerns about dual exchange rates causing distortions and permission to handle those distortions under either the antidumping or countervailing duty provisions of Article VI of the GATT. When currencies become significantly undervalued there can be significant distortions in economic outcomes. While at least the United States is addressing such distortions under its countervailing duty law at the moment, there is no agreed updated rules in the WTO.

Last week, the WTO on November 19 celebrated its first 25 years with both various panels and with a video of the last three Directors-General being interviewed about the first 25 years. Former Director-General Roberto Azevedo who stepped down at the end of August this year was asked a question of where the WTO had fallen short in his view in the first 25 years. His answer was as follows (according to my notes): “The WTO has to be constantly updating itself. For example, tariff negotiations or disciplines or rules we negotiated thirty years ago are completely out of date.” WTO at 25: Conversations with former Directors-General of the WTO, 19 November 2020 (video). He added that when the WTO came into existence in 1995, it was clear that the WTO would need to update itself continuously without requiring big rounds, but that has not occurred.

There is no area where a review of the existing rules and disciplines is needed more urgently than the area of subsidies. But unlike in the past, there should be greater evaluation of all subsidy areas to be sure that distortions in any area of economic activity internationally can be addressed while actions which simply address emergency situations flowing from pandemics or weather events are not addressable if not adding to capacity. Such a review obviously needn’t slow down the important efforts to reach agreement on Fisheries Subsidies which has dragged on for roughly 19 years and is tied now to the UN Sustainable Development Goal 14.6.

Past Directors-General, the candidates for the position in 2020 and most Members readily agree that for negotiations to advance there has to be items of interest to all Members. A broad subsidy review should provide exactly that broad potential interest while at the same time permitting the rules and disciplines on subsidies to be updated to address the commercial realities of today.