The subsidy conundrum

State subsidy programs can disrupt normal trade flow. If the government subsidizes a particular export, the export price falls to lead to increased imports by other countries.

Bark Tae-ho The author is president of Lee & Ko Global Commerce Institute and former Minister of Trade.

State subsidy programs can disrupt normal trade flow. If the government subsidizes a particular export, the export price falls to lead to increased imports by other countries. If the government subsidizes use of domestic parts, the finished product’s cost would fall to reduce import of the same product from overseas. The General Agreement on Tariffs and Trade (GATT) launched in 1947 had a provision on government subsidies and countervailing measures to contain state subsidy programs.

The World Trade Organization (WTO), which replaced GATT in 1995, addressed the issue with more clarity and comprehensiveness through the Agreement on Subsidies and Countervailing Measures (ASCM). In the ASCM, a subsidy was defined as a financial contribution by a government or any public body in the form of income or price support, and a benefit must be conferred, which make the receiver better off. It specified what type of subsides should not be provided to a certain company and industry. It categorized subsidies in the form of “red-light” (prohibited except under certain cases), “yellow-light” (not prohibited but could be subjected to remedies if causing prejudice to traders of other countries, and “greenlight” subsides that can be granted.

Subsidies to promote exports and use of domestic goods or services over imports are red-lighted. Subsides causing direct damage or serious prejudice to national interests of other countries would fall under remedies. Governments are permitted to take countervailing actions for such subsidies or file a suit against the injurious acts with the WTO. Subsidies for research and development, regional development or education and environment were examples of “greenlight” subsidies, but the provision’s effect expired in late 1999.

(Left to right) Phil Hogan, EU Trade Commissioner, Kaji- yama Hiroshi, Japan’s Minister of Economy, Trade and Industry and Robert Lighthizer, U.S. trade representative, take a photo after signing a joint statement on reinforcing WTO regulations on industrial subsidies in Washington on Jan. 14, 2020. [JAPAN’S MINISTRY OF ECONOMY, TRADE AND INDUSTRY]

The WTO’s version on ASCM was deemed more effective than the precedent. But the agreement emerged as an agenda for WTO reform amid the conflict between the United States and China. The United States and other developed economies blame Beijing’s unfair industrial subsidies for causing a supply glut in various sectors, including steel, aluminum and solar panels, and seriously distorting global trade order. They have been strongly protesting to the WTO leadership for doing little to contain or correct the phenomenon.

In January 2020, the United States, the European Union and Japan issued a joint statement on the agreement to strengthen global rules on industrial subsidies. Under the agreement, the three economic powers first seek to broaden the WTO’s definition of a countervailing subsidy to include subsidies with unlimited guarantees, subsidies to insolvent or ailing firms without credible restructuring plan, and subsidies to firms and industries with overcapacity unable to obtain long-term financing from independent sources. They also demanded that member governments be transparent and prove the validity of their excessively large-scale subsidies, their subsidies for uncompetitive companies, and subsidies causing overcapacity. They also added “overcapacity” in the form of “serious prejudice” that prohibits any form of government aid in WTO rules, and demanded state-owned enterprises be included in the definition of a “public body” that provides subsidies. Lastly, they want to include references of thirdcountry data in investigating subsidies in non-market economies.

The statement more or less aims at China. But Beijing has entirely different ideas. It wants WTO to revive the green-light provisions on research and development, regional development and environment-related subsidies in an expanded scope. It wants the WTO subsidy rules to be eased on the cases of developing countries and demands developed economies eliminate their politically sensitive agricultural subsidies completely and stop unilateral trade restrictions on the grounds of security concerns.

Changing the WTO rules on subsidies may not be easy due to differences among key members. The U.S. and other developed countries have upped subsidies in the form of tax incentives and fiscal support to promote competitiveness in high-tech areas such as artificial intelligence, semiconductors, batteries, next-generation mobile networks and clean energy.

Fair trade cannot be guaranteed at the aggressive and unrestrained rate of promotion for new industries by developed countries and for massive industrial subsidies by the Chinese government. A new rule must be established to balance the competition. Otherwise, WTO reform and a multilateral trade order could be destabilized. Key members must find a middle ground on WTO subsidy guidelines to avoid such a catastrophe.

The proposed reform outlines on subsidies — such as the expanded definition of public body and a ban on subsidies to ailing companies and new industries — could directly affect Korea. The state-led bailout and restructuring in shipbuilding industry had stoked criticism for potentially breaching the WTO subsidy agreement. The government must set new guidelines on subsidy and actively partake in the WTO-level discussions to reflect national interests.

Translation by the Korea JoongAng Daily staff.