Discussions at the World Trade Organization (“WTO“) on key issues concerning the regulation of international trade are intensifying in the lead up to the 13th biennial meeting of the highest decision making organ of the organization — the Ministerial Conference — scheduled to take place from 26-29 February 2024 in Abu Dhabi (“MC13”).
Several informal meetings are being held in Geneva to streamline the work programme for MC13. One such meeting, scheduled to take place on 25-26 September 2023 (“September meeting“), will consider the interaction between trade and state intervention in the economy. The European Union (“EU“) and the African Group (composed of 44 WTO Members and 9 observers from Africa) have each put forward submissions on this topic. Taken together, the submissions could be said to reflect a degree of divergence between developed and developing countries on how to strike the appropriate balance between, on the one hand, strengthening multilateral disciplines to curtail the use of harmful industrial subsidies and, on the other hand, maintaining sufficient policy space for industrial development for developing countries.
The EU submission
The EU submission notes that current WTO rules are not effective in tackling industrial subsidies, especially due to a lack of transparency in some Members’ interventions in the market. Under certain conditions, the EU says, well-designed subsidy schemes can make an important contribution to achieving climate transition and other environmental goals. However, in other cases, industrial subsidies can have negative, trade-distortive effects. The work on industrial subsidies must, in the EU’s view, complement WTO talks on agricultural subsidies, as well as the WTO fisheries subsidies rules, which is the most recent multilateral agreement to be concluded at the WTO.
Ultimately, the EU calls for international consensus on:
- tackling harmful industrial subsidies;
- defining the parameters of WTO Members’ (“Members“) interventions in support of industrial sectors;
- identifying gaps in the current rules, including in the WTO Agreement on Subsidies and Countervailing Measures (“SCM Agreement“); and
- finding effective solutions to address the problems of harmful industrial subsidies and Members’ interventions.
The EU’s call for the strengthening of multilateral subsidy disciplines is not new. Back in 2018, the EU, the United States of America (“U.S.“) and Japan formed a trilateral group to inter alia define the basis for the development of stronger rules on industrial subsidies. In January 2020, the group announced proposed reforms to WTO rules, apparently aimed at targeting alleged trade-distorting subsidies used by China to support strategic industries.
The proposed reforms included:
- expanding the list of subsidies prohibited under the SCM Agreement;
- making it easier to impose countervailing measures on certain actionable subsidies by reversing the burden of proof in countervailing duty investigations; and
- permitting subsidies that have not been notified by the granting Member and that are counter-notified by other Members to be deemed prohibited subsidies.
The African Group Submission
The African Group submission ahead of the September meeting calls for the disciplines under the SCM Agreement to be recalibrated and rebalanced to infuse certainty and equity in the multilateral trading system. Noting, for example, that Africa’s growth trajectory is limited by its dependence on production and exports of agricultural and extractive primary commodities, the submission calls for the extension of flexibilities to enable developing countries to grant subsidies, including complimentary localization initiatives, to promote industrial development and structural transformation, economic diversification and development, and green industries to confront climate change.
The submission provides a non-exhaustive list of issues that WTO Members can consider to rebalance trade rules to facilitate sustainable economic transformation in developing countries, especially those in Africa. For example, the submission proposes that the current prohibition under Article 3(1)(b) of the SCM Agreement against conditioning access to subsidies on the satisfaction of local content requirements should not apply to developing country Members, provided that the use of domestic goods does not exceed a threshold to be agreed by Members.
Arguably, complicating the African Group submission is the fact that, at the WTO, “developing country” status is designated on the basis of self-selection, and such Members receive several flexibilities under the WTO agreements through the Special and Differential Treatment principle. China has self-selected itself as a “developing country”, and has allegedly been the main target of calls for the strengthening of subsidy disciplines to tackle harmful industrial subsidies.
The Global Race to Subsidize Domestic Industries
The September meeting comes at a time when Members are openly subsidizing domestic industries and are arguably in a “subsidies race” with each other. For instance, the U.S., with its 2022 Inflation Reduction Act, announced that it would provide USD 390 billion in subsidies to several industries, in particular, its electric vehicle industry. As a countermove, the EU is in the midst of formulating its own subsidy scheme for its electric vehicle industry. Similarly for the semiconductor industry, after the U.S. announced USD 280 billion in subsidies for its manufacturers, Japan and the EU announced subsidies for their own semiconductor industries. Other industries manufacturing products deemed critical to the energy transition and to national security have already followed – or will likely follow.
One effect of an industrial subsidy race is that Members might make more aggressive use of trade defence instruments – such as anti-dumping and anti-subsidy (or countervailing) measures – to investigate and to counteract injurious effects of another Member’s subsidies. For instance, a prominent EU lawmaker has called for the use of trade defence instruments to offset subsidies provided by the U.S. to its hydrogen industry. The costs resulting from such trade defence investigations (i.e., extra import duties) aim to offset the benefits of subsidies to beneficiaries that export subsidized products.
A subsidies race is of course not a new phenomenon, and neither are WTO disputes on such subsidies. The WTO disputes between the EU and the U.S. over subsidies to Airbus and Boeing ran for more than 15 years before the EU and the U.S. reached a deal in 2021 to suspend application of retaliatory tariffs worth USD 11.5 billion. In the context of these disputes, the U.S. Department of Commerce had proposed putting in place 292% anti-dumping and anti-subsidy duties on imports of aircraft from Bombardier (which was taken over by Airbus), only to be stopped by the U.S. International Trade Commission.
While the aircraft subsidy race concerned many billions in state support, the amounts pale in comparison to the current industrial subsidy race. Moreover, while the WTO dispute settlement helped resolve the aircraft disputes, it took more than 15 years to arrive at a solution. Members might resort to cross-subsidization and aggressive use of trade defence instruments as the policies of choice to counter other Members’ industrial subsidies.
In this regard, the EU’s proposal could be seen as an attempt to curtail the slippery-slope effect of this subsidy race, so as to prevent some negative trade-distorting effects. But the EU’s submission and the September meeting are no more than stepping stones to initiate negotiations at MC13. Needless to say, we are still far from a negotiated outcome.