Subsidies, Trade and the WTO World Trade Report 2006 Presented at WTO Public Forum, 26 September 2006

World Trade Report 2006 A comprehensive overview of use and impact of government subsidies: definitions of subsidies predictions of economic theory about the effects of subsidies reasons governments give for using subsidies incidence of subsidies across countries and sectors WTO rules on subsidies

The legal, statistical and economic definitions of subsidies differ 1. Economic definition may involve: - budgetary outlays -regulatory intervention -public provision of good and services at less than market price -any government intervention that affects relative prices 2. National accounts statistics only include - direct payments to resident enterprises 3. WTO legal definition -Broad range of forms of subsidies (direct payments, tax concessions, provision of goods and services) -BUT EXCUDES public infrastructure, regulation -specificity Need studies based on legal definition

Report emphasises need for more and better data on subsidies Data from international sources that allow for cross-country comparability only exist at a highly aggregated level or are available for a limited number of (sub) sectors (agriculture, fisheries, coal) instruments (export credit support) Very few data exist on services subsidies.

Lack of transparency on the use of subsidies Significant discrepancies exist between value of subsidies according to different statistical sources (inter)national statistics and WTO notifications World Trade Report raises serious questions about the completeness of WTO notifications and therefore about the achievements of the WTO with respect to transparency

Subsidies (bil.$, averages 98-02) National AccountsWTO Datanotifications Canada EU (15) - total Australia Japan Norway Switzerland United States Brazil India Republic of Korea South Africa0.9...

Fishery subsidies reported to WTO, OECD and APEC (mil $) Country WTO notifications OECD GFT APEC Canada Mexico United States EU a Russia Australia Japan Korea, Rep. of Taipei, Chinese

How much do countries subsidize? According to national accounts statistics 69 countries spent around $300 billion on subsidies in 2003 of which 21 developed countries spent $250 billion. The average ratio of subsidies to GDP was: 1.4 per cent for developed countries 0.6 per cent for developing countries

How much do countries subsidize at the sectoral level? Large variation in the sectoral distribution across countries (yet, differences across data sources in composition by industry and instrument used) Agricultural subsidies in OECD countries show a downward trend There is no solid information on trends in industry and services subsidies There seems to be a tendency to redirect subsidies towards horizontal objectives Who benefits from these subsidies? Are horizontal subsidies de facto less trade distortive?

Stated objectives of governments for using subsidies Governments extend subsidies to... pursue industrial development support the creation of new knowledge through R&D attain distributional objectives protect the environment. Economic theory: Subsidies Can be effective instruments to pursue these objectives Can distort trade by giving artificial competitive advantage to beneficiaries

Subsidies as a policy tool Compared to other policy instruments, subsidies tend to: represent a relatively transparent form of government intervention at national level have less undesirable side effects than some other policies if well-designed Can be more easily afforded by higher income countries, a disadvantage for some But they make governments prone to capture by recipient groups Need more empirical studies to assess the relevance of market failure and the effectiveness/design of subsidization policies

The Trade and Welfare Effects of Subsidies A systematic analysis of trade and welfare effects of subsidies has only been carried out in the economic literature for agricultural subsidies Economic simulation models suggest that agricultural subsidies create welfare losses that are borne primarily by the major providers of subsidies, although they still distort trade Their removal may hurt net food importers

Disciplining the Use of Subsidies at the WTO The WTO disciplines the use of specific subsidies, i.e. subsidies that are explicitly limited to a particular set of beneficiaries. The WTO thus seeks to ensure that eligibility for subsidies is based on objective criteria and neutral conditions (so targeted subsidies may differ from specific subsidies). Export subsidies prohibited in manufacturing. In Agriculture they will be eliminated by 2013 (HK 2005). S&D treatment for developing countries. Question: Should developing countries be permitted to apply export subsidies to manufacturing?

WTR 2006 concludes More reliable and more comprehensive data sets that are comparable across countries are necessary in order to increase transparency on the use of subsidies

WTR 2006 concludes Need of more studies to answer some questions: Are market failures relevant to justify subsidies? How effectively are subsidies used for governments stated objectives? What is the impact of subsidies on income and welfare? (studies limited to agriculture) What is the impact of subsidies in developing countries? Who are the actual beneficiaries of the subsidies? (Eg. Approx. 5% recipients receive 50% agriculture subsidies in the EU) How theoretical predictions and empirical evidence relate to the legal definition of subsidies?