Subsidies, countervailing duties, and the WTO: Towards an open subsidy club

Subsidies have become one of the most important instruments for industrial policy purposes in recent years, especially for the purpose of promoting high-technology industries. However, the multilateral rules for the granting of subsidies and the imposition of countervailing duties are still rather weak and imprecise and subsequently leave broad space to national discretion. In order to mitigate the international frictions that are arising from subsidization of domestic firms and industries, an "open subsidy club" should be introduced. The establishment of such a club should include at least three reform steps: To overcome the problems associated with the current material injury test, a multilateral notification system should be introduced. It should provide that all plans to grant new subsidies or to alter existing subsidies are to be notified to and approved by the WTO Committee on Subsidies and Countervailing Measures (CSCM). Given that a signatory grants a subsidy in violation of multilateral rules, the CSCM should be empowered to require a repayment of the subsidy. If a rule-violating country does not react to a CSCM ruling, it should be excluded from all newly established open subsidy clubs. - All subsidies should be ranked according to their potential competition (trade) distortion effects. It can be realistically assumed that the competition effects of subsidies are the higher, the closer the respective subsidy base is to the end of the value-added chain of a firm. For each subsidy category, qualitative thresholds that limit the provision of subsidies to a certain fraction of the respective subsidy base should be set. One of the main reasons for the relatively vague and imprecise regulations on subsidies and countervailing duties is that governments are simply not willing to give up two important instruments of industrial policy. It is thus rather optimistic to believe that the strict thresholds proposed above will become reality in the near future. However, to facilitate further liberalization steps, one could think about establishing an open subsidy club that provides a compromise between the economic need for stricter rules and the desire of governments to keep a "free hand" for the funding of domestic industries. The rules of this open club could provide that a country is free to exceed the thresholds proposed above, if, and only if, a national subsidy program offers firms located in third countries an open access on a conditional most favored nation basis. Countries joining the open subsidy club would be free to double the thresholds proposed above.