Global Trends by Martin Khor

Monday 18 June 2007

Storm over WTO proposal to ban subsidies

A recent United States proposal at the WTO to ban more subsidies is causing controversy.  Development experts fear the ban would damage economic development in developing countries and cripple their industrial and services firms.


A new controversy erupted in the World Trade Organisation when the United States recently proposed that many types of subsidies provided by governments to their industrial and service enterprises be banned.

If adopted, the proposal will have grave implications for developing countries since most of them make use of the practices which the US now seeks to ban.

Development experts have attacked the proposal, saying it would halt industrial development in developing countries by affecting growth or even the survival of their firms.

"The proposal is very much against the interests of developing countries, which will lose the ability to use these subsidies which are now permitted in the WTO,” said Bhagirath Lal Das, an international trade expert who was formerly a high United Nations official.

The experts point out that developed countries have also been making use of these subsidies, particularly when they were at their development phase. Now that their companies have become giant multinationals, the rich countries want to prohibit practices in other countries to prevent the entry of new competitors.

Moreover, the US wants to exempt the agriculture sector from the subsidy ban. In agriculture, the US is providing massive domestic subsidies, including some of the varieties that it seeks to prohibit in other sectors.

The double standards in the US proposal are causing the developing countries to call “Foul!”

The US proposal was made as part of the Doha Round negotiations.  It wants to amend the WTO Agreement on Subsidies and Countervailing Measures (SCM) by adding five new types of subsidies onto the two subsidies (export subsidies, and subsidies that promote the use of domestic goods over imported goods)

that are now prohibited.

The five subsidies are: (1) government payments to companies to cover operating losses; (2) forgiveness of government-held debt; (3) government lending to "uncreditworthy" companies; (4) government equity investments in "unequityworthy" companies; and (5) other financing, such as "royalty-based" financing that is not commercially available.

The US also wants countries to notify the WTO of details of government or public-sector ownership of an enterprise.

The information to be notified includes: (1) any changes in such ownership or provision of equity capital, as well as explanations whether the government investment is consistent with the "usual practice of private investors" in the country; and (2) the percentage of government or public-body ownership in the enterprise and terms and conditions of any government financial contribution to the enterprise (including government revenue foregone or not collected).

This is presumably to assist the WTO and its members to monitor and track down any practice of governments providing the prohibited subsidies to enterprises.

US Trade Representative Susan Schwab said that “the subsidies we want to prohibit maintain inefficient production capacity in industries ranging from steel to semiconductors. Stronger rules for these subsidies would address trade-distorting practices of many of our trading partners that often lead to unfair trade."

However, many development experts see the US move differently.

"The United States wants to preserve the use of subsidies that it continues to use, especially in agriculture where it is refusing to even discuss changing the rules to limit and discipline subsidies known as the Green Box,” remarked Chakravarthi Raghavan, a veteran analyst of the GATT/WTO trading system.

Dr. Ha-Joon Chang, a development economist in the University of Cambridge, and author of several books including “Kicking Away the Ladder”, said the US proposal “appears to be a monopolistic attempt by the existing producers to freeze out competition.”

Chang asked:  “Who decides which company is 'creditworthy' or 'equityworthy'?”   For example, Nokia, the electronics company, which was founded in 1960, incurred losses for the first 17 years of its existence.

“Now, in that situation, if the Finnish government wanted to invest in Nokia electronics in, say, 1965, that would go against the proposed US rule, as the company was definitely not equityworthy”, said Chang.

“The point is that some developing country firms may need to run losses for some time to get into new industries. If the government cannot help them, that will be the end of industrialisation in developing countries. In the long run, this is not even good for the rest of the world.

“In the short run, it may be more 'efficient' not to allow new producers to enter the market, but in the long run, it may be more 'efficient' for the world to have new producers emerge with the use of subsidies.

“Consider the Japanese and Korean steel or automobile industries, which all emerged thanks to government subsidies, but eventually they brought the prices of steel and cars down.”

 Dr. Ajit Singh, Professor of Economics at the University of Cambridge, commented:   “Many successful companies had long periods of negative profits. 

“In view of the unequal playing fields and the great inherent advantage of advanced country corporations over those of developing countries, the five extra disciplines the US wishes to introduce into the WTO's subsidy regime may cripple the development efforts of emerging countries.” 

 “Such a proposal is remarkably ill-advised” said Yilmaz Akyuz, a former Director of UNCTAD.

He said many developing countries often cover operating losses of public or semi-public enterprises that render social functions, such as providing essential inputs to certain segments of producers, including credits.  Most subsidies in the developing world focus on these.

“The proposal is in effect using creditworthiness as a measure of subsidy -- that is, loans to a creditworthy firm is not a subsidy,” said Akyuz.  “Can you trust market assessment in this respect? 

Many Wall Street firms that were deemed creditworthy have gone bust with the bursting of the bubble while several Korean firms that looked unviable in the 1960s and 1970s turned out to be highly successful.”