TWN Info Service on WTO and Trade Issues (Jul22/08)
22 July 2022
Third World Network

Trade: A "peace clause" needed for industrial subsidies at WTO
Published in SUNS #9620 dated 21 July 2022

Geneva, 20 Jul (D. Ravi Kanth) -- The allegedly hypocritical positions on industrial subsidies adopted by the Northern countries, including the United States and the European Union, stand exposed, with the US Senate having embarked on subsidizing domestic semiconductor production.

In a move to counter China's dominance in the production of semiconductor chips, a Senate bipartisan bill worth $52 billion is being seen as a global fight in controlling chip production and the fourth industrial revolution.

"It is essentially a battle over who is going to be the hegemon and who is going to lead the fourth industrial revolution," said Rob Davies, former South African trade minister, in an interview with this writer on 13 May 2019.

Perhaps, Mr Davies' prescient warning is now taking concrete shape with both the US and the EU seemingly set on intensifying the chip war with tens of billions of dollars of what could constitute a clear form of industrial subsidies.

The proposed $52 billion US subsidy bill is expected to enable the American chip companies to ramp-up the production of chips within the US.

It is already being touted as a "critical national security need", according to a report in the Wall Street Journal (WSJ) on 20 July.

The proposed bipartisan bill, which has crossed its first hurdle on 19 July, will also include additional funding for scientific research.

Last year, the US Senate approved a bipartisan, $250 billion bill boosting government spending on technology research and development amid rising competition from China and other nations, the WSJ reported.

The current bill would also focus on cutting-edge technology research in areas such as quantum computing and artificial intelligence.

"In all, it (the Senate) authorized $190 billion in spending, in addition to the semiconductor subsidies, according to Congressional analysis," the WSJ reported.

Apparently, the US House of Representatives earlier passed its own version of the legislation, a subsidy bill worth $390 billion.

According to the WSJ report, lawmakers are also negotiating tax credits for research and development to increase US competitiveness for the long-term.

It remains to be seen whether these industrial subsidies being provided by the world's largest economy would constitute "harmful industrial subsidies" and "trade-distorting actions".

However, it is an irrefutable fact that the subsidies approved by the US Senate for its chip manufacturers would fall in the category of industrial subsidies.

G7 "HYPOCRISY"

At a meeting in Elmau, Germany on 28 June, the leaders of the G7 (Group of Seven countries comprising the US, Canada, Italy, France, Germany, the United Kingdom and Japan, as well as the European Union) issued a strong statement on industrial subsidies.

"We will further step up our efforts working towards a level playing field through more effective use of existing tools, as well as developing stronger international rules and norms on non-market policies and practices, for example, harmful industrial subsidies and trade-distorting actions by state-owned enterprises, notably those that lead to excess capacity," the G7 leaders said.

Effectively, the G7 leaders seem to have justified the industrial subsidies provided by them as market-based even if they are harmful and trade-distorting.

However, the claim that the subsidies provided by China and other developing countries could constitute harmful and trade-distorting industrial subsidies appears to be somewhat dubious, said people who asked not to be quoted.

Last year, the so-called "trilateral" members - the United States, the European Union and Japan - issued a paper, saying that "the current list of prohibited subsidies provided for in Article 3.1 of the Agreement on Subsidies and Countervailing Measures (ASCM) is insufficient to tackle market and trade distorting subsidization existing in certain jurisdictions."

"Therefore, new types of unconditionally prohibited subsidies need to be added to the ASCM. These are:

a. unlimited guarantees;

b. subsidies to an insolvent or ailing enterprise in the absence of a credible restructuring plan;

c. subsidies to enterprises unable to obtain long-term financing or investment from independent commercial sources operating in sectors or industries in overcapacity;

d. certain direct forgiveness of debt."

The three members said that "certain other types of subsidies have such a harmful effect so as to justify a reversal of the burden of proof so that the subsidizing Member must demonstrate that there are no serious negative trade or capacity effects and that there is effective transparency about the subsidy in question."

The subsidies that have been identified by the three members in this category include, but are not limited to: "excessively large subsidies; subsidies that prop up uncompetitive firms and prevent their exit from the market; subsidies creating massive manufacturing capacity, without private commercial participation; and, subsidies that lower input prices domestically in comparison to prices of the same goods when destined for export."

"If such a subsidy is found to exist and the absence of serious negative effect cannot be demonstrated, the subsidizing Member must withdraw the subsidy in question immediately," they argued.

The moot issue is in which category of subsidies would the US subsidies worth $52 billion outlined in the Senate bipartisan bill fall.

There seems to be a glaring display of double standards, i.e., one category of subsidies for the industrialized countries and another for China and other developing countries, said people, who asked not to be quoted.

UNCTAD ON INDUSTRIAL SUBSIDIES

The United Nations Conference on Trade and Development (UNCTAD), in its Trade and Development Report (TDR) 2021, said the G7 countries had used industrial subsidies even though they criticized the subsidies provided by China.

The TDR said that "the G7-communique (issued last year) also highlighted the trade ministers' united position against "unfair trade" and "non-market policies and practices" including industrial subsidies and forced technology transfer, even though these same countries have used these policies in their own successful development process."

Meanwhile, in an UNCTAD research paper (No. 65) titled "Reforming the International Trading System for Recovery, Resilience and Inclusive Development", the authors of the paper had argued for a "WTO Peace Clause for Emergency Response."

The authors said that "not only do the developing countries need to recover faster, they have to recover better by correcting the bias in the current trading system in favour of large firms and their collection of monopoly rents."

According to the authors, Rob Davies, Richard Kozul-Wright, Rashmi Banga, Jeronim Capaldo, and Katie Gallogly Swan, "this will require effective measures against the use of restrictive business practices along the lines advocated by UNCTAD in the 1980s but it will also require that countries can provide substantial financial as well as non-financial support to their small and medium-size firms."

"However, the WTO Agreement on Subsidies and Countervailing Measures (ASCM) restricts developing countries' freedom to extend industrial subsidies curtailing the policy space they need to revive their manufacturing sector," the authors argued.

It is against this backdrop that "UNCTAD has proposed the introduction of a "Peace Clause" in the ASCM which will suspend restrictions on policy space during peacetime economic emergencies, such as the Covid-19 pandemic and its fallout, allowing State support of small and medium enterprises in export-oriented sectors."

Further, "a temporary WTO Peace Clause would enable use of industrial subsidies for reviving industrial and trade growth in the South and would also enable countries to overcome barriers related to intellectual property and data ownership," the authors pointed out.

More importantly, they said "a permanent exclusion of all proceedings and actions against government measures implemented in the context of Covid-19 is also required in all relevant fora to help create the necessary policy space for recovery."

"An immediate moratorium on ISDS (Investor-State Dispute Settlement) cases by international corporations against governments based on cross-border investment treaties is also needed, alongside a longer-term approach to ensuring investment protection measures in BITs (bilateral investment treaties) and FTAs (free trade agreements) do not undermine or hold back broader public interest policies such as necessary labour regulation and climate action," the authors argued.

In conclusion, there is need for a "peace clause" on industrial subsidies, as "what is good for the gander is also good for the goose". The time has come to do away with the sophistry on industrial subsidies. +