Rethinking international subsidy rules

• DOI: http://doi.org/10.1111/twec.13022
• Published date: 01 December 2020
• Author: Douglas Nelson,Bernard Hoekman
• Date: 01 December 2020

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wileyonlinelibrary.com/journal/twec World Econ. 2020;43:3104–3132.

© 2020 John Wiley & Sons Ltd

Received: 28 May 2020

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Revised: 31 July 2020

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Accepted: 28 August 2020

DOI: 10.1111/twec.13022

ORIGINAL ARTICLE

Rethinking international subsidy rules

BernardHoekman1,2

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DouglasNelson3

1EUI, Fiesole, Italy

2CEPR, London, UK

3Tulane University, New Orleans, LA, USA

Funding information

European Union’s Horizon 2020 research and innovation program, Grant/Award Number: 770680 (RESPECT); Bertelsmann

Stiftung

KEYWORDS

G20, international cooperation, spillovers, Subsidy policies, WTO

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INTRODUCTION

In this paper, we focus on a rising source of trade tensions: national subsidy policies. This is not

simply a ‘China issue’ nor is it limited to ‘industrial’ subsidies as distinct from agricultural subsidies,

which has been the primary focus of WTO membership. Subsidies constitute the great majority of

trade interventions imposed since 2009 (Evenett,2019). Their use increased greatly in 2020 as gov-

ernments everywhere responded to the COVID-19 pandemic. While these interventions are driven

by public health and (macro-)economic considerations, industrial policy motivations may also figure

and many interventions have competitiveness spillovers. Bolstering international cooperation to help

control negative, and more effectively realise positive, spillovers has become even more important in

safeguarding and extending the rules-based multilateral trade regime.

Unlike tariffs, subsidy policies are the natural, and appropriate, instruments for the pursuit of a

wide variety of policy goals, but like any policy of economic significance, they will generally have

spillovers via effects on trade.1 Of course, governments may also adopt subsidy policy with the ex-

plicit intention of affecting trade flows. In either case, subsidy policies create tension between the

gains from openness and losses of sovereignty in particularly stark and difficult ways. The problem is

rendered more difficult because while tariffs relate to both the economic and political system in

broadly similar ways, subsidies are embedded in both systems in nationally distinctive ways. Any

1We use the term subsidies broadly, including transfers via tax expenditures to span measures that (dis-)incentivise certain

types of economic activity, whether through the supply or demand side. See Steenblik (2003, 2007) and OECD (2011) on the

measurement and classification of subsidies. Our focus is on non-agricultural subsidies spanning both industry and services

sectors. Many subsidies target services, an area not subject to WTO disciplines.

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HOEKMAN ANd NELSON

rethinking of the international subsidy regime must rest on a clear understanding of the economics and

politics of subsidies and the nature of cross-border spillovers created by national policies.

We begin in Section2 with a brief overview of the rising use of subsidies and what the term en-

compasses. Section3 presents a simple, but robust framework for thinking about subsidies. Section4

discusses spillovers and their measurement. Section5 argues that because subsidies are embedded in

nationally distinctive economics and politics, rulemaking efforts need to take a ‘varieties of capital-

ism’ perspective.2 In Section6, we characterise extant examples of multijurisdictional cooperation on

subsidies. Section7 distils some principles for an international subsidy regime suggested by existing

regimes and the theory of economic policy. Section8 discusses options for moving forward incremen-

tally on rulemaking. Section9 concludes.

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SUBSIDIES: AN INCREASINGLY PREFERRED

INSTRUMENT OF INTERVENTION

Subsidies of one type or another constitute the great majority of trade interventions imposed since

2009. This has been documented in some detail by the Global Trade Alert (GTA) initiative. Figure1

shows the steady increase in the share of subsidies in all trade-affecting measures between 2008 and

2018. The trend was briefly broken in 2019, but in 2020 the expansive use of subsidies in response

to the COVID-19 pandemic will imply a further increase in the relative importance of subsidies. The

frequent use of subsidies is observed in both developed and developing countries—this is not just a

rich country phenomenon (Figure2).

2See, for example, Hall and Soskice (2001).

FIGURE 1 Share of subsidies in all G20 post-GFC trade measures (%, 2009–20). Note: 2020 data covers only

the first trimester and is incomplete. Source: Global Trade Alert (data downloaded on May 22, 2020) [Colour figure

can be viewed at wileyonlinelibrary.com]

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Share of subsidies in all harmful measures Share of subsides in all liberalization