Yours is bigger than mine! Could an index like the Producer Subsidy Equivalent help in understanding the comparative incidence of industrial subsidies?

• Published date: 01 February 2021
• Date: 01 February 2021
• Author: Robert Wolfe
• DOI: http://doi.org/10.1111/twec.13069

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wileyonlinelibrary.com/journal/twec World Econ. 2021;44:328–345.

© 2020 John Wiley & Sons Ltd

Received: 27 July 2020

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Revised: 3 November 2020

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Accepted: 30 November 2020

DOI: 10.1111/twec.13069

ORIGINAL ARTICLE

Yours is bigger than mine! Could an index like the

Producer Subsidy Equivalent help in understanding

the comparative incidence of industrial subsidies?

RobertWolfe

School of Policy Studies, Queen's University, Kingston, ON, Canada

Funding information

Bertelsmann Stiftung

KEYWORDS

Organisation for Economic Co-operation and Development, subsidies, trade

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INTRODUCTION

Governments are often confident that the subsidies provided to firms in other countries are large and

pernicious, while support for their own producers or consumers is reasonable, legitimate, and essential

for regional development, social stability or just countering the subsidies of their trading partners.

Such misplaced confidence that your subsidies are bigger than mine is especially prevalent in this era

of apparent economic nationalism.

When the trade ministers of the European Union, Japan and the United States met in January 2020,

their major concern was finding ways to strengthen existing World Trade Organization (WTO) rules

on industrial subsidies on the assumption that current rules are “insufficient to tackle market and trade

distorting subsidization existing in certain jurisdictions”. That objective would be easier to justify

and to attain if more information were available on subsidies. The WTO ought to be a repository of

high-quality data on subsidies, but it is not. Notifications of industrial subsidies are notoriously inad-

equate (Wolfe,2018), and cannot tell us much about state-owned enterprises (SOEs) because of the

absence of agreed rules (Wolfe,2017). The WTO Director-General's annual monitoring reports ought

to be an alternative, but the Secretariat stopped including data on “general economic support” because

Members fail to provide the needed data, although it is obvious that the extent of subsidies remains

significant (Evenett,2019; WTO, 2019, section 3.7). Efforts to reduce tensions will require more

transparency. The countries implicated need to understand the scope of the problem and that they are

all complicit if negotiations are to succeed.

We have been here before. In the early 1980s, countries knew that some of the problems in farm

trade were caused by subsidies, but fingers were pointed in all directions. Many people recall that the

Organisation for Economic Co-operation and Development (OECD) was tasked with the analytic

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work that became instrumental in supporting the Uruguay Round of trade negotiations in the GATT,

launched in 1986. In the course of that work, the OECD developed an index of farm support that

helped countries to see the overall incidence of agricultural subsidies, the Producer Subsidy Equivalent

(PSE) and the Consumer Subsidy Equivalent (CSE).1

Indexes are common in economics—inflation, unemployment and GDP are all constructed to help

citizens and policymakers understand their own economy, and to compare themselves with others.

Every index is the answer to a question. The answer depends on definitions and decisions about what

to measure. The last part proves controversial, because countries that heavily rely on a certain policy

tool may resist including it in the index. The likely impacts on negotiations of a new indicator shape

the debates on how it should be calculated. The choice made between calculating the effective rate of

protection, or a PSE, or a trade restrictiveness index, affects the results (Anderson,2003). But indexes

let everybody see disparate policy tools in one framework thus gaining an appreciation of the overall

magnitude, for example of the incidence and form of subsidies within a sector.

Are there lessons for today in the PSE approach? In this paper, I try to answer that question from

the standpoint of economics: how did the PSE evolve, what is it, is the concept relevant to industrial

subsidies? And of politics: how was the OECD able to create the tool, and do present conditions per-

mit something similar? The brief answer is that the PSE was a response to a shared perception of crisis

in world agricultural commodity markets, but it was pushed by finance not trade or agriculture min-

isters. It drew on well-established concepts in the agricultural economics and trade literatures. And it

works best in a context where market power is sufficiently diffuse that a price gap between domestic

and world prices can be calculated. Perhaps most important, it emerged from and was endorsed by a

series of multilateral meetings that included all the major players in the farm subsidy war.

Only some of those conditions are met today. The issue of industrial subsidies has not yet reached

the point where major multilateral meetings are trying to find a way forward. And the trade literature

is still developing the conceptual tools that would support negotiations. The PSE proved valuable as

an index in creating a consensus on the need for action. It proved just as valuable for the database of

support measures on which it rests. Whether the concept could prove useful today depends on whether

there is a consensus on the question an index could answer, and on what countries collectively would

do with that answer.

In the next section of this paper, I explain what the PSE is. In the second section, I discuss how and

why the OECD was able to undertake an enormous project that showed all of its Members in a poor

light: the PSE was created in a fortuitous conjunction of structural change in agriculture (from fears of

shortage to managing a surplus), the development of new ideas, and of political pressure from finance

ministers. In the third section, I explain how the PSE affected the Uruguay Round negotiations, before

briefly outlining, in the fourth section, subsequent efforts to use the PSE concept to analyse subsidies

in other sectors. In the fifth section, I ask if the OECD approach works for industrial subsidies using

the examples of steel excess capacity, aluminium and semiconductors, which I then compare with the

PSE for agricultural policy. The conclusion teases out the implications of the differences in drawing

lessons for current efforts to discipline subsidies.

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WHAT IS THE PSE?

The OECD reports a number of different indicators of agricultural support. For convenience, I refer to

only one of them, the Producer Support Estimate (PSE). The OECD originally defined what was first

1The name was changed later, as discussed below. I use “PSE” throughout for convenience.