Tuesday, April 24, 2012

Export subsidies and WTO

An interesting debate on "export subsidies" was recently posted in the IELP blog. A clear understanding on the contours of subsidies in general and export subsidies in particular assumes significance due to the SCM Agreement, several high profile cases like the Airbus-Boeing dispute at the WTO (which revolves around subsidies) as well as the allegation that China supports its local industry with subsidies of various forms.

As per Article 3 of the SCM Agreement, subsidies contingent on export performance (Export subsidies) are prohibited.
3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited:
(a) subsidies contingent, in law or in fact(4), whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I(5);"
A country shall neither grant or maintain such subsidies. An Illustrative List of Export Subsidies is found in Annex I of the SCM Agreement. As the IELP Blog notes there is an exception to the general prohibition of export subsidies and that is found in (k) as below:
"(k)        The grant by governments (or special institutions controlled by and/or acting under the authority of governments) of export credits at rates below those which they actually have to pay for the funds so employed (or would have to pay if they borrowed on international capital markets in order to obtain funds of the same maturity and other credit terms and denominated in the same currency as the export credit), or the payment by them of all or part of the costs incurred by exporters or financial institutions in obtaining credits, in so far as they are used to secure a material advantage in the field of export credit terms.
Provided, however, that if a Member is a party to an international undertaking on official export credits to which at least twelve original Members to this Agreement are parties as of 1 January 1979 (or a successor undertaking which has been adopted by those original Members), or if in practice a Member applies the interest rates provisions of the relevant undertaking, an export credit practice which is in conformity with those provisions shall not be considered an export subsidy prohibited by this Agreement."
Thus, though export subsidies are taboo under WTO law and a whole list of prohibited export subsidies exist, there are exceptions listed in the SCM Agreement itself.

The issue of the US EXIM Bank's future has been in the news lately on the issue of it's reauthorisation. The EXIM Bank has been one of the main providers of Boeing's subsidies. Are the steps undertaken by EXIM Bank consistent with the SCM Agreement? Do their measures fall under the exception in (k) of Annex I of the SCM Agreement? This piece in HBR blog makes the case for a more active EXIM Bank to counter "state capitalism" and other forms of support from other countries to their local industry? Do two wrongs make a right?

"The small government advocates live in a fantasy world if they think there is unfettered competition, untouched by policies of other governments, in the global economy. They barely acknowledge the "industrial policies" of other market capitalist nations much less mention the rise in the last 15 years of a new, potent form of state capitalism. Traditional business groups like theNational Association of Manufacturers and the Chamber of Commerce do, however, support a four year authorization and higher credit limits for Ex-Im. Republicans like Richard Shelby (Alabama) andLindsey Graham (South Carolina), whose states have Boeing facilities, do as well. Says Graham: "I wish we didn't need an Ex-Im Bank. But other countries have far more aggressive financing regimes in place. The United States cannot and should not unilaterally disarm."

The Ex-Im controversy is thus a reprise, for the umpteenth time, of a small government/big government debate inside the United States. But, the fundamental, long-term debate should be about how government in general, and "state capitalism" in particular, is distorting economic competition in the global market place, and what is the proper response for the U.S. government in aiding corporations playing by "market capitalism" rules, and in creating a fairer international economic system."
The Multilateral system is constantly under stress from countries pushing for domestic policy choices that are at times contrary to international trade rules. While pushing for maximum domestic policy autonomy within the confines of WTO Agreements may be acceptable, a blatant violation on the ground that other countries also violate rules may be a detrimental path to follow. The credibility of a rule based system founded on non-compliance would be at stake. It would be interesting to study export subsidy policies across geographies to see their consistency with respect to WTO rules.

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