TWN Info Service on WTO and Trade Issues
26 April 2022
Third World Network
www.twn.my

IMF, WB, WTO & OECD advance their agenda on industrial subsidies
Published in SUNS #9562 dated 26 April 2022

Geneva, 25 Apr (D. Ravi Kanth) – The newly created so-called “Gang of Four” comprising the heads of the International Monetary Fund (IMF), the World Bank, the World Trade Organization (WTO), and the Paris-based Organization for Economic Cooperation and Development (OECD) have called for tackling subsidies, particularly industrial subsidies, due to their alleged economic and trade distortions in a de-globalizing world.

Worried by the end of globalization that has been undergirded by liberal trade and finance rules, the heads of the IMF, WB, WTO and OECD, who called themselves the “Gang of Four”, stated their joint goal to discipline and design subsidies to curb the growing distortions and market failures.

At a virtual meeting on “Preserving Open Trade: Subsidies, Geopolitics, and International Cooperation” in Washington DC on 22 April, Ms Kristalina Georgieva, the Managing Director of the IMF; Mr David Malpass, the President of the World Bank; Ms Ngozi Okonjo-Iweala, the Director-General of the World Trade Organization; and Mr Mathias Cormann, the Secretary-General of the OECD, stated in nuanced terms their respective positions on “subsidies, geopolitics, and international cooperation.”

The nuanced positions on subsidies, as articulated by the four heads, seem to have converged on a rather questionable architecture.

The WTO DG, in her repeated interventions at the meeting, suggested that the harmful subsidies provided largely by rich countries as well as China and India in agriculture, and industrial subsidies for the new semiconductor industry and infrastructure among others could pose trade-distorting effects and even reinforce growing “mistrust” among countries.

Ms Okonjo-Iweala emphasized that industrial subsidies need to be tackled on a war footing, suggesting that much work has already been done on agriculture subsidies.

Equating the farm subsidies provided by the US and the European Union with that provided by China and India, the two developing countries with the largest populations, the four organizations said in a report issued at the meeting that around $447 billion were provided annually by the EU, the United States, China and India.

While the EU and the US managed to protect their trade-distorting domestic subsidies and have engaged in what is called “box-shifting” (shifting their trade-distorting domestic subsidies throughout the past 30 years from the “amber box” to the “green box”), China and India have not taken any scheduled commitments for AMS (aggregate measurement of support or “amber box” subsidies), said people familiar with the development.

China and India also have hundreds of millions of low-income farmers, who need to be supported through their limited entitlements, as compared to the subsidies provided by the US and the EU to their rich farmers, said people, who preferred not to be quoted.

On the issue of industrial subsidies that was raised by the WTO DG at the virtual meeting, the target appears to be China, said people, who asked not to be quoted.

Hailing the successes provided by the multilateral trading system (MTS) since the inception of the GATT/WTO, Ms Okonjo-Iweala said globalization has pushed billions of people above the poverty line.

Interestingly, the WTO DG, however, did not mention the grotesque inequalities created by globalization, a fact that was raised by the IMF Managing Director Ms Kristalina Georgieva.

The IMF head cautioned about the inequalities that were created during the period of globalization that appears to be in dire straits.

The MTS or the multilateral trading system, according to the WTO DG, severely lags behind the developments in the global economy.

Speaking on the issue of subsidies, Ms Okonjo-Iweala said growing subsidies in different sectors and economies “constitute the most frequent type of intervention since the financial crisis in 2008, more than tariffs and non-tariff measures.”

According to the DG, subsidies “can distort trade and investment and undermine other trade policy commitments and erode public support for open trade.”

Ms Okonjo-Iweala argued that currently, subsidies “are main drivers of tensions among our main trading partners.”

She pointed out that subsidies “can have significant macro-economic costs and trigger retaliatory actions”, as shown by increasing countervailing investigations that have quadrupled over the last decade.

Ms Okonjo-Iweala expressed concerns over subsidies, saying that they can impede trade negotiations in other areas.

She said addressing this issue i.e., subsidies, is “of central importance to the global trading system at this juncture.”

For Ms Okonjo-Iweala, the top priority in addressing subsidies, especially industrial subsidies, is transparency, as a range of subsidies are currently being hidden and not being reported.

“Going forward,” the DG said, “our four organizations need to work together to address this issue.”

She stressed on transparency in the provision of subsidies by countries, suggesting that there is no data on several categories of subsidies that have been provided by various governments.

Ms Okonjo-Iweala called for “building a coalition of interests across borders” to make it “possible to improve the effectiveness of subsidies and limit any negative international spillovers from their use.”

The DG emphasized that a “better grasp on the prevalence of subsidies programs and their effects can help develop and shape the necessary rules.”

When asked by the moderator at the virtual meeting whether countries are witnessing the end of globalization, Ms Okonjo-Iweala underscored the need to work towards “re-globalization”, claiming that globalization has lifted millions of people above the poverty line.

She further claimed that “this globalization and multilateral trade is a public good”.

The IMF’s Managing Director, however, apparently shot back by quoting Adam Smith, that in trade, things are not done as a public good.

The IMF head maintained that it is difficult to shy away from the problem of disappearing globalization, suggesting that we are living in a “multi-polar world.”

However, it is also difficult “to throw away the baby with the bath water” when referring to globalization, Ms. Georgieva said.

The United Nations Conference on Trade and Development (UNCTAD) has repeatedly pointed out in its Trade and Development Reports (TDRs) that globalization has led to growing inequalities, under-development of developing and least-developed countries, and increasing immiseration.

It is also a matter of concern that a multilateral trade and development organization such as UNCTAD has been excluded from preparing the joint report on subsidies.

UNCTAD, which has done considerable work on subsidies through its TDRs, including in its latest update, has called for providing industrial subsidies for developing crucial industries in developing countries, as well as creating a “peace clause” for the provision of such subsidies.

IMF, WB, WTO & OECD REPORT

In a 41-page report prepared by the Staff of the IMF, WB, WTO, and the OECD, titled “Subsidies, Trade, and International Cooperation”, it is argued that “the growing use of distortive subsidies alters trade and investment flows, detracts from the value of tariff bindings and other market access commitments and undercuts public support for open trade.”

The report says, “sharp differences over subsidies are contributing to global trade tensions that are harming growth and living standards.”

However, it did not provide any details of the alleged tensions that are being created by the provision of subsidies.

According to the report, “the renewed drive toward industrial policies to promote “strategic” sectors may distort international competition, especially against smaller, fiscally constrained developing countries.”

It points out that “below-market borrowings average about 3 to 4 percent of recipient firms’ revenue in sectors such as aluminum, cement, glass and ceramics and semiconductors.”

The report says that “unlike in agriculture, evidence on the scope and scale of government support in industrial sectors remains relatively scarce.”

It argues that “insights into the magnitude of industrial subsidies can nevertheless be gained from studies of selected sectors. Over 2014-18, 306 large firms in 13 industrial sectors received (conservatively) government grants and tax concessions worth $48 billion and $108 billion, respectively. Additionally, the same firms also borrowed more than $66 billion on below-market terms.”

Also, “many subsidy programs are related to services, although comprehensive data on their nature and extent are lacking.”

According to the report, “subsidies provided by or to SOEs (state-owned enterprises) appear to be important, although information can be difficult to compile.”

The report said that “subsidies appear to be widespread, growing, and often poorly targeted at their intended policy objectives.”

Lastly, the report said “broad-based cooperation on subsidies is needed to bring greater transparency, openness, and predictability to global trade.”

However, the report’s failure to take into consideration the recommendations made by UNCTAD’s TDR and its latest update, which underscored the need for providing industrial subsidies for the development of various sectors in developing countries, has revealed the alleged biases of the IMF-WB-WTO-OECD report, said a person, who asked not to be quoted.

UNCTAD’S RECOMMENDATIONS ON SUBSIDIES

In an update of its Trade and Development Report 2021, UNCTAD argued that “while (and contrary to the four- decade-long ideological drive) massive financial subsidies are being rolled out in the North to sustain its businesses during the pandemic, developing countries, who cannot afford comparable bailouts, will, at all levels, need to revive the use of strategic trade and industrial policies.”

The update suggested that “learning how to successfully implement these policies can begin through closer South- South arrangements.”

More importantly, contrary to the narrative on Northern subsidies articulated by the IMF-WB-WTO-OECD, UNCTAD said that “industrial subsidies including financial support to specific industries, tax credits, rent rebates to small and medium enterprises, export subsidies, debt forgiveness etc,. are important policy instruments which will be needed by developing countries to provide additional support to their domestic producers during and post pandemic.”

According to UNCTAD, “these subsidies can enable the rebuilding of labour intensive and export-oriented industries like textile and clothing, footwear etc., which are expected to take the hardest hit and lead to massive unemployment.”

The UNCTAD update said that “developing countries do not have enough policy space to support their economic recovery given the existing multilateral trade agreements, especially with respect to industrial subsidies.”

Therefore, the update argued, “a sensible place to explore the judicious mix of liberalizing and subsidizing measures in support of economic diversification would be through South-South agreements which could be subsequently used as a model for reform of the multilateral rules in this area.”

“Meanwhile, a temporary “WTO peace clause” to use industrial subsidies for reviving their industrial growth and subsequently their exports are desirable to ensure enough policy space during and after the crisis to developing countries,” the UNCTAD update argued.

In short, the WTO DG, instead of advancing the use of industrial subsidies in developing countries, appears determined to prevent them from developing their under-developed industrial sectors.