State Aid amid a Global Financial Crisis and WTO Rules on Subsidies

Author Name KAWASE Tsuyoshi  (Faculty Fellow, RIETI)
Creation Date/NO. June 2011 11-J-065
Research Project Comprehensive Research on International Trade System
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Following the collapse of Lehman Brothers in the fall of 2008, governments worldwide went on massive spending sprees in a bid to stimulate the flagging world economy. Typical measures targeted at specific sectors included government bailouts of financial firms and support for the automotive industry such as the U.S. federal government's program designed to support the country's Big Three carmakers. As more comprehensive programs, the American Recovery and Reinvestment Act of 2009 (ARRA) in the United States and the Act on Special Measures for Industrial Revitalization in Japan can be cited as examples. In addition, the Group of Twenty (G20) countries took steps to stimulate consumption, for instance, by offering government subsidies for the purchase of environmentally friendly cars, and to promote exports by expanding trade finance.

Such state aid interventions are reasonable as a government policy response to a crisis such as the one triggered by the Lehman failure. At the same time, however, they are governed by the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) and the provisions of the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS). Being trade-restrictive in nature, these measures are subject to countervailing duties or constitute a violation of the WTO agreements. However, WTO provisions on subsidies are not explicit about welfare criteria for such measures. Thus, this paper attempts to give an extensional definition of such criteria by examining specific cases of state aid programs, and draw up suggestions for WTO-consistent crisis measures.

Under the framework of the WTO, trade-distortive state aid interventions are subject to multilateral surveillance by relevant WTO committees and the Trade Policy Review Body (TPRB). Furthermore, they could be subject to the dispute settlement procedures of the WTO. Such exit strategies and the role of the WTO in ensuring the appropriateness and legitimacy of government subsidies as a government policy under a crisis will be examined as well.

By focusing on the aforementioned points, this paper aims to assess whether the WTO, as it stands today, effectively disciplines trade-distorting government subsidies, while at the same time allowing appropriate policy space for its members by implementing subsidy provisions as a token of embedded liberalism, and identify future challenges that need to be addressed.