Rethinking WTO subsidy rules: Should the SCM have an escape clause?

Call it the “subsidy war” or “domestic policy space”, as you wish. The world has dramatically changed over the last three months: governments from the United States to just about every other country have rushed to rescue their economies by pumping trillions of dollars into their financial and manufacturing sectors. Most, if not all, such cash injection raises issues under the SCM Agreement. Although subsidies to banks are supposed to be covered by GATS, which does not yet have a subsidy discipline, the question of indirect subsidy will arise when the subsidized banks lend to manufacturing firms in the future. The United States has used this logic to find actionable subsidies in China where the government bailed out its failing banks in the 90’s and set low interest-rates for the banks to lend. Sounds familiar?   

Such irony aside, I have been wondering why the SCM should not have an escape clause like GATT XIX, which could exempt subsidies used in an emergency situation so as to prevent the collapse of industries important to a national economy. If higher tariffs and quantitative restrictions can be legally used to protect an uncompetitive industry under GATT XIX, why shouldn’t subsidies be allowed to support an uncompetitive industry in a crises? 

The WTO Negotiating Group on Rules just released the current draft on the revision of the SCM Agreement (TN/RL/W/236). But this draft does not seem to reflect recent development in government subsidy practice.

Here are some additional thoughts on the revision of the SCM. The SCM was negotiated in the late 80's and early 90's when the world was moving towards embracing free market and privatization. It is therefore not surprising to find that the SCM Agreement imposes very strict disciplines and contains no general exceptions. The few provisions on non-actionable subsidies, which can be viewed as very narrowly tailored exceptions from the SCM disciplines, have long expired. (The draft SCM revision does not seem to revive these provisions.) As a result, a subsidy for environmental purposes is now technically actionable under the SCM. Then there is also the issue of “industrial policy”, which many developing countries aspire to employ, but the term is pretty much a synonym for subsidy under the SCM Agreement.

Today, the pendulum is swinging the other way. The United States, long the champion of free market and privatization, has just turned its banking and auto industries into partially state-owned sectors. The scale of current government intervention has made the benchmark of “marketplace” used to define subsidy benefits under the SCM unrecognizable. Even after the current crisis passes, we can all expect the role of government in the economy to increase considerably.

How would the new political economic climate affect the SCM? It would be counterproductive if the EU or China threatens to bring WTO lawsuits against the U.S. bailout of GM or others, and vice versa. Such “war on subsidy”, at best, would make the WTO look totally irrelevant in the eyes of millions of people whose lives hang on government rescue efforts. Instead of focusing on which country has violated which rule of the SCM in the current crises, I would like to see WTO members devote energy to rethink the adequacy of existing subsidy disciplines. It should be in the common interest of WTO members to have a set of subsidy rules that reflects a better balance between the role of government and the marketplace.