With the EC - Aircraft Subsidies interim panel report almost upon us, this seems like a good time to talk about disciplines on subsidies. Alan Sykes' new paper "The Questionable Case for Subsidies Regulation: A Comparative Perspective," available on SSRN, is a good starting point. Here's the abstract:
"Subsidization” by member governments occurs in the U.S. Federal system, the WTO, and the European Union. These three legal systems have responded very differently to the issues raised by subsidies, from the largely laissez-faire approach of the United States to the elaborate “state aid” rules of the EU to the intricate but weakly enforced rules of the WTO. This paper examines the three approaches asking which, if any, makes the most sense. It argues that the detailed rules of the WTO and EU are largely indefensible from an economic perspective. They fail to identify subsidization in any meaningful sense, and lack the capacity to distinguish socially constructive subsidies from those that are “protectionist” or are otherwise objectionable. The problems are likely irremediable, hinting that a laissez-faire attitude toward subsidies may be the best option.
And from the conclusion:
This paper raises serious questions about the utility of general subsidies disciplines in the WTO that go beyond the nonviolation doctrine and the opportunity for market-by-market commitments, as well as questions about the basic approach to state aid regulation in the EU. For the reasons given, the ability of rules of general applicability to identify and measure subsidization in any meaningful sense, let alone to determine whether it is socially desirable or undesirable, is much in doubt. The laissez-faire approach to subsidies in the U.S. Federal system, therefore, may have much to commend it given the weaknesses of the available alternatives.
In the WTO context, he argues that even the prohibited categories, export subsidies and import substitution subsidies, are too difficult to regulate:
Thus, export subsidies are assuredly a mixed bag from a welfare standpoint. An across the broad prohibition on them seems difficult to defend, however, unless one is prepared to assume (a) that export subsidies are on average welfare-reducing; and (b) tailored rules to sort the good from the bad are too difficult to devise. Although assumption (b) is plausible, the empirical basis for (a) is not evident.
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The blanket prohibition on import substitution subsidies seems odd. Imagine a subsidy to a domestic purchaser of an Italian tractor equal to 500 Euros, a subsidy that is clearly illegal. Now imagine instead a subsidy to the Italian tractor manufacturer of 500 Euros per tractor sold. If the manufacturer does not export (or if the subsidy to the manufacturer is limited to units sold domestically), the economic effects of the two subsidies are identical. The producer subsidy shifts the supply curve inward, while the purchaser subsidy shifts the demand curve outward by a comparable amount. The effect on the equilibrium number of sales by the manufacturer, and thus the effect on foreign manufacturers seeking to sell tractors in Italy, will be the same. It thus seems peculiar for the law to condemn the purchaser subsidy but potentially to allow the producer subsidy.
I've actually been wondering recently if WTO subsidies disciplines, and U.S. disciplines as well, need to be strengthened in response to the recent, widespread government bailouts, not to mention tax incentives like these. But the paper certainly makes some good points as to why it is difficult to come up with a coherent and effective subsidy regulation regime.
This issue probably requires a lot more detail than I have time to put into it right now, and hopefully some day I'll come back to this. But very briefly, my view on this is similar to my view of non-discrimination requirements: Subsidies should be prohibited (in the general sense of that word, not the SCM Agreement Article 3 sense) where their "intent" and "effect" is to favor domestic over foreign goods/services/companies/industries. If the degree of the combined protectionist intent and effect reaches a certain level, a violation will be found. Relevant considerations for both intent and effect could be defined in advance to help with this analysis. For example, where the subsidy measure explicitly favors domestic over foreign companies, this could be evidence of both intent and effect.
(As a side note, an obvious caveat here is that many, perhaps most, people are wary of looking at intent. Nevertheless, it seems to me that even where intent is not formally part of the analysis, people are often looking at it anyway. Thus, it's better to make it a formal element, so the analysis can be more transparent.)
One final note: If I try really hard, I can just about convince myself that the current SCM Agreement rules reflect my view! ;)
