It is pretty well accepted, I think, that government loans provide a "benefit" (one component of a subsidy) when they are made at "below market" interest rates. However, given the role of governments in setting interest rates, through the monetary policy implemented by central banks, are interest rates ever really "market based"? Is there a free market here at all? And if not, can government lending ever be "below market"? These questions occur to me after reading the following passages from the U.S. - AD/CVD on Products from China panel report:
10.124 ... China ... argues [that] central banks set interest rates as a tool of monetary policy, which rates in turn affect the interest rates on commercial loans charged by all banks, whether or not the latter are government-owned. According to China, ... the effect that governments have on interest rates does not result from whatever role they play in the market for commercial lending, i.e., from their "role in providing the financial contribution". Rather, it arises from their role as a government in guiding monetary policy.
10.125 ... China's argument presumes that all government control or regulation of or intervention in lending markets, of whatever kind and degree, must be treated as the simple implementation of general monetary policy, which by definition cannot give rise to distortion of lending rates so as to make the observed interest rates within the country unusable as benchmarks (even if all of those observed interest rates happened to be for government-provided loans). We see no such rule in Article 14(b) or anywhere else. Indeed, we recall that the overall purpose of the SCM Agreement includes, precisely, to discipline certain forms of market interventions by governments. We can see no logic, given this, to considering that a particular class of government market interventions (relating to interest rates) must be accepted "as is" as the underlying "market" condition, particularly where the question to be resolved is exactly whether on a given loan transaction the interest rate charged by that same government is "below-market".
10.126 ... Here, we see a clear distinction between, on the one hand, the government as the setter and implementer of the general monetary policy of a country; and, on the other hand, the government participating as a lender and/or otherwise intervening in the lending market as such, in a way and to an extent that effectively it is the government, and not the market, that establishes the lending rates.
10.127 We acknowledge, as China points out, that government influence over interest rates is an important feature of monetary policy. Indeed, adjusting their own lending rates up or down is one of the principal tools by which central banks influence the money supply. It also is true that interest rate movements at the central bank level ripple through the commercial lending market such that the different sorts of commercial lending rates (short- and long-term, fixed and floating, for borrowers of different risk levels, etc.) tend to move in parallel with the central bank rates. This indeed is generally the goal of such central bank actions, as the loosening or tightening of commercial credit directly increases or decreases the money supply.
10.128 This is a very different matter, however, from a hypothetical situation in which, for example, the government is the only lender in a country. ...
Is there a difference between central banks setting interest rates to guide the economy, as compared to government lending at low interest rates as a policy tool? If so, is the difference one of degree, or are these completely different categories of actions?
It's worth noting that even if there were an issue here relating to central banks influencing interest rates, this is an area where "everyone's doing it," so it would be hard for a WTO panel to condemn it.
