Subsidies have been in the news a lot recently, as China's subsidies continue to cause concerns, and the Biden administration and others are now increasing their own use of subsidies. In trade policy, the reaction to foreign subsidies tends to be an anti-subsidy (aka, countervailing duty) case carried out by a domestic agency, either at the request of a domestic actor or initiated by the government itself. Based on what I come across in the general political debate, it seems like many people assume that this is the most effective approach to dealing with the economic harm caused by subsidies.
But how well do domestic countervailing duties deal with the underlying problems caused by subsidies? From what I can tell, not that well, for a couple reasons.
First, domestic CVD actions are generally seen by their targets as biased and protectionist. As a result, the subsidizing government mostly just complains about the unfairness of being targeted in this way, and rarely -- at least as far as I know, although please feel free to point me to evidence to the contrary -- makes change to its subsidy measures as a response to the CVD action. It may even retaliate against the CVDs with trade restrictions of its own.
Second, while the duties imposed on the basis of the CVD investigation may provide a bit of help to the domestic industry that is experiencing the injury, the overall global market remains distorted -- because, as noted, the subsidies tend to continue -- possibly causing injury to the domestic industry on sales in foreign markets, and also continuing to cause injury to industries in other countries.
Thus, when you use CVDs, what you end up with is continued subsidies and tariffs added on top of the subsidies, which is a system that mostly favors well-connected established companies over new entrants, and limits competition.
With these inherent flaws in the CVD approach to dealing with subsidies, it may be worth considering another option: "Adverse effects" complaints brought at the WTO. (And let me note here that while the WTO dispute settlement system is having problems at the moment, it works for Members who are parties to the MPIA, and China, the main target of complaints about subsidy use, is a party. And let me further note that it would be great if the ongoing DS reform effort succeeded and the rules worked for everyone!)
Adverse effects cases have some overlap with domestic CVD actions in terms of the subsidy effect that is targeted, although there are additional bases on which these cases can brought. Here's the key part of SCM Agreement Article 5:
Article 5: Adverse Effects
No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members, i.e.:
(a) injury to the domestic industry of another Member11;
(b) nullification or impairment of benefits accruing directly or indirectly to other Members under GATT 1994 in particular the benefits of concessions bound under Article II of GATT 199412;
(c) serious prejudice to the interests of another Member.13
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11The term "injury to the domestic industry" is used here in the same sense as it is used in Part V.
12The term "nullification or impairment" is used in this Agreement in the same sense as it is used in the relevant provisions of GATT 1994, and the existence of such nullification or impairment shall be established in accordance with the practice of application of these provisions.
13The term "serious prejudice to the interests of another Member" is used in this Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT 1994, and includes threat of serious prejudice.
Serious prejudice is then elaborated in Article 6.
For the purposes of my argument here, there are two crucial difference between adverse effects cases brought at the WTO and domestic CVD cases:
- Adverse effects cases are decided by a neutral adjudicator, so the subsidizing government can't characterize them as biased and protectionist.
- The WTO remedy can be broader than just imposing tariffs on the subsidized imports. This gives the complaining government a greater ability to induce changes to the subsidy measures, as the remedy can go beyond simply imposing tariffs on the product in question when imported into the domestic market.
Now, there's an obvious reason why domestic industries and governments like CVDs: They want the government to make these determinations itself, so as to get a quick and favorable outcome, and a remedy that helps with the basic problem of import competition in the domestic market. However, when you see how subsidies and their distortions remain in place despite the increasing use of CVDs over the years, it may be worth thinking about adverse effects cases as an alternative. There have been a handful of these cases (including the large civil aircraft cases, but those were not ideal for various reasons, as well as U.S. - Cotton and a couple others), but the option hasn't been explored as much as it could be. If the CVD approach isn't working, maybe it's worth giving something else a try.