There are no atheists in foxholes, and there are no subsidy hawks in a supply chain crisis. A crunch in semiconductor production, a food shortage, a general sense that the global trading system is unreliable: suddenly, the fiscal valve is wrenched open and the public cash starts to pour.
Having spent several years attempting to craft new rules to restrain trade-distorting industrial subsidies (aimed very obviously at China), advanced countries have rather undermined their own arguments by lining up lavish handouts themselves. The US and EU each have their own Chips Act to encourage semiconductor production, with a combined public spending boost target of about $100bn, after big spending programmes by Japan, South Korea and Taiwan. After years of trying to use the World Trade Organization and other forums to inoculate economies from the subsidy disease, Washington, Brussels and Tokyo have caught the bug themselves. The Global Trade Alert monitoring service says that even before the pandemic, 62 per cent of global goods trade was in products and on trade routes where subsidised American, Chinese, and European firms compete: the number of subsidy programmes has only increased since.
The EU and US insist that their semiconductor subsidies will meet WTO rules. But even if a subsidy is legal, doesn’t mean it’s wise. The surge of spending might have been a good time to revise and tighten WTO rules: it has not been taken.
Meanwhile, the global guardians of probity are sufficiently alarmed to have lumbered into collective action. The World Trade Organization, OECD, IMF and World Bank issued a joint report recently on using international co-operation to restrain distorting handouts. It correctly admits that clear definitions and undisputed taxonomies are elusive. Many subsidies are entirely sensible, indeed planet-saving, but the exact design is highly important. Paying households to install solar panels, which in effect compensates for the benefits of the carbon emissions saved, is totally justifiable: shelling out money to boost domestic solar cell production less so.
The problem right now is that crises have a way of making bad subsidies look like good ones, at least in the short term. India, for example, supported by other developing countries, has been at odds with rich countries for years at the WTO over the support it gives to farmers. The government buys grains, particularly rice and wheat, above market prices and puts them into public stocks, some of which it distributes cheaply to households. So far, so cumbersome, compared with simply giving families income support. But also so relatively non-distorting of international trade as long as the stocks don’t get sold abroad. If they do, the government purchases begin to count as an illegal export subsidy.
Yet there’s currently a shortage of wheat in food-importing countries, particularly in Africa, thanks to the disruption of sales from Ukraine and Russia. India has made hay, as it were, with the argument that it would love to sell its stocks abroad but the WTO is stopping it. In the longer term, it makes total sense to encourage efficient and competitive production and sustainable food security rather than create periodic gluts through distortive handouts. But presentationally it does look odd for India to be keeping food off the global market in a crisis just to stick to rules written for normal times. (To be fair, it would help if India accurately reported its subsidies, as required under WTO transparency guidelines.)
The same is true for agriculture as for industrial subsidies: there are few big players innocent enough to take a principled stand. The EU and US have been increasing their own domestic agricultural subsidies in recent months and years. In the EU’s case, its recent sudden push to ramp up production is a reasonable enough short-term response to the global food crisis, and its planned spending remains well within legal WTO limits. But the US shelled out vast production-distorting subsidies for years to shield its farmers from the effects of Donald Trump’s US-China trade war, and before that has a long history of dumping agricultural surpluses on world markets in the name of humanitarian aid.
Fishing faces the same problems. WTO members are trying to negotiate reductions in the fishing subsidies that are emptying the world’s oceans of life. Again, India is busy trying to exempt itself and other developing countries from new rules. But the EU in this case has its standing in the debate undermined by its own desire, under pressure from Spain and France, to hang on to fuel subsidies for long-distance fishing boats.
In the face of all of this, the idea of effective international restraint to prevent trade-distorting subsidies remains, like the Spanish trawlers, well over the horizon. There’s unlikely to be a meaningful WTO deal on fisheries or farm subsidies soon. The EU and US are promising to use the bilateral transatlantic Trade and Technology Council to co-ordinate — or at least be transparent about — their semiconductor production subsidies. But realistically most constraints will come from unilateral means via traditional anti-subsidy duties or perhaps the EU’s new “foreign subsidies instrument” which in effect extends European domestic state aid restrictions to overseas companies competing in the EU single market.
What is it that ultimately stops spirals of production subsidies? After the industrial interventions of the 1970s in rich economies, it was governments running out of money and a clear feeling that the handouts hadn’t worked. So, mark your calendars for let’s say a year or two from now, when public borrowing has probably got more expensive, the pressure on public spending in rich countries more acute and the billions thrown into semiconductor production looking less strategically brilliant. Until then, it’s a question of hoping that at least some of the public money lands on fertile ground.
alan.beattie@ft.com
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Source: Economy - ft.com
