Abstract
Geo-economic tensions, notably associated with the rise of China, and global collective action problems – climate change; the COVID-19 pandemic – call for international cooperation to revise and develop rules to guide both the use of domestic subsidies and responses by governments to cross-border competition spillover effects. Current WTO rules dividing all subsidies into prohibited or actionable categories are no longer fit for purpose. Piecemeal efforts in preferential trade agreements and bi- or trilateral configurations offer a basis on which to build but are too narrow in scope. Addressing spillover effects of subsidies could start with G20 countries launching a work program to mobilize an epistemic community concerned with subsidy policies, tasked with building a more solid evidence base on the magnitude, purpose and effects of subsidy policies. The need for such cooperation has become even more pressing by the COVID-19 pandemic and the associated increase in the use of subsidy programs in major economies.
Highlights
Geo-economic tensions and global collective action problems call for international cooperation to revise and develop rules to guide both the use of domestic subsidies and responses by governments to crossborder competition spillover effects
Any rethinking of the international subsidy regime must rest on a clear understanding of the economics and politics of subsidies and the nature of cross-border spillovers created by national policies
We argue below that the analysis of trade policy in general, and subsidy policy in particular, does not share a common language and that the attempt to develop one would be a major advance in supporting cooperation on subsidy policy
Summary
Trade policy has once again become a prominent source of international tension and uncertainty. In this paper we focus on one of the central sources of trade tensions: national subsidy policies. Subsidy policies are the natural, and appropriate, instruments for the pursuit of a wide variety of policy goals, but like any policy of economic significance, they will generally have spillovers via effects on trade.. The problem is rendered more difficult because unlike tariffs, which relate to both the economic and political system in broadly similar ways, subsidies are embedded in both systems in nationally distinctive ways.
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