Abstract
Negative international spillovers created by nontariff policies are a rising source of trade tensions and conflicts. The WTO does not include rules for subsidies for services industries, state-owned enterprises or investment incentives. Existing disciplines on industrial policies are increasingly seen to be inadequate by many WTO members. Efforts to revisit and expand rules for contested policies must recognize the changing nature of international production. A first step in addressing trade conflicts associated with industrial policies is to determine where negative international competition spillovers are both large and systemic in nature. Doing so requires going beyond trade ministries and bringing in finance and line ministries, as well as competition agencies and international organizations with expertise in collecting information on subsidies and analyzing their effects.
Highlights
Negative international spillovers created by nontariff policies are a rising source of trade tensions and conflicts
Policy design and international cooperation in a global value chains (GVCs) world is more complicated relative to a world where goods are produced with domestic factors and inputs and supply chains are national
What has increased the political salience of industrial development policies as a perceived source of negative spillovers for other countries is the rapid growth of China and views that large-scale subsidization of Chinese firms, especially state-owned enterprises (SOEs) is one reason for China’s success
Summary
It has become a platitude that we live in a supply-chain world. This has changed the relative importance (salience) of different types of trade and external policies. Subsidies and subsidy-like interventions have dominated the post-2008 trade policy landscape These types of instruments are used to target specific domestic economic activities deemed desirable from an economic growth and development perspective. Analogous to tariffs and similar at-the-border protectionist instruments, domestic policies that support local economic activity may create negative international spillovers. Such interdependencies become more prevalent – and more complex – in a GVC world. A basic problem in the design of international rules for subsidies and related industrial policies is to strike a balance between the legitimate role of governments to support economic development goals and to address market failures on the one hand and the negative spillovers that that domestic policies may create on the other.
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