Subsidies, Spillovers and WTO Rules in a Value‐chain World
| Published date | 01 September 2016 |
| Date | 01 September 2016 |
| DOI | http://doi.org/10.1111/1758-5899.12327 |
| Author | Bernard Hoekman |
Subsidies, Spillovers and WTO Rules in a
Value-chain World
Bernard Hoekman
Robert Schuman Centre for Advanced Studies, European University Institute in Florence
Abstract
As tariffs have fallen, subsidies and related policies with similar effect are being used to support local production. This raises
the question of whether the existing World Trade Organization (WTO) ‘rules of the game’are adequate. Assessing the eco-
nomic effects of subsidies is complicated, given the need to consider linkages within and across supply-chain networks. Many
of the policies that affect supply-chain operations are not considered subsidies under the WTO. There are no rules on subsi-
dies for services or investment incentives by local governments. Conversely, some WTO rules may not be appropriate or effec-
tive given the increasing prevalence of global value chains. The widespread use of subsidies post-2008 suggests WTO
members should launch a process of deliberation to revisit the status quo set of multilateral rules on subsidies. The 2015 Nair-
obi WTO ministerial declaration has created the necessary window to permit interested countries to do so. A central element
of this should involve a concerted effort to collect better data and to analyze how subsidies and policies with equivalent
effect impact on value chains, whether negative international spillovers are created and, if so, their magnitude and incidence.
Policy Implications
•Value-chain-based production and trade are changing the incentives of governments to use different trade policy instru-
ments.
•WTO rules on subsidies need to be revisited as a result of the rising role of global value chains.
•More policy attention and resources must be devoted to international data collection and monitoring of the use of sub-
sidy policies.
•Too much attention is being given to traditional trade-policy instruments like tariffs and antidumping –and too little to
the use of different types of subsidies and measures with equivalent effect.
•Policies targeting trade in services and investment are not subject to multilateral disciplines even though these are likely
to have negative impacts globally on welfare and efficiency.
Trade policy post-2008 crisis
The use of subsidies by governments expanded dramatically
after the 2008 financial crisis, with many governments bail-
ing out their financial sectors and providing subsidies to
support certain manufacturing activities, most notably and
visibly the automotive sector. While a direct response to a
major financial/demand shock, the use of subsidy instru-
ments –broadly defined to include fiscal measures such as
tax exemptions and investment incentives such as tax holi-
days for new investment in a region –has been a constant
feature of government policy in both high-income and
emerging economies. This takes different forms in different
countries, depending in part on fiscal and administrative
capacity. A common feature is that intervention is often
non-transparent.
Motivations underlying efforts to promote certain types of
economic activity in a jurisdiction include a desire to gener-
ate employment and investments that are deemed desirable
from an economic growth and development perspective.
These often include ‘high-tech’- and ‘green-tech’-oriented
activities, and more generally a desire to ‘move up’the
value chain (VC) by encouraging investment in innovation
or activities that generate higher productivity and thus
higher-paying jobs. The employment objective is often cen-
tral in assistance programs targeting small and medium-
sized enterprises (SMEs), the main source of employment in
most countries. Examples of frequently used policies include
government procurement policies; for example, giving price
preferences to local firms or to firms that generate the high-
est local content, and locational investment tax/subsidy
instruments. Frequently used examples of the latter are long
tax holidays, financial guarantees or provision of services at
below market rates.
Developments in the global trade landscape are discussed
briefly in the next section, with particular focus on the
emergence of international production networks and VCs,
and the associated increase in the share of trade in interme-
diate products and services. I then provide a snapshot of
recently compiled data on the use of various kinds of subsi-
dies by governments following the 2008 financial crisis.
These illustrate that subsidies are widely used, mostly by
Global Policy (2016) 7:3 doi: 10.1111/1758-5899.12327 ©2016 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 7 . Issue 3 . September 2016 351
Research Article
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