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IMPORTANCE OF THE SUBSIDY REGULATION UNDER THE WTO REGULATION
Kholmirzayeva Shokhista
Master of the “International law” faculty of
the university of world Economy and Diplomacy
E-mail:
@xolmirzayeva shoxista.mail.ru
Phone: 99890-443-84-40.
https://doi.org/10.5281/zenodo.13879976
Abstract.
This thesis
aims to explore the legal basis of the regulation of subsidies within
the WTO. The regulation of subsidies holds significant importance in the realm of international
trade. Subsidies, defined as financial contributions made by governments to support domestic
industries, can have far-reaching implications for market competition and trade flows.
Key words:
regulation of subsidies, actionable subsidies, World Trade Organization (WTO),
Agreement on Subsidies and Countervailing Measures (ASCM), protectionism, International trade,
Agreement on Agriculture, GATT.
Subsidies play a crucial role in promoting economic growth in several countries.
1
Regulating subsidies ensures that government intervention does not hinder trade and that the
benefits of economic growth are spread equitably across all countries. Multilateral rules governing
subsidies promote opportunities for competitive trading and help countries integrate into the global
economy, making international trade an excellent tool for economic growth.
Subsidies in the agriculture sector have the potential to artificially protect recipients from
market changes and distort
2
the global prices for agricultural products.
3
This may constitute unfair
trade, since it may violate the commitments importing countries have made to the WTO regarding
1
For example, US high technology production and export are to a large extent due to substantial R&D subsidies to
many industries through heavily subsidised university research sectors, subsidies to defence and space exploration
sectors, as well as direct export subsidies provided by the Export-Import Bank of the United States to high technology
industries, including aircraft production. See Brandner, supra note 33, at 64-65.
2
The measurement of subsidies in the international trade field was studied by the OECD, which developed a set of
measures for the purposes of comparing Member countries’ levels of subsidies, types of subsidies, and reductions
under the Uruguay Round Agreement on Agriculture. The Aggregate Measurement of Support [AMS] is now used to
estimate the dubbed “trade distorting” agricultural support measures, which are the support policies slated for
reduction under the AoA. Timothy Wise. “The Paradox of Agricultural Subsidies: Measurement Issues, Agricultural
Dumping, and Policy Reform” Paper n. 04-02 from the Global Development and Environmental Institute, 2004
(Medford: Tufts University, 2004).
3
The World Bank predicts that removing trade barriers in agriculture could lift hundreds of millions of people out of
poverty. There is an estimation that the removal of trade barriers in agriculture by industrial countries could reduce
poverty worldwide by 8%, or about 200 million people. William R. Cline, Trade Policy and Global Policy,
(Washington, DC: Institute for International Economics, 2004) [Cline, Trade Policy].
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market access
4
and may displace exports from other WTO Members. According to these
considerations, agricultural subsidies violate fundamental principles of the WTO.
5
Therefore, the regulation of subsidies ensures that all countries have a level playing field
when it comes to trade. Without regulations, some countries may provide massive subsidies to
their domestic industries, giving them an unfair advantage in the global market, both to industrial
and agricultural products. Agriculture receives extensive and well-documented government
support.
6
Over the course of 2018–2021, public budgets supported agriculture with $447 billion
annually,
7
of which almost three-fifths ($268 billion) went to producers directly and the remainder
to general services or consumers.
8
Improper and excessive usage of subsidies
can lead to the
destabilisation of the functioning of international trade and the distortion of international
competition.
9
Regulations ensure that competition is fair and that smaller countries have a chance
to participate meaningfully in the global economy.
By regulating subsidies, the WTO can promote sustainable development and ensure
environmentally-friendly practices. Governments can offer less harmful subsidies that support
green initiatives, such as promoting renewable energy and organic farming. Regulations ensure
that subsidies do not cause harm to the environment but help protect natural habitats for future
generations. Environmental degradation, poor food safety, resource waste, and labour disputes are
examples of societal problems brought on by economic globalisation and progress.
10
4
WTO market access conditions are the tariff and non-tariff measures agreed to by Members for the entry of specific
goods into their markets. Each Member has a schedule of concessions associated with its tariff commitments.
5
Trade without discrimination, free trade, predictability and promoting fair competition
(http://www.wto.org/english/theWTO_e/whatis_e/tif_e/fact2_e.htm).
6
The OECD measures support to agriculture for 54 economies through its Producer Support Estimate (PSE), covering
around three quarters of the global agricultural value added, and support to fisheries through its Fisheries Support
Estimate (FSE) databases. The International Organisations Consortium for Measuring the Policy Environment for
Agriculture—a joint effort across the IDB, IFPRI, FAO, OECD and WBG—provides consistent information for 88
countries globally, representing over 90 percent of the global value of agricultural production.
7
Total support to the sector was $720 billion a year, but this also includes $272 billion in market price support (MPS),
which is a measure of the actual transfers to agricultural producers through price policies. The OECD methodology
to calculate support to agriculture differs from that used in the WTO.
8
OECD, “Measuring Distortions in International Markets: Below-market Finance.” OECD Trade Policy Papers, No.
247, OECD Publishing, Paris. (2021). Available at: doi:10.1787/a1a5aa8a-en.
9
OECD and Global Forum on Competition, ‘Subsidies, Competition and Trade ’ (OECD Competition Policy
Roundtable Background Note, 2022). Available at: https://www.oecd.org/daf/competition/subsidies-competition-and-
trade-2022.pdf.
10
Khurshid A and others, “Technological Innovations for Environmental Protection: Role of Intellectual Property
Rights in the Carbon Mitigation Efforts. Evidence from Western and Southern Europe - International Journal of
Environmental Science and Technology” (2021). Available at: doi.org/10.1007/s13762-021-03491-z.
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Furthermore, disputes relating to subsidy regulations are common in global trade.
11
Different countries employ varying levels of subsidies; some are excessively high, while some
fiscally constrained developing countries use far less. Thus, sharp disagreements over subsidies
are fuelling trade tensions worldwide, which are detrimental to growth and living standards.
12
A
thorough understanding of the rules and regulations governing subsidies can help resolve these
disputes efficiently. A clear understanding of the legal principles involved in regulating subsidies
ensures that disputes are resolved through existing structures established in the WTO.
In recent years, there has been a steady rise in the quantity and size of subsidy measures
taken around the world.
13
Globally, states face a number of challenges, including recent events
like the COVID-19 recovery
14
, climate change, fragile and disrupted global value chains
15
, and
other challenges that have necessitated and will continue to require government intervention
16
(see
Figure 1).
State sovereignty and international regulation of subsidies will always clash
17
. On the one
hand, governments are free to enact any laws they see fit as sovereign states, including those that
depend on the use of subsidies to further their goals. International control of subsidies, however,
poses certain difficulties because not all states are willing to restrain their own policy space
18
. The
gains of the national and international economies are also constrained by subsidies because they
11
The SCM Agreement was raised in WTO disputes more than 130 times during the period between 1995-2021.
Available at: https://www.wto.org/english/tratop_e/dispu_e/dispustats_e.htm
12
IMF, OECD, World Bank, and WTO report “Subsidies, Trade, and International Cooperation” (January 2022).
Available
at:
https://thedocs.worldbank.org/en/doc/0534eca53121c137d3766a02320d0310-
0430012022/original/Subsidies-Trade-and-International-Cooperation-April-19-ci.pdf
13
Though the exact understanding of the size and role of the subsidies is incomplete due to uneven and incomplete
data because of the lack of transparency by governments about their support to companies.
14
Evenett, S. and J. Fritz, Subsidies and Market Access: Towards an Inventory of Corporate Subsidies by China, the
European Union, and the United States (2021). Available at: www.globaltradealert.org/reports/gta-28-report.
In response to the pandemic, governments have provided businesses and whole industries with substantial support,
particularly through subsidies. Such assistance programmes have yet to be loosened and finally terminated in many
economies, and the various methods for doing so (speed, extent, etc.) may result in considerable trade conflicts and
competition.
15
IMF et al., Subsidies, Trade, and International Cooperation, (OECD Publishing, Paris, 2022). Available
at:https://thedocs.worldbank.org/en/doc/0534eca53121c137d3766a02320d0310-0430012022/original/Subsidies-
Trade-and-International-Cooperation-April-19-ci.pdf
16
OECD and Global Forum on Competition , ‘Subsidies, Competition, and Trade ’ (
OECD Competition Policy
Roundtable Background Note
, 2022). Available at: https://www.oecd.org/daf/competition/subsidies-competition-and-
trade-2022.pdf.
17
Hugo Paemen, ‘Forces that (may) Have Shaped Subsidy Regulation’ in What Shapes the Law? Reflections on the
history, law, politics, and economics of international and European subsidy disciplines (Luca Rubini and Jennifer
Hawkins eds., 2016). Available at: https://ssrn.com/abstract=2960046.
18
Chikusa E, ‘Surveillance and Litigation of the GATT/WTO Subsidy Disciplines’ (2015) in What shapes the law?
Reflections on the history, law and politics and economics of international and european subsidy disciplines (Luca
Rubini and Jennifer Hawkins eds., 2016). Available at: https://ssrn.com/abstract=2960046.
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imply distortions. As a result, governments "have a collective interest in cooperating to limit the
adverse effects on trade, but they also have a legitimate interest in seeking to influence economic
activity within their jurisdiction."
19
On the other hand, from the governments’ perspective, despite the fact that some subsidies
pose challenges, they nonetheless possess a certain level of legitimacy that 'border instruments'
like tariffs or quotas do not.
The most common defence of subsidies is that they enable
governments to address a variety of market failures.
20
By reducing negative externalities (such as
those between jurisdictions and the environment) or by generating positive externalities (such as
investment in research and development), subsidies can be used to alleviate market failures and
attain specific policy goals.
21
To increase the economic growth of a state, government subsidies
can be used to circumvent the market system in the allocation of resources. Economically
speaking, subsidies are similar to negative taxes in that they can be used to achieve significant
social and political goals, frequently more effectively than other policies. For example, subsidies
are used to stimulate innovation (e.g., through R&D tax credits), address regional inequalities (e.g.,
through European Commission Objective I initiatives), and enable social mobility (e.g., through
funding student loans). Due to these factors, trade agreements, such as the GATT/WTO system,
have attempted to strike a balance between limiting subsidies and state autonomy. As a result,
agreements were reached to reduce or eliminate export subsidies as well as limit the detrimental
effects they could have on trade flows.
Subsidies are often used as a tool to promote economic development and stimulate growth
in certain industries or regions.
22
Governments may provide financial assistance to industries such
as aerospace, defence, renewable energy, or high-tech sectors to nurture domestic capabilities and
maintain a competitive edge in the global market. By providing financial support to businesses,
governments aim to encourage investment, innovation, and job creation. Subsidies can attract
domestic and foreign investment, boost exports, and enhance competitiveness in strategic sectors.
Governments may offer financial incentives, tax breaks, or grants to entice companies to establish
19
Terry Collins-Williams, ‘A Negotiator’s Perspective on Enhancing Subsidies’ Discipline’, in What Shapes the
Law? Reflections on the history, law, politics, and economics of international and European subsidy disciplines (Luca
Rubini and Jennifer Hawkins eds., 2016). Available at: https://ssrn.com/abstract=2960046.
20
Ibid
.
21
Krugman P. R., et al. ‘International Economics Theory and Policy 226(27) (9th ed. 2012).
22
Zahariadis N., ‘State Subsidies in the Global Economy’ (2008). Available at: doi:10.1057/9780230610514.
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or expand operations within their jurisdiction. These subsidies aim to create jobs, boost local
economies, and enhance competitiveness by providing advantages over other locations.
23
Subsidies, particularly export subsidies, expand trade volume; therefore, limiting export
subsidies may result in a decline in world trade.
24
This has long troubled economic theorists: there
is an economic equivalence between tariffs and export taxes, as both raise the relative price of
local products, and export subsidies are equivalent to negative export taxes because both lower the
price of local products. According to this reasoning, governments that want to increase tariffs
should welcome foreign export subsidies, as both help a country's terms of trade.
25
From an economic perspective, subsidies, in comparison to tariffs, are more efficient at
overcoming market failures
26
as well as bringing social and private costs and benefits into
alignment.
27
In situations where the market does not adequately allocate resources, such as in the
case of public goods or externalities, governments may provide subsidies to incentivize private
investment or consumption. This can ensure the provision of essential services, promote research
and development, or mitigate negative environmental impacts.
It is important to note that while subsidies can have positive effects, they can also lead to
unintended consequences, such as market distortions, inefficient resource allocation, or trade
disputes. Balancing the objectives of subsidies with the principles of fair competition and
international trade rules is a complex challenge faced by governments worldwide.
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24
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25
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26
Market failure is when the prices of goods and services do not reflect the true costs of producing and consuming
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27
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