TWN Info Service on WTO and Trade Issues (June 07/17)

18 June 2007

Development experts attack US industrial-subsidy proposal

The US proposal to have a new WTO ban on five types of industrial subsidies has been strongly criticized by development experts.

They have urged WTO members not to accept the US proposal which in their view would put up severe obstacles to the efforts of developing countries to industrialise.

Among the experts are former UNCTAD chief economist Dr. Yilmaz Akyuz, Cambridge University economists Prof. Ajit Singh and Dr. Ha-Joon Chang, and international trade analyst Bhagirath Lal Das.

Another renowned WTO analyst, Chakravarthi Raghavan, has also warned that the US proposal attempts to re-introduce aspects of the agriculture "peace clause" which expired at the end of 2003.

The US proposal, dated 5 June, is being discussed at the WTO's Negotiating Group on Rules, as part of the Doha work programme.

The report below was published in the SUNS on 14 June.

Best wishes
Martin Khor
TWN

Development experts attack US industrial-subsidy proposal

By Martin Khor (TWN), Geneva, 13 June 2007

The United States' proposal to have a new WTO prohibition on five types of industrial subsidies has been strongly criticized by several development experts, including renowned scholars specializing in industrial development.

The experts have urged WTO members not to accept the US proposal which in their view would put up new and severe obstacles to the efforts of developing countries to industrialise.

Among the experts are former UNCTAD chief economist Dr. Yilmaz Akyuz, Cambridge University economists Prof. Ajit Singh and Dr. Ha-Joon Chang, and international trade analyst Bhagirath Lal Das.

Another renowned WTO analyst, Chakravarthi Raghavan, has also warned that the US proposal attempts to re-introduce aspects of the agriculture "peace clause" which expired at the end of 2003. The peace clause protected countries using subsidies which comply with the WTO's Agreement on Agriculture from being challenged under other WTO agreements.

The US proposal, dated 5 June, is being discussed this week at the WTO's Negotiating Group on Rules, as part of the Doha work programme.

The proposal seeks to amend the WTO's Agreement on Subsidies and Countervailing Measures (SCM) in order to prohibit five more types of subsidies that governments provide to their firms in the industrial sector. The agreement presently prohibits only export subsidies and subsidies that promote the use of domestic goods over imported goods. (See SUNS #6265 dated 6 June 2007).

The additional five types of subsidies which the US wants the WTO to prohibit are: (1) government payments to companies to cover operating losses; (2) forgiveness of government-held debt; (3) government lending to "un-creditworthy" companies; (4) government equity investments in "un-equityworthy" companies; and (5) other financing, such as "royalty-based" financing that is not commercially available.

The subsidies would be banned if they are "specific" (i. e., are only given to a particular company or industry) and if they benefit a product that is exported or competes with imports.

Although the SCM Agreement covers subsidies in goods in general, the US proposal restricts the prohibition on the five new categories to only non-agricultural products. It specifically exempts subsidies that are "provided in the Agreement on Agriculture."

In agriculture, the US is providing massive domestic subsidies in many forms, including some of the varieties that it seeks to prohibit in the industrial sector. The US and the EU are also resisting proposals by developing countries that their Green Box agricultural subsidies be subjected to disciplines to ensure they are really not trade distorting.

But in the industrial sector, the US is proposing that many subsidies that developing countries are using (and which the developed countries themselves made use of) can no longer be available to them, raising strong concerns that through this loss of policy space, the developing countries will be prevented from building their domestic enterprises and that their industrial development will be blocked.

"Such a proposal is remarkably ill-advised" said Yilmaz Akyuz, former Director of UNCTAD's Division on Globalization and Development Strategies. "It is getting us into uncharted waters. This will create more problems than it can solve, not only between developed and developing countries, but also among developed countries.

"Linking subsidies to shaky financial conditions such as "creditworthiness" and "equityworthiness" can undermine the WTO and its sanction mechanisms. Besides it widens the asymmetry between industry and agriculture in the treatment they receive in the WTO."

According to Akyuz, the proposal should not be accepted not only because of the need for subsidies in developing countries, but also because of the complications it can create. The proposal seems to be directed not only at developing countries like China, but also concerns conflicts between the US and the EU, such as in the case of Boeing and Airbus.

Akyuz adds that developing countries often cover operating losses of public or semi-public enterprises that render social functions, such as providing essential inputs to certain segments of producers, including credits. Most subsidies in the developing world focus on these. But these do not appear to be exempted under the proposed article 3.4 in the US paper.

Instead, the article allows an exemption for subsidies for arms and war material indispensable for national security or defence purposes. This, according to Akyuz, is significant since the arms industry (with its satellites) is one of the only competitive industries in the USA. This also raises the question of who is to determine when the provision of arms is for national security or defense purposes - for example, the WTO panels or the United Nations?

"The proposal is in effect using creditworthiness as a measure of subsidy -- that is, loans to a creditworthy firm is not a subsidy," said Akyuz. "Can you trust market assessment in this respect?

"This concept also has a time dimension. Many Wall Street firms that were deemed creditworthy have gone bust with the bursting of the dot. com bubble while several Korean firms that looked unviable in the 1960s and 1970s turned out to be highly successful."

Akyuz added that there are also several instances that can contradict the criteria set in footnote 7 of the US paper, which seeks to determine whether an enterprise or project is uncreditworthy. Similar faults can be found in footnote 8 on criteria for "equity-worthiness."

Dr. Ha-Joon Chang, a development economist in the University of Cambridge, and author of several books including "Kicking Away the Ladder", commented that the US proposal is basically an attempt to extend procedures like the ones used in the anti-dumping area by the US, where the plaintiff is also the judge.

"Who decides which company is 'creditworthy' or 'equityworthy'?," asked Chang. For example, Nokia, the electronics company, which was founded in 1960, incurred losses for the first 17 years of its existence.

"Now, in that situation, if the Finnish government wanted to invest in Nokia electronics in, say, 1965, that would go against the proposed US rule, as the company was definitely not equityworthy", said Chang.

"The point is that some developing country firms may need to run losses for some time to get into new industries. If the government cannot help them, that will be the end of industrialisation in developing countries. In the long run, this is not even good for the rest of the world.

"In the short run, it may be more 'efficient' not to allow new producers to enter the market, but in the long run, it may be more 'efficient' for the world to have new producers emerge with the use of subsidies.

"Consider the Japanese and Korean steel or automobile industries, which all emerged thanks to government subsidies, but eventually they brought the prices of steel and cars down.

"The US proposal appears to be a monopolistic attempt by the existing producers to freeze out competition."

Dr. Ajit Singh, Professor of Economics at the University of Cambridge, commented: "The Uruguay Round prohibitions of subsidies were bad enough from the point of view of developing countries, in that they deprived them of policy spaces.

"The new US prohibitions will make the situation worse. This can hardly be labelled as the US pursuing an agenda with a view to completing the Doha Development Round.

"I think developing countries should propose that these new disciplines be applied only to advanced countries and that, as part of the special and deferential treatment, developing countries should be exempt from them.

"Many successful companies have had prolonged periods of negative profits. In a way, the Chapter 11 bankruptcy provisions of the US credit regulations may be regarded by those countries, like Britain, which have more stringent bankruptcy regimes, as subsidising the corporations.

"In view of the unequal playing fields and the great inherent advantage of advanced country corporations over those of developing countries, the five extra disciplines the US wishes to introduce into the WTO's subsidy regime may cripple the development efforts of emerging countries."

According to Bhagirath Lal Das, former Director of UNCTAD's Trade Programme and former Ambassador of India to the GATT, the US proposal will particularly constrain the developing countries from providing support to their industrial units that sometimes face temporary problems.

"The provision of subsidy for production is currently permitted except if it causes injury or serious prejudice to some other country," said Das. "Hence a country can go on providing subsidy for production until some country makes a complaint that such a subsidy is causing injury or serious prejudice to it. The developing countries can use this flexibility to provide subsidy to their industry until there is a complaint.

"This flexibility will be lost if the US proposal is accepted. The proposal is mainly targeted at ailing industries or units, a situation that can be quite prevalent in the developing countries. While facing competition from the firms of the developed countries they may sometimes need support for survival.

"And the new proposal will stop the support from the government in such cases. The proposal is very much against the interest of the developing countries. They should certainly oppose it."

According to Chakravarthi Raghavan, Editor Emeritus of the SUNS and a veteran analyst of the GATT/WTO trading system, the US proposal not only seeks to prevent developing countries from using the type of industrial subsidies that US companies received and which assisted in their growth, but it also seeks to extend extra protection to the US government to provide subsidies to its agricultural enterprises.

Under the "peace clause" (Article 13 on "due restraint" in the WTO's Agreement on Agriculture), countries using subsidies that comply with the Agreement on Agriculture cannot be challenged by other countries under other WTO agreements such as the Agreement on Subsidies and Countervailing Measures.

The peace clause expired at the end of 2003, and the US has been trying to have it re-instated, with no success for the time being. It is still floating this in the current Doha negotiations.

However, according to Raghavan, the new US proposal to amend the SCM agreement to a significant extent would grant such protection because the proposal would specifically exempt agricultural subsidies from the prohibition of the proposed five new types of subsidies.

"By exempting these agricultural subsidies from being prohibited in the SCM Agreement, the proposal makes it possible for these types of subsidies to be used in agriculture unless they go against the rules of the Agreement on Agriculture," said Raghavan. This is similar to a peace clause type of arrangement.

Raghavan added that the exemption for agricultural subsidies in the US proposal on the SCM Agreement was also important for the US because the WTO's Appellate Body in the case of the Indonesian motor industry and the TRIMS Agreement (and in other cases) had ruled that members must observe all the different WTO agreements, and gave the Appellate Body the ability to interpret the agreements in order to resolve conflicts that may arise among agreements.

"The developing countries would do well to summarily reject the US proposals and refuse even to discuss them," said Raghavan.

The US paper is entitled "Expanding the Prohibited Red Light Subsidy Category" (TN/RL/GEN/146 dated 5 June). It proposes revised text for Article 3 (on prohibited subsidies) and Article 25 (on notifications) of the SCM Agreement. +