Will the Japan-EU-US effort effectively address government subsidies?

A long list of glaring shortcomings in the multilateral trade system have become evident in recent years, contributing greatly to the systemic dysfunction we are now witnessing. Among the various shortcomings, our inability to develop equitable and effective ways to deal with the pernicious impact of subsidies is undoubtedly near the top of the list.

The distortions created by China’s use of industrial subsidies, for example, has been a core issue fueling the US-China trade war, and will pose one of the biggest obstacles to achieving a lasting resolution between these two countries.  But it is the decade-and-a-half long Airbus-Boeing fiasco which provides the ultimate case study of the damage wrought by subsidies, and the near total inability of existing trade governance to meaningfully cope with these practices.

Airbus, Boeing and the shortcomings of the WTO

Airbus and Boeing have been the beneficiaries of literally billions of dollars in subsidies – taking a myriad of forms – from their respective governments.  Both the US and the EU filed WTO dispute settlement cases in 2004 charging that the other sides’ subsidies are illegal under existing trade rules.

Now, after more than 15 mind-numbing years of charges, counter-charges, filings, investigations, interim decisions and appeals, we are on the threshold of a destructive new chapter in this saga.  The US has been given a green light by the WTO to slap tariffs on $7.5 billion of EU imports as a result of the latest WTO ruling which confirmed the illegality of Airbus subsidies. A decision is expected later this year which would give the EU the go-ahead to hit the US with its own tariff action in retaliation for subsidies provided to Boeing.

Such an outcome would serve only to damage the interests of consumers on both sides of the Atlantic, as well as the manufacturers and other businesses who will lose sales as a result.  Meanwhile, the officials and bureaucrats responsible for the ill-conceived policies in the first place – and the companies that benefited – will likely manage to keep their heads below the parapet.

Subsidies and trade

Why are subsidies such an important trade issue? In conceptual terms at least, the pursuit of traditional free trade implies a fair competition between private entities that are beholden to marketplace considerations, engaging on a level playing field unencumbered by trade barriers. If one of those competitors directly or indirectly benefits from government support, it tilts the playing field and corrupts the competition.

Subsidies though have always existed in one form or another and undoubtedly always will. Current WTO provisions therefore recognize that reality and attempt to delineate between what should be considered “acceptable” and “prohibited” subsidies. But the Airbus-Boeing dispute demonstrates that the existing distinctions are inadequate to fully capture and account for the nuanced realities of how business and governments can collaborate and the ways in which that collaboration can tilt the playing field.  Far too many types of damaging subsidies continue to be either WTO-compliant or fall into grey areas.

Worse yet, governments can – and frequently do – craft subsidization policies in ways that are intentionally murky in order to avoid detection, blur the lines between what’s acceptable and what’s not, or simply fail to provide information about subsidy programs to their trade partners.

Case in point, one of the reasons the Airbus-Boeing dispute has dragged on for so long is that there have been endless arguments over whether or not immensely complex and frequently opaque government programs do in fact constitute a prohibited subsidy.

Japan, EU, US Ministerial Statement

It will not be an easy task to meet any of the challenges associated with governing subsidy programs.  There is however a potentially encouraging development on the horizon. Trade ministers from the Japan, the EU, and the US recently issued a joint statement which attempted to address some of the deficiencies in the existing WTO Agreement on Subsidies and Countervailing Measures (ASCM).

The statement recognizes that the existing WTO list of prohibited subsidies is inadequate and recommends a number of additions, including subsidies to companies unable to obtain long term financing from commercial sources. The ministers also agreed that some subsidies, such as those that are “excessively” large, are so damaging that the burden of proof should be reversed. Countries would have to demonstrate that such subsidies do not produce serious negative trade effects.

This could be a real game-changer, and it’s intriguing to think how differently the Airbus-Boeing debacle might have played out if such a requirement had been in place. As citizens, most of us would prefer to live under legal systems built on the premise of “innocent until proven guilty”. But when it comes to trade governance and subsidies, a policy of “guilty until proven innocent” might be more effective and just.

The ministers also identified the need to address subsidies which wreak havoc in markets by creating “massive manufacturing capacity”. The global steel glut of recent years was largely driven by huge Chinese subsidies which produced domestic oversupply that eventually spilled into global markets and resulted in a spate of harmful dumping. This led the US to impose Section 232 tariffs on steel and aluminum in 2018, and more recently, to expand the scope. These tariffs took the blame in many quarters for having started the trade war, but one could argue that the underlying subsidies which spawned the global steel glut in the first place were in fact the real culprit.

The ministers have also usefully identified that State Enterprises are a primary conduit for subsidies but the existing WTO understanding of what constitutes a “public body” is too narrow and excludes a wide swath of entities – and their associated subsidization activities – from discipline.

More support needed

Ultimately, it’s unclear what if anything might come of the ministers’ statement. It’s still fairly embryonic.  But it does represent a serious initial effort to confront the distortive impact of subsidies and a willingness to engage in fresh thinking. For that, Japan, the EU, and the US should be applauded.

As a destructive round of $7.5 billion in tariffs hangs in the balance, the Airbus-Boeing debacle signals the need to finally get serious about addressing subsidies. Consumers, manufacturers, and shareholders – oftentimes unconnected to the underlying subsidies – have for too long been asked to pay the price for ill-conceived policy decisions and inadequate trade governance.

Making progress on subsidies won’t remedy all the problems now manifesting in the trade system.  But without serious action on subsidies, the functionality and long-term sustainability of the multilateral trade system will continue to be in jeopardy. Japan, the EU, and the US have taken an important first step – others should get behind the effort.

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