The Hindu Business Line : Subsidies and development

If the WTO Doha Agenda is all about development, the scales must be tilted a bit in favour of the poor, for only then will the principle of equity be sufficiently infused in the negotiating process for the outcome to be truly useful and meaningful to the vast majority of people. While some countries consider a further strengthening of the disciplines in the Subsidies and Countervailing Agreement, others are for more flexible use of subsidies.

The just released "World Trade Report 2006: Exploring the link between subsidies, trade and the WTO" focuses on, among other things, the utility of subsidies to the general task of promoting development, a linkage which is indispensable for those who are entrusted at the national level with the job of drawing up and implementing economic policy.

But, first, what is an economic subsidy? At a very general level, it is simply assistance which is meant to help the recipient tackle existing market conditions better than the other players in the sector. In the interest of fair play, such help will always have to be time-barred, preferably with a stipulation that the assistance will continue for a specific period and no longer.

Second, the disadvantage which existing players will have to face on account of this subsidy to a competitor can be justified only if the target is national economic development. In other words, every economic subsidy will have to be totally geared to the larger objective of enhancing national economic development if it has to pass the test of equity and fairness, both within the economy and outside it.

The LDC story

This is the background against which the WTR 2006 should be seen, particularly the efforts currently being made to further evolve the concept of subsidies and special and differential treatment for a certain class of countries. Indeed, as everyone knows, the WTO regime, ever since its inception, has looked at the least developed countries (LDCs) differently vis-à-vis the rest of the world, and rightly so because these economies need far more assistance than other poor countries to lift themselves up and begin playing an effective, productive, self-sustaining role in the international economy.

As a separate category, the developing countries have also been treated sympathetically but, over time and in the thick of battle at the negotiating table, the promise of special treatment for this much larger group has been diluted — in fact to such an extent that, today, the historically rich and industrialised economies have become extra-cautious in conceding any ground whatever to the `other camp'.

Clearly, this is not what is wanted if, at the end of the day, the WTO scheme of things is really to help international trade, specially if the entire effort is geared to promoting development in as equitable a manner as possible. In fact, the latest round of multilateral trade negotiations (kicked off at Doha in 2001) has once again reiterated the primacy of the concept of helping the least-developed (and developing) countries relatively more if the cause of a more liberalised international trading environment is to be attained progressively.

Hardening positions

But, unfortunately, the utterances of negotiators representing the major players (Washington and Brussels, for instance) suggest rather strongly that positions have hardened much beyond the point of acceptability of the developing two-thirds of the world, something which is not welcome in the interests of a freer and fairer international trading environment.

To return to the subject of subsidies and trade, the problem is that such (toughening) attitudes are probably the last thing needed to make the earlier and original approach on the linkage work effectively. To quote the WTR 2006: "As with all WTO Agreements a key criterion in determining the overall contribution of the subsidy rules is the extent to which they allow developing countries the opportunity to meet their national objectives.

We have argued here that continued pressure by some developing countries for extensions of the right to subsidise manufactures might be looked at in terms of broader questions about the potential development contribution of certain subsidy practices, particularly perhaps those that are less firm-specific and more infrastructure-oriented.

"If this were to be done, it would need to be against very strong cautions about the dangers of destructive subsidisation. Governments would need to confront the real risk that subsidy policies may be espoused which contribute nothing to development, and may even compromise development opportunities."

Give poor a chance

What this passage indicates clearly is that, buttressed by technical facts and arguments, the rich must necessarily give the poor the benefit of the doubt if the link between time-barred subsidisation and development is to bear fruit. The task is made even harder by the fact that the link between subsidies and development is not very clear and, on occasion, has to be argued forcefully by the subsidy-imposer, especially when specific measures have been taken to the dispute settlement mechanism of the WTO by aggrieved economies.

The WTR 2006 has itself referred to a couple of such cases where one of the issues under the scanner has been precisely this link. Article 27 of the Agreement on Subsidies and Countervailing Measures details aspects of the `Special and Differential Treatment of Developing Country members'. As the report points out, this Article provides considerable flexibility to developing countries on the use of subsidies but, importantly, `this flexibility is not unlimited'.

One of the disputes cited by the WTR 2006 in this context is the Indonesia-Autos case where, as opposed to import-substitution measures where immunity from challenge "was unconditionally available to developing country members, the immunity in respect of export subsidies was subject to additional conditions." The report says: "In particular, Article 27.4 established development-related conditions for the use of export subsidies and placed a standstill on the level of export subsidies that could be maintained during the specified transition period."

Brazil-Aircraft article

The second example cited is the Brazil-Aircraft case where the complainant, Canada, was (in the words of the report) able to prove that the Brazilian export-subsidy programmes had not complied with obligations to refrain from increasing the level of the subsidies and to phase them out by the end of the eight-year transition period. However, Canada could not prove that the subsidy programmes concerned were inconsistent with Brazil's development needs and that Brazil thus should have eliminated them in less than eight years.

The dispute-resolution panel's observation on the development aspect is interesting. Among other things, it said (as quoted by the report): "There could be any number of reasons why the provision of export subsidies might be consistent with a Member's development needs in such a case. For example, a developing country Member might be interested in the possible technological spin-off effects from the development and production of the product in question, or the need to establish a strong market presence and reputation in foreign markets as a stepping stone to introducing products with greater national value-added."

The WTR 2006 argues that the right balance must be struck between "the strong disciplines on trade-distortive subsidies and flexibility to use subsidies to achieve national objectives in the face of market failures". It adds that while some members consider a further strengthening of the disciplines in the Subsidies and Countervailing Agreement, there are others — "especially developing country members" — which are for more flexibility in the use of subsidies.

Clearly, if the Doha Agenda is all about Development, the scales must be tilted a bit in favour of the poor, for only then will the principle of equity be sufficiently infused in the Doha Round negotiating process for the outcome to be truly useful and meaningful to the vast majority of those populating Planet Earth at this juncture.