Subsidies, Spillovers and WTO Rules in a Value-chain World

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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 economic 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 subsidies for services or investment incentives by local governments. Conversely, some WTO rules may not be appropriate or effective 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 Nairobi 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 instruments.
  • 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 subsidy 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.
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