Question

Should subsidies be used to control production of goods (especially those with negative impacts)? 75 words or more

Answer 1

For the purpose of this study, the concept of subsidies is broadly defined as a subset of government intervention (or inaction) in the marketplace. Industry-specific protective tariffs, safeguards, export taxes, input quotas, and trade remedy tariffs are not addressed. More broadly, the discipline of regulatory action with subsidy-like effects is not treated. While the Agreement on Subsidies and Countervailing Measures (ASCM) provides some discipline on the use of subsidies to goods, there are almost no multilateral disciplines in services and the agricultural sector receives different treatment. This paper takes the view that subsidies for agriculture and services should be subject to the same (or similar) discipline as goods, even if remedies for services may need to be different. The proposals in this paper stem from an assessment that the arguments for some disciplines on the use of subsidies are, on balance, stronger than the counterarguments. The arguments in favour derive from the following impacts amongst others: subsidies can distort trade and resource allocation, and lead to unfair competition; they can encourage behaviours proven to be destructive of the environment; and they may increase the development gap between rich and poor. The economic arguments against the implementation of disciplines on subsidies, widely viewed by governments as effective instruments to achieve a variety of policy goals, must nevertheless carefully be considered. Subsidies “may represent sensible policy responses to a range of market failures [… and] the task of distinguishing the good from the bad is extremely complex as a practical matter. Existing subsidies disciplines do a poor job in this regard, and simple fixes are not apparent” The underlying issue is how to evaluate (and measure) the impact of subsidies outside the border of the subsidizing government and on global public goods. Any discipline must recognize the positive as well as the negative. If one starts with the proposition that governments should have the policy space to provide subsidies as long as it does not cause adverse impact outside their territory or on the commons, then the question becomes how to determine whether there is impact and to what extent.