Honest appraisal of and action on global trade-distorting subsidies is required to foster competition built on merit, alleviate trade tensions and promote next-generation technologies, innovation and investment, writes Simon J. Evenett, professor of international trade and economic development, University of St Gallen, Switzerland, and coordinator, Global Trade Alert
Exporting firms pay better because they reach higher levels of productivity. The pay premium is even larger for firms with operations in many countries. But selling abroad is riskier than selling at home, and rewards compensate those companies and their staff that successfully navigate differences across the world economy. These great jobs are threatened when G7 governments try to steal market share by propping up uncompetitive firms.
Since 2016, G7 members have been piling agony onto exporting firms by implementing many more trade distortions than in earlier years (see Figure 1). By June 2019, steps taken by G7 governments to favour local companies resulted in 31.7% of world trade being skewed, putting at risk many of the best-paid jobs around the world.
Tariff hikes in recent years grab headlines, but in fact it is the build-up of trade-distorting subsidies that significantly distorts global trade. That so much state largesse is handed over so quietly also creates uncertainty for competitors, which react by postponing upgrades, investments and staff training. The damage is compounded when governments with deep pockets take bets on firms that make promises to ‘disrupt’ their sectors. History shows that pampered corporate couch potatoes rarely become gold medal winners in world markets.
Worse, as the decades-long dispute concerning Airbus and Boeing makes plain, subsidy races are a recipe for recurring trade tensions. There has to be a more rational way to promote next-generation technologies, innovation and investment.
Kicking the G7’s subsidy habit differs from tariff brinkmanship. Subsidies cost taxpayers money and ultimately must be financed with higher taxes. ‘Corporate welfare’ is not popular with voters in an era of populism. Finance ministries can normally be counted upon to support subsidy cuts.
When poorly chosen state loans go sour, they threaten the viability of state banks and the inevitable bailouts of those financial institutions add to government fiscal woes. The International Monetary Fund worries about the impact of growing subsidies on government financial health, limiting the space that governments have to expand spending and boost national economies during the next crisis. So subsidy reform yields short- and longer-term benefits.
Subsidies thrive where transparency is weak. Corporate recipients of state largesse often wilt under the spotlight. Rivals highlight how they survive without financial support. Tough questions are asked about why promised restructuring of uncompetitive firms is not followed through. Shedding light on the plethora of subsidies available to firms is where the G7 should start.
Laying the groundwork for global subsidy reform
The first step for G7 governments is to put together an inventory of their trade-distorting subsidies, starting with help to manufacturing and service-sector firms (the more sensitive agricultural sector can come later). If governments reckon a subsidy has some merit, they can say so – but that must not be used as an excuse to keep information back. G7 governments should be allowed to supply information on one another’s subsidies, too.
Committing to submit subsidy notifications to the World Trade Organization on time would be a useful second step. None of this information should be kept secret. Sunlight is the best disinfectant, as US Supreme Court Justice Louis Brandeis once put it.
Over the next year, working groups of each major type of trade-distorting subsidies should be formed. Each group should be charged with identifying the good, the bad and the ugly subsidies, ranking state largesse by their efficiency and harm to trading partners. The goal is not to rid the G7 of all subsidies, but rather to target the least effective and those doing the greater harm to global commerce. Identifying better practices would be the third step, with a report made to next year’s G7 summit.
Having done their homework, G7 officials should then widen the discussion to include other governments. Eschewing one-sided assessments of global subsidy problems builds credibility with the G7’s trading partners. Rationalising subsidy regimes would result in more competition being on merit, strengthening firms’ incentives to invest in their staff and the technologies of tomorrow.