The WTO Perspective on Subsidies in International Trade

Abstract

Not long after the end of the Second World War economists and policy makers started considering free trade as a method of maximizing welfare, and also as a means of finding solutions to social and political problems. After the formation of the GATT in 1947 and WTO in 1995, governmental policies of the member states have continued moving forward to a system of free trade. The majority of nations have started following liberal trade policies, both in their pursuit of domestic economic objectives and while contributing to world trade. When government policies start inducing a system of liberal market economy, they have to modify the underlying economic concepts of government, and further make it suitable to cotemporary cross border trade requirements. First, government has to agree not to increase the existing levels of tariffs and second, when existing tariffs are lowered, it is likely that an even greater number of industries (domestic and foreign) will face the need to adjust to the competitive market situations. With the newly developed market conditions, nations start competing with each other for profitable international business. Consequently, they resort to policies of granting aid and subsidies, so as to maintain a dominant position in the market. As far as obligations under the WTO are concerned, all members are automatically bound by all the multilateral trade agreements, including the “Agreements on Agriculture and Subsides and Countervailing Measures (ASCM),” as well as the “Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU)”.1Additionally, member states, while framing domestic policies, should ensure that WTO subsidy provisions are not breached. In so oing it is also necessary for WTO members to bear in mind the provisions of Article 31(1) of the Vienna Convention on the Law of Treaties.2 In practice, there is invariable use of subsidies by nations even for minor reasons. Over time this practice is substantiated by legal precedent, ironically, indifferent to the vagueness of their purpose. The indiscriminate use of subsidies is contrary to the basic objectives of the WTO and enhanced legal complexities follow. It has led to the demand for broader legal support for various other subsidies with unclear objectives. To understand the far reaching effects of subsidies in international trade, we start with discussing state aid. The impact of subsidies and state aid in international trade can be divided in two stages. A noticeable aspect of such aid and subsidies is that they improve the initial conditions of an enterprise and later, these aids and subsidies act as a factor for export promotion. In order to understand market practices better, it is necessary to distinguish between state-aid and subsidy. Although, the two terms are different they have some commonness also. More significantly, the legal approach towards these two terms varies.