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WTO: 2006 PRESS RELEASES

Press/447
24 July 2006
WORLD TRADE REPORT

WTO World Trade Report focuses on subsidies

Government subsidies can be useful instruments in correcting market failures and working towards social objectives but can also distort trade and provoke strong responses from trading partners, according to the WTO’s 2006 World Trade Report which was launched today.

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“WTO economists have carefully scrutinized the use and the impact of government support in a variety of sectors. While some subsidies can benefit society and can offset the negative externalities of economic activity, other types of government support are clearly more controversial and can be damaging. One significant part of our Doha round negotiations involves reducing subsidies which distort trade while encouraging governments to use other forms of support which can facilitate development and environmental protection. Shifting support in this way is politically difficult and requires determination and courage, but the evidence is clear that such reforms can level the playing field and provide real rewards across the board,” said Director-General Pascal Lamy.

The incidence and the impact of subsidies remain seriously under-researched. Many governments maintain extensive subsidy programmes at the national and sub-national levels, and invoke a multiplicity of objectives to justify the programmes. Because subsidies can be trade distorting, WTO Member governments must notify the organization of any such support. Yet few governments fully meet their notification obligations under the WTO, contributing to a serious lack of information and transparency on the use and effect of subsidies. The absence of systematic information is aggravated by the lack of common definitions of subsidy practices. The Report begins with a review of attempts to define subsidies. It goes on to consider what economic theory tells us about the effects of subsidies, providing a guide for assessing the desirability of different kinds of subsidy programmes. The authors of the Report examine the reasons governments give for using subsidies, and assess the incidence of subsidies in various industries and sectors. Finally, the Report undertakes an analysis of the WTO rules on subsidies. Some of the salient findings of the Report are summarized below:

Governments extend subsidies to build infrastructure, help struggling industries or foster new ones, promote research and develop new knowledge, protect the environment, redistribute income and help poor consumers.
Economic theory tells us that some but not all of these objectives are most effectively addressed by subsidies. Theory also tells us that subsidies can distort trade by giving an artificial competitive advantage to exporters or import-competing industries, and this can be a source of tension among trading partners.
Concern among trading partners about subsidies rises in direct proportion to the extent to which subsidy practices have direct trade effects within a narrow segment of economic activity. If the effects of subsidies are perceived as severe enough in the marketplace, they may trigger a reaction nullifying any advantage from the subsidy.
The Report estimates that 21 developed countries spent almost $250 billion on subsidies, while all countries spent over $300 billion. The arithmetic average ratio of subsidies to GDP is lower in developing than developed countries, but large variations of the ratio can be found in both country groups. For a sample of 31 developing countries the average ratio of subsidies to GDP was 0.6 per cent, while the comparable figure for a sample of 22 developed countries was 1.4 per cent.
Agricultural subsidies in OECD countries — both domestic and export subsidies — show a downward trend. The available evidence suggests industrial subsidies are most pervasive in mining, coal, steel, forestry, fishing, shipbuilding and automotive industries. Comparable data on the incidence of subsidies in services sectors do not exist. Incomplete evidence suggests support measures are concentrated in the transport, tourism, banking, telecommunications and audiovisual sectors.
Information is not solid enough to conclude that there is any systematic downward trend in subsidies to industry and services. In some cases, however, evidence exists of a tendency to redirect subsidies towards “horizontal” objectives. This will generally make subsidies less distorting.
The GATT/WTO rules on subsidies have evolved considerably over the years, becoming more precise and detailed. Competing views exist as to whether the rules are tight enough to limit trade distorting subsidies, or accommodating enough to allow governments to pursue their legitimate objectives, including development.

The Report also examines 2005 trade developments and includes four essays; on textiles and clothing trade trends, flows of international receipts, trade trends of least-developed countries and the trade impact of natural disasters and terrorist acts.

The Report notes that while trade growth was lower in 2005 (6.5 percent) than the preceding year (9 per cent), it was still above the average for the last decade. A particular feature of the trade scene in 2005 was higher commodity prices, especially oil. While higher commodity prices have affected countries in very different ways, they nevertheless contributed to the largest share of developing countries in world trade for over five decades. (The trade data provided in this Report corresponds to that published on April 11, 2006 in WTO Press/437).
While the elimination of textiles and clothing quotas at the beginning of 2005 had a limited impact on demand and market conditions in the major importing countries during the year, there were significant shifts in trade shares among exporting countries.
Developed countries still dominate international receipts and payments of royalties and licence fees, although the share of a number of Asian developing countries is on the increase. These transactions may be seen as a somewhat imperfect indicator of high-technology investment and production.
The least-developed countries (LDCs) have increased their share in world trade, driven in large measure by commodity price increases. The trade performance of individual LDCs has been very mixed and some 35 per cent of total LDC trade is accounted for by only two countries, while thirteen LDCs account for less than one per cent of the total.
Natural disasters and acts of terrorism can take a terrible toll on human life, but the trade effects of such events tend to be small and often short-lived. Impacts are frequently concentrated on particular industries, although the cost implications of additional security measures aimed at preventing terrorist acts are more broad-based.