The Economist magazine has “published”:http://www.economist.com/agenda/displayStory.cfm?story_id=2296891 a a rather too rosy assessment of the potential for developing country use of the WTO Agreement on Subsidies and Countervailing Measures against US and EU subsidies to agricultural products.The ‘peace clause’ of the 1995 WTO Agreement on Agriculture—actually Article 13, entitled ‘Due Restraint”—meant that for a decade, complaints of ‘serious prejudice’ against the use of farm production or export subsidies that were in accordance with the provisions of the Agreement were suspended. As of yesterday, that protection is no longer available to US or EU (or other) subsidizes. The Economist assumes that it will be “easy enough” to prove that these subsidies have “seriously prejudiced” the interests of another, non-subsidizing, producer. But that’s a much riskier assumption than the Economist admits (or knows?). The history of attempts to demonstrate ‘serious prejudice’ flowing from the use of export subsidies on agriculture is depressing. Brazil and Australia tried very hard in the 1970s and 1980s to demonstrate serious prejudice in cases against the EU on beef and sugar, when the EU subsidy regimes were much stronger than they are today. The two countries had a very hard time of it, eventually winning the sugar case but losing the battle when it turned out that the obligations on the EU to do anything in response to the adverse finding were minimal. The Uruguay Round agreement on Subsidies and Countervailing Measures (SCM) clarified the definition of ‘serious prejudice’ making it easier (probably) to demonstrate the prejudicial impact of subsides. But the obligations on any country that loses a case do not necessarily require the removal of the subsidy. The WTO imposes the same requirement on the losing party in every adjudicated dispute: to remove the cause of the problem. In the case of a subsidies dispute this is not the same as removing the subsidy. It might be achieved, for example, by simply modifying the way the subsidy is delivered, for example. Nor does a victory in any case bring any right to compensation. The Economists’ assumption that bq. … the offender would be forced to withdraw the subsidies and offset their damaging effects, or face the consequences … is inaccurate. First, there are no “offenders” in WTO disputes: only winners and losers. Second, the only case in which the WTO would require a losing party to withdraw a subsidy would be if there were no other way to remove its prejudicial effect on the country that wins the case. It’s not clear to me that even under the SCM rules the USA or EU have anything much to worry about. I have previously reported[⇒ related story] on the academic work that the Economist quotes. The authors show some interesting results from a novel approach to demonstrating price impacts (using regression analyses). But a clever advocate could, in my view, put many holes in the assumptions and conclusions drawn from this statistical approach.
Peter Gallagher is student of piano and photography. He was formerly a senior trade official of the Australian government. For some years after leaving government, he consulted to international organizations, governments and business groups on trade and public policy.
He teaches graduate classes at the University of Adelaide on trade research methods and the role of firms in trade and growth and tweets trade (and other) stuff from @pwgallagher