Industrial Subsidies and Friction in World Trade: Trade Policy or Trade Politics?

By Rambod Behboodi | Go to book overview
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INTRODUCTION

Despite the theoretical difficulty of defining 'subsidies' and determining their effects, it has been generally accepted that an unconstrained use of subsidies tends to be harmful to the economic interests of trading nations-if harm is defined broadly in the narrow context of nations' economic interests. For example, the first reaction to foreign government subsidies was in the late nineteenth century by the US, when countervailing duties were imposed on Russian imports. However, the Russians had subsidised their sugar to offset the distortive effects of American tariffs on sugar imports. So it is not clear whose economic interests were harmed, in what way, and what the harmful effects of subsidies were in that context. 1

The US concern with subsidisation, which by the time of the Great Depression was being characterised as an 'unfair' trade practice, found its way into the negotiations that led to the General Agreement on Tariffs and Trade (GATT) (Articles VI and XVI). However, the GATT did not provide enough protection against either subsidies or the imposition of countervailing duties. The Subsidies Code, 2 signed in 1979 at the end of the Tokyo Round of trade negotiations, was intended to provide guidelines for the granting of subsidies and the imposition of countervailing duties. It was not successful. The US concern with subsidies has not subsided and its enthusiasm to regulate other countries' domestic economic practices has not been checked. In fact, other countries have moved to enact countervailing duty laws to benefit from the permissiveness of the Subsidies Code, and the international debate on the scope of subsidies continues to poison trade relations among nations.

By no means can it be asserted that, at least since the inception of the GATT, subsidies have been solely a US concern. The treaties establishing the European Coal and Steel Community (ECSC), the

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