## anea2022001 - Executive Summary

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### Need for international cooperation on subsidies
- Dealing constructively with subsidies in global commerce is central to G20 leaders’ goal of reforming and strengthening the multilateral trading system.
- Growing use of distortive subsidies:
  - alters trade and investment flows,
  - detracts from the value of tariff bindings and other market access commitments,
  - undercuts public support for open trade.
- Sharp differences over subsidies are contributing to global trade tensions that are harming growth and living standards.
- Reasons this issue is urgent:
  - distinguishing ‘good’ and ‘bad’ subsidies is analytically and politically fraught,
  - unilateral responses (such as “trade defense” measures) are a limited deterrent,
  - the renewed drive toward industrial policies to promote “strategic” sectors may distort international competition, especially against smaller, fiscally constrained developing countries,
  - frequency and complexity of distortive subsidies are increasing even as active policies are needed for climate, health, food, and other emergencies.

### Scope and prevalence of subsidies
- Subsidies are common in all sectors, used by countries at all stages of development, take many forms, and affect all countries.
- Most merchandise trade occurs in products and markets in which at least one subsidized firm operates.
- Forms of subsidies noted include direct grants, tax incentives, and favorable terms for financing, energy, land, or other inputs.
- Many subsidies are explicitly aimed at correcting market failures and may do so effectively; many others are designed in ways that:
  - do little to advance their stated objective,
  - do so at high domestic cost,
  - have harmful effects on the global commons and on other countries, notably the poorest and most vulnerable countries.
- Investment incentives are widespread and often provided at sub-national levels where they can be hard to monitor.
- Definition and focus:
  - The paper refers loosely to "subsidies" as a transfer from the government (including indirectly) to an entity that is "unrequited," i.e., without an equivalent contribution in return.
  - Focus is on subsidies with potentially harmful international effects: those that may distort international trade or investment, including by eroding tariff bindings or other market access commitments, and those that may distort the “global commons,” such as by promoting production harmful to the international environment.

### Existing international rules and gaps
- International subsidy disciplines were progressively strengthened, notably in 1995 with the WTO Agreement on Subsidies and Countervailing Measures and the WTO Agreement on Agriculture.
- Agenda to negotiate detailed subsidy rules for services has largely been set aside; GATS Article XV negotiations remain unfinished.
- Many major countries adhere to the OECD Export Credit Arrangement; some recent FTAs go beyond WTO rules.
- Remaining gaps and challenges:
  - extensive trade-distorting domestic farm subsidies are still allowed in many cases,
  - WTO members have yet to agree special disciplines for harmful fisheries subsidies that contribute to overfishing,
  - recognition of gaps is shaped by developments including global value chains, digital markets and network concentration effects, the global importance of economies in which the state plays a central role (and international SOEs), the urgent challenge of climate change, and the need for subsidies in emergencies.

### Analytical and transparency needs
- Better information, more extensive objective analysis, and regular dialogue can help governments accelerate reform of their own subsidies and expedite negotiations toward improved international disciplines.
- Needed actions include:
  - improving information available on existing subsidy programs and their effects, especially on trading partners,
  - conducting careful, high-quality economic analysis to assess how well current subsidy programs meet domestic objectives, at what cost, and how they spill over onto international markets,
  - assessing interactions with international policy goals, like climate mitigation.
- Improved transparency and analysis, more robust inter-governmental consultation, and strengthened international rules can be expected to reduce the use of harmful subsidies and improve their design.

### Cooperative approaches and priorities for action
- International cooperation that delivers improved subsidy disciplines, improves business certainty, and reduces trade frictions would be superior to unilateral actions and should be expected to reduce subsidy use.
- Practical cooperative steps emphasized:
  - enhanced transparency and data collection,
  - coordinated analytical work agendas to develop methodologies to assess cross-border effects of different forms of subsidies,
  - structured inter-governmental dialogue informed by analysis to develop a more common perspective on appropriate roles for subsidies,
  - use of these processes to facilitate development of updated norms and standards.
- Cooperation can be pursued through individual or joint work of staff of the authoring institutions and by the international community more broadly.

### Role of the authoring international organizations
- The IMF, OECD, World Bank, and WTO can strengthen individual and joint work to support governments, including by:
  - collecting, organizing, and sharing data,
  - coordinating analytical work agendas,
  - supporting inter-governmental dialogues.
- Institutions will involve outreach and work with other international institutions as part of these efforts.
- Responsibility for subsidy policies remains primarily with domestic authorities—finance ministries, trade ministries, and sectoral and specialized agencies—while IOs provide analytical, informational, and convening support.

### Additional empirical note
- Prior evidence on costs of trade tensions: IMF (2019) estimated that US-China trade tensions would reduce the level of global GDP in 2020 by 0.8 percent.

### Box highlights — Selected empirical findings and datasets
- Global Trade Alert (Evenett and Fritz, 2021): in 2019, more than three-fifths of global goods trade was in products and on trade routes in which one or more subsidized Chinese, EU, or U.S. firms compete; when a major player introduces a new subsidy, the others usually respond within six months with their own subsidy.
- SOEs: SOEs account for 20 percent of assets of the world’s largest 2,000 firms (IMF, 2020).
- Agriculture support (OECD, 2018–20 averages):
  - public budgets provided $447 billion a year in support to agriculture;
  - $268 billion of that went directly to producers;
  - total support to the sector was $720 billion a year, which includes $272 billion in market price support (MPS);
  - budgetary support corresponds to 11.4 percent of average gross farm receipts (GFR) over 2018-20.
  - The EU (with the UK), China, the US and India account for $376 billion of the $447 billion per year.
- Fisheries: global fisheries subsidies estimated at around $35 billion annually (Sumaila and others, 2019); for 39 economies reporting to OECD FSE database during 2016–18:
  - these countries spent $9.4 billion a year on fisheries support;
  - $4.8 billion was direct support to fishers and companies; $4.6 billion benefited the sector more generally.
- Below-market finance (OECD analyses):
  - In sectors such as aluminum, cement, glass and ceramics, and semiconductors, below-market borrowings average about 3 to 4 percent of recipient firms’ revenue in relative terms.
  - Over 2014–18, 306 large firms in 13 industrial sectors received government grants and tax concessions worth $48 billion and $108 billion, respectively, and borrowed more than $66 billion on below-market terms.
  - Representative sample of large semiconductor firms received $7 billion in budgetary support and more than $800 million in below-market borrowings per year.
  - Aluminum firms benefitted from budgetary support and subsidized intermediate inputs worth $2.5 billion, and from below-market borrowings of at least $8 billion per year.
- Fossil-fuel support:
  - OECD and IEA estimate government support for production and consumption of fossil fuels across major economies totaled $351 billion in 2020, down 29 percent from 2019.
  - Transport sector support fell 15 percent in 2020; petroleum support fell 19 percent in 2020.
- Notifications and transparency gaps:
  - The share of WTO members providing subsidy notifications to the SCM Committee decreased from 75 to 35 percent between 1995 and 2021.
  - As of 13 December 2021, 106 WTO members had not yet made their 2021 new and full subsidy notifications for which the deadline was 30 June 2021.

### Design principles and policy guidance
- Support that is necessary (because of market failures or severe crisis) should be:
  - well targeted,
  - time-limited (preferably with an announced phase-out plan),
  - proportional,
  - transparent,
  - non-discriminatory.
- Well-designed subsidies can preserve the ability of competitive forces to spur innovation and productivity improvements while preventing damaging effects on trading partners.

### Priorities for action (operational recommendations)
- A. Transparency and Analysis
  - Improve national-level disclosure and reporting through international fora, focusing on areas with scarce information (fisheries, agricultural notifications, industrial subsidies, services subsidies).
  - Special efforts to improve knowledge of sub-national subsidies and those provided through SOEs.
  - IOs should coordinate to build on existing subsidy information collection, share information, identify gaps, and establish informal data collection priorities.
  - Proposal to develop a common subsidies platform with input from governments; immediate next step: hold a workshop with relevant stakeholders to identify pilot areas and data-collection challenges.
  - Urgent analytic priorities: role of subsidies in development; environmental impacts and net-zero transition; digital transformation and R&D targeting; SOEs and below-market financing; emergency support design.
- B. Consultation and Dialogue
  - Use existing consultation mechanisms and pursue strengthened international norms and legal commitments on distorting subsidies.
  - IOs to provide high-quality, targeted, unbiased analysis to enable fact-based dialogue and to counter lobbying and rent-seeking.
  - Create or build on fora for joint government discussions on particular classes of subsidies, supported by IO analysis.

_Prepared by staff of the IMF, OECD, World Bank, and WTO under coordination of Brad McDonald (IMF), Julia Nielson (OECD), Jose Signoret (World Bank), and Alex Keck (WTO)._

### Executive Summary ......................................................................................................

### anea2022001 - Executive Summary

### Need for international cooperation on subsidies
- Dealing constructively with subsidies in global commerce is central to G20 leaders’ goal of reforming and strengthening the multilateral trading system.
- Growing use of distortive subsidies:
  - alters trade and investment flows,
  - detracts from the value of tariff bindings and other market access commitments,
  - undercuts public support for open trade.
- Sharp differences over subsidies are contributing to global trade tensions that are harming growth and living standards.
- Reasons this issue is urgent:
  - distinguishing ‘good’ and ‘bad’ subsidies is analytically and politically fraught,
  - unilateral responses (such as “trade defense” measures) are a limited deterrent,
  - the renewed drive toward industrial policies to promote “strategic” sectors may distort international competition, especially against smaller, fiscally constrained developing countries,
  - frequency and complexity of distortive subsidies are increasing even as active policies are needed for climate, health, food, and other emergencies.

### Scope and prevalence of subsidies
- Subsidies are common in all sectors, used by countries at all stages of development, take many forms, and affect all countries.
- Most merchandise trade occurs in products and markets in which at least one subsidized firm operates.
- Forms of subsidies noted include direct grants, tax incentives, and favorable terms for financing, energy, land, or other inputs.
- Many subsidies are explicitly aimed at correcting market failures and may do so effectively; many others are designed in ways that:
  - do little to advance their stated objective,
  - do so at high domestic cost,
  - have harmful effects on the global commons and on other countries, notably the poorest and most vulnerable countries.
- Investment incentives are widespread and often provided at sub-national levels where they can be hard to monitor.
- The paper’s scope is selective and does not adopt a single formal definition; it refers loosely to "subsidies" as a transfer from the government (including indirectly) to an entity that is "unrequited," i.e., without an equivalent contribution in return.
- The focus is on subsidies with potentially harmful international effects:
  - those that may distort international trade or investment, including by eroding the value of existing tariff bindings or other market access commitments,
  - those that may distort the “global commons,” such as by promoting production harmful to the international environment.

### Existing international rules and gaps
- International subsidy disciplines were progressively strengthened, notably in 1995 with the WTO Agreement on Subsidies and Countervailing Measures and the WTO Agreement on Agriculture.
- Agenda to negotiate detailed subsidy rules for services has largely been set aside.
- Many major countries adhere to the OECD Export Credit Arrangement.
- Some recent free trade agreements go beyond WTO rules, including provisions disciplining state-owned enterprises and more extensive lists of prohibited subsidies.
- Remaining gaps and challenges:
  - extensive trade-distorting domestic farm subsidies are still allowed in many cases,
  - WTO members have yet to agree special disciplines for harmful fisheries subsidies that contribute to overfishing,
  - recognition of gaps is shaped by developments including global value chains, digital markets and network concentration effects, the global importance of economies in which the state plays a central role (and international SOEs), the urgent challenge of climate change, and the need for subsidies in economic and health emergencies.

### Analytical and transparency needs
- Better information, more extensive objective analysis, and regular dialogue can help governments accelerate reform of their own subsidies and expedite negotiations toward improved international disciplines.
- Needed actions include:
  - improving information available on existing subsidy programs and their effects, especially on trading partners,
  - conducting careful, high-quality economic analysis to assess how well current subsidy programs meet domestic objectives, at what cost, and how they spill over onto international markets,
  - assessing interactions with international policy goals, like climate mitigation.
- Improved transparency and analysis, more robust inter-governmental consultation, and strengthened international rules can be expected to reduce the use of harmful subsidies and improve their design, leading to better outcomes with fewer negative effects at home or abroad.

### Cooperative approaches and priorities for action
- International cooperation that delivers improved subsidy disciplines, improves business certainty, and reduces trade frictions would be superior to unilateral actions and should be expected to reduce subsidy use.
- The paper emphasizes not only strengthened formal rules but also practical cooperative steps:
  - enhanced transparency and data collection,
  - coordinated analytical work agendas to develop methodologies to assess cross-border effects of different forms of subsidies,
  - structured inter-governmental dialogue informed by analysis to develop a more common perspective on appropriate roles for subsidies,
  - use of these processes to facilitate development of updated norms and standards.
- Such cooperation can be pursued through individual or joint work of staff of the authoring institutions and by the international community more broadly.

### Role of the authoring international organizations
- The IMF, OECD, World Bank, and WTO can strengthen individual and joint work to support governments, including by:
  - collecting, organizing, and sharing data,
  - coordinating analytical work agendas,
  - supporting inter-governmental dialogues.
- The institutions will involve outreach and work with other international institutions as part of these efforts.
- Responsibility for subsidy policies remains primarily with domestic authorities—finance ministries, trade ministries, and sectoral and specialized agencies—while IOs provide analytical, informational, and convening support.

### Additional empirical note
- Prior evidence on costs of trade tensions: IMF (2019) estimated that US-China trade tensions would reduce the level of global GDP in 2020 by 0.8 percent.

*Prepared by staff of the IMF, OECD, World Bank, and WTO under the coordination of Brad McDonald (IMF), Julia Nielson (OECD), Jose Signoret (World Bank), and Alex Keck (WTO).*

### Box 1. Selected Recent International Reports Relating to Subsidies

### Box 1. Selected Recent International Reports Relating to Subsidies

### Selected recent international reports and findings
- ADB (2021) — Asian Economic Integration Report: examined measures to support tourism in selected ADB developing members; draws positive lessons to help governments maintain critical levels of tourism infrastructure and to facilitate a rapid rebound in tourism.
- Global Trade Alert (Evenett and Fritz, 2021): finds that in 2019, more than three-fifths of global goods trade was in products and on trade routes in which one or more subsidized Chinese, EU, or U.S. firms compete; when a major player introduces a new subsidy, the others usually respond within six months with their own subsidy.
- FAO, UNDP, and UNEP (2021) — A Multi-Billion-Dollar Opportunity: Repurposing Agricultural Support to Transform Food Systems: finds some forms of support to agricultural producers are distortive and socially and environmentally harmful; sets out a six-step guide for repurposing the provision of public goods and services for agriculture.
- World Resources Institute (2021) — Repurposing Agriculture Subsidies to Restore Farmland and Grow Rural Prosperity: argues public agricultural subsidies failed to achieve stated objectives but that smart agricultural subsidies can restore degraded land and rural economies.
- IMF (2020): advises governments on raising efficiency and managing other challenges related to SOEs—frequent recipients or providers of subsidies; calls for global principles for multinational SOEs, noting that SOEs account for 20 percent of assets of the world’s largest 2,000 firms.
- OECD (2021a): provides country-comparable data and information on agricultural support and analyzes whether current support is helping to meet the triple challenge facing food systems (food security and nutrition, environmental sustainability, and livelihoods).
- OECD (2019a) and OECD (2019b): examine support received by the largest firms in the aluminum and semiconductor value chains; shed light on support provided through the financial system and explore environmental harm that can arise from subsidies.
- WTO (2006): reviewed the case for international cooperation on subsidy disciplines and examined existing WTO subsidy disciplines.
- WTO (2020) — World Trade Report: showed that international cooperation can shape the pursuit of digital development more effectively while minimizing cross-border spillovers from national policies.
- WEF (2021): calls for international cooperation to tackle COVID-19 and climate change and to address cross-border spillovers from state intervention; outlines ways forward across subsidies, state ownership and control, government procurement, investment screening, and trade remedies.

### Subsidies: Design and rationales
- Forms of subsidies listed: direct government expenditures, tax incentives (such as tax credits or reduced tax rates), equity infusions, soft loans, government provision of goods and services and procurement on favorable terms, and price supports.
- Actions may be taken at supranational, national, regional, or local levels, either directly by government or by another entity under government influence (such as through a state-owned enterprise).
- Other policies providing support but not the focus here: trade restrictions, local content requirements, capital controls, exchange rate policy.
- Motivations for subsidies:
  - Address market failures (environmental externalities, other externalities, or domestic or foreign policy measures).
  - Lack clear economic rationale; may go beyond what is necessary; may outlast rationale; may respond to lobbying or political pressure.
  - Sound economic rationales include:
    - Subsidies to basic R&D where private rate of return is less than social return (IMF, 2021).
    - Subsidies that raise consumption of environmentally friendly goods to improve social welfare.
    - Programs paying farmers to set aside land to preserve natural ecosystems.
    - Subsidies to address informational asymmetries (e.g., subsidize credit or credit rating services for small borrowers).
    - Subsidies to exploit economies of scale or to complement intellectual property rights to encourage innovation.
    - Targeted, well-crafted subsidies in low-income regions to overcome financial distortions and support new industries.
    - Emergency subsidies following natural disasters or to distinguish liquidity from solvency crises.

### How subsidies work (mechanisms and examples)
- A given policy objective may be achieved by paying consumers or producers and may be introduced using various instruments, giving economic benefits at different points in the supply chain.
- Example schemes to provide cheap bread to consumers (Schwartz and Clemens, 1999):
  - Give consumers coupons to buy bread; bakeries present the coupons to the government, which pays enough for the coupons to incentivize bread baking.
  - Fix the price of bread artificially low and pay bakers to compensate their losses.
  - Fix the price of bread artificially low and require commercial banks to provide loans to bakers (with the government presumably absorbing the costs of failed loans).
  - Provide a cash subsidy to bakers to buy flour or to flour millers to buy wheat.
  - Allow flour mills preferential access to scarce foreign exchange if they use it to buy wheat.
  - Restrict exports of wheat, pushing its price down in the domestic market, which in turn could lower the price of bread.
- Immediate effects differ: some involve budgetary cost; distribution of risks between government and private actors varies; commitments that are not paid transfer risk to private balance sheets.

### Economic consequences of subsidies
- Classic economic argument: absent market failures or externalities, subsidies create a costly wedge between prices and production costs, causing deadweight loss and misallocation of resources.
- Subsidies can cause:
  - Expansion of subsidized sector by drawing scarce resources away from other sectors.
  - Contraction or exit of more innovative or efficient firms, lowering overall productivity.
- Distortions can be substantial when goods are already over-produced due to negative externalities (example: fossil fuel subsidies).
- Trade and investment effects:
  - Subsidies may raise or lower welfare of other countries depending on net importer/exporter status of the subsidizing country.
  - Subsidies can cause undersupply of unsubsidized goods in the global economy.
  - Concerns over foreign subsidies often focus on disruption to domestic production and job dislocations, and loss of “strategic” industries.
- Global supply chains:
  - Subsidies can accumulate along supply chains; support for upstream inputs lowers input costs downstream.
  - Support in upstream industries can increase demand for manufacturing equipment.
  - Attribution of benefit to a firm or sector is complicated; subsidies can be provided transnationally via multinational enterprises.
- Interactions and cascading effects:
  - Tax incentives can make a firm’s financial position appear stronger, enabling low-interest loans from state-owned banks that would not be justified absent other support.
  - Subsidies can combine with other interventions (e.g., export restrictions) to lower input costs for downstream producers.
  - Subsidies in one country can trigger subsidies in others, potentially producing a race to the bottom in tax incentives for FDI.
  - Competition between sub-central jurisdictions can cause over- and under-investment and opportunity cost concerns.

### Design principles and policy guidance
- Support that is necessary (because of market failures or severe crisis) should be:
  - Well targeted
  - Time-limited (preferably with an announced phase-out plan)
  - Proportional
  - Transparent
  - Non-discriminatory
- Well-designed subsidies can preserve the ability of competitive forces to spur innovation and productivity improvements while preventing damaging effects on trading partners.

*Source: anea2022001 - Box 1. Selected Recent International Reports Relating to Subsidies*

### Box 2. International Tax Reform and Tax Incentives

### Box 2. International Tax Reform and Tax Incentives

### Overview
- Recent developments aim to address international tax competition that has contributed to a proliferation of tax incentives.
- The two-pillar solution agreed by more than 130 jurisdictions within the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) sets limits on tax competition.
- Pillar Two seeks to put a floor under competition on corporate income tax (CIT) by introducing a global minimum effective corporate tax rate.
- Both pillars should reduce the impact of certain CIT incentives for multi-national enterprises (MNEs).
- Structural changes embedded in the two-pillar solution could have substantial effects on investment and economic output, through:
  - direct effects on the effective tax rates of MNEs; and
  - indirect effects on the relocation of MNE investment and on profit-shifting incentives.

### Design and Alternatives to CIT Incentives
- Effective design of tax incentives will remain important.
- Governments retain a wide range of tax instruments (such as non-CIT tax incentives) and non-tax instruments (such as other types of subsidies).
- Non-tax instruments may become more relevant in countries with enough fiscal space.
- Use of such instruments remains subject to subsidy-related rules in the WTO and other international contexts (e.g., EU State Aid rules and FTAs).

### Lessons from Earlier Work
- The 2015 Report by the IMF, OECD, UN, and WBG and the Platform for Collaboration on Tax (PCT) suggest good practices for the design of incentives to encourage investment when there is a legitimate case to use them.
- The 2015 work emphasizes:
  - transparency and good governance in implementation;
  - tools to support a rigorous cost-benefit analysis of tax incentives.
- These lessons are relevant for developed countries as well.
- PCT toolkits and reports can be accessed online.

### New Issues Affecting the Role of Subsidies
- Global economic challenges are prompting new debates about the role of subsidies. Key challenges include:
  - Climate change:
    - A net-zero economy needs large investments, prompting debate on a greater role for subsidies.
    - Views differ on tolerance for short-term market distortions versus risks of undermining longer-term solutions.
    - Some propose designing subsidies with performance metrics or sunset clauses to encourage innovation and future market competition.
    - Recognition that many existing subsidies have environmentally harmful consequences and should be removed or reformed.
  - Digitalization:
    - Structure of digital markets (economies of scale, industry concentration, network effects) raises issues about subsidies promoting competition.
    - Digital innovation subsidies generate big cross-sectoral spillovers at home and abroad.
    - Targeting R&D subsidies is challenging in fast-paced technology markets with high private returns to R&D.
    - Perceived links to national security raise issues of strategic competition or support for national supply.
  - Emergency support:
    - Subsidies needed in a severe crisis should be carefully designed to avoid supporting insolvent firms or harming competitors.
    - Design affects how easily support can be unwound to prevent long-term distortions.
  - Resilient global supply chains:
    - COVID-19 highlighted the need to ensure supply of essential goods and concentration in supply chains.
    - Governments are increasingly active in seeking, and in some cases subsidizing, alternative sources of supply and production for key inputs.
  - Changing role of the state:
    - Co-existence of different economic models in a single rules-based international system raises debates, especially as SOEs become more internationally active.
    - Important in context of trade and investment among countries with different economic systems.
- These trends suggest new efforts to understand positive, negative, and ambiguous aspects of subsidies and how public resources can be directed to global public goods while minimizing market distortions.

### Global Landscape of Subsidy Measures — What We Know and Don’t Know
- Understanding of subsidies remains uneven and incomplete; gaps exist across sectors and countries.
- At the global level, the number of subsidy measures is better known than their relative size or importance; numerical counts can be misleading.
- Uneven transparency across sectors and countries affects the picture.

Key patterns discernible from available information:
- Post-2008 frequency:
  - Subsidies were the most frequent form of intervention after the financial crisis of 2008, surpassing measures such as tariffs and other non-tariff measures.
  - The Global Trade Alert (GTA) reports that during 2009–21 nearly half of recorded interventions were subsidies (note: this refers to a simple count of measures, not to the value of production or trade affected).
  - The GTA finds most recorded subsidy programs are implemented by the largest trading economies with potential to influence global markets; collectively the top trading regions of China, the EU, and the United States account for over half of the number of global subsidy measures.
- Countervailing duty (CVD) investigations:
  - The number of CVD investigations into alleged foreign subsidies has increased sharply.
  - This could reflect more trade-distorting subsidies by foreign partners, more aggressive pursuit of import relief by import-competing industries, or other factors.
  - According to the World Bank’s Temporary Trade Barriers Database, since 2009 exports from China have been the main subject of CVD investigations.
  - Iron and steel products account for more than seven of every 10 products affected by countervailing measures.
  - From 1995-2020, the United States (46 percent), the EU (14 percent) and Canada (12 percent) initiated the largest numbers of CVD investigations; they account for about 85 percent of applied countervailing duties in recent years.
  - Since 2017, China and, especially, Brazil, India, and Turkey, have become more active in initiating antidumping (AD) and CVD actions.
- Sub-central provision of subsidies:
  - Most recorded subsidy programs appear to be provided by sub-central government entities, though separate data on the value of production affected are not available.
  - Official notifications to the WTO show extensive subcentral subsidy programs.
  - Of those reporting subcentral subsidies, information for 2018 shows that Australia, Canada, China, the EU, India, and the United States reported the largest shares of subsidy programs at the subcentral level (EU data refer to programs at the EU level as well as to incentives by a range of individual member states, some of which are provided at subnational level).
  - A large number of reported subsidies by these economies were provided at the sub-central level (for example, by U.S. states or Chinese provinces).
  - This highlights the need for better information on government interventions at central and subcentral levels.
- Concentration in largest trading economies and subsidy types:
  - Most recorded subsidy programs are in the largest trading economies of China, the EU, and the United States.
  - According to the GTA, the top 10 countries also account for over half of all global subsidy measures.
  - Among the top five most frequent users, nearly 90 percent of the total number of subsidies consist of:
    - financial grants;
    - subsidized trade financing;
    - state loans, guarantees, or subsidized interest payments; and
    - tax incentives.
  - The kinds of subsidies used most frequently vary considerably across other countries.
- Below-market finance in industrial sectors:
  - Below-market finance is an important source of subsidies in industrial sectors.
  - This includes debt provided on below-market terms (e.g., preferential interest rates and government loan guarantees) and below-market equity funding (e.g., government equity infusions provided on non-market terms, or government shareholders tolerating lower equity returns than private investors would demand).
  - Such support lowers companies’ cost of capital, helping them invest more than they would otherwise or allowing them to tolerate heavier losses.

_Italic: International Monetary Fund | Box 2. International Tax Reform and Tax Incentives (from anea2022001)_

### Box 3. Prevalence of Below Market Financing

### Box 3. Prevalence of Below Market Financing

### Overview
- Below-market finance is especially common in heavy industries where capacity build-up appears to exceed market-justified levels, based on an analysis of large manufacturing firms in 13 sectors (OECD, 2021a).
- The OECD analysis examined the largest firms in each sector; the firm sample in each sector generally covers around two-thirds of global sales and the many countries in which these firms operate.
- Around half of firms examined by the OECD in aluminum, solar photovoltaic panels, shipbuilding, and steel seem to have benefitted from below-market borrowings over the period 2005–19.

### Sectoral findings on below-market finance
- In relative terms, below-market borrowings average about 3 to 4 percent of recipient firms’ revenue in sectors such as aluminum, cement, glass and ceramics, and semiconductors.
- Below-market equity returns were more prevalent in high-tech sectors reliant on intangible assets and equity financing, particularly semiconductors and aerospace and defense.
- Below-market finance is most directly associated with investment in manufacturing capacity because it lowers companies’ funding costs.
- Box Figure (summary): Heavy industries tend to benefit more from below-market borrowings (Average below-market borrowings, % of revenue). Note: Blue bars count below-market borrowings as zero for companies that exceeded the benchmark; these firms are dropped when calculating the grey bars. Coverage ranges from 25 to 75 percent of global sales, output, or capacity, depending on the sector.

### Magnitude of industrial support (selected estimates)
- Over 2014–18, 306 large firms in 13 industrial sectors received government grants and tax concessions worth $48 billion and $108 billion, respectively, and borrowed more than $66 billion on below-market terms (OECD, 2021a).
- A representative sample of large semiconductor firms received $7 billion in budgetary support (e.g., grants and tax concessions) and more than $800 million in below-market borrowings per year (OECD, 2019b).
- Aluminum firms benefitted from budgetary support and subsidized intermediate inputs, including energy, worth $2.5 billion, and from below-market borrowings of at least $8 billion per year (OECD, 2019a).

### Subsidies across industries and services
- Electrical energy and motor vehicles are the two industries most commonly observed in the Global Trade Alert data for 2009–2021.
- At the aggregate Central Product Classification (CPC) two-digit level, the highest frequency of subsidies is in the transport equipment sector (motor vehicles, aircraft, ships, railway locomotives and rolling stock).
- Special-purpose machinery (mining machinery, agricultural machinery, machine tools) has relatively high frequency of subsidies.
- Service sectors including financial, transport, construction, professional, and telecom services accounted for about 15 percent of instances of subsidies in 2009–2021 in the GTA database; this is roughly similar to recorded subsidy measures for agricultural and minerals combined in the same database.

### Agriculture and fisheries support (key statistics)
- Over 2018–20, public budgets provided $447 billion a year in support to agriculture; some three-fifths ($268 billion) went directly to producers and the rest to general services or consumers (OECD, 2021b).
- About a quarter of direct budgetary support to producers consisted of payments based on outputs or the unconstrained use of variable inputs.
- Some 0.3 percent of total budgetary support was linked clearly to environmental public goods.
- Some $102 billion a year went to general services to the sector (infrastructure, biosecurity, R&D and innovation); of this, $26 billion was spent on R&D and innovation (OECD, 2021b).
- Total support to the sector was $720 billion a year, which includes $272 billion in market price support (MPS).
- Budgetary support corresponds to 11.4 percent of average gross farm receipts (GFR) over 2018-20 across all countries, ranging from 30 to 40 percent in Iceland, Norway, and Switzerland to less than 3 percent in Argentina, Colombia, Costa Rica, New Zealand, South Africa, and Ukraine.
- The EU (with the UK), China, the US and India account for $376 billion of the total $447 billion per year in absolute terms.
- Potentially most distorting support represents 30 to 50 percent of support in six economies; less distorting support accounts for more than half of budgetary support in nine economies; and nine economies devote more than 50 percent of budgetary support to innovation, biosecurity, and infrastructure (OECD, 2021c).

- Fisheries: Global fisheries subsidies are estimated at around $35 billion annually (Sumaila and others, 2019). For the 39 economies reporting to the OECD FSE database during 2016–18:
  - These countries together spent $9.4 billion a year on support to fisheries.
  - $4.8 billion was direct support to fishers and companies in the fishing sector.
  - $4.6 billion was support that benefits the sector more generally (infrastructure, fisheries management).
  - $3.2 billion was spent annually on policies that reduce the cost of inputs; support to fuel accounted for 25 percent of total support to the sector.
  - Measures that help fishers operate more sustainably or provide direct income support that does not incentivize unsustainable fishing currently account for less than a third of spending to reduce the cost of inputs ($1 billion) (OECD, 2020).

### Data gaps, transparency, and measurement challenges
- Information on subsidies overall remains weak; with the exception of agriculture, most data for a broad scope of countries and sectors refer to counts and have important shortcomings.
- Data rely heavily on information directly from authorities or indirectly from other sources; differences in transparency and consistency inhibit direct comparisons.
- Some sources (e.g., Global Trade Alert) collect from post 2009 and may not reflect legacy programs implemented earlier.
- Counts do not capture magnitude or economic importance; a higher count does not necessarily imply more distortive policies or higher subsidy levels.
- Some forms of subsidies (subsidized input pricing, subsidies via SOEs or intermediaries) may be inherently difficult to identify and count.
- The share of WTO members providing subsidy notifications to the SCM Committee decreased from 75 to 35 percent between 1995 and 2021.
- As of 13 December 2021, 106 WTO members had not yet made their 2021 new and full subsidy notifications for which the deadline was 30 June 2021.

### Role of SOEs and government ownership
- Industrial firms that are at least 25 percent owned by governments receive relatively more government grants and below-market loans (OECD, 2021a).
- SOEs can also be providers of support (e.g., state banks providing below-market lending; state utilities providing below-cost gas and electricity) (OECD, 2019a).
- Government equity infusions can involve corporate intermediaries, giving government subsidies the appearance of commercial transactions between independent parties (OECD, 2019b).
- Quasi-fiscal activities in support of SOEs in energy, transport, and water sectors can be significant and are typically regressive and significantly distortive.

### Fossil fuel subsidies
- The OECD and IEA estimate government support for production and consumption of fossil fuels across major economies totaled $351 billion in 2020, down 29 percent from 2019.
- The transport sector saw a 15 percent drop in support in 2020 due to the slump in fuel use during the pandemic.
- Petroleum support fell 19 percent in 2020.
- On the production side, direct support for production of fossil fuels across 50 advanced and emerging economies rose 5 percent in 2020, partly from large government bailouts of state oil and electricity companies.
- Without policy changes, the value of consumption subsidies can be expected to rise with energy prices and the level of economic activity.

### Implications for analysis and policy
- Improving transparency and data on the complexity and size of subsidy measures could facilitate discussions to strengthen international rules and limit negative spillovers from subsidies while allowing legitimate policy objectives.
- Existing multilateral rules, notably those at the WTO (SCM Agreement, AoA, GATS), provide a solid basis; further work is needed to enhance transparency, analysis, and dialogue.
- More economic analysis is needed to address methodological challenges such as counterfactuals in determining whether a benefit exists.

*Source: Box 3. Prevalence of Below Market Financing, anea2022001.*

### Box 5. Transparency and Surveillance of Subsidies

### Box 5. Transparency and Surveillance of Subsidies

### Notification requirements and compliance
- The SCM Agreement requires WTO members to notify information about subsidies they provide, including all specific subsidies and all other subsidies "which operate directly or indirectly to increase exports of any product from, or to reduce imports of any product into, the territory of the member granting or maintaining the subsidies."
- Compliance with these obligations remains low (WTO, 2021a). Reasons cited include:
  - lack of institutional capacities;
  - members' concerns they will be targeted by their trading partners in potential disputes;
  - disagreement on whether a program should be considered a subsidy (Li and Tu, 2020).
- The AoA requires members to notify domestic support and export subsidies: domestic support must be notified on an annual basis (LDCs must notify every other year). New or modified domestic support measures for which exemption from reduction is claimed must be notified promptly, with details and conformity information as set out in Article 6 or Annex 2.
- Members must also provide information on agricultural export subsidies and measures with equivalent effect, including export credits, annually.
- Compliance is low and should be improved:
  - Of the five agricultural notification requirements, domestic support notifications have the highest number of outstanding (“yet to be received”) notifications, with 34 percent (888 notifications) for the period 1995-2019.
  - Compliance rates vary greatly: 25 members with 100 percent compliance, while 28 members have a compliance rate of zero percent (WTO document G/AG/GEN/86/Rev. 43), September 2021.

### SCM Agreement: categories of subsidies and remedies
- The SCM Agreement distinguishes two categories of specific subsidies: prohibited and actionable. (A third category of non-actionable subsidies expired in 1999.)
- Prohibited subsidies are irrebuttably presumed to distort trade and can be subject to countermeasures (“remedies”).
- For actionable subsidies, adverse trade effects—serious prejudice, injury to the industry of an importing member, or nullification or impairment of multilaterally negotiated benefits—must be demonstrated for remedies to apply.
- Remedies may be pursued via:
  - multilateral dispute settlement: the complaining member must demonstrate either that the measure is a prohibited subsidy (in which case the subsidy must be withdrawn) or that it is an actionable subsidy that has caused adverse trade effects (in which case the subsidy must be withdrawn or its adverse effects removed);
  - countervailing duties (CVDs): the importing member must demonstrate that the imports are subsidized and are causing injury to its domestic industry.
- Analytical observations and limitations:
  - Procedural difficulties of investigations and limited prospective effects of CVDs have led some analysts to argue unilateral remedies are ineffective in dismantling production capacity created through subsidization.
  - Imposing CVDs may push subsidized goods into other markets, distorting prices there (Bown and Hillman, 2019).
  - CVDs address trade effects of subsidized imports but offer no remedy to a domestic industry suffering injury from lower world prices caused by subsidies, as opposed to the impact of subsidized imports.
- Serious prejudice may arise where a subsidy causes: import displacement or impediment in either the subsidizing-country or third-country markets; significant price undercutting, significant price suppression, price depression or lost sales in any market; or an increase in the world market share of the subsidizing member in a particular primary product or commodity.
- Some analysts argue for expanding the list of prohibited subsidies to cover more trade-distortive supports (e.g., those leading to excess capacity) and for reversing the burden of proof on adverse trade effects for certain supports (Bown and Hillman, 2019). The Trilateral Initiative of the EU, Japan, and the United States proposes amending the SCM Agreement accordingly.

### Flexibilities and disciplines under the AoA (Agreement on Agriculture)
- The SCM Agreement provides flexibility for:
  - LDC members as defined by the United Nations; and
  - a group of named other developing members with GNP per capita below $1,000 a year, which are exempted from the export subsidy prohibition until they cross the threshold criterion.
- Previous flexibilities on subsidies contingent on use of domestic goods or import-substitution subsidies have expired; all WTO members are now subject to the prohibition of these types of subsidies.
- The AoA identifies two categories of domestic support according to potential to distort trade:
  - Green Box support: support that must have no, or at most minimal, trade-distorting effects or effects on production; allowed without limit (Annex B).
  - Aggregate Measurement of Support (AMS), commonly labelled “Amber Box” support: other support measured in AMS and constrained by reduction commitments.
- De minimis allowances:
  - The de minimis amounts apply to product-specific support and to non-product-specific support to agriculture as a whole.
  - Amounts, expressed relative to domestic production, are 5 percent for developed members and 10 percent for developing members (with exceptions).
  - Exceptions: China and Kazakhstan (8.5 percent), and Chinese Taipei and South Africa (5 percent).
- Additional allowances and criticisms:
  - Currently, 32 members (counting the EU as one) are allowed additional amounts of support up to their “final bound total” (FBT) AMS limits. These country-specific FBT AMS limits were originally based on historical levels of support and are expressed in monetary values in members’ schedules and subject to listed reduction commitments.
  - The additional amounts have been criticized for allowing trade-distorting support above the de minimis.
- Categories excluded from Current Total AMS calculations:
  - development programs (Article 6.2);
  - direct payments under production-limiting programs (Blue Box; Article 6.5).
- The support allowed without any limit (Green Box, Blue Box and Article 6.2 support) is exempt from reduction commitments. Concerns have been raised about increasing amounts of Green Box support, particularly through direct payments.
- The 2013 Ministerial Decision on Public Stockholding for Food Security Purposes shields, on an interim basis, developing members’ public stockholding programs for food security involving food purchases at administered prices, subject to transparency and certain other conditions. A 2015 decision encouraged members to make all concerted efforts to agree on a permanent solution and to continue negotiations in an accelerated timeframe.
- The 2015 Nairobi Ministerial Decision on Export Competition narrowed the use of agricultural export subsidies:
  - members agreed to phase out export subsidies for agricultural products according to different timelines and to put in place specific disciplines on export credits; export credit guarantees and insurance programs; international food aid; and agricultural exporting State Trading Enterprises.
  - Nairobi Decision set a maximum repayment term of 18 months for export credits, with possible extension for exports to least developed and net food-importing developing-country members.

### Subsidies and the General Agreement on Trade in Services (GATS)
- Subsidies that are “measures affecting trade in services” fall within the scope of the GATS.
- General GATS obligations such as nondiscrimination among trading partners (MFN treatment) and certain transparency obligations apply to subsidies affecting trade in services.
- In sectors included in a member's GATS schedule of commitments, the obligation not to discriminate against foreign services and service providers (national treatment) also applies to subsidy measures that affect trade in services, subject to conditions and qualifications inscribed in the schedule.
- Aside from non-discrimination obligations, the GATS does not contain disciplines on trade-distortive subsidies or restraints on the level of subsidies (no “prohibited” or “actionable” subsidies).
- Negotiations mandated under GATS Article XV remain unfinished. The negotiating mandate in GATS Article XV:1 is to develop the "necessary" multilateral disciplines to avoid the "trade-distortive effects" that certain services subsidies may have and to address the appropriateness of countervailing procedures.
- GATS Article XV:2 stipulates that any member that considers itself to be adversely affected by a subsidy of another member may request consultations with the member in question.

*Source: Box 5. Transparency and Surveillance of Subsidies (anea2022001).*

### Box 6. GATS Article XV on Subsidies

### Box 6. GATS Article XV on Subsidies

### GATS Article XV provisions
- Members recognize that, in certain circumstances, subsidies may have distortive effects on trade in services.
- Members shall enter into negotiations with a view to developing the necessary multilateral disciplines to avoid such trade-distortive effects.
- The negotiations shall also address the appropriateness of countervailing procedures.
- Such negotiations shall recognize the role of subsidies in relation to the development programs of developing countries and take into account the needs of members, particularly developing country members, for flexibility in this area.
- For the purpose of such negotiations, members shall exchange information concerning all subsidies related to trade in services that they provide to their domestic service suppliers.
- Any member which considers that it is adversely affected by a subsidy of another member may request consultations with that member on such matters. Such requests shall be accorded sympathetic consideration.

### Related GATS and WTO instruments referenced
- WTO members may undertake additional obligations regarding non-discriminatory subsidies through “additional commitments” under GATS Article XVIII.
- The Reference Paper on Basic Telecommunication Services, which several members have scheduled as an additional commitment, contains an obligation aiming to prevent anti-competitive cross-subsidization.
- GATS Article VIII on Monopolies and Exclusive Suppliers and GATS Article IX on Business Practices hold relevance in a subsidy context by drawing attention to the role of government ownership and regulation in generating effects similar to trade-distorting subsidies.

### Negotiations history and challenges
- Services subsidies have been on the agenda of the WTO Working Party on GATS Rules since 1996, but the process has stalled.
- Possible causes for stalled progress:
  - Subsidies are widely used to ensure the provision of essential services and maintain viable public service sectors, to attract FDI, or to foster R&D (Geloso-Grosso, 2008).
  - Discussions on possible disciplines on trade-distortive non-discriminatory subsidies under the GATS occurred in a context where directly trade-impeding barriers remain very high, such as quantitative market access restrictions, economic needs tests, and discriminatory barriers.
  - Disciplines on subsidies related to goods trade began to take hold only as direct barriers to goods trade came down.
  - Identifying trade-distortive subsidies based on their actual impact on services trade flows has proved challenging, including due to services trade's four different modes of supply.
- Negotiations on discriminatory subsidies would likely primarily have to be addressed through negotiations on specific commitments under future negotiating rounds under GATS Article XIX (“Negotiations of Specific Commitments”).

### Interface with other subsidy disciplines and policy debates
- The box notes interplay with other WTO workstreams and multilateral fora addressing subsidies, including:
  - Subsidies to fisheries, agriculture, and industry.
  - Sectoral discussions in fora such as the G7 and G20 (e.g., fossil-fuel subsidies, steel).
- The text highlights tensions between:
  - Calls from some advanced economies to update the ASCM to capture subsidy practices they view as contributing to “overcapacity,” implicit government guarantees, and lending on non-commercial terms.
  - Proposals from countries such as India to reinstate and expand lists of “non-actionable” subsidies and to curb perceived misuse of trade remedies.
  - China’s November 2021 statement that it is open to negotiations on industrial subsidies and SOEs (statement referenced in source).

### Key numerical and procedural notes (as presented)
- Services subsidies have been on the WTO Working Party agenda since 1996.
- Challenges in implementing subsidy disciplines are tied to the four different modes of supply in services trade.
- Negotiations on discriminatory subsidies would likely involve GATS Article XIX.

*Source: anea2022001 - Box 6. GATS Article XV on Subsidies (excerpt).*

### introduction of a non-actionable (“green box”) category for industrial subsidies, stressing also what it sees as the

### anea2022001 - introduction of a non-actionable (“green box”) category for industrial subsidies, stressing also what it sees as the

### Transparency and notification requirements
- Many WTO members report poor and deteriorating compliance with WTO subsidy notification requirements; the EU identified “a lack of comprehensive information on subsidies” as “one of the biggest shortcomings in the application of the current system.”
- Proposals by the EU, Japan, the United States and others would aim to:
  - make the WTO better able to monitor members’ activities;
  - create sanctions to encourage members to comply with notification requirements;
  - expand technical assistance to developing-country members that lack capacity to make adequate notifications;
  - encourage members to make counter-notifications to fill gaps.
- Many other members emphasize capacity-building rather than punitive measures, noting some developing members struggle to comply with existing obligations.
- WTO actions cited:
  - In December 2021, some 45 WTO members initiated a plurilateral initiative on fossil-fuel subsidies.

### Fossil-fuel subsidies
- Several international fora (G20, G7, APEC) have called for the phaseout of inefficient fossil-fuel subsidies while balancing developing-country needs and conditions.
- Defining an “inefficiency criterion” for reforming fossil-fuel subsidies has been elusive (OECD and IEA 2019).
- IMF economists estimate that introducing efficient fossil-fuel pricing in 2015 would have lowered:
  - global carbon emissions by 28 percent;
  - fossil-fuel air pollution deaths by 46 percent (Coady and others, 2019).

### Export-credits and international financing disciplines
- The competitive landscape for official export credits has expanded beyond Participants to the OECD Export Credit Arrangement to include non-participants.
- Participants increasingly employ financing programs outside Arrangement disciplines (e.g., “untied” export credits and investment credits).
- The China-US led International Working Group made limited progress on financing rules applicable to all major providers of official export credits; efforts have been suspended.
- WTO SCM provisions apply to official export-credit practices of all WTO members, but specialized arrangements with timely information sharing and specific norms can be more effective than WTO rules alone.
- Modernizing the OECD Export-Credit Arrangement is seen as essential to:
  - ensure rules remain relevant;
  - apply important transparency disciplines;
  - prevent Participants from evading rules to compete with non-Participants.
- Concern exists about government financing crowding out private markets and the need to avoid a “race to the bottom.”

### Overcapacity, industrial subsidies, and competition policy
- Debate exists over the existence and root causes of overcapacity in certain industrial sectors; concerns about adverse trade effects of subsidies leading to overcapacity were raised in the G20 and WTO SCM Committee in 2016.
- Intergovernmental fora established to address overcapacity include:
  - OECD Global Forum on Steel Excess Capacity (established 2016) — focused on “root causes” rather than trade-defense “effects”;
  - Governments/Authorities Meeting on Semiconductors (earlier forum).
- OECD Recommendation on Competitive Neutrality (OECD 2021d) calls for Adherents not to discriminate between SOEs and private competitors or among private enterprises; competitive neutrality requires avoiding undue advantages (e.g., favorable tax treatment, below-market loans and guarantees).
- Where public policy objectives require support, the OECD Recommendation advises support be transparent, proportionate, and subject to periodic review; legal frameworks and enforcement should not discriminate between firms.
- Open and competitive global markets are underpinned by open and competitive domestic markets and vice-versa.

### Roles of international organizations (IOs)
- The IMF: specialized fiscal expertise, technical assistance and policy advice on tax and expenditure, surveillance focusing on policies affecting balance of payments, domestic stability, and spillovers influencing the international monetary system.
- The OECD: measures and analyzes government support across agriculture, fisheries, fossil fuels, and industrial sectors; provides a policy forum; develops norms and standards (e.g., SOEs and competition policy).
- The World Bank: research and analysis; engagement with ministries and competition authorities; expertise in fiscal measures, trade and competitiveness, sector management, and the environment.
- The WTO: negotiates and administers subsidy rules; collects subsidy notifications; promotes dialogue; reviews subsidy programs in Trade Policy Reviews and trade monitoring reports.

### Priorities for Action — overarching findings
- Some subsidies distort trade and investment, disrupt foreign markets, and undermine perceptions of evenhanded international competition; new subsidies may undermine past tariff and market-access negotiations.
- Some subsidies are appropriate when carefully designed to address market failures (e.g., under-provision of basic R&D), promote competition in concentrated industries, or advance economic development.
- Economic analysis is central to distinguishing appropriate subsidies from those that cause unnecessary harm.
- International cooperation should:
  - address negative spillovers from subsidies while accommodating legitimate public-service and market-failure roles;
  - enhance information on subsidies;
  - use economic tools to understand subsidy impacts and alternatives;
  - employ and build on consultation mechanisms to encourage improved practices;
  - work toward strengthened international norms and legal commitments regarding subsidies that distort markets or degrade the global commons.
- Successful cooperation could reduce trade remedies and unilateral actions, diminish global trade tensions, and remove rationale for unilateral responses.

### A. Transparency and Analysis — Moving Forward on Transparency
- Improving transparency is a fundamental first step; governments should increase national-level disclosure and reporting through international fora.
- Transparency is especially needed where information is scarce:
  - fisheries support;
  - agricultural-support notifications to the WTO;
  - subsidies in industrial sectors (including prevalence, objectives, and impacts);
  - services subsidies (form, sectors, effects on trade and investment).
- Special efforts are needed to improve knowledge of subsidies at sub-national levels and those provided through SOEs.
- IOs should coordinate to:
  - build on existing subsidy information collection;
  - share information and identify gaps;
  - establish informal data collection priorities (e.g., sub-national; services; industrial);
  - coordinate data collection and dissemination.
- Proposal: develop a common subsidies platform with input from governments to make information from participating institutions available in a clear and coherent format; extend collaboration to UNCTAD, industry associations, academic actors, and entities such as the GTA.
- Immediate next step: hold a workshop with relevant stakeholders to identify pilot areas, explore data-collection challenges, and refine perspectives on a systematic analytical database.

### A. Transparency and Analysis — Moving Forward on Analysis
- More analysis is needed to understand:
  - effectiveness of subsidies in meeting stated goals;
  - spillovers on other countries, trade, and investment;
  - costs, opportunity costs, and domestic benefits (including distributional impacts).
- Transparency and analysis can motivate and better design reforms; example: agricultural data improvements helped shift to less-distorting support in the European Union.
- Urgent analytic priorities include:
  - The role of subsidies in development: how lower-income countries face market failures and how designs in middle-income and advanced economies affect development opportunities.
  - Environmental challenges: understand environmental impacts across sectors and design subsidies for transition to net-zero carbon emissions while minimizing spillovers.
  - The digital transformation: design of R&D subsidies, conditions under which subsidies promote competition in concentrated industries, implications of subsidies aiming to build domestic capacity (e.g., semiconductors) for trade, investment, and the global commons.
  - SOEs and the role of the state: analyze below-market financing, equity infusions in failed or non-commercial enterprises, and provision of inputs at below-market prices.
  - Emergency support: design effective emergency support that minimizes harmful effects on others and prevents temporary support becoming persistent distortions (OECD 2021e).
- IOs intend to cooperate to bring efficiency and coherence to subsidy-related policy analysis within existing mandates, taking into account competition and trade-related concerns, advising governments to consider trade spillovers in subsidy design.
- Closer IO collaboration could produce joint analysis on particular subsidy types or areas; such analysis would be shared and regularly presented to participating institutions’ memberships.

### B. Moving Forward on Consultation and Dialogue
- Multiple approaches are needed: from using existing consultation mechanisms to pursuing strengthened international norms and legal commitments on distorting subsidies.
- Dialogue among governments can support reform by:
  - facilitating learning from others’ reform experiences and subsidy designs;
  - demonstrating good practices;
  - exerting peer pressure;
  - providing venues to outline negative spillovers.
- IOs can enable more effective dialogue by providing high-quality, targeted, unbiased analysis and by holding a mirror up to governments on policy costs and impacts—countering lobbying and rent-seeking that obscure who pays and who benefits.
- IOs can build on existing fora and mechanisms or create new formats for joint government discussions on particular classes of subsidies, supported by IO analysis.

*IMF, OECD, World Bank, and WTO | Subsidies, Trade, and International Cooperation*

### Box 7. Existing IO Mechanisms for Government Discussions

### Box 7. Existing IO Mechanisms for Government Discussions

### WTO mechanisms and activities
- Serves as a forum for governments to discuss and try to sort out trade-related problems through bodies such as the General Council, the Committee on Subsidies and Countervailing Measures (SCM Committee), and the Committee on Agriculture (CoA).
- Longstanding agenda items:
  - Timeliness and completeness of notifications.
  - Ways to improve subsidies transparency.
  - Subsidies and overcapacity.
- Activities:
  - Regular SCM Committee meetings addressing notification obligations and subsidy analysis.
  - Technical assistance at national and regional levels, often focused on notification obligations.
  - Individualized technical assistance, in collaboration with requesting members, addressing subsidy analysis and design for developing members with capacity constraints.
- Institutional proposal referenced:
  - Permanent Group of Experts (PGE) envisioned in Agreement on Subsidies and Countervailing Measures, Article 24 — to give confidential advisory opinions on proposed or existing subsidies and assist dispute panels dealing with subsidy issues.

### IMF surveillance and technical assistance
- Policy advice provided through:
  - Multilateral surveillance (e.g., the World Economic Outlook).
  - Bilateral surveillance (e.g., Article IV consultations with individual members).
- Outreach around these vehicles can promote dialogue and could be organized jointly with other IOs.
- Technical assistance, when requested, on areas of IMF expertise including:
  - Tax exemptions.
  - Fiscal expenditure (which could include subsidy design).
  - Employment and social policies to address impacts on workers and communities from disruptions to product markets.

### World Bank engagements
- Provides financing, advice, and research on reforms that promote an open, transparent, rule-based global trading system.
- Offers data, analysis, and advocacy to remove distortions (such as subsidies) that can harm:
  - Domestic competition.
  - Other trading partners, especially in developing countries.
  - The global economy.
  - The environment.
- Supports client countries in implementing reform agendas drawing from best international practices and analyses.

### OECD dialogue and instruments
- Ongoing dialogue with member governments via Committee structure on subsidy design, impacts, and options for reform.
- Non-OECD members participate in committee meetings; regular Global Forums with wide participation.
- Engagement areas:
  - Design and reform of subsidies across agri-food, industrials, fossil fuels and fisheries.
  - SOEs and competition policy more widely.
  - Global rules on export credits.
  - Global Forum on Tax Cooperation (includes over 150 jurisdictions) which negotiates rules such as on a global corporate minimum tax.
- Provides specific country studies and technical assistance for tailored analysis and recommendations.
- Examples of OECD instruments:
  - OECD Recommendation on Competitive Neutrality.
  - OECD Guidelines on Corporate Governance of State-Owned Enterprises.

### IOs’ roles in advocacy and creating enabling environments for reform
- IOs can:
  - Advocate for reform of subsidies in bilateral and collective fora.
  - Make the case for reform in the context of fiscal constraints and alternative uses for public finances.
  - Build public support by showing where subsidy support is ineffective, inequitable, or harmful to the environment (example cited: OECD 2021b).
- IOs can create enabling environments by making the wider public case on failures of existing programs to achieve stated objectives.

### Rules, norms, and the need for strengthened disciplines
- Rationale for updated rules and norms:
  - Emergence of huge environmental externalities (e.g., climate change).
  - Growth of services trade and the digital economy.
  - International presence of SOEs.
  - Potential for national and international health or economic emergencies.
- Suggested approaches:
  - Develop strengthened rules and norms as rapidly as possible.
  - Improve transparency, analysis, and consultation around subsidies to improve application of existing rules and inform further development.
  - Facilitate recourse by dispute panels to outside expertise and promote subsidies-focused structured dialogue.
  - Introduce further information and analysis into existing exercises (e.g., WTO monitoring, IMF bilateral/regional/multilateral surveillance, OECD dialogues).
  - Facilitate individual members' access to confidential outside economic expertise (as envisioned with the PGE).
- Emphasis on fact-based dialogue drawing on high-quality impartial inputs to elucidate effects of particular subsidies and identify subsidy designs that reduce negative international spillovers.
- Note: Discussions start from existing rules in the WTO for agriculture and industrial subsidies and supplementary areas like the OECD Export Credit Arrangement; nearly 30 years since the WTO SCM and AoA were negotiated suggests a fresh look is warranted.

### Annex A — Scope of the SCM Agreement: Definition of Subsidy and Specificity
- Legal foundation:
  - WTO rules on subsidies are set out in the GATT (1994) and specifically in the SCM Agreement and the Agreement on Agriculture (AoA).
- Article 1 definition of a subsidy (first element): "a financial contribution by a government or any public body within the territory of a member."
- Article 1 closed list of what constitute "financial contributions":
  - (i) direct transfer of funds (e.g. grants, loans and equity infusions) including potential direct transfer of funds or liabilities (e.g., loan guarantees);
  - (ii) government revenue otherwise due that is foregone or not collected (e.g., tax credits or reduced tax rates);
  - (iii) government provision of goods or services other than general infrastructure, or government purchases of goods;
  - (iv) government payments to a funding mechanism, or entrustment or direction of private entities by the government to carry out one or more of the type functions illustrated under (i) to (iii).
- Additional Article 1 reference:
  - Any form of income or price support in the sense of Article XVI of GATT 1994 (i.e., support which operates directly or indirectly to increase exports of any product from, or reduce imports into, a member’s territory) can potentially give rise to a subsidy.
- Determination of "public body":
  - Requires assessment beyond ownership/control; Appellate Body held that an entity must possess, exercise, or be vested with governmental authority to be a "public body" — ownership/control alone is not sufficient.
  - This finding has created tensions regarding identification of SOEs as public bodies and potential exclusion of subsidies provided by such entities.
- Existence of a "benefit":
  - Article 1 deems a subsidy to exist where a financial contribution also confers a benefit.
  - For a benefit to exist, the financial contribution must be on terms more advantageous than those available on the market to the recipient.
  - Government measures that do not improve on market conditions available to the recipient are excluded from applicability of the SCM Agreement.
- Specificity requirement (Article 2):
  - To be subject to SCM disciplines, a subsidy must also be "specific" as defined by Article 2.
  - A subsidy is "specific" if access is explicitly limited to an enterprise, industry, or group thereof ("certain enterprises").
  - Eligibility based on objective, neutral, horizontal economic criteria (e.g., size of enterprise) with automatic eligibility implies specificity does not exist.
  - Article 2 recognizes that programs may appear non-specific but be specific in implementation; factors include limited use by certain enterprises or discretion by granting authority.
- Prohibited subsidies (Article 3):
  - Two types prohibited: (i) export subsidies; and (ii) subsidies contingent on use of domestic goods or import substitution subsidies.
  - Export subsidies are contingent, in law or in fact, on export performance.
  - Establishing "in fact" export contingency is complex and requires factual analysis of whether exportation or anticipation of exportation figured in granting authority’s decision.
  - Import substitution subsidy disputes have addressed whether "in fact" contingency applies and relations to GATT 1994 Articles III:4 and III:8(b).
- Special and differential treatment:
  - SCM Agreement provides extensive “special and differential treatment” for developing members, especially regarding export subsidies.
  - Developing members listed in Annex VII are exempted from the export subsidy prohibition until they cross the threshold criteria.
  - Members referred to in Annex VII are:
    - (i) Least-Developed-Country (LDC) members as defined by the United Nations; and
    - (ii) a group of other developing members with GNP per capita below USD1,000 per annum.
  - Note: In the Doha Ministerial Conference decision, listed members in Annex VII would remain exempt from the export subsidy prohibition until their GNP per capita reaches USD1,000 calculated in constant 1990 US dollars for three consecutive years; if GNP fell back below USD1,000, the member would be re-included to the list.
  - All WTO members are subject to the prohibition of import substitution subsidies.

*Source: Box 7. Existing IO Mechanisms for Government Discussions (anea2022001).*

### Annex B. Support Measures Allowed without Limit under the

### Annex B. Support Measures Allowed without Limit under the Agreement on Agriculture

### Overview
- Under the WTO AoA some categories of support are allowed without any limit because they are considered non-trade distorting or minimally trade or production distorting (“Green Box”), are provided under production-limiting programs (“Blue Box” or Article 6.5 support), or for development purposes (Article 6.2 support).  
- The first two categories of support are available to all WTO members; Article 6.2 support can only be provided by developing country members.  
- China is an exception. It undertook to forego the use of Article 6.2 as part of its accession to the WTO.

### “Green Box” support (government general service programs and direct payments)
- General criteria:
  - Must be provided through publicly funded government programs (including when a government forgoes revenue).
  - Must not involve transfers from consumers.
  - Must not have the effect of supporting prices for producers.
- Special treatment:
  - Developing country members receive special treatment regarding governmental stockholding programs for food security purposes and subsidized food prices for urban and rural poor.
  - Bali Ministerial Decision on General Services (WT/MIN(13)/37) expanded the list of general services by adding programs particularly important for developing countries for rural development, food security and poverty alleviation; these programs relate to land reform and rural livelihoods and are given a clearer “green light” to continue.
- Legal/dispute context:
  - The only dispute that has addressed the Green Box is United States — Subsidies on Upland cotton (DS267), which concluded that measures related to the type of production were not Green Box measures conforming fully to paragraph 6(b) of Annex 2 to the AoA.

### “Blue Box” support (production-limiting programs)
- Conditions for payments to be allowed without limit (and exempt from “reduction commitments”):
  - Payments made on fixed areas and yields, or on a fixed number of livestock.
  - Payments made on 85 percent or less of production in a defined base period.
- Characterization:
  - Blue Box direct payments fall between Green Box (decoupled payments) and Amber Box (payments directly linked to current production) in potential to distort trade: actual payments do not relate directly to current production while production is limited overall.

### Article 6.2 support (development-related support for developing countries)
- Article 6.2 allows without any limit direct or indirect assistance designed to encourage agricultural and rural development, including:
  - Investment subsidies generally available to agriculture.
  - Agricultural input subsidies generally made available to low-income or resource-poor producers.
  - Support to producers to encourage diversification away from illicit narcotic crops.

### Annex C — Indicative OECD Matrix of Support Measures (illustrative structure)
- Statutory or formal incidence axes capture to whom and what a transfer is first given: Production versus Consumption; Outputs, enterprise income, inputs, labor, land/natural resources, capital, knowledge, unit cost of consumption.
- Transfer mechanisms (how a transfer is created) include:
  - 1: Direct transfer of funds (e.g., output bounty or deficiency payment; operating grant; input-price subsidy; wage subsidy; capital grant linked to land acquisition; government R&D).
  - 2: Tax revenue forgone (e.g., production tax credit; reduced rate of income tax; investment tax credit; VAT or excise-tax concession).
  - 3: Other government revenue forgone (e.g., waiving administrative fees; under-pricing of a government good or service; debt forgiveness or restructuring; government transfer of intellectual property rights).
  - 4: Transfer of risk to government (e.g., government buffer stock; third-party liability limit; credit guarantee; loan guarantee; price-triggered subsidy).
  - 5: Induced transfers (e.g., tariff or export subsidy; local-content requirements; monopoly/monopsony concessions; regulated price; cross subsidy).
- Note: The matrix is a work in progress; some measures may fall under multiple categories (example: debt-equity conversions may involve both risk transfers and revenue foregone).

### Annex D — Budgetary Support to Agriculture (key statistics and distribution)
- Aggregate support:
  - Budgetary support to agriculture remains significant at $447 billion a year over 2018-20 across the 54 economies measured by the OECD Agriculture Monitoring and Evaluation report.
- Concentration:
  - In absolute terms, the EU (with the UK) and China, the US and India account for USD 376 billion of the USD 447 billion per year.
- Support relative to Gross Farm Receipts (GFR):
  - Across all countries, budgetary support corresponds to 11.4 percent of average GFR over 2018-20.
  - Range across economies:
    - From 30 to 40 percent of GFR in Iceland, Switzerland and Norway.
    - To less than 3 percent in Colombia, South Africa, New Zealand, Costa Rica, Ukraine and Argentina.
  - Several large economies, including the US, the EU, and India, provide support corresponding to between 18 and 24 percent of GFR.

### Annex E — Selected International Data and Information Sources on Subsidies (selected entries and coverage)
- IMF Government Finance Statistics: 1987-2020; 175 countries; budgetary information of government expenses on subsidies.
- IMF Coady and others (2019): Oil, gas, coal, electr.; 2015; 191 countries; estimates by 7 regional aggregations and 30 selected countries.
- OECD Inventory Support Measures for Fossil Fuels: 2010-2019; 50 countries; identifies and quantifies some 1,300 measures.
- OECD Agricultural support estimates: Reference tables: Agriculture 1986-2020; 54 countries; producer and consumer support estimates (PSE, GSSE, CSE, TSE).
- OECD Fisheries support estimates: Fisheries 2010-2018; 41 countries.
- World Bank Temporary Trade Barriers Database: Various sectors 1985-2019; 51 countries; trade remedy actions by type.
- WTO Notifications under the SCM Agreement and under AoA: From 1995; varies; inventory of government subsidies; domestic support and export subsidies.
- Additional datasets and publishers listed include IEA, IRENA, CEP Global Tax Expenditures Database, GTA Global Trade Alert Database, WTO Trade Monitoring Reports, WTO Trade Policy Reviews; coverage and country counts vary by dataset.

*Compiled from the document Annex B–E of the source PDF.*

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_Source: https://www.imf.org/-/media/files/publications/analytical-notes/2022/english/anea2022001.pdf_