19

Disciplines on subsidies in the light of policy

responses to the economic crisis

In this final chapter we address governments’ responses to the recent

financial and economic crisis insofar as their measures touch on subsidy
disciplines under the SCM Agreement.1 Some observers have questioned
whether the SCM Agreement leaves sufficient policy space for govern-
ments to respond adequately to the challenges of the current crisis.
Others, on the other hand, have precisely pointed to the weaknesses in
the current system to prevent ‘beggar-thy-neighbour’ subsidies and have
thus advocated more multilateral policy constraints.
At first sight, any appeal to increase flexibility on subsidy disciplines
during times of global economic downturn seems to be somewhat
counter-intuitive. As shown by the experiences in the 1970s and 1980s,
such a downturn puts pressure on governments to enter into competitive
subsidization so as to safeguard domestic production and employment.
Hence a global economic downturn or crisis would rather offer an
incentive to strengthen subsidy disciplines in order to stop detrimental
subsidy wars generating over-capacity and budgetary difficulties. Given
that the Subsidies Code was largely unsuccessful in halting such ‘beggar-
thy-neighbour’ policies, countries were ready to agree on more stringent
subsidy disciplines during the Uruguay Round.2 Yet a particular feature

1
For an overview of measures adopted by WTO members, see Report to the TPRB from the
Director-General on the Financial and Economic Crisis and Trade-related Developments
(JOB(09)/30, 26 March 2009). An in-depth legal analysis of some of these interventions can
be found in C. Brunel and G. C. Hufbauer, ‘Money for the Auto Industry: Consistent with
WTO Rules?’, Policy Brief, Peterson Institute for International Economics, February 2009;
A. van Aaken and J. Kurtz, ‘Prudence or Discrimination? Emergency Measures, the Global
Financial Crisis and International Economic Law’, 12:4 Journal of International Law (2009),
859–94; R. H. Weber and M. Grosz, ‘Governments’ Interventions into the Real Economy
under WTO Law Revisited: New Tendencies of Governmental Support of the Automobile
Industry’, 43 Journal of World Trade (2009), 969–1012.
2
The Great Depression of the 1930s similarly inspired countries to negotiate disciplines
on export subsidies after the Second World War, but such disciplines were ultimately

601

https://doi.org/10.1017/CBO9781139046589.025 Published online by Cambridge University Press

 602 normative analysis

of the recent crisis is that it precisely mandated increased government

interventions (i) to prevent a collapse of the financial system; and (ii) to
boost aggregate demand through stimulus packages (i.e., so-called
Keynesian interventions).3 Regarding the second aim, demand could
be boosted by increasing public spending as well as by stimulating
private spending through fiscal incentives, targeted at either consumers
or producers. The crux is that by raising income and confidence, such an
expansionary fiscal policy multiplies its effect on the growth of gross
domestic product (GDP).4 Yet, in an open economy, some of the fiscal
stimulus expended by a government does not accelerate its national GDP
growth (i.e., national multiplier) by boosting domestic production, but
leaks abroad in the form of increased imports and thus benefits other
countries.5 Because countries aim at maximizing their national multi-
plier and given that increased imports may result in trade deficits,
countries have an incentive (i) to set fiscal stimulus at a suboptimal
low level and ‘free ride’ on the stimulus packages of foreign countries,
and/or (ii) to impose trade-distortive measures so as to prevent leakage
when implementing their own stimulus package. Hence, to reach
the Pareto-optimal outcome in this classic Prisoner’s Dilemma, co-
operation between countries is needed to ensure both ‘Keynes at home’
(stimulus packages) and ‘Adam Smith abroad’ (implemented in a non-
discriminatory manner), as some have phrased it.6,7 After briefly assess-
ing government interventions preventing the collapse of the financial
system, we analyse whether the SCM Agreement facilitates stimulus
packages respecting ‘Keynes at home, and Smith abroad’.
First, several governments bailed out large financial institutions in
distress as an immediate response to the crisis, which was justified on the

not adopted because of the failure to ratify the Havana Charter (see above Chapter 2,
section 2.1).
3
See, e.g., A. Spilimbergo, S. Symansky, O. Blanchard, and C. Cottarelli, ‘Fiscal Policy for
the Crisis’, IMF Staff Position Note, 29 December 2008, at 2–3; P. Krugman, The Return
of Depression Economics and the Crisis of 2008 (New York: W.W. Norton, 2009), 181–91.
4
At the same time, an accommodating monetary policy that prevents interest rates from
rising as a result of fiscal expansion should be put in place, as this would undercut
demand again.
5
See, e.g., O. Blanchard, Macroeconomics (Upper Saddle River: Prentice Hall, 1997), at 232–8.
6
See F. Erixon and R. Sally, ‘Keynes at Home, Smith Abroad: Domestic Stimulus Spills
Over to Protectionism’, Wall Street Journal, 9 September 2009.
7
Co-ordination ensuring that countries effectively implemented their own stimulus pack-
age mainly took place in the IMF as well as in the G-20 setting. On the advantages of co-
ordinated stimulus packages see C. Freedman, M. Kumhof, D. Laxton, and J. Lee, ‘The
Case for Global Stimulus’, IMF Staff Position Note, March 2009.

https://doi.org/10.1017/CBO9781139046589.025 Published online by Cambridge University Press

 disciplines in the light of the economic crisis 603

basis of the systemic risk that their potential bankruptcy would pose to
the financial and real economy. Insofar as governments did not direct
financial institutions to channel this support to (specific) domestic
producers, this aspect of the recovery programme targeting the financial
service sector is not disciplined under the SCM Agreement.8,9 Arguably,
in cases where an explicit ‘only lend national requirement’ was attached
to such support, the government would offer a subsidy within the mean-
ing of the SCM Agreement, given that it directs a private actor (i.e., the
financial sector) to make a financial contribution (e.g., transfer of funds)
that would otherwise not have been available to domestic producers.10 In
this case, however, such subsidies will only be actionable if it can be
demonstrated that they are specific to certain enterprises within the
subsidizing country and cause adverse effects on other members.11
Second, with regard to Keynesian interventions implemented to boost
aggregate demand, three different forms have been distinguished: meas-
ures increasing direct public spending, fiscal stimulus aimed at consum-
ers, and fiscal stimulus aimed at producers.12
The first two forms of stimulus measures directly target public and
private consumption respectively. Both types do not trigger substantive
disciplines under the SCM Agreement if they are effectively imple-
mented in a non-discriminatory way. After all, such measures do not
qualify as a specific subsidy to enterprises within the jurisdiction of the

8
Any distortion created in the service sector itself should be scrutinized under the GATS.
Generally speaking, the GATS does not substantively curtail such bailout measures,
because of the lack of strong subsidy obligations in the absence of specific commitments
and the presence of important exceptions such as the prudential carve-out (see above
Chapter 12). See B. De Meester, ‘The Global Financial Crisis and Government Support
for Banks: What Role for the GATS?’, 13:1 Journal of International Economic Law
(2010), 27–63; van Aaken and Kurtz, above n. 1, at 871–6.
9
The Appellate Body has emphasized that ‘entrustment or direction’ (Article 1.1(a)(1)(iv)
of the SCM Agreement) would not be present in ‘the situation in which the government
intervenes in the market in some way, which may or may not have a particular result
simply based on the given factual circumstances and the exercise of free choice by the
actors in that market’. Appellate Body Report, US – Countervailing Duty Investigation on
DRAMS, para. 114.
10
‘Direction’ covers situations where the government exercises its authority over a private
body (Appellate Body Report, US – Countervailing Duty Investigation on DRAMS, para.
116). Demonstration of ‘direction’ would be much more difficult in the more likely case
that such direction is implicit. On the standard for demonstrating ‘direction’, see above
Chapter 3, section 3.1.2.2.
11
Likewise, specific subsidies would be countervailable if causing injury to the domestic
industry.
12
Spilimbergo et al., above n. 3.

https://doi.org/10.1017/CBO9781139046589.025 Published online by Cambridge University Press

 604 normative analysis

granting authority and do not cause adverse effects on foreign pro-

ducers.13,14 Because they do not inherently discriminate between foreign
and domestic producers, such consumption stimulating measures are
not only WTO-compatible but are also the most efficient way to boost
global demand (i.e., they respect ‘Smith abroad’).15
In contrast, fiscal stimulus measures aimed at producers are more likely
to fall within the ambit of the SCM Agreement disciplines. Here, functional
as well as selective interventions aimed at domestic producers could be
discerned. First, for governments to offer non-sector-specific credit guar-
antees to producers in financial distress could be legitimate when they are
confronted with a capital market failure.16 Such government guarantees in
times of a credit crunch would qualify as subsidies under the SCM
Agreement because these constitute potential direct transfers of funds that
confer a benefit to the recipient.17 If an allocation is not de jure specific and
is based on objective criteria, such generally available guarantees might,
however, be classified as non-specific under Article 2 of the SCM
Agreement, unless they are considered de facto specific.18 Only in the case
where such guarantees could be classified as specific to certain enterprises,

13
See above Chapter 16, section 16.1.1.2.2.1. See also Brunel and Hufbauer, above n. 1, at 9.
Examples of fiscal stimulus measures targeting consumers are tax credits for the purchase of
cars, or so-called ‘Cash for Clunkers’ programmes. Under a ‘Cash for Clunker’ programme
(as for instance, implemented in the United States and Germany), compensation was offered
to owners of old cars if they purchased more energy-efficient cars. If such consumer subsidies
were to discriminate against foreign producers, they violate Article III of the GATT.
14
The relevant agreement with regard to direct public spending is the plurilateral
Agreement on Government Procurement. This agreement also incorporates a national
treatment obligation, but this is only useful for those WTO members that have signed
this agreement. For an analysis of ‘buy national’ conditions attached to public spending
under this plurilateral agreement, see van Aaken and Kurtz, above n. 1, at 871–81. The
suggestion put forward by some scholars that ‘buy national’ provisions in procurement
programmes could be challenged as actionable subsidies under the SCM Agreement
seems highly speculative in the light of the subsidy definition under the SCM Agreement
and the plurilateral nature of the Agreement on Government Procurement (in con-
junction with Article III:8(a) of the GATT).
15
As recognized by the WTO Director-General Report (above n. 1, at para. 8), where
subsidization can be undertaken, its full value as a stimulus for global activity will
therefore ‘come from targeting them at consumption, not production, with consumers
free to choose internationally the goods and services that they buy’.
16
Spilimbergo et al., above n. 3.
17
If the private capital market no longer offers credit at affordable terms, such government
guarantees render possible credit transactions that would not otherwise have taken place. The
potential fee charged for such government guarantees will not compensate for this benefit.
18
The question of de facto specificity would be determined in the light of the conditions for
allocation assessed under the de jure specificity and ‘objective criteria’ tests. Hence the

https://doi.org/10.1017/CBO9781139046589.025 Published online by Cambridge University Press

 disciplines in the light of the economic crisis 605

could an actionable subsidy claim or a CVD action be considered. Second,

large selective interventions in which specific sectors are bailed out are more
problematic in both efficiency and legal terms.19 The prototypical example
is the substantial support given to the car sector in a number of members,
such as the United States and certain EU countries. These interventions
took the form of loans, loan guarantees, or equity infusions. Such (potential)
direct transfers of funds to a specific recipient at better-than-market terms
fall within the reach of the SCM Agreement.20 Again, such specific domestic
subsidies are not prohibited as such, but are only vulnerable to an actionable
subsidy claim or unilateral CVD action. The large scale of these interven-
tions suggests that bailouts might very well cause adverse trade effects on
foreign producers.
This conclusion seems not to have been altered by the Appellate Body’s
findings in Canada – Renewable Energy / Feed-in Tariff Program, which allow
recourse to an alternative benchmark if the government creates a market. The
supported goods market already exists and creating the market of the
financial contribution (i.e., financial services in times of a financial crisis)
seems not to clear the way to the alternative benchmark. Further, it could be
argued that the financial market still exists, even in times of a credit crunch.21
In evaluating the success chances of the multilateral track, it is impor-
tant to underline that demonstration of a threat of serious prejudice to
other countries’ trading interests is sufficient to find a violation of Article
5 of the SCM Agreement and to trigger the remedies available in Article 7
of the SCM Agreement. As Hufbauer and Brunel have emphasized,
gathering sufficient data to show actual serious prejudice might be
much more difficult in an early case against such bailouts. In legal
terms, it is not relevant that the complaining member would have
similarly subsidized its own car industry.22 Of course, in political

fact that the subsidy is predominantly used by certain enterprises would not ipso facto
imply that the subsidy is de facto specific. See above Chapter 17, section 17.3.1.
19
Although bankruptcy of ‘high-visibility’ sectors may adversely affect expectations and
thus demand, such support is according to an IMF study inherently arbitrary and the
risk of political capture makes proper implementation too difficult (political-economy
argument). Further, such specific subsidies create an ‘uneven playing field’ with foreign
competitors, and thus could lead to retaliation and trade wars. See Spilimbergo et al.,
above n. 3.
20
Brunel and Hufbauer also conclude that ‘government loans and guarantees to auto
companies around the world invariably entail below-market interest or credit-guarantee
rates’. Brunel and Hufbauer, above n. 1, at 7.
21
See above Chapter 3, section 3.2.1.2.4; Chapter 15, section 15.2.1.1.3.
22
Brunel and Hufbauer, at 7–8.

https://doi.org/10.1017/CBO9781139046589.025 Published online by Cambridge University Press

 606 normative analysis

terms, such competitive subsidization might decrease the probability

that such a multilateral claim is formulated.23 Moreover, the time-
consuming dispute settlement procedure and the fact that any remedy
would not work retroactively might further reduce the appeal of this
multilateral track. Hufbauer and Brunel state that it is somewhat more
probable that members would opt for the unilateral track to offset the
(threat of) injury to their domestic industry.24 Hereby, members have to
adhere to the specific procedural and substantive disciplines set out in
the SCM Agreement before any provisional or definitive CVD could be
imposed. Even if CVDs are put in place, it is implausible that such a
unilateral measure would effectively constrain bailouts in the car
industry.25
Overall, the SCM Agreement thus seems to leave considerable
policy space to implement Keynesian types of intervention. One
might even argue that existing disciplines are not sufficient to rule out
fiscal stimulus packages being implemented in a trade-distorting way.
The SCM Agreement seems to allow ‘Keynes at home’, and gives a
helpful incentive to – but does not ensure – ‘Smith abroad’. After all,
the most inefficient and trade-distorting stimulus measures, namely
those in which specific domestic sectors are bailed out by large govern-
ment injections, are not simply prohibited, but are only actionable and
countervailable. Somewhat ironically, the United States proposed in the
Doha Round negotiations to prohibit precisely those types of subsidy.26
If such a prohibition were put in place at the onset of the economic
downturn, this would have outlawed the bailouts in the car sector and
might have pushed members towards the more efficient types of
Keynesian intervention in order to boost global demand (i.e., those
targeted at consumption).27 On the other hand, a rigorous prohibition
might have made members reluctant to implement any fiscal stimulus
plan whatsoever (i.e., wait until ‘Keynes comes from abroad’) or might
have given rise to more systemic protectionist tendencies. Arguably, a
careful way partly to limit the risk of competitive subsidization in the
future could be the re-establishment of the presumption formulated

23
Yet the mutual claims by the United States and the EU against each other’s aircraft
subsidies indicate that this is not inconceivable as well.
24
Brunel and Hufbauer, above n. 1, at 8–9. 25 See also ibid., at 10.
26
TN/RL/GEN/146, 5 June 2007.
27
On competitive subsidization in the car industry, see A. O. Krueger, ‘Trade Openness Is
Now More Important than Ever’, World Bank Institute, Development Outreach
(December 2009), 37–49, at 38.

https://doi.org/10.1017/CBO9781139046589.025 Published online by Cambridge University Press

 disciplines in the light of the economic crisis 607

under Article 6.1(b), (c), and (d) of the SCM Agreement.28,29 Here, the
presence of serious prejudice would be presumed in cases where devel-
oped countries offer subsidies that cover operating losses sustained by
an industry or enterprise, except for one-time non-recurring subsidies
enabling an enterprise to develop a long-term solution and avoid acute
social problems. Yet it seems doubtful that members will agree on even
the mere reactivation of this presumption under Article 6.1 of the SCM
Agreement.

28
See also G. N. Horlick and P. A. Clarke, ‘WTO Subsidies Disciplines during and after the
Crisis’, 13:3 Journal of International Economic Law (2010), 859–74, at 870.
29
Reactivation of Article 6.1(a) (subsidization above 5 per cent ad valorem) is more
problematic, because it would, for instance, reverse the burden of proof if producers
of climate-unfriendly products were to challenge subsidies given to climate-friendly
product producers. See above Chapter 16, section 16.1.1.2.2.

https://doi.org/10.1017/CBO9781139046589.025 Published online by Cambridge University Press