International Trade and Industrial Policies

The current multilateral trade negotiations (MTN) are taking place under circumstances less promising and substantially different from those of the Kennedy Round. Not only have governments found it increasingly difficult to maintain their commitments to trade liberalization as a result of lower growth rates, but they have also called into question many of the rules which have been the basis for the international commercial system in operation since the late 1940s.

In order to broaden and concretize the study of the subsidy issue, it is important that it be related to the policies of specific countries. This requires providing an overview and analysis of the various goals pursued, the instruments through which governments act, and the financial magnitudes involved. Britain, France and West Germany have been selected not only because of the differences in style which mark each country, but also because they allow a comparison of policies pursued by three advanced industrialized states at similar levels of development.

It used to be an agreeable habit of some British participants in international commercial negotiations to try to enliven the tedium of the proceedings by contributing occasional light-hearted offerings for the amusement of their colleagues. As the Stockholm meetings at which the European Free Trade Association was established drew to a close, the British delegation circulated a draft ‘Convention for the Frustration of Trade’. Its first Article declared the establishment of an ‘Association for the Frustration of Trade’, trade being defined as ‘the benefits which it is feared may be conferred by the Convention’. And Article 3 read as follows:

The objectives of the Association shall be:

(a)

to frustrate the normal tendency of trade to increase and to ensure its diminution.

 

(b)

to frustrate all measures that any Member State might attempt to introduce in pursuit of the first objective; and

 

(c)

to ensure, by use of subsidies, by the encouragement of dumping and by discrimination on all possible grounds, that the following provisions of the Convention, in so far as they may apply, shall be circumvented.

 

The issues raised by the widespread recourse to industrial policies illustrate some of the essential weaknesses of the General Agreement on Tariffs and Trade (GATT). The regulatory power of the General Agreement reposed, for the first 25 years of its existence, on a tacit international consensus that the United States should take the lead in, and assume responsibility for, world trade liberalization. Not surprisingly, given the traditional US insistence on the contrast between market and government decision-making, the distinction between the two spheres was endorsed by the GATT. As a result, many GATT articles are based on the premise that governmental activity in the market place leads to discriminatory and unfair competition and, indeed, is abnormal and should be strongly discouraged if not eliminated.

Modern governments intervene in their economies in countless ways. This is true even of such countries as the United States, with its strong commitment to an economic system of ‘free enterprise.’ The concept is relative, for enterprise today is anything but free, if by that is meant free from government regulation or influence. A few of the US government’s actions, such as import tariffs, the cabotage rules on coastal shipping or the oil import quotas (now in abeyance), are aimed specifically at foreign trade in goods or services. Most actions are not, but they have an influence on international trade — via the competitiveness of the firms subject to regulation or influence, and through them indirectly to all firms — that varies from negligible to substantial.

The considerable misunderstanding about the different stages through which government intervention in the private sector has evolved as well as the changing nature of industrial policy, has prevented a balanced estimate of the current determinants of the international competitiveness of Japanese firms. It has also precluded an accurate assessment of the role subsidies play and the problems Japanese industry faces in adjusting to more complex patterns of competition.

The American position in the current round of trade negotiations for revising GATT Articles VI and XVI includes a proposal for a tripartite differentiation of national subsidies.¹ This so-called ‘traffic light’ or ‘red, green, amber’ system is in many respects quite close to existing European Community (EEC) practices. Since the EEC represents the most far-reaching attempt to liberalize trade among industrialized states, its experience with subsidies, albeit a highly specialized issue, may not only provide useful insights for understanding the American proposal, but also be relevant to efforts to reform the pertinent GATT articles. These include such questions as the extent to which and under what conditions general rules and obligations can be defined which are economically relevant, politically acceptable and enforceable multilaterally among a group of industrialized states; the frame of reference a multilateral organization can develop for evaluating national subsidies; the pressures it can bring to bear on its members; and the limits imposed on policy formulation. In the EEC’s case one limit is a result of the fact that the Community constitutes a suboptimal area from the perspective of the international economy.

How broadly to define subsidies and how narrowly to limit the range of practices one tries to deal with by international agreement are major questions that run through the other chapters in this volume. The difficulty of believing that there will soon be widespread agreement on concrete rules covering many different kinds of subsidies could lead to the conclusion that one should concentrate on establishing principles even if practice develops more slowly. This entails the question of whether such principles should apply to all international arrangements touching subsidies, even if they deal mainly with such broader matters as international investment, economic development or the problems of certain troublesome industries.

Several contributors to this volume have pointed to the difficulties in finding methods which might provide generally agreed upon estimates of the extent and effects of government subsidies. This chapter discusses some of the methods which have been developed in recent years to provide empirical estimates of both the ex ante and ex post effects of subsidies. The former involves prior evaluation of the potential implications of national legislation, and the latter is concerned with the actual effects of specific instances where a subsidy has been granted. While there is a growing flow of information on the extent to which governments subsidize the private sector, the national reporting systems need an oversight mechanism capable of identifying potential sources of conflict. Two such present sources of conflict are the inadequacies of the GATT Articles VI and XVI and the disparities between the GATT and the national legislation of contracting parties shielded by the grandfather clause.

There appears to be consensus that state aids to industry are growing in scope and in effect, worldwide. These aids are sometimes general, such as in the case of investment incentives available to all industries, and at other times they are specific to a particular firm, industry, region, or area of research and development. Their effects are to distort market conditions and to reorient the pace and direction of adjustment of the industrial structure of each nation. Consequently, aids distort the conditions of international trade, affecting imports as well as exports. They can create adverse effects, giving rise to disruption or injury to particular economic interests. This brings about the potential for conflict among nations.