Industrial Subsidies, State-Owned Enterprises and WTO Reform: Prospects for Cooperation?

The role of the state and market-distorting state intervention in the global economy have come increasingly to the fore in recent times, in large part as reaction to China’s rise to becoming the second largest world economy, and a direct competitor with developed economies across many sectors.

State-owned enterprises (SOEs) and industrial subsides have played an important part in China’s development, a fact that has become increasingly contentious in developed country capitals. The Trilateral Trade Ministerial Cooperation (Trilateral Cooperation) comprised of the US, EU and Japan has laid out an agenda for World Trade Organization (WTO) reform targeting SOEs and industrial subsidies. China has separately laid out its own reform agenda that includes removing agriculture subsidies entitlements in developed economies. In many ways both reform agendas are pulling in opposite directions, indicative of growing geo-economic tensions between these leading economic powers. This policy brief outlines the two opposing reform agendas and proposes a process for getting to a realistic landing zone for reforms.

The problem: conflicting agendas on industrial subsidies, SOEs and WTO reform

The distorting effects of SOEs and industrial subsidies on global market competition has become a topic of increasing importance for many WTO members in recent years. There is growing pressure for WTO reform that involves new rules for governing use of industrial subsidies, notification of subsidies by governments, and also the role of SOEs. On these issues the US, EU and Japan are cooperating under the Trilateral Cooperation to clarify their specific concerns and propose solutions. China can reasonably be viewed as the major target of Trilateral Cooperation reform proposals owing to the central role of SOEs in its economy, and the tensions arising from increased economic competition globally between China and leading developed economies in many sectors. Any reform viewed as China-specific will be dealt short shrift in Beijing. Likewise, any counter proposal that ignores developed country concerns about unfair competition deriving from industrial subsidies and their deployment by SOEs will meet strong resistance from the Trilateral Cooperation. The risk is that opposing reform agendas become an intractable standoff between direct competitors. Understanding the nature of both proposals is crucial to identifying a political process for getting to a possible agreement. 

DOWNLOAD FULL POLICY BRIEF

The views expressed here are the author’s, and may not necessarily represent the views of the Institute for International Trade.