Council Special Report: Rethinking International Rules on Subsidies

In the Council Special Report Rethinking International Rules on Subsidies, authors Jennifer Hillman and Inu Manak describe how the subsidies rules did little to prevent widespread industrial use by countries hoping to gain an edge in international trade and advise that now is the time to consider sensible guardrails to prevent an ensuing arms race in subsidization.

DONNAN: Good to go? OK. Good afternoon and welcome to the Council on Foreign Relations. I am Shawn Donnan from Bloomberg News. I see some familiar faces in the audience here. There may be some out there on Zoom. If I’m using my broadcast voice, it is because there is a world listening to us outside this room out on Zoom.

We’re here to talk about a new report from two fantastic CFR fellows on rethinking the international rules for subsidies. It’s been released today—yesterday and I highly recommend it. It offers a pretty clear diagnosis of the problem, the risks, and some interesting recommendations for the future and avoiding a descent into economic conflict—which is the tension point, I think, in all this.

I’m joined by two eminent folks.

If there was a Hollywood Walk of Stars for people in the world of trade policy, it’s pretty clear that Jennifer Hillman would have a star on that walk. She’s now a senior fellow here at the CFR and she teaches at Georgetown University Law School or at the Center for Law, is it? What is the formal—

HILLMAN: I’m also at the Center on Inclusive Trade and Development at Georgetown Law.

DONNAN: And the Center for Inclusive. And you told me just in the room there that you spend eighty hours a week there, which is a lot.

HILLMAN: (Inaudible.)

DONNAN: Prior to that, she was a member of the WTO’s Appellate Body, a commissioner at the U.S. International Trade Commission, general counsel at USTR, and a trade negotiator to boot. She knows more than most about the world of textiles and negotiating.

Jennifer’s co-author is Inu Manak, who is a fellow for trade policy here at CFR and has for a number of years been a leading expert here in Washington on trade policy, previously doing her deep thinking at the Cato Institute until she came over here about eighteen months ago, right?

So we thought we’d get right into a discussion. We’ll do—we’ll go about half an hour up here and then we’ll open it up to the eminent folks in the room here. We are on the record today and I’m going to remind you of that. We also are on Zoom, and we have over a hundred people who had registered to attend via Zoom. They will be able to ask questions and those will be relayed to us here in the room.

I thought we’d start with you, Jennifer, and ask you to start just by laying out what you in this report call a paradigm shift in U.S. trade policy and particularly on subsidies that we’ve seen in recent years. We can take the debate all the way back to 1791 and Alexander Hamilton’s report on manufacturers. I don’t think we need to do that, but certainly there’s been a change and it fits with a—with a broader context.

So why this report? Why now? Why don’t you just start by setting the scene for that?

HILLMAN: Yeah. So we thought that really now was a time to really think about these issues and about the disciplines, because if you think about it, leading up to the Uruguay Round in 1995 there was a lot of pressure to develop new disciplines on subsidies, largely around agriculture subsidies. I mean, the perception was that it was the United States, the European Union, and Japan that were the heavy subsidizers of agriculture that were creating huge problems for the world, and a perception in the United States that were creating huge problems for ourself just because of how much those subsidies cost. So the perception was subsidies were sort of bad, and to be restrained, and to be contained. And hence, we ended up with the Agreement on Subsidies and Countervailing Measures, which had subsidies on the industrial side. And then we ended up with the Agriculture Agreement, that had much more significant disciplines on the total amount that you could spend, and largely prohibitions on export subsidies, and other constraints on subsidies; as well as this notion that you could make a distinction between a good subsidy and a bad subsidy, all right? So that was kind of the paradigm where we were.

But the presumption was that industrial subsidies—manufacturing subsidies—were considered, in essence, bad, and they were considered actionable. You could bring countervailing duty cases to challenge them, and the United States was the champion of bringing all of those countervailing duty cases. We had way more countervailing duty cases than anyone else. So we were the ones saying industrial subsidies are bad and they create unfairnesses, and we were specific about how bad the industrial subsidies in China were. In fact, the vast majority of our concerns about our disputes with China have been over the huge use by China of subsidies, state-owned enterprises, and the ability for China to sort of get ahead on what was perceived to be illegal and wrongful engagement in so much subsidy activity.

And yet, if you look at what’s happened in the last year, year and a half, the United States has made this huge pivot. When you look at the combination of the Infrastructure Act, the CHIPS Act, and the Inflation Reduction Act, we are now granting $805 billion in subsidies—domestic industrial subsidies, you know, of the exact kind we’ve been complaining about China doing. So our notion was, yeah, we’ve changed our mind on whether—on the approach to fighting subsidies is to try to create stronger rules or whether the approach to fighting subsidies is getting in the game; I mean, let’s just start subsidizing all ourselves.

So our sense was: Wait a minute here. We need to just stop and think about whether this is really the road we want to go down—just follow China down the road of more money and more money and more money and more subsidies, or whether we really wanted to go back to where we were and think about whether it makes sense to create some guide rails and some—guidelines, I’m sorry, and some guardrails so that we don’t all just end up granting a subsidy. And when we grant one, what happens? The European producers that produce the same thing say, hey, now we need a subsidy over here to compete with the Americans, and we just start down this subsidy war.

So that’s the kind of setting in which we think we are absolutely headed for. We are headed for a subsidy war where we’re going to start—we’re going to grant—we are granting $805 billion worth of subsidies and probably more. And the Europeans are already responding, and other countries are going to respond. So we are headed down this road of a subsidy war. And what we’re saying is: Can we please take a timeout and think about whether that’s really where we want to go? And are there tools available that we should be using?

DONNAN: Inu, I want you to build a little bit on the subsidy war. I mean, what—and the consequences that we’re talking about here. I mean, it is—when we think about industrial policy and the kind of rebirth of industrial policy in the United States, it’s often with the flag waving, the idea that we’re rebuilding the industrial base, we’re fighting climate change, we are handling a huge transition in the economy from fossil fuels to renewable energy. These all seem like relatively good things, and yet there are consequences or potential consequences out there in all of these subsidies that are being injected. Just walk us through what you think those consequences are.

MANAK: Sure. You know, there are a lot of potential consequences from the growth of subsidies worldwide, and I think one of the things that Jennifer points to in terms of all the spending and the reaction we’re getting to the spending is the fact that we have to think about who can afford to spend this much money. And at the moment, it’s only a few of the major markets, right?

So we’re thinking about something like tackling climate change, which is a global problem. If we’re only having the United States, the European Union, and China spending billions and billions of dollars here, how do we ensure that the benefits of what we’re spending on actually accrue to fighting the global problem that we’re trying to solve? How do we ensure that that technology can be accessed by developing countries that face really specific constraints on financing their own development challenges and adaptation and mitigation issues that we should be able to assist with? So it brings out that question about is this an equitable way for us to think about solving a problem that is not just our own problem, right? So I think that’s the first bucket of that.

The second thing—and it comes back to how you just described the different motivations for industrial policy, right? So we’re trying to create American jobs. We have national security concerns, economic competitiveness. Our motivations are getting a bit crossed here. And without clarity on what our goals are, it’s really hard for us to coordinate among all our trading partners about what we’re trying to achieve, right?

So, for example, we’re trying to pursue friendshoring in some ways as part of our industrial policy. Now, friendshoring would make sense if we’re thinking about it in terms of how we improve resilience throughout all these supply chains, but we’re thinking about it in sort of a political and security framework. And so then we have to ask ourselves: Is this about national security, or is this about job creation, or is it about something else, right? So I think we have to have clarity on our goals in order to get everyone onboard for the same things.

HILLMAN: I’d only add the other—you know, the other piece of it is just literally the amount of money. You know, it’s one thing to say we’re going to spend $805 billion on these subsidies, but when you think that it is coming on the back of the huge budget deficits that were created during the financial crisis, the increased budget deficits that were created then as a result of the pandemic, we are already at, you know, again, very high levels of budget deficits. And it’s not just we; I mean, it’s many in the world who are already running major budget deficits right now. And we’re not having a conversation about whether—because climate change is a global problem, we’re not having the conversations about therefore we need a global way to think about taxing or otherwise raising revenues in order to pay for the fight against climate change or other global goods. So part of the other problem with it comes on just the sheer amount of money at a time when, you know, again, there isn’t a subsequent conversation about how does that all get funded. And at a time when interest rates are higher so debt costs are higher, it does raise issues on just the pure math of the money.

DONNAN: And then there is the kind of economic distortions that come from it, right? I mean, as you talk about in the report, Alexander Hamilton identified this early on, that you want to limit the number of sectors to which you steer subsidies and you want to be wary of injecting too much money into the economy, that that kind of creates distortions and too much coal production, or too much steel production—although perhaps he wouldn’t have said either of those things. But I mean, we are in a world where we may have too many semiconductors, right? I mean, that seems unlikely right now with the birth of AI and so on, but there’s a lot of money going into the semiconductor industry and so on.

MANAK: Yeah. I would say, you know, Hamilton was really concerned about this early on. And you know, I know you said maybe we won’t go back to 1791, but here we are.

DONNAN: Yeah. Let’s go there.

MANAK: I think it’s relevant because when you think about how Hamilton was thinking through how we could use subsidies effectively, he suggested that we need to be—target these are industries where we just don’t have the capacity right now and where we need to develop our technology. He really was clear that we should not be investing in industries long established, so we should not be trying to pick national champions that are trying to compete against, you know, Britain, for example. But he said what also we need to do is to ensure that subsidies and tariffs are pursued differently. He said tariff policy was really inefficient. It’s going to raise the cost of getting inputs in to help us build our own technologies. And he said subsidies targeted really well could help, but we could not also have a tariff policy.

You go back to the debates happening at the time between Jefferson and Madison and Hamilton, and Jefferson and Madison liked tariffs, and we know they imposed lots of tariffs. And Hamilton was not happy about this idea. He didn’t live to see how it actually rolled out, but I think he would have been unhappy with it then, and he would be unhappy with how we’re compiling tariffs today on top of our industrial policy as well.

DONNAN: Do you want to add, Jennfier? No?

I mean, one of the reasons we’re having this conversation is China and its rise in recent decades, right? I mean, there are rules at the WTO on this. Those—but the WTO, the view in this town—I think the kind of consensus view in this town and in other Western capitals, that the WTO rules have failed to kind of constrain China, and really police China’s use of industrial subsidies, and that China has run amok, and that it’s time to kind of push back, and so on. So how do you—if you’re proposing a rethinking of the international rules on subsidies, do you start with how do we make sure that that doesn’t happen again, that we don’t get WTO rules that can’t handle this huge rising economy?

HILLMAN: Yeah. So I would certainly agree that there’s been a lot of problems with the way the subsidy rules in China have meshed or not. And for me, the blame, if you will, or the fault is on—is on both sides.

I mean, the blame is in part on the rules themselves and on the way that they were interpreted, because the interpretation makes it really hard to find a subsidy. A subsidy is defined as a financial contribution by a government or public body that confers a benefit, and the problem has been what do you mean by public body. And the United States for many, many years assumed that a state-owned enterprise where the communist party can say, OK, I want you to sell steel at a very cheap price over here, that ought to be deemed a subsidy. That is the government telling you what to do. That is the government commandeering resources. And therefore, another competitor is getting something on the cheap. Unfortunately, the rules were then interpreted such that it was very hard to say that a public body could constitute the provider of a subsidy. So part of it is in rethinking how we define what is a subsidy.

But the other problem is, to be quite frank, we didn’t use the rules. Did we challenge China on subsidies in a major way? No. None. Zero. I mean, we—right at the end of the—of the Obama administration, a case was filed involving aluminum, and it was supposed to be the test case where we laid out everything that was wrong with China’s subsidy program, everything that was wrong with state-owned enterprises. Granted, in a single industry of aluminum, but it was really meant to be the case that would show the world why and how you can use WTO disciplines. And the Trump administration chose never to pursue that case, so there’s never been any panel appointed or anybody to actually take it on. And I would say the rest of the world did the same thing.

There were a lot of rules put in place when China joined the WTO—a special safeguard provision we invoked once, the rest of the world almost none. Again, there was all kinds of special provisions to go after China, and by and large they were not used. So China would say—you know, to the extent that cases have been brought against China, China would argue: We’ve been in compliance. We’ve complied with the decisions that we’ve lost. The problem has been nobody brings them. And now, with the demise of the Appellate Body, there is no faith. Why bother to bring a case? Because there is no ending binding dispute resolution because, in the absence of an Appellate Body, if China were to lose a case China can simply file a notice of appeal, and you can’t take any action on your winnings, if you will, while an appeal is pending. And in the absence of an Appellate Body it pends forever, so you’re in this void.

So the problem, I think, is both with the rules themselves—and that’s one of the things that we talk about, is that we have to make it very clear that you cannot do this: I don’t think it’s a subsidy; therefore, I’m not going to notify it; therefore, if it’s lodged in a state-owned enterprise, I don’t have to worry about it. We really need to make it very clear what constitutes a subsidy and what does not.

But at the same time, the problem has been the rules—the remedies for the rules have also not been effective. I mean, part of the reason why do people not bring cases, if you think about it, the rules in the WTO are meant to say that you don’t have to comply retroactively. Remedies are prospective only. So if you think about it, in China you get a big subsidy to create a steel plant. Great. Now the steel plant gets up and running. Now the steel goes out into the world and starts hurting everybody else because that steel is very low priced because it’s produced on the backs of the subsidies. Now you file a case at the WTO. Now you get a panel decision. Now you get Appellate Body decision. What is that timeframe? That’s five, six, seven, eight years from the time the subsidy was granted in the beginning. By that point, the steel company is up and running, and what the remedy will not be is to go back and say to China: You have to dismantle that steel plant because you made it on the backs of the illegal subsidies. You know, shut that plant down and stop that production. That’s not what the remedy is. The remedy is from the date that the ruling actually happened plus fifteen months, then you’re supposed to remove the adverse effects. So, clearly, one of the things that we are suggesting in this report is that the remedies themselves need to be tougher.

DONNAN: Let’s walk through those recommendations. Does one of you want to kind of go through them one, two, three? There’s three—there’s three big ones.

HILLMAN: So I’ll just—maybe I’ll start just with where I just ended, which is the remedies—

DONNAN: Yeah. Yeah.

HILLMAN: —because one of the things that we say is for prohibited export subsidies the remedy ought to be: You have to pay it back. You know, you can’t just pocket the money, produce the steel plant, walk away, and say, OK, ten years down the road I’ll do something about it. You have to actually pay it back. It’s what the European Union does with its state aid rules. If you’re found in the European Union to violate state aid rules, you have to pay it back. That would be a huge deterrent against accepting the subsidy in the first place, if you knew that it was a prohibited subsidy that was impermissible and you were going to have to pay it back if you were found in violation. Again, we think that would add a lot of discipline.

And the other one is to add a lot more disciplines about notifications, you know, so you can’t get away with notification.

DONNAN: Right.

HILLMAN: So that’s one of the key recommendations.

But I’ll let Inu discuss the other ones.

MANAK: I can jump in on the notification issue.

DONNAN: Yeah. There’s two others, right?

MANAK: So, transparency. It’s a massive problem in terms of subsidies. What we know and then what we don’t know really matters. If we look at notifications that WTO members make or should be making to the WTO, there’s not a lot of them being made on a regular basis. So if we look at 2021, the midyear review in which members are supposed to submit notifications, more than half had not yet submitted their notifications. So this is a clear problem. If we don’t know what is being subsidized and who’s doing it, how do we even begin to address the scale of the problem, right?

Part of the issue here is a lack of clarity on what should be notified. And this comes down to the fact that members notify what they think they should notify. So there’s lots of discretion on members to do what they want here. China, obviously, thinks that, you know, some of its subsidies don’t count, so it hasn’t notified them. So we have this huge gap in knowledge about what China has been subsidizing in particular. So without that, we don’t really have a clear idea of what we can do in terms of all the potential rule changes. We don’t really know how much money is being spent. And we also have an inability to coordinate to avoid inefficiencies, right? There may be opportunities for members to work together, for instance, and we can’t do that because we don’t even know what the others are doing.

So I think the first thing to do is really to improve transparency, and we can do that at the technical level at the WTO that does not require a big political agreement. Part of it requires members explaining—you know, if they’re doing something that they think is for a good purpose, they should notify that and then we can have a discussion about that and have a larger, I think, debate about what should be merited as a good subsidy versus a bad subsidy.

DONNAN: And that is—that’s the kind of third bucket in terms of recommendations, is defining better what good and bad subsidies are. Now, I confess I’m fuzzy on what—good and bad. So do you want to just quickly walk us through what we—what you think the good subsidies should be and what the bad subsidies should be?

HILLMAN: And there’s no question we think this is the hardest part, and yet among the most important parts of these recommendations. And we don’t think it’s impossible. Again, it was done in the agriculture area, where they decided certain subsidies went to what was referred to as the blue box, some went into the green box, and some went into the amber box. The test there was how trade distorting was the subsidy. I mean, how much did it create overproduction or over-exports?

For us, in the industrial subsidy area you probably aren’t going to be able to live with just the idea of trade distorting. So, for us, a lot of it is thinking about those subsidies that are going towards, if you will, the common good. And this is really thinking about the need particularly in the climate change space, but it’s not just climate change. It’s global health and it’s many other things.

So from our perspective, one of the easier ways that you could start was to think about saying subsidies that are specifically designed and shown to be trying to meet one of the Sustainable Development Goals—these are seventeen goals set out by the United Nations, agreed to already by 178 countries, so we don’t have to have a lot of negotiations about what these goals are. They are already fixed and agreed upon. If you can show that your subsidy is leading to, again, the development of products, goods, technology, services in furtherance of an SDG goal, you put it into the category of a good. And again, the burden on the country providing the subsidy to show that this is what it was for and this is why it would help meet an SDG goal. It’s clear that—things like when the WHO declares a pandemic and you say I’m granting subsidies in order to create a vaccine in order to fight the pandemic, you are clearly going to be in that good box. When you are developing climate change technologies that are clearly decarbonization technologies, you’re going to be in the good box. And the—and the thought is by doing that and linking it at least potentially to SDGs, you’re not going to have a big fight over can we agree on what is a global good. They’re already defined. That’s at least the idea to take some of the disputing over it—

DONNAN: And bad is everything else?

HILLMAN: No. No. Well, arguably to some degree yes, bad is everything else, because everything else will have these unfair trade-distorting effects.

DONNAN: You also talk about setting a cap on subsidies.

HILLMAN: Yeah. And that is—that is, again, coming—

DONNAN: And negotiating—that gets tricky, doesn’t it?

HILLMAN: That is coming out of the agriculture world, you know, where there really was a sense of, whoa, at some level—no matter how good or bad, at some level if you allow the big and rich countries to do so much subsidization, it ends up driving a wedge between the developed world and the developing world that simply cannot afford the largesse of the developed countries. So at some level we could all over-subsidize, and at some level that becomes inefficient for everybody, and definitely exacerbates the income inequality gaps. And so, yes, there is this notion that you should agree at some level that there is a limit on how much you’re going to spend. Even if it is for these sort of good ideas, at some level it creates distortions that you cannot live with, and so there should be some kind of an overall cap.

DONNAN: And that’s a cap that—

HILLMAN: I’m not saying that would be easy to come by, but the idea is to at least start a conversation to say there’s a reason to believe that overall limits are necessary.

DONNAN: And is that a cap that envisions kind of restraint, or is it a step back from the current level, or is USTR—presumably, they go in and say our starting position is $805 billion, right? I mean, that’s our limit. Where do you think it should be? And should we be shooting kind of for some restraint in terms of industrial subsidies, or do you just kind of take in the world as it is now and kind of freeze it there?

HILLMAN: Again, my own sense is I think you’re going to have to go even above 800 billion (dollars), but you’re still trying—what you’re trying to avoid is a tit for tat where every subsidy we grant then Europe grants, then Japan grants, then, you know, India and Brazil and Canada and everyone else feel like they have to do some matching. If the whole world knew that there was going to be some kind of a cap overall, the hope is that you avoid this kind of spiral where everybody just keeps piling on and piling on. And part of it is they’re all—we’re going to be all piling on at some level, we’re all going to be then making semiconductors. We’re all going to be spending money on EV batteries. And at some level, it’s too much even in—even in, if you will, sort of good—or, good areas. So, yeah, I don’t think we’re talking about a cutback from where we are now, but I think we are not going to be allowing a lot more room for growth.

MANAK: Yeah. And I would add, you know, on the transparency side, this is where that can help, right? So having a discussion where members are notifying and explaining what they’re actually spending will help us understand what the overall levels are that we’re starting with. And then think about how we can ensure that we can create a more equitable way of thinking about this, so ensuring that—(inaudible)—countries don’t have, you know, a cap that is as large as they may want, and understanding that even if you are going to spend a lot of money there has to be also, as we see from the fisheries subsidies negotiations, a way to have a fund where you have to—if you’re saying I’m doing this for public good, you have to give a certain amount of money that goes into this fund that makes sure that other countries have access to the same technologies that you’re investing in, right? So there has to be a way to balance out the largesse of some countries with the weaknesses of others.

DONNAN: One of the other things I like in this report is the ambitious timeline you set for getting this all done. You say we need to get this all done in the next year. Now, for—(laughs)—there are some folks who have done trade policy in the room here. It sounds ambitious.

HILLMAN: I’ll admit it’s ambitious, and that maybe comes because I think we’re at an urgent point where we need to move fast.

But secondly, I would say a lot of work has been done on this. I mean, the United States, the European Union, and Japan have been meeting for—you know, since the 2017 ministerial to try to come up with new rules on disciplines—new disciplines on subsidies, and a fair amount of work has been done within that trilateral process. There is a huge amount of work being done in collaboration. The OECD, the WTO, the IMF, and the World Bank have set up a new database on subsidies because there is a recognition, again, among all of those international organizations that subsidies are getting out of control and we need to get our arms around it. So there’s a lot of work being done, particularly I would say at the OECD, around these issues to try to catalog them, get our arms around the total amount of them, do a lot more work on them.

There is a lot more conversation within Geneva about—at the WTO about the need to rethink this. I think the director-general of the WTO has put this on the kind of list of things that needs to be discussed sort of in the leadup to the ministerial meeting that’s happening in February, so that’s not that far away.

So some of a lot of these discussions, particularly I would say in the climate change space, have moved a long way already. So I could at least imagine an agreement really by the time of the ministerial that everybody that thinks they’re doing green subsidies should notify them in this box, use this form, and see if you can get credit, if you will, some kind of acknowledgement that they’re not going to be challenged, because you’re putting them out there as: Here’s my green subsidies. This is my contribution to climate change. And you’re in essence saying to the world: Hands off. I mean, these are good subsidies. Leave them alone. Don’t bring countervail cases. Don’t challenge them at the WTO because I’m telling you I’m doing these all for good reasons, and here’s what’s going to come of them, and here’s what I’m willing to share out of these green subsidies that I’m doing.

I think at least in the climate change space, the conversation has moved a very long way where I think some of the kind of transparency, notice, defining of what is good I don’t think is unrealistic to achieve. Whether you could actually get a cap, mmm, OK, I’ll agree that one’s going to be a lot harder. And whether you could agree to stronger disciplines, again, a tougher row to hoe, but again, not impossible.

DONNAN: My last question before I open it up to members is a—is about the venue for these discussions. And you suggest in the report that the U.S. needs to lead the push for these new rules at the WTO. The U.S. and the WTO, it’s fair to say the relationship with the WTO is not at a—at a high point in terms of the U.S. This administration, prior administrations have kind of soured on the WTO as a place to get negotiations done and so on. Walk us through why you think the WTO is there and why you think the U.S. needs to lead this push.

MANAK: Yeah. I can start there.

DONNAN: Yeah.

MANAK: You know, I would say, OK, I’ll take the administration at their face value what they say. I keep hearing repeated the United States is very committed to the WTO. OK. So if you’re really committed to the WTO, then let’s make it work, and let’s actually put to work the ideas that the United States has put forward over the years to reform the institution in a way that’ll make it equitable and functioning better for everyone.

So one thing the United States has consistently complained about, our subsidies rules. This, I think, is an opportunity to really change it. And as Jennifer said, we have a ministerial conference coming up. It’s a good opportunity to have that discussion among the broader membership.

Also, if we’re thinking about just the scale of the problem and the challenges that we’re facing that we’re trying to address with subsidies, these are global issues. We’re going to need to involve a broad range of countries in those discussions. So while it may be helpful to have discussions in other places like in a trilateral basis between the EU and Japan as well, or at the OECD, I think to have a full effect of understanding how we can make these better and how we can rein in bad behavior, we have to do it at the WTO.

And I would say also, if we look at the record of the WTO on compliance, it’s actually really good. And if we want to strengthen the rules there and ensure that countries do not violate the rules, that’s the place to do it. And the United States has complained that dispute settlement doesn’t work. Well, here’s your chance. We can fix it, and we can make it work better for all of us, and also improve compliance in this space.

DONNAN: Did you want to add anything?

HILLMAN: Well, the only thing I would add is the China point, which is, you know, part of the reason why I think the United States has soured on the WTO is its perception that if the WTO is not capable of reining in China then the WTO is not worth saving. And this is an opportunity to rein in at least one aspect of China. And again, it is my sense that, you know, the China problem, if we don’t start solving smaller pieces of it, providing offramps for some of the issues that we have with China, it just becomes a bigger and bigger problem.

If we could use just this refining of the subsidies rules to rein in just some of the Chinese subsidies, we’ve at least solved a few. We’ve taken a few of the underbrush problems with China off the table. And if we could use the WTO rules to get better transparency around subsidies in China, again, that would go a long, long way toward, again, some opening up of some conversations, and would at least let us see that the WTO is one—one—tool in a toolbox to try to address the China issues.

DONNAN: OK.

At this point, I’d like to open it up to the room and also to our members who are joining us via Zoom. I think if they put their questions in the chat there, we’ll pick them up and they’ll be relayed to the room here. But put your flag up and we’ll go—we’ll go around the room. I’m going to go in order. I think, Karen, you were first. I’m going to go there. Just introduce yourself. And just a reminder to you all: This is on the record.

Q: OK. Hi. I’m Karen Alter from Northwestern University and at the Department of Commerce, speaking in my personal capacity.

So the dynamic that you’ve described about how we got here is, like, a historic dynamic. The rules don’t work. The U.S. is going to go unilateral. Going unilateral doesn’t work. The answer is to enhance the dispute settlement system. It’s a dynamic that pushes towards legalization and judicialization. If I—if I understand correctly—but you can correct me—one of the reasons why the U.S. broke the Appellate Body is it didn’t like how the Appellate Body was interpreting rules on zeroing and other kinds of rules. So your solution seems to be causing part of the problem that got us here in the first place. That’s my first question.

But then also, if I think about your example of the subsidies of the CHIPS Act, one of the other directions which I imagine the WTO’s going to have to go is involving national security exceptions. And that is just—the CHIPS Act is justified on a national security basis. And so I’m wondering if that’s going to then really mess with the strategy that you’re laying out, which by the way is really creative and interesting. So thank you for this report and the presentation.

HILLMAN: So maybe I’ll start with the national security side first before coming back to the rules. You know, it’s very clear part of the reason why we think there needs to be this rethinking is because so much is now being justified as a national security measure and/or everything is being viewed through the prism of national security.

Excuse me. Just one second. (Coughs.) Sorry. Actually, I’m going to let—I’m going to let you—(coughs).

MANAK: I can jump in.

I’ll follow up on the national security side, because I think we see this in so many other trade policy spaces where so many measures are being employed for national security reasons. I think that one of the complications in some of how the subsidies have been sold, even IRA, if you look at things that U.S. officials have said, at first it’s just about climate change, and then we saw Katherine Tai make a comment saying that, no, this is also about economic security with China and broader national security issues.

So then it’s like, OK, so what is this about, right, and how do we separate out? It goes back to the motivation and the goals for what we’re doing. And I think it’s important for us to have those conversations and be upfront about it. Yes, there may be subsidies for legitimate national security concerns, and that’s fine. But let’s also talk about that.

One of the challenges I find at the WTO is that we can’t talk about national security at all. There’s just no conversation to be had for it, right? I had a paper with my colleague Simon Lester many years ago. We talked about what we need is a national security committee at the WTO where we can actually have these discussions among members. It could be closed doors. You can have an escape valve where they can have discussions and make tradeoffs. But the thing is, we need to actually talk about what it is that we’re doing and find a way to actually pay each other back for violations of rules, right? Because there has to be a tradeoff involved here, and I think we have to be quite honest about what we’re doing.

HILLMAN: So I apologize. (Coughs.) Sorry. Wow.

So let me—I think there’s a lot of parallels to what you’ve just said because, if you think about it, in the national security area there’s always this issue of drawing a line—(clears throat)—excuse me—between a genuine national security measure and a—and a protectionist measure. Ditto in this area of subsidies between a good subsidy and a bad subsidy. You’re going to have to draw a line.

And again, to me, that does go to the issue to some degree of rules and to some degree of somebody has to judge which side of the line are you on. And so the question is whether and how that should be done. And what we’re suggesting is there may be a way to let the WTO, maybe not entirely through the dispute settlement process—maybe through the committee process; maybe through raising specific trade concerns; maybe through the notification process; maybe through a lot of other things that are softer, necessarily, than per se the rules system, the adjudicatory system—but that nonetheless there needs to be some line drawn: Genuine national security or protectionist? Genuinely climate change or protectionist? And somewhere there’s got to be somebody that helps say this is which side of the line it falls on. And that’s basically what we’re saying, is use the whole process at the WTO—not just the adjudicatory process; the whole process—to help do that.

But, yeah, it has rules at its base. Yeah.

DONNAN: Everett Eissenstat.

Q: Well, thank you. And that was really, really excellent work, and just commend you both for tackling this—

DONNAN: I think we’re just going to ask you to pull the microphone a little bit closer, sir.

Q: Oh, I’m so sorry. Yeah. Sorry. I should know this by now. But really great work and commend you for doing this.

My name is Everett Eissenstat. I’m with Squire Patton Boggs.

You raised so many issues, there’s so much to unpack. I just want to comment on a couple of things.

First, Jennifer, what you just said about intent versus effect I think is really critical. When you—if you’re going to use the SDGs as an anchor or a definitional way to get out of subsidization, it needs to be, well, we intended it to have this effect; it has to actually have the effect. And so getting to that technical definition of what is actually achieving a goal is really important and super, super difficult. So there’s a lot of work to be done there, but at least it’s a good place to start.

My question’s a little bit outside the box on your paper. I think the international public rules definitely have an effect and need to be looked at, but is there something in the U.S. legislative bucket that you think could be done to help push this conversation forward in the sense of our, you know, reform of any of our countervailing duty or antidumping legislation?

HILLMAN: That’s a—that’s a good question. I don’t off the top—I’m trying to think about how we could do that. Right now, if anything we’re going the other way in terms of saying if the European Union CBAM, you know, we’re going to consider other things to be a countervailable subsidy. You know, so, if anything, we’re going in the other direction of adding more into the category of what constitutes a countervailable subsidy. But it may be that there would be things that we could think about in—but again, the question is who are we trying to help here, whether there could be other categories that get added to what is not countervailable or whether, again, we could expand the list of what constitutes a countervailable subsidy to pick up more things. It depends on whether what you’re trying to do is put more disciplines on subsidies or whether you’re trying to create more space, I mean, which is what we’re suggesting in this idea of a green box—create more space where you’re saying this group of subsidies is not actionable, it’s not challengeable, it’s not countervailable.

So on the U.S. side, it would mean whether you wanted to change what constitutes a countervailing subsidy to take some things out if they were in this—if they were duly notified to the WTO as a green subsidy, let’s say, then you would say they would not be subject to countervailing duty action in the United States. That would be a huge incentive for countries to notify those subsidies in that way. So it would be—you know, it would be hugely helpful on the transparency side, and the question would be whether legitimately those subsidies should fall in that category or not.

DONNAN: I was going to turn the question back on Everett. As someone who used to work up on the Hill and knows legislation inside and out when it comes to trade policy, is there something you had in mind?

Q: Yeah, of course. (Laughter.) No, but as I think about it, and you said a couple of things that are so important—not a couple; many, many things. But one is U.S. leadership. And so one way to have this dialogue and this debate would be to talk about it in the context of legislation or getting some of these concepts deliberated about what is an appropriate subsidy, what is the right level of subsidization. And I think what Inu said about the goal—is it climate, it is national security, is it manufacturing—that needs to be discussed. Like, why are we spending $805 billion? You know, what is hoped to be achieved by that? So I do think there’s a place for the U.S. Congress to have a—I know this may be a minority, but to have a productive role in this conversation.

DONNAN: Marc Levinson, do you want to—

Q: Thank you.

Up until the Inflation Reduction Act, most of the industrial subsidies in this country were handed out by states and local governments, not by the federal government. Similarly, in China a very large proportion of the industrial subsidies don’t come from the national government but they come from the provinces or the cities. How does the WTO deal with that, in your view?

HILLMAN: So the—I mean, the Agreement on Subsidies and Countervailing Measures in the WTO counts both federal and sub-federal subsidies as—so I’ll back up. So the WTO rules basically divide subsidies into those that are considered actionable—and when you say they’re actionable, that means they can be subject to either a countervailing duty action—so again, it’s a domestic action where if imports are coming into the United States that we think are subsidized, and that subsidy can be federal or sub-federal—so it could be a municipality or a—or a county or a state within a country that is providing the subsidy. The only requirement is that it be provided by a government, right? So as long as it’s a government in any foreign entity that is subsidizing that production, those goods come into the United States, we can bring a countervailing duty action against them and put a duty on that covers the amount of the cost of production that was subject to the subsidies. So if the subsidy paid for 40 percent of the cost of production, we can put a 40 percent countervailing duty on that.

The other action that you can take is one at the WTO, where you’re saying the harm is not that the good is coming into my market; the harm is that I’ve got to compete in all these third-country markets with the subsidized goods. That’s a challenge that you bring at the WTO, but it’s the same standard of is it a subsidy. Is it a government contribution that confers a benefit? And government, again, is defined as a government or public body, and government can include state and municipal governments.

I don’t know whether that answered your question. So, yes, all of these local—more local subsidies could end up in these actions.

Now, as a purely practical matter, to be honest, I don’t think it’s often a really local subsidy that ends up going into a corporation that ends up exporting goods into a market in a major way. Those are much more often national subsidies, particularly around the world. I mean, it is much more often that it’s a national grant of a subsidy that results in this massive amount of production. But it doesn’t matter from the purposes of the rules at what level the subsidy is granted.

DONNAN: We’re going to go online quickly because we don’t want to leave them out.

OPERATOR: We’ll take the next question from Simon Lester. (Laughter.)

Q: Thanks. Can everybody hear me?

DONNAN: Yes.

HILLMAN: Yes.

Q: Great. Well, thank you very much for doing this, Jennifer and Inu and Shawn. This has been a great presentation.

I wanted to ask about the good versus bad subsidies distinction, and I have what is, you know, somewhat of a technical legal question, so it’s probably more for Jennifer. Jennifer, if your coughing acts up again, that’s OK; you can just get in touch with me later about this.

HILLMAN: Hopefully I’m OK. Sorry.

Q: You had—you had talked about subsidies that are designed and shown to meet Sustainable Development Goals as this is the category that are good and we want to allow, and I just wanted to see if you had any thoughts on how we would go about allowing them. So, you know, we have the GATT Article XX exception out there, and most people seem to think, well, that doesn’t apply to the SCM Agreement. One option would be just to have that apply to the SCM Agreement. Another would be to build something sort of like the GATT Article XX exception, maybe taking what we’ve learned over the years about what has worked with GATT Article XX and what hasn’t worked and develop something new for this specific purpose. And I just wondered if you had—I skimmed through the report that you wrote and I hadn’t seen anything about that scenario, but I just wondered if you had, you know, thoughts on that—something that, you know, have you been considering as you wrote this? And you know, just anything more detail about how this exception or carveout would work.

HILLMAN: To be honest, I was thinking of it more in the vein of what is Article 8 of the Agreement on Subsidies and Countervailing Measures, which, as you know, Simon, no longer exists. So it was a provision that was put in originally in 1995 and it said that there were some categories of subsidies that were deemed to be non-actionable—meaning, yes, we agree that they’re subsidies, but we’re all agreeing that we’re not going to take any action about them. We’re not going to bring countervailing duty actions. We’re not going to subject them to WTO disputes. Included in that list was certain environmental subsidies. And so my thinking was more that it would be in that vein, that you would end up having to—you would end up with a category of subsidies that were deemed not actionable.

So it would be a revival of Article 8—a revival and an expansion of Article 8 of the SCM Agreement, rather than trying to go through Article XX or create other exceptions. Not that you couldn’t do that. I mean, that might be another possibility. But I think we were more thinking of it as leaving it within the realm of subsidies.

DONNAN: Are there any other questions online? I have to say, I enjoyed that moment of Simon as the voice of God here in the room. (Laughter.)

STAFF: We have one more.

DONNAN: One more.

OPERATOR: We can take our next question from Raj Bhala.

Q: Well, thank you for this fantastic report. And it was great to, you know, be a part of it, and I really appreciate that.

I guess my question is kind of through the lens of—and I apologize for saying this—my new book on the trade war with China. And that is the Chinese Communist Party views—and this is a proposition for you to react to—subsidization as an existential matter for it to stay in power and continue its bargain with the Chinese people ever since 1949. That is just a fundamentally different way of viewing subsidies than we Americans do. And I’m just wondering if you think that their view can be—can get in the way of subsidies reform.

HILLMAN: Inu, do you want to, or do you want me to?

MANAK: Yeah, I can start taking that.

So, yeah, great, great thing to throw out there. And I think, you know, there are certainly different ways of approaching subsidies. What I would say is that the distinctions aren’t always so clear. Yes, you can say that China’s main goal is to stay in power and to increase its sort of economic competitiveness. But I think a lot of what we’re seeing today, even in the growth of subsidies in the industrial space, is a desire to stay economically competitive. I mean, we did see in a previous national security strategy report the quoting of Alexander Hamilton, and the desire to build our industrial base to compete with a rising China. I think that part of the problem is that we’re also starting to think almost like a weaker country that needs to compete, as we did with Great Britain back in the 1790s.

So I think one of the things that we do need to be careful of is thinking through how we craft our subsidy policies, how we think through what the motivations are, and whether or not we fall into the trap of just trying to outcompete China over and over again. And I don’t think—you know, if we look at what’s going on in China, there are lots of questions about whether their economic model is actually working. They certainly have lots of potential economic crises that they could be facing very soon. And if we look at the track record on their industrial policy, it’s actually not been great. So there is a big question of whether or not it is creating the buy-in of its people to ensure that the government stays in power. And so I do think there are bigger questions here that we need to talk about in terms of how we emulate China, because I think we can get into a pretty slippery slope here.

HILLMAN: And I’d only add on the on the legal side, I mean obviously this is the hugest problem. This is part of this whole discussion we’ve been having about how the United States has lost faith that the WTO is capable of disciplining China, is because of how difficult it is when you have to live with the definition of, you know, a contribution by a government or public body that confers a benefit and is specific. I mean, if you have to live with that as your only way of thinking about a subsidy, you know, as Mark Wu’s, you know, China, Inc. and other articles have said, you know, that’s very difficult in the Chinese economy when, arguably, there is this overlapping set of controls such that the Communist Party ends up with a seat at—you know, on the board of every corporation that has any presence significantly in China.

And everybody starts to realize, even though that’s only one member, so technically they don’t fit within the category of controlling the corporation, everyone starts to realize if you don’t vote the way the Communist Party member wants you to vote, all of a sudden you don’t get your licenses, you don’t get your permits. So as a practical matter, one member of the board actually is the controlling and only member. And therefore, it is a state-owned—state-controlled corporation. And ditto, ditto, ditto. So some of it is in the details of how you think about how those rules and those definitions are or are not applied to China.

And I’m not suggesting that we’re saying anything in this report that will completely cure all of that. But at a bare minimum, the notion that you really do have to provide all of this transparency, and you do have to put on the record all of your subsidies as, in essence, others have defined them not as you have defined them, is at least beginning the conversation of whether there is a way to rein in, and at least rein in some of what China is doing in the subsidy space.

DONNAN: Should we come back into the room, and Irving Williamson.

Q: Hi. Irving Williamson, a former commissioner of the U.S. International Trade Commission, now retired.

I love the comprehensive approach that you’ve taken to this subject. And I know there are a lot of—there are a lot of different things. You know, the dispute settlement understanding and getting a deal on that, all the work that has to be done to get governments, other governments, to understand approaches on subsidies and whether it can be done. I really liked the fact that you brought using the SDGs and bringing developing countries, so that they have a stake in this, I think is fantastic.

There once was an Australian ambassador in Geneva who said that the reason why we have big trade rounds is because there’s so much political pain that you have to put everything together in order to get a deal. Now, I know it’s way too early to talk about any kind of round, but it seems like all the compromises that are eventually going to have to be made, that at some point that’s where you’re going to have to do it is some kind of massive agreement. And I was just wondering what your thoughts are on that.

HILLMAN: I guess I’m not holding out a lot of hope for another big, massive agreement.

Q: I said, it’s way too early, but. (Laughs.)

HILLMAN: So I actually—Inu and I think we mentioned it—but, I mean, to me, I took a lot of comfort from the fact that they got a deal on fishery subsidies. I mean, if you think about that, that’s pretty remarkable, what was—what was achieved in terms of the agreement that they got, because of what it did. I mean, without actually technically going in and amending the subsidies agreement, it effectively amended the subsidies agreement by adding to the list of what is a prohibited subsidy. And again, prohibited subsidies really are in a different category, because you can pretty much take immediate action against them. And they are per se illegal. And you don’t have to prove that it was a, you know, public body or any of that jazz.

You know, they put into this category of prohibited subsidies these certain fishery subsidies. So part of me says, you know, if you can get that kind of an agreement, couldn’t we get a further agreement that would add—again, maybe some of these, quote, “bad subsidies”—you know, fossil fuel production subsidies or other things—to that list of what is a prohibited subsidy? If you could do it in the fisheries area in a limited agreement, could you do a little bit bigger agreement in the subsidies area that would take onboard some of the ideas in this? I’m saying maybe. I think that was an agreement that showed at least a way that you could go—a road you could go down.

DONNAN: Would a plurilateral negotiation work? I mean, that was the idea behind the U.S.-EU-Japan negotiation, right? Was to start with the three and then—and then grow it out, right?

HILLMAN: Right.

DONNAN: Deliberately to leave China out, but to start there and agree amongst these big economies what the right disciplines are. Is that the right way to go? Or maybe a more pragmatic way?

HILLMAN: It very well could be. It very well could be. And I think a lot of what’s happening in the WTO is happening in plurilaterals. I mean, I think that is the way everybody—I mean, all of these joint strategic initiatives that are happening at the WTO right now are all plurilateral agreements. So no reason why not. And I think there are a number of countries that would see a real interest in—and it wouldn’t just be the United States, and the European Union, and Japan. I do think—I mean, like I said, India’s already, you know, doubling down on the subsidies that it’s providing in the semiconductor space, and already looking at a lot more subsidies than many in India think they can afford.

So it is a not small number of countries that are very interested in this—in this discussion. But, yeah, plurilateral is absolutely—I think that would have to be the way it would go.

DONNAN: You said it’s early days. And one of the things in the report that jumped out at me was when you talked about the Uruguay round and its role in negotiating rules there, that that was a response to alarm at a wave of subsidies in the 1960s and ’70s. You started the negotiations in the mid-1980s. You ended up—you ended those negotiations in the mid-1990s. So it may be really early days right now—(laughter)—in terms of getting something done there.

Doug Palmer, you’ve been waiting patiently and sagely in the corner there.

Q: Oh, well, thanks.

Well, I did have a question about the timing. I didn’t—once you said that they said to get this done in a year, I kept looking through my report trying to find that line. But I didn’t remember it saying that these negotiations should start immediately. And I was thinking, well, immediately, maybe by the ministerial they would get started, you know, possibly. But I guess my question really has to do more with, like, the $805 billion worth of subsidies and the idea of transparency. I mean, are—is the U.S. overdue in reporting its new subsidies to the to the WTO? Where would I go to find out how that $805 billion is divvied up? I mean, I’ve asked the WTO one time to, like, look at a subsidy notification. And I couldn’t—I mean, I couldn’t—it meant nothing to me whatsoever.

I mean, one thing that I would—that I admire—admire may be the wrong word—but the one thing about the agricultural subsidies is that they were pretty clearly defined. I mean, you could find out how much the EU subsidized for soybeans, or the U.S. for soybeans, et cetera. And you could find out how—when they were subsidizing wheat exports, you could find those numbers. But I don’t know where to go, you know, post-IRA and the CHIPS and Science bill, to find out, like, what exactly, you know, are the level of subsidies that have been allocated, you know, how much has been paid out, et cetera. I know these programs are still getting up and running, but if you have any guidance on that I’d be interested.

MANAK: Yeah, great question. Something I’ve been talking to the WTO about for years and years is improving the way that we can view the notifications. One of the challenges, and we point out in the report, is the fact that governments notify what they think they should notify, right? And they—and when you look at the actual survey, they have, like, a document they have to fill out that says, you know, all these little things that they need to report. And a lot of stuff is not really clear what they’re supposed to put in each of those boxes. A lot of stuff goes underreported. Sometimes there’s just lots of text and no clear place to put a number or other figures. And then the secretariat has to receive all of this stuff. And what do they do with it? You know, I mean, in the past it would just be sitting in a, you know, filing cabinet, and they’d, you know, have to take out the paper copies and take a look and compare the notes at the committee meetings.

Now, they have digitized a lot of this, but they digitize the forms and sometimes not the individual data points in there. So it’s really difficult when you’re trying to research this to figure out just how much is allocated per each subsidy. So that can be challenging. The United States is generally very, very good about notifying across the board, across all the WTO committees, they do a great job. Not every other member does this. The United States has been pushing for many, many years to improve notifications, I think one part of it has to be to completely digitize them, and to ensure that where there are gaps the secretariat is enabled to collect that data. This is one of the proposals we put forward to say, look, we have this secretariat that knows the issues really well. They should be able to solicit that information and put it together so it’s accessible to everybody. Not just WTO members, but the public as well.

Because we need to be able to understand what’s going on in this space in order to have recommendations and to think through the problem itself. So I think there’s a lot of work that can be done at the technical level, just improving accessibility. And that can be done without some big agreement. Like, and we’ve seen this happen at the TBT Committee, and the SPS Committee over the years. They’ve had these technical improvements, and it made it so easy to log in. You can actually—there’s a product that you export. Type it in, and you can get a notification when some other country notifies that they have a rule now on that product. So this is something that we should be doing. If you’re subsidizing something, you should be able to get a ping. Like, oh, country X is subsidizing that. That’s what I make, I should be paying attention to this. So that private companies can also get involved in understanding and monitoring what’s going on. So I think there’s a lot of space here for creativity. And I agree with you that the data really needs to be improved.

HILLMAN: And my sense is there is a lot of receptivity at the WTO to moving in this direction. I think that’s part of the reason why, like I said, there’s this new subsidies database that was created with the OECD and the IMF. Because I think everybody is basically in the same place you are, that we have to figure out a way to make this usable. And to make it usable, it’s probably going to have to be, like, by product, OK? Semiconductors. Let’s all be able to figure out exactly what everybody is doing on X kind of chip, Y kind of chip, Z kind of chip. You know, so that you can look at that across that. So I actually think there is a lot of work being done right now at the WTO to improve this. And that’s part of what this report is trying to say. It’s really important that we do it, and that there’s a lot of reason why we should be getting it better than where it is right now.

That takes us right up to 4:30. And my job here is to get us out of here on time. I’m going to take one little extra minute here and say any parting thoughts, Jennifer or Inu?

HILLMAN: Oh, any parting thoughts? Well, like I said, I guess my parting thought is, first of all, thank you all for coming. And thank you for reading and looking at this. We do think this is an issue that is going to keep coming. So we hope that these kind of ideas that we all need to think about this is an issue of the moment. And we hoped we’ve put forward some ideas, but really we’re hoping to get lots more ideas to try to continue this conversation. We are both actually off next week to Geneva to the WTO public forum. And among the conversations that we want to have are exactly with the people at the WTO that are doing these kinds of notifications to say, you know, these are among the things that you need to really think about, about how to make these notifications and databases more useful to everybody in the world. So I’m going to cross my fingers and be optimistic that, you know, there is some momentum behind doing something.

MANAK: Yeah, and I would just add, you know, we’re looking at the past. The growth of subsidies triggered new disciplines. And thinking about what we should be doing to ensure that what we are investing in is equitable and ensure that it falls within certain rules. And I think we have an opportunity, now at this moment, to also think really strongly about what it is that we’re trying to achieve here and how we can work with our trading partners to do it together. Because at the end of the day, if we want to make an impact on climate change, on global health, we can’t do it alone. And I think this is a place we need to start.

DONNAN: Well, it’s 4:32, so I’ve failed. But thank you so much for joining today’s meeting, both here in the room and on Zoom. Just a reminder that a recording of today’s session is—and a transcript—will be available on the CFR website. Thank you for joining us. (Applause.)

(END)