Reforming International Trade and the WTO

Reforming International Trade and the WTO

A number of developed countries have seen their automobile sectors struggling and asking for bailouts. While banking bailouts could be understood as it affects the entire economy, bailouts for the auto-industry is more controversial; while they support many jobs, they do not support the whole economy in the way a bank does. Bailing out car-makers could result in other industries asking for similar bailouts.

So what have most governments done? Professor Ha-Joon Chang raises the concern that developed countries have spun the proposed assistance as a “green” issue, not because of a sudden care for the environment and climate change, but to by-pass WTO rules on subsidies, thus revealing a fundamental problem with the World Trade Organization system:

The [major car-producing countries outside Asia] are trying to present their bail-outs [to the car industry] as green initiatives to avoid having their subsidies declared “illegal” in the WTO.

Back in the summer of 2007, the US government proposed a new subsidies rule in the WTO, in which government lending to “uncreditworthy” companies and government investments in “unequityworthy” companies are all to be classified as illegal subsidies. This proposal was objected to by the developing countries, which use many of these measures, but was supported by the Europeans, with some minor qualifications.

Having spectacularly bailed out their banks recently by investing astronomical sums in “unequityworthy” companies, the Americans and Europeans would be completely undermining their position if they also lent huge sums of money to “uncreditworthy” carmakers. Therefore, they need to be able to say that the huge subsidies that they are giving to their car industries are “legal” subsidies aimed at greening.

What is going on in the automobile industry in Europe and the US exposes the inherent contradictions and inequities in the current international trading system, represented by the WTO. The system bans policy tools that developing countries use more, such as tariffs, direct subsidies and regulations on foreign investment, while being very generous with the tools that the rich countries need, such as the subsidies for agriculture, R&D and reduction of regional disparity. Now that they need to use direct subsidies in large quantity, the rich countries are just going ahead — only they are painting everything green.

By so blatantly going against the WTO rules, the rich countries have implicitly admitted that the present world trading system is not working. Rather than trying to cover this up by painting everything green, they should start a serious rethink on how to truly reform the system so that not just the rich countries but also the developing countries can use policies that are more suitable to their conditions.

— Ha-Joon Chang, Painting carmakers green; Developed nations are trying to get around WTO subsidy rules by portraying their industry bail-outs as green initiatives, The Guardian, February 3, 2009