If you are an economist, you probably regard most if not all subsidies as pernicious distortions of the market designed to provide an unfair advantage to domestic producers. And, of course, you would be right. They do distort the market, although the intent is not always to provide an unfair advantage. Sometimes their purpose is simply defensive—to support domestic industries under attack from cheaper imports. Exporting is not really the objective; it’s about survival.

A growing problem is the use of subsidies as a tool of industrial policy. A country decides that it wants to be a global leader in industry X and then devotes government resources to achieving that goal. Subsidies might be direct cash payments to a favored company, but they might also be indirect through more favorable borrowing terms or laxer regulatory policies. They might not even be connected to a specific company, as when a government might decide to subsidize STEM education programs at its universities in order to build a cadre of well-educated graduates, some of whom would end up working in targeted sectors. (That would probably not be a countervailable subsidy under the current General Agreement on Tariffs and Trade’s [GATT] and World Trade Organization’s [WTO] rules.)

The poster child for these tactics is China, whose five-year plans have been clear in identifying sectors where the Chinese intend to create global champions. (Since most of them are sectors where the United States is currently leading, the challenge is clear.) China is also essentially a non-market economy, in that capital is primarily allocated by the government rather than freely in the marketplace. The government identifies favored industries and makes sure that financial institutions channel funds to them.

The result is inevitably overcapacity. Government-led investment always overshoots the mark and creates more capacity than the domestic economy can absorb. The result is that the surplus is exported and often dumped—sold below its actual production cost—threatening the viability of producers in other countries. That is what has happened in steel and aluminum and will eventually be happening in semiconductors and commercial aircraft, among others.

The announcement last weekend of an agreement between the United States and the European Union on steel and aluminum tariffs is yet another effort to deal with chronic overcapacity in those sectors. While the deal resolves the tariff dispute, the more important issue is the extent to which it commits the two parties to work together to press China to reduce its capacity and to favor lower-carbon steel. This is similar to what I recommended, and it is essential that it work so the same crisis will not simply repeat itself.

What makes this debate more interesting is the decision by the United States to play the same game in sectors it determines are essential to our security or necessary to tackle climate change. (This is not new, as the United States has a long history of mobilizing public resources in the pursuit of specific economic goals dating back to the Lincoln administration, although it has been out of favor until recently.) For example, we are about to put billions of dollars into semiconductor development and production to maintain our leadership, and we are crafting more incentives to switch to “green” technologies like electric vehicles.

This raises some awkward questions: are subsidies “good” if we provide them but “bad” if someone else does, and is a subsidy justifiable if it is in pursuit of a noble goal like mitigating climate change?

When I served on the U.S.-China Economic and Security Review Commission, we periodically held hearings on Chinese economic tactics where witnesses presented a litany of economically distorting Chinese practices that were harming us. When asked what we should do about it, however, the usual answer was that we should do what they were doing—a response that makes dead economists roll over in their graves.

As for noble goals, they appear to be in the eye of the beholder. Environmentalists say fossil fuel subsidies are bad. Politicians from oil and coal regions prefer to talk about the jobs that will be lost if the subsidies are removed.

We will be debating these questions for a long time. My answer to the first one is that the government can play an important role in the economy but does it best by supporting innovation and basic research rather than picking winning and losing companies. My answer to the second one is that an existential crisis may require extraordinary steps to deal with it, including more “good” subsidies and getting rid of “bad” ones.

Current trade rules only partially reflect these contemporary realities. By prohibiting subsidies linked to exports and by requiring determination of injury as a predicate for imposing countervailing duties in other cases, the rules provide useful guidelines for governments on how to construct their intervention. However, distinguishing between “good” and “bad” subsidies in manufacturing may be difficult (though we have attempted it in agriculture). It would be worth trying to settle that multilaterally, if only with respect to climate (and perhaps public health), but failing that, we will have no choice but to rely on the injury test as the means of distinguishing between what is acceptable and what is not.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

To read the full commentary from the Center for Strategic and International Studies, please click here.

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Change is happening as West African countries work together to ‘pool’ their power systems for better use and sharing of cheaper, greener energy resources available right in the neighborhood. The region has significant natural energy resources, namely, hydropower, gas, and wind mostly along the coast and solar power – especially in the Sahel region. The West African Power Pool (WAPP), established in 1999, expects to interconnect the 14 mainland countries of the Economic Community of West African States (ECOWAS) by the middle of the decade and bring to fruition a self-reliant regional power market that delivers abundant affordable electricity to all.

Across the region, the economic benefits of the regional power market are evaluated at up to US$665 million per year, with the average cost of electricity generation expected to fall by between a quarter and a third. Over the past 10 years, the World Bank has financed close to US$2.3 billion of investments in transmission infrastructure, and institutional capacity in support of the WAPP.  

But hardware and institutions alone do not make a market. For actual trade to happen, neighbors must have confidence in each other and in the flow of commodities and payments. Despite progress, market confidence remains shaky as some countries balk at the lumpy capital investments and long lead times needed to develop new WAPP-dependent infrastructure. Others suffer from financially distressed national utilities whose creditworthiness and ability to trade may be called into question. These and other factors have caused some would-be importer countries to continue to rely on their own expensive small-scale electricity generation instead of shifting their sights and investment priorities toward least-cost options from neighboring exporter countries.     

The World Bank and other partners are helping countries overcome the financial barriers but changing mindsets and instilling trust in the market have required a new focus on regional cooperation in domestic policies.

An important step forward was the adoption of the ECOWAS Directive on the Securitization of Cross-Border Power Trade in December 2018. This regional reform program aims to increase confidence in the enforcement of commercial agreements, to encourage least-cost investment decisions that promote regional options and competition, and to promote transparency on the creditworthiness of national power utilities and on key investment decisions that may impact demand and supply across the market. It calls for national policies and reforms that, if implemented collectively across the region, will lead to sustained trade and thus investment decisions that lower costs.  

Funding from the World Bank’s Energy Sector Management Assistance Program (ESMAP) supported the directive’s preparation, and the Bank is now helping to operationalize it through the $300 million West Africa Regional Energy Trade Development Policy Financing (DPF) in Burkina Faso, Côte d’Ivoire, Guinea, Liberia, Mali, and Sierra Leone. Like other DPFs issued by the Bank, this one provides governments with fast general budget support in exchange for a pre-agreed program of institutional and policy reforms referred to as “prior actions.” Unlike other DPFs, this one marks the Bank’s first multi-country DPF operation using the Regional IDA window –[IDA is the International Development Association, the branch of the World Bank Group that supports poor countries]– and a joint matrix of policy and institutional actions. Not surprisingly, there has been a learning curve. Three important lessons have emerged so far:

1. Start with joint agreements among high-level decision makers. Early in the process (and pre-pandemic), we were able to get all the Ministers of Finance and Ministers of Energy from all six countries in one room to mutually agree on the prior actions needed to build trust in trade. This has meant that sector ministries have found it hard to back out of difficult, but necessary, prior actions required of them.
2. Design prior actions in a manner that is resilient to events. The structural measures put in place to regularize payments from Mali to Côte d’Ivoire were simple transparent mechanisms designed to limit opportunities for interference, and were unaffected by the August 2020 coup d’état in Mali, even while the West Africa Economic and Monetary Union (WAEMU) closed normal flow of funds with Mali.
3. Remain flexible to keep on track. The COVID-19 pandemic and continuing political instabilities in Mali delayed the DPF’s effectiveness, but we did not let these forces blow us off course. We continued to work with countries bilaterally (and virtually), and the DPF was able to launch in February 2021 with all countries fully on board.

We are encouraged by this initial progress, but deep complexities remain in knitting together the region’s power systems. Most recently, unforeseen supply shortages curtailed exports from Côte d’Ivoire to Mali and Burkina Faso. Several interconnectors under construction will eventually alleviate such shortages, as countries will be able to import from different sources in the region. Regulatory reforms backed by the DPF will further increase trade connections and confidence. Transformation at this scale takes time, but as it happens, the West Africa region will be more self-reliant, greener, and more able to cope with shocks. Together, we remain committed to achieving affordable and reliable electricity for all.   

Mustafa Zakir Hussain advises senior levels of government on policies to advance major infrastructure service delivery while controlling fiscal deficits and advancing national and global de-carbonization objectives. During 2018-21, he led dialogue in a number of countries in West Africa to reduce the fiscal burden of the energy sectors – including leading the Bank’s landmark 6-country Regional Energy Trade Development Policy Financing operation to advance affordability, resilience and de-carbonization in the region’s energy use.

His over 15-year career at the Bank has also covered Eastern and Southern Africa, South Asia, East Asia Pacific, the Balkans and North Africa. He has worked on many aspects of infrastructure service delivery – including economic regulation, output-based financing, project finance and guarantees – and polices to increase competition and improve governance around key investment decisions. A major sector focus has been on energy transition. Beyond infrastructure, he has led national multi-sector budget support operations and worked on the Bank’s operational policies and corporate agenda.

To read the full commentary from World Bank Blogs, please click here. 

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Two years ago, US President Donald J. Trump welcomed then President of the European Commission Jean-Claude Juncker to the White House to face off escalating trade tensions between Washington and Brussels, and ultimately to call a truce. It was an interesting sell for staffers on both sides of the Atlantic. US officials argued that ultimately the best thing to do was get the two in a room together to hash it out and give negotiators a fresh mandate after the Transatlantic Trade and Investment Partnership (TTIP) had fizzled and the US president threatened tariffs on automobiles—a cleverly identified Achilles heel for European exporters. For those of us in the Rose Garden that day, watching with disbelief as the two leaders delivered a hastily assembled joint statement that set us on the road to new talks, there was a giddy sense of relief but also a long sigh of recognition—our work would never be as easy as getting Trump and Juncker to kiss.

In his recent address at Chatham House, US Trade Representative Robert Lighthizer criticized the EU for negotiating seventy-seven individual trade agreements globally, promulgating European and not internationally arbitrated standards. Whether you believe the EU is justified in doing this is a matter of opinion, but what was more striking in this comment was not the criticism of Brussels, but what that number revealed about the transatlantic dilemma. Europe can take home ancillary prizes but the golden goose—an agreement with the United States—remains out of reach.

TTIP grew too big for its britches because of the sheer scope of the negotiating mandate, as experts and politicos set aside the prospect of a narrower agreement in the glow of the moment. But the rhetoric went even further. The United States and the European Union are a community of values—transparency, democracy, open markets—” so there is no reason why we can’t reach an agreement,” officials repeated, and “this should be the easiest thing.” It’s time to turn this argument on its head and manage expectations. Moving forward, let’s acknowledge that this is one of the hardest and most nuanced negotiations out there.

The United States and the EU are nearly equal-sized markets and are competitors. In many sectors they are near perfect competitors—witness the Airbus-Boeing standoff playing out in real-time—meaning there are fewer comparative advantages available to make concessions worthwhile. To take an easy example, let’s wager that both the United States and the EU want to import cheap textiles from Vietnam, and not from each other. Previous negotiations had gotten most tariff lines to zero, but the going gets tough on standards and regulation. Washington and Brussels each present two sophisticated and advanced regulatory frameworks, with equal claim to fairness and transparency, and an equally long list of the other’s transgressions. Geopolitics aside, it’s hard to see, by the analogy of game theory or just a chessboard, why either would give way.

But where can we show some leg? Tax and state aid. Let’s try and give an optimistic case for both.

Finance ministries have a way of getting along even while fighting. Like lawyers, economists like to exchange friendly fire over principle. The Trump administration’s sweeping tax reform caused many in Europe to bristle, not over politics but out of jealousy that the United States could push corporate rates through a glass floor. The OECD negotiations on digital taxation—derailed just as much by Congress as the coronavirus—will continue despite USTR’s bullseye on French wine. The European Court of Justice’s rejection of the Commission’s case against Apple last week is a lob into America’s court. Brussels had wrongly presumed that a proxy battle with a US tech company could lay a stake in EU tax harmonization because taking on Ireland would never survive a veto by the same. There is also reason for optimism that individual EU member states introducing autonomous regimes at the promise of the quick windfall will see their efforts backfire, especially as tech holds up a greater percentage of the corona-economy. The companies themselves have stopped trying to ax the concept and are now, reasonably, lobbying for clarity.

One of the greatest parries on the regulatory front surrounds state aid and public procurement, an unforgivable irony for two trade blocs waving the free trade flag. The United States has cleverly funneled sponsorship for technology innovation and heavy industry through defense budgets, and the Buy America Act, according to Brussels, is not even thinly veiled protectionism. Meanwhile, Washington maintains a longstanding bugaboo over Europe’s direct subsidies to key industries such as agriculture and manufacturing. In this area, both are equal sinners with constituencies that won’t take changes lightly. But things are moving. First, the coronavirus has shifted conversations on both sides of the Atlantic on what it means to be competitive to include structural changes within our economies. If the United States needs to introduce comprehensive unemployment insurance and a viable option for universal public health care, the European Union is learning the hard way (at the recent EU Summit for example) that fiscal heterogeneity is a lasting and dangerous holdover from the eurozone crisis.

Second, a parallel agenda in negotiations with China will eventually force a convergence of interests and tactics. Phase 2 of the proposed negotiations (when and if it starts) between Washington and Beijing, which should cover subsidies for state-owned enterprises, sounds a lot like the draft EU-China Investment Agreement (when and if those negotiations resume). The Capital Markets Working Group, comprised of US agencies examining the behavior of Chinese corporates in US markets, sounds like the EU’s recently amended competition policy, which requires third party participants to adhere to the rules of the Single Market. “Why are we going after each other when we need to go after China together?” is a common lament of the past years. On a hot, sticky July day in Washington, this author is cautiously optimistic that this convergence will occur in time to avoid irreparable damage to the global economy.

In the meantime, Brussels and Washington will chip away at the cracks in the areas identified two years ago in the Rose Garden. BusinessEurope’s excellent publication from this month provides an exhaustive list of a positive US-EU trade agenda. US and EU leaders don’t need to kiss (please don’t!), but they do need to recognize that fair competition, alongside cooperation, is the idea that our institutions dare to uphold.

Julia Friedlander is the C. Boyden Gray senior fellow and deputy director of the Global Business and Economics Program at the Atlantic Council. She has served as senior policy advisor for Europe at the US Treasury and director for European Union, Southern Europe, and Economic Affairs at the National Security Council from 2017 to 2019.

To view the original blog post at Atlantic Council, please click here

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