We are witnessing important setbacks in the open, international trade system that has driven prosperity around the world and lifted billions of people out of poverty in developing countries. Geopolitical tensions, on the heels of earlier trade wars—and accentuated by shocks such as the pandemic, disruptions in supply chains, and climate events—are heightening the risk of economic fragmentation.
These setbacks could become a source of unwarranted economic inefficiency and a potential drag for the global economy. In particular, in a renewed drive toward self-reliance and interest in industrial policies to promote “strategic” sectors, the world’s major economies are increasingly turning to subsidies. And while subsidized exports of industrial goods from China were often blamed for hurting domestic industries in the West, these practices are increasingly being replicated elsewhere.
Developing countries are most vulnerable to the trade-distorting effects of subsidies. They rely on trade to drive economic growth, reduce poverty, diversify their economies, and respond to climate change. To attract investment, they need the certainty provided by a credible and coherent system of global trade rules. They also need to be able to compete on fair terms, a capacity that trade-distortive subsidies and protectionist policies will hurt.
Most subsidies are not directly related to trade but could have important effects on trade. Many have legitimate economic and social goals, such as promoting research and development or the production of environmentally friendly goods and technologies. Yet, even when deployed in pursuit of legitimate goals, subsidies can distort trade, fueling tensions and provoking countermeasures. And because the international trading system is ill-equipped to discipline their use, governments increasingly are responding with countervailing tariffs or subsidies of their own.
Breaking this escalating cycle of subsidies and countermeasures calls for a multilateral solution. But to reach such a solution, trade negotiators will need far more information than is currently available on subsidies and their economic impact. A recent World Bank study, “Unfair Advantage: Distortive Subsidies and Their Effects on Global Trade,” takes a step toward filling this knowledge gap and lays a foundation for further research. It builds and analyzes a database that categorizes over 2,000 subsidy programs in major trading partners (accounting for over 70 percent of global trade).
The report highlights that the use of subsidies is not limited to a single country or region. At the same time, they tend to be concentrated in big economies with the potential to influence global markets. China, the EU, and the United States account for about 75 percent of the documented measures.