Industrial Policy and International Competition: Trade and Investment Perspectives

Why the report matters

Subsidies and state-owned enterprises (SOEs), have been used for decades by governments to support economic growth. Yet the disruptions of recent years have prompted even those that largely supported laissez-faire economics to turn to industrial policy. Supply chain disruptions caused countries to reconsider where supplies are located and how to make them more resilient.. Increasing US-China contention has led to greater focus globally on China’s use of subsidies, and in particular, which forms of subsidies affect fair competition.

The paper provides a useful summary of key rules and concerns related to the most commonly adopted industrial policy measures, along with a summary of issues to be addressed when regulating these policies.

What’s in the report

The report contains two key sections:

• An analysis of the key instruments of industrial policy, the international rules governing their use, and the debates surrounding reform of these instruments, including subsidies, state ownership and control, government procurement, investment screening and controls, and trade remedies; and
• A summary of the key concerns that the WEF recommends considering as industrial policies, and international trade rules governing them, are adopted.

How to find the insights

This report contains key insights on industrial policies, organized according to policy areas of concern to those negotiating international trade rules. We distinguish the insights into the following categories:

3. WTO rules place restrictions on subsidies but generally allow them so long as they are not trade-distorting. (Box 1, p. 8)
4. A fundamental issue with regulating subsidies is defining “good” and “bad” subsidies. In times of crisis, governments may use subsidies to address legitimate public policy issues and need the space to do so. (p. 10)
5. Governments do not routinely report their subsidies, which makes it challenging to identify their economic impact. (p. 10)
6. The G7 countries account for the greatest share of subsidies granted. Large emerging markets tend to implement more trade-related investment and price-control measures. (p. 11)

3. WTO rules require SOEs to operate on a commercial basis and in a non-discriminatory manner, yet SOEs are often motivated by more than commercial concerns, including national strategic and geopolitical objectives; yet these rules may not adequately take into consideration different kinds of SOEs or the levels of control governments exert over them. (p. 13)
4. Key areas of contention are how to define an SOE, how to gauge the level of control a state has over the SOE, and how to judge between behavior and ownership of the entity. International rules have different definitions and requirements for state control. (p. 13)
5. The Covid pandemic has led to more state ownership and control of commercial enterprises, concurrent with government aid or bailouts to industries most affected by the pandemic’s economic disruptions. This triggers a debate over how and when governments should exit such investments. (p. 14)

3. The US and the EU have recently proposed or adopted new restrictions on government procurement to ensure that more procurement comes from domestic producers, or GPA or regional trade agreement members. (p. 15)

4. China’s bid to join the GPA raises additional questions about how to treat China’s SOEs. (p. 15-16)

5. Addressing transparency in procurement could help expand government procurement rules to all WTO members. Common transparency requirements across countries would facilitate participation by suppliers engaged in foreign procurement markets, without the need for market access commitments. (p. 16)

2. Increased foreign investment, particularly from state-owned entities, has led 31 countries to adopt or reform mechanisms to screen foreign investments. (p. 17)
3. Foreign investment screenings raise questions about what constitutes a “national security” interest, and whether these mechanisms are being used as protectionist measures.
4. The European Commission has also proposed an investment screening mechanism on the basis of foreign investments benefitting from state subsidization. (p. 17)

4. In anti-dumping cases, governments distinguish between non-market economies (NMEs) and market economies, which can lead to higher duties assessed on NMEs in anti-dumping actions, and debates over how best to make these assessments. (p. 19)
5. A future area of debate is the application of countervailing duties to third countries that have received transnational subsidies from other governments. (p. 19)

4. Investment screening and controls: Rule-makers should strive for more clarity about the definition of national security; how to treat investments by state entities; more clarity, certainty, and transparency about domestic review processes; and address the need and process for judicial review of screening decisions. (p. 21-22)
5. Trade remedies: Rule-makers should consider offering China market economy status in exchange for reforms; agree to limits on unilateral actions; and clarify rules countering transnational subsidies. (p. 22)
6. Transparency: Rule-makers should incentivize better notification of industrial policy measures; support tracking initiatives and develop technological solutions for better tracking; and increase cross-policy coordination. (p. 22)