The Appropriate Response to the Era of Large-Scale Subsidies

Not long ago, the head of Japan’s economy declared that Japan would discuss subsidy standards on electric vehicles, semiconductors and other critical fields with the United States and the European Union, with a view to constructing a synchronized subsidy policy. Although it is still too early to say whether an agreement can be reached in the future, trends in the development of international subsidy policies are worth paying attention to.

In recent years, and under the dramatic changes to the global economic and trade environment, the previously established and finely wrought supply chain has seemed unspeakably fragile. In responding to the supply chain disruption crisis and building supply chains that are in line with economic security, governments of various countries have introduced all sorts of subsidy measures targeting key industries, ensuring the autonomy and resilience of the supply chain. As a rule, the more critical and important the industry, the stronger the support from each country, and the world would thus enter an era of large-scale subsidies.

The U.S. is arguably the leader of this wave of subsidies: Under the CHIPS and Science Act and the Inflation Reduction Act, it has invested huge sums of money in subsidies, and all major countries have followed suit; according to statistics, subsidy measures have increased exponentially in recent years, and the world has entered a subsidy race.

The U.S. believes that the Chinese mainland is the source of global subsidy upheavals because China has been heavily subsidizing local enterprises through various regulations and administrative orders. Through abuses of administrative discretion at the central and local levels in particular, many gray subsidies have proved to be the devil in the detail, doing great damage to foreign companies.

The outcome of the subsidy race may be detrimental to all parties involved: Where countries that implement subsidies are concerned, apart from the fact that the sources of financing for those subsidies may not be sustainable, they may also not be able to extend those subsidies equitably to all domestic industries. Instead, they will usually pick the winners and subsidize the strong, bending resources further out of shape, thus worsening income distribution.

When implemented improperly, subsidies can also lead to unfair international competition; like tariffs, they are trade-distorting, in that they lower one’s own costs, while tariffs increase competitors’ costs.

The core principle of the World Trade Organization Agreement on Subsidies and Countervailing Measures is that the degree of acceptance is relatively high for subsidies that are at a further remove from the final production stage of a product — as seen in R&D subsidies — because they have less impact on trade and more space for implementation. On the other hand, subsidies directly on the production or sales end, such as production subsidies, export subsidies or import substitution subsidies, are usually not allowed.

However, subsidy measures in various countries are too numerous to mention, with a constant weeding out of old ones and introduction of new ones. Many gray-area subsidies are even more difficult to define, and the WTO norms of the last century have long since become obsolete. But negotiations on WTO subsidy-related issues have been slow; so far, a consensus has been reached only on fisheries subsidies, and basically no progress has been made on the most important industrial subsidies. Additionally, the WTO has no means of effectively restricting subsidies that violate the norms — another major reason for the proliferation of subsidies.

Japan’s joint efforts with the U.S. and the EU to formulate standards not only show that the WTO has been marginalized, but also reveal that Japan is ready to put the brakes on several endless subsidy races as well. In fact, these three major economies have proposed new subsidy standards in the past, but their proposals have never received any follow-up.

All in all, the establishment of modern, international norms on subsidies is still a long way off, and countries will continue to inject resources into key projects to strengthen the security and resilience of their supply chains. Of course, Taiwan has neither the capital nor the need to throw itself into the maelstrom of great powers competing on subsidies. The fundamental approach is how to consolidate Taiwan’s position in the international supply chain, in terms of human talent, technological development, infrastructure and international cooperation.

The author is director of the Regional Development Study Center at the Chung-Hua Institution for Economic Research, Taiwan.