News

There's a monster in the room, quietly watching as governments around the globe take unprecedented action, pouring billions of dollars into their sinking economies to combat the economic crisis.

The monster is called “trade remedies” and its home is in the World Trade Organization. It sits in a corner of the room called the WTO Agreement on Subsidies and Countervailing Measures.

The creature comes to life whenever government aid programs are provided that help local industries in their export markets. That's because the WTO agreement comes down hard on subsidies – which it defines as any financial contribution involving direct or indirect financial transfers by a government to an industry or group of industries that confers a “benefit” on the recipient.

The WTO agreement exempts governmental programs that are generally available, such as fiscal measures that apply throughout the economy, tax write-offs and the like. It also exempts some narrowly focused regional assistance programs.

But wherever government assistance of almost any kind – including credit and bank guarantees – is bestowed on identified industries, the monster opens its wary eye. And it's not easy to keep this fellow quiet.

Subsidies, needless to say, are the centrepiece of stimulus packages here and around the world, the objective being to benefit local industries and kick-start economic recovery. The WTO agreement classifies these as legally “actionable” and allows other governments to invoke arbitration panels to challenge those measures by showing that they cause “adverse effects” on trade or “nullify and impair” that country's own export interests.

But there's more to the subsidies agreement than the right of governments to attack each other in the WTO. Under national laws, including our own, subsidy complaints can be filed with government agencies by private parties. Those complaints are then investigated. If the investigation concludes subsidized imports cause or threaten material injury to the domestic industry, countervailing duties are imposed.

In this global crisis, an array of countervailing duty scenarios is emerging. Think foreign cars whose companies have received massive subsidies in Europe and elsewhere. Steel exports of all sorts. Multiply by all the instances where governments provide direct bailouts, credit support or indirect financial help to specific industries and you get the picture.

In Canada's case, the issue we face – as do many other countries – is not just that foreign-made products may benefit from direct and indirect infusions of capital and government-backed credit and other guaranties. As an exporting country, there is a risk that Canada's own production could be targeted, particularly in our most proximate market to the south. Perversely, countervailing duty remedies can be invoked and applied even though the importing country itself has subsidized its own industries. Trade remedy laws are oblivious to that fact.

So while governments use their fiscal resources to inject massive economic stimuli, the monster is there, sitting in the corner. Something needs to be done to tame its powers.

One thing that governments must urgently do, ideally within the WTO, is to agree on a standstill on state-to-state trade challenges – or at the very least, agree on clear criteria that limit when these actions can be initiated. Otherwise, the WTO system is in danger of being clogged with endless trade disputes.

More challenging is to find some way to curb private complaints against foreign subsidy measures until the current crisis abates. This is much more difficult, since laws have been passed in virtually all WTO member countries that give rights to domestic industries to initiate action. Short of amending trade remedy laws, it may be impossible to stop complaints from being filed and investigations being launched.

The problem lies at the very root of the multilateral system, where domestic trade laws were implemented under the post-Second World War Bretton Woods agreements to combat unfair practices that distorted international trade and inhibited world economic development. The danger is that those same anti-subsidy remedies might be applied perversely to do the opposite in the current global downturn.

As governments wrestle with reactivating stagnant economies, they must keep a close eye on the monster in the corner. While tentative discussions of the problem have occurred in the WTO, an international agreement is urgently needed to prevent this creature from pouncing.

Lawrence Herman is international trade c ounsel at Cassels Brock & Blackwell