External Aspects of State Aids

Abstract

The issue of State aids (or subsidies) in an international perspective is a permanent source of conflicts because it is at the junction of three opposite views — the mercantilist attitude, the pure trade theory and the political economy approach. First, in a mercantilist perspective focusing on exports and domestic producers (to the detriment of imports and domestic consumers), that subsidies increase imports or reduce exports of the trading partners of the subsidising country is 'unfair' competition. Firms under foreign subsidy pressures feel that they cannot 'compete with foreign governments' and they lobby for 'countervailing' those foreign subsidies. Second, the pure trade theory has two stands. It underlines the fact that subsidised imports from trading partners are a benefit for the consumers of the importing country. And it shows that subsidies are among the least distorting instruments for solving a long list of problems. In particular, they are less distorting than tariffs or non-tariff barriers (NTBs). If public action favouring a particular activity is desired or if there is a need to compensate for economic distortions, then subsidised production funded by general taxation is likely to be the best instrument to be used. Lastly, the third view based on a political economy approach stresses the fact that State aids are easily captured by vested interests for their own agenda — hence becoming a source of waste of scarce economic resources. This approach explains the wide reluctance among economists to support subsidies and their perception that State aids should be constrained for domestic reasons — in sharp contrast with the first view which focuses on disciplines to be imposed on foreign subsidies and with the second view suggesting the use of subsidies for many purposes (.).