SUBSIDIES ARE RAINING IN THE DEVELOPED NATIONS !
CA. Pradip Kumar Ghosh
Now I mainly work as a SEBI registered Research Analyst (Reg. No. INH000016515.) In the past, in the corporate I worked at Arcelor Mittal (Europe), ICICI and KK Birla Group. Post corporate was an MBA faculty also.
The French Objection
Look at the following news on December 1, 2022.
“Emmanuel Macron took aim at a new US law that he says unfairly subsidizes North American electric-vehicle production, threatening to overshadow the French president’s trip to Washington.
The so-called Inflation Reduction Act and a separate law meant to incentivize semiconductor production ‘are very good for the US economy, but they weren’t properly coordinated with European economies,’ Macron said on Good Morning America on Thursday ahead of a meeting with President Joe Biden. ‘They create just the absence of a level playing field.’”
?Recent US Subsidies
How much subsidy is of concern?
“The?Bipartisan Infrastructure Law (BIL), the?CHIPS & Science Act, and Inflation Reduction Act (IRA) have partially overlapped priorities and together introduce USD 2 trillion in new federal spending over the next ten years. “
This is thus 2000/10 = 200 billion USD every year on an average, and most probably this will be front ended. So in the first year if USD 400 billion or more is spent on subsidy, no one should be surprised.
2 trillion dollars of subsidy under the very nose of European Union, China and World Trade Organization (WTO) ! Everyone knows that subsidy distorts world trades, gives unfair advantage to subsidy recipients as competitors and affects the unhindered global growth of industries. But when USA does it, every one should copy it rather than lodging formal complaints with WTO.
What is Germany doing ?
Germany has announced ?some plan to subsidize its industries which are suffering from high energy costs. By 10th October, 2022, it was known that :
Europe’s largest economy is going to dole out a mammoth 200 billion euro ( 1 USD = 0.95 Euro) ?energy-assistance plan for its households and businesses.
Other economies, including poorer members of the Eurozone, fear that Berlin’s desire to go it alone may jeopardize the single market in a time of crisis and fragment it further.
France has also objected to this German subsidy, without raising any issue at WTO. France's participation in some inter-governmental meeting between Germany and France has been withheld in protest.
Energy Subsidy at UK
On September 8, 2022 CNN had the following to say :
" The United Kingdom on Thursday confirmed plans to subsidize?energy bills?for households and businesses, joining other European governments in a costly race to protect their economies from freezing up this winter as Russia?cuts off supplies of gas.
The UK plan could cost as much as ￡150 billion ($172 billion), analysts said. Add that to recent similar announcements by Germany, Austria and other EU governments, and the region’s bill for drawing the sting of rising prices is already more than €500 billion ($500 billion).
Any one interested in WTO regulations on subsidies can visit the following link.
?The WTO rules
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AS per WTO there are basically two types of subsidies, to quote from the above link
" Prohibited subsidies:?subsidies that require recipients to meet certain export targets, or to use domestic goods instead of imported goods. They are prohibited because they are specifically designed to distort international trade, and are therefore likely to hurt other countries’ trade.
Actionable subsidies:?in this category the complaining country has to show that the subsidy has an adverse effect on its interests. Otherwise the subsidy is permitted."
If actionable, the complaining country can raise counter measure like raising the tariff barrier etc. But lodging of complaint against subsidy to WTO is a must.
Only day before yesterday, Bernd Lange, head of the European Parliament's Trade Committee, told the Berliner Morgenpost newspaper?:
“My assumption is that the negotiations between the EU and the US will not be able to help agree even on small changes in the implementation of the IRA. The basic structure of the IRA will remain in place. In this regard, I think it is necessary for the EU to quickly file a complaint with the WTO in the coming months,”
If this is done EU shall be able to take specific countermeasures against USA's subsidy bonanza to its industries.
But will France complain in WTO against Germany for the subsidy Bonanza that Germany is giving to its industries?
Baseless criticism against India and China
There was a time when there was severe criticism against subsidies given by India and China, as if, the subsidies are withholding the western companies' will to conquer 100% of the two biggest markets of the world.
Eventually both India and China joined WTO and changed many of their subsidies.
Particularly, China by joining WTO has won more markets in the world than Western companies have won markets in China. India has not suffered much also.
The western countries, particularly Europeans, ?have realized that with their dwindling population, they cannot fight against low cost domestic products of India and China in Chinese and Indian market, except in niche and high technology area. China is closing the technology gap very fast and India is following the same course, although slowly.
On PPP basis most of the western currencies have much less purchasing power than in nominal terms, which is also a handicap in taking over Indian and Chinese markets by Western companies.
WTO has proved to be more beneficial to China than USA and USA has lost interest in WTO since the Trump era. This does not mean they will stop using WTO against developing nations.
Energy subsidy in the state of Punjab in India.
Now let us see the case of an energy subsidy being given in India in the largest scale. In the state of Punjab, with a population of 30 million, the state government is giving free electricity to people having 300 units or less of monthly consumption of electricity. That translates into 80% of the billable consumers. No free electricity is, however, provided to industrial consumers. ?The subsidy has worked out to 24860 crore rupees so far ( 15845 crore rupees for 2022-23 alone). Yearly it translates to 1.95 billion dollars at current rate of exchange. If the entire population of 1400 millions of India are provided subsidy on this scale, the subsidy will work out to 90.80 billion USD in nominal term.
Luckily or unluckily all the states of India do not provide free electricity to low electricity consuming population as in Punjab, and even if they provide the big brothers in the West has nothing to complain because :
(a)???The West are providing subsidies to their industries in a much large scale,
(b)??This subsidy in question in Punjab is not addressed to industrial consumers,
(c)???The social responsibility of a developing country like India calls for it to support right to life as a fundamental right, enshrined in the constitution of India. And free electricity is an essential ingredient for that.
Eventually all countries have to design proper subsidies for its population and industry in national interest and the WTO clauses on Subsidy will or has already moved into the shadow.