The United States Takes a New Look at Industrial Subsidies

It has long been a key part of the trade policy of the United States that subsidies (i.e., financial contributions) from governments to private companies are anathema to free and fair trade. Almost every U.S. trade negotiation begins with an effort to eliminate or at least minimize such subsidies in the interest of promoting a market economy approach to trade. Further, under U.S. countervailing duty law—where the United States can impose duties on imports of subsidized products—subsidies of less than one percent of the value of sales can result in an offsetting duty on the subsidized import.

Yet, the United States may soon find itself in a very different position regarding such subsidies because of two bills passed by the Senate and endorsed by the Biden administration (but not yet passed by the House): The United States Innovation and Competition Act (USICA) and The Infrastructure Investment and Jobs Act (Infrastructure Bill). The USICA calls for major new government-financed investments in artificial intelligence, 5G telecommunications technology, semiconductors, biotech, and quantum computing. The infrastructure bill provides for large investments in bridges and pipelines, rail and buses, low-cost broadband, plug-in electric vehicle charging stations, and environmental remediation. Much of this funding, totaling well over $1 trillion dollars, will likely result directly or indirectly in government payments to private companies.

These programs are necessary, despite the major change that this represents in U.S. subsidization and trade policy. Additionally, these industrial investment programs are larger than anything comparable that the United States has done before and cover a wider range of sectors. The United States has been driven to these changes by vast subsidies in China and in other countries, which have non-market approaches to industrial development and provide government subsidies to a range of industries. These industries include many that are critical to technology leadership and national security, such as 5G, semiconductors, steel, high-performance computers, and maritime vessels. The United States cannot pretend that it lives in a world of free market economies and hope that its companies can compete against enormous foreign government coffers.

When faced with foreign subsidization that undercuts U.S. industries and technological leadership, the United States has three possible responses. The first approach is to file trade cases against companies receiving or governments granting subsidies. This has been by far the most common approach, but this presents a myriad of problems as a macroeconomic approach to international competition. First, trade law remedies do not reach all kinds of subsidies, such as subsidies in the service sector. Second, it is difficult to pursue anti-subsidy cases at the World Trade Organization (WTO) or other international forums; indeed, the WTO case between the United States and the European Union on Airbus and Boeing lasted 17 years. In other instances, U.S. industries have shied away from bringing multilateral anti-subsidy cases because of concerns about the ability of the international dispute settlement system to be administrated. Last, under a trade law administered by the U.S. government—the countervailing duty law—anti-subsidy duties can be circumvented by transshipment through third countries. Although there are methods to deal with such transshipment, they can take a long time to utilize.

The second approach is to try to reach agreements with foreign countries to limit subsidization. This has been tried repeatedly in areas such as steel subsidization, research and development subsidies, and subsidies for fisheries. The results of such negotiations have been slim and difficult to enforce.

This brings us to the third approach, currently being tried for the first time on a significant scale: major investment in critical U.S. industries to stand up against foreign subsidies. This approach should probably have been undertaken decades ago, or at least added to the U.S. anti-subsidy portfolio. There is no way that the United States can compete successfully against major Chinese subsidized industries without taking them on directly through U.S. investments. If the United States fails to do so, it would be equivalent to competing with its hands behind its back.

But this new approach does raise an issue for the United States, particularly for its trade negotiators and trade law enforcers. That is, how does the United States continue to argue against major subsidies in trade negotiations and trade cases if it is investing large amounts in its own industrial development? The simple answer is that the United States just does. The United States keeps up all its trade negotiation and trade enforcement activity, while vastly increasing the likelihood of overall success in the subsidy domain. The former is achieved by investing hundreds of billions of U.S. dollars into critical U.S. industries and infrastructure. If anyone raises complaints about this, the United States has several responses. The first is that international agreements such as the WTO have not shown themselves to be capable of dealing with large nonmarket economies and their subsidies. The United States needs to try to reform these agreements, but in the meantime, it needs to take action. The second answer is that many of the programs the United States is undertaking are probably not illegal or actionable subsidies under the internationally recognized definitions. The programs may be “generally available,” such as pipelines and bridges, or critical to our national defense, and as such exempt from WTO provisions. They also might not be causing “injury” in an international trade sense because the investments are meant to enhance the United States’ job base and national economy and are not targeted to export performance. Also, many of the investments are for pre-competitive university research, such as new programs at the National Science Foundation, which are not considered unfair trade practices.

Certainly, these “defenses” will sometimes be successful, though they don’t address the fundamental issue of how the United States continues to argue against the basic policy of subsidized industries while pursuing the policy itself on a large scale. For that issue, there’s a more obvious answer: If foreign countries are going to engage in major subsidization and build up key technology industries, the United States should do so too. It is the world leader in technology and intends to stay in that position.

The final benefit of this approach is that the United States may end up back where it started and where it ultimately wants to be. By engaging in government investments to meet the challenge of foreign subsidization, it will become clear to foreign competitors that they will not win the technology race through their subsidization. They will see that the United States intends to keep up with them as long as it has to. This could result in greater disciplines enacted on subsidies worldwide, in changes in the WTO to address nonmarket economy practices, and in a greater ability to reach international anti-subsidy agreements. The United States has the greatest research base, the greatest technology base, and the most creative economy in the world. If it can return to a world with more economic freedom in international competition, the United States will ultimately prevail.

Gilbert B. Kaplan is a non-resident senior adviser with the Project on Prosperity and Development at the Center for Strategic and International Studies in Washington, D.C. He is currently chairman of the advisory board and senior fellow with the Manufacturing Policy Initiative at the O’Neill School of Public and Environmental Affairs at Indiana University.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Gilbert Kaplan

Gilbert Kaplan

Senior Adviser (Non-resident), Project on Prosperity and Development