Are Subsidies Trade-distortionary?

The adverse report of the World Trade Organization (WTO) panel on India’s sugar and sugar cane subsidy—in response to the complaints by Brazil, Guatemala, and Australia—observed that for five consecutive sugar seasons from 2014–15 to 2018–19, India provided non-exempt product-specific domestic subsidies to sugar cane growers beyond the permitted level of 10% of the total value of production (the de minimis). They also raised the issue of India’s alleged export subsidies, those under the production assistance and buffer stock schemes, and the marketing and transportation scheme. The WTO asked India to “withdraw its prohibited subsidies under the Production Assistance, the Buffer Stock, and the Marketing and Transportation Schemes within 120 days from the adoption of (the) report” against which India will appeal.

Brazil alleged that the export subsidies on sugar have caused suppression in its global price by 25% approximately and hence a loss of trade for them. The Trade Policy Review by the WTO, in early 2021, also brought India under scrutiny, with many countries complaining that India has not declared its agri-export subsidies for more than eight years. Specifically, the complaint made was along three lines that India provides: (i) domestic agricultural support violating the Agreement on Agriculture (AoA), (ii) export subsidies in excess of the budgetary outlays hence the AoA violation, and (iii) export subsidies support contingent upon export performance and hence violating the Agreement on Subsidies and Countervailing Measures (SCM), particularly the “specificity” of subsidy and Article XVI (subsidies related to agricultural primary products) of the General Agreement on Tariffs and Trade.