For some time now, international relations have been under increasing pressure from opposite directions. On the one hand, tackling contemporary challenges, such as climate transition and global health security, requires strengthening multilateralism. On the other hand, competition between countries for the technological and productive leadership of the transformations necessary to respond to such challenges generates geopolitical tensions and weakening of multilateral relations.

Since the 2008-2009 crisis, international trade in goods and services and flows of foreign direct investment (FDI) have been growing at a slower pace than world GDP, breaking the previously observed trend. Even before the COVID-19 pandemic, with the escalation of the US-China trade conflict in 2019, it did not seem that this pattern would be quickly reversed. Then, terms such as “deglobalization,” “slowbalization,” “fragmentation” of the world economy or “decoupling,” among others, became frequent.

The weakening of the WTO dispute settlement system by the US, the maintenance of tariffs on Chinese products even with the change of the US government, the rupture of production chains during the pandemic, as well as the raising of barriers to FDI (Letters IEDI n. 1004 and 1036), not to mention the war in Ukraine, are additional aggravating factors.

In this context, industrial strategy actions are also provoking tensions, not only with Asian countries, notably China (Letter IEDI n. 1088 and n. 1154), but also between the US and the European Union. Europeans consider that the Inflation Reduction Act (IRA), the main part of the Biden government's strategy for sustainability, is at odds with WTO rules and, according to the French president, carries a risk of “fragmentation of the West.”

This Letter IEDI discusses the relationship between industrial policy and WTO rules, based on the study “The international legal framework for industrial policy: World Trade Organization disciplines and rules,” by Jan Wouters and Julia Marssola, which is part of the book “EU Industrial Policy in the Multipolar Economy,” released at the end of 2022. This issue, it is worth remembering, has already cost Brazil condemnation by the WTO in 2017. 

The study, while from a European perspective, examines WTO rules and standards that impact industrial policy actions. In particular, the authors assess measures to protect against imports, such as tariff and non-tariff barriers, and to promote exports, through the granting of subsidies. Local content requirements and subsidies to trade in services were also examined.

According to the authors, in practice, there are degrees of freedom to adopt industrial strategies without opposing WTO rules, although they recognize asymmetries in favor of developed countries in some areas. The following is a summary of the analysis.

•  With regard to tariff measures, countries that have kept consolidated tariffs higher than the tariffs they actually apply, in general emerging countries, preserve flexibility to use them as an instrument of industrial policy. 

•  Regarding non-tariff measures such as quantitative restrictions and licensing procedures, the authors state that there is room for maneuver due to the many exceptions and the broad content of the Agreement on Import Licensing Procedures. 

• Agreements on Technical Barrier to Trade (TBT) and on Sanitary and Phytosanitary Measures (SPS), which seek regulatory harmonization of technical and phytosanitary barriers to trade, also offer “safety valves” for governments to impose measures even in the absence of scientific evidence of risk to human, plant or animal health.

WTO rules also do not appear to significantly restrict members' policy space in terms of trade defense mechanisms. However, in the authors' assessment, trade defense rules at the WTO affect member countries asymmetrically.

Asymmetry is also observed in the Agreement on Subsidies and Countervailing Measures (SCM), which does not impact all WTO member countries in the same way, according to the authors. As developing countries lack the resources to subsidize their industries, in practice, the subsidies allowed by WTO rules correspond mainly to the political priorities of developed countries.

•  With regard to local content requirement policies, WTO rules and disciplines leave little room for policy action. Exceptions apply only to members who are not signatories to the Agreement on Government Procurement and to sectors that are not on members' commitment lists under the General Agreement on Trade in Services.

•  As far as subsidies for trade in services are concerned, the WTO disciplines are, in the authors' view, clearly inadequate. Although GATS has a mandate to advance this agenda, in 25 years no significant progress has been achieved. To defend themselves against competition-distorting subsidies, member countries have resorted to alternatives to the multilateral system, such as Preferential Trade Agreements.

The authors also state that there is no unique relationship between the type of policy instrument used and its effect on trade. Experiences between 2008 and 2020 suggest that a regulatory framework for industrial policy, rather than allowing or prohibiting specific instruments, should take into account their different potential effects. 

The study also examined the monitoring function of the WTO, particularly through the Specific Trade Concern (STC) mechanism of the TBT and SPS committees. This platform allows members to check and monitor each other's policy measures, but also subject their own to peer review. However, in the absence of a practical application of this mechanism, the authors consider that it is difficult to argue that it significantly restricts the political space of members for industrial policy. 

On the other hand, the decisions of the Dispute Settlement Body (DSB), which is responsible for examining trade disputes referred to the WTO, can also expand or reduce the scope of member countries for industrial policy. This is achieved by the mandatory inter partes decision of the DSB and also by the jurisprudence created through its decisions. 

However, even when DSB decisions reduce countries' policy space, they may find alternative ways to implement their measures. This is the case of the recent cost adjustment methodology adopted by the EU, which takes into account the social and environmental standards observed by European industry. 

Wouters and Marssola acknowledge that there is no consensus among analysts on the impact of WTO rules on governments' ability to promote economic development through industrial policy. There are those who identify a restrictive impact and there are those who show that there is room for these national initiatives.

In their conclusions, the authors acknowledge asymmetries, but seem to belong to this second group of analysts. They point out that WTO rules do not exist to curtail the autonomy of its members in formulating and adopting policies, establishing a framework to remedy trade conflicts. WTO disciplines and rules provide, in the authors' interpretation, a more “effective” policy space for negotiation, with greater clarity for trade and investment policy decisions.

The full text is available in Portuguese.