State interventions are finding new purchase in major economies. Geopolitics is smothering geoeconomics, sharpening rivalries in key areas of economic and trade policy. These trends are evident in the reconfiguration of global value chains through increased homeshoring and nearshoring, a throwback to tariff-driven protectionism following shifts in US trade policy, as well as a growing reliance on subsidies and subsidy-equivalent regulatory measures.

Subsidies are among the most complicated policy instruments in widespread use. Simply put, a subsidy is any government measure that changes market-determined outcomes in favor of, or against, producers or consumers. The complexity lies in the numerous ways governments can apply measures with subsidy-like effects. Besides fiscal transfers, subsidy near-equivalents can be dispensed through import tariffs, administered prices, expenditures on the part of governments as consumers at non-market prices, public equity shareholdings in privately owned companies, credit guarantees, and government procurement at preferential prices.

The World Trade Organization (WTO) definition of a subsidy as stipulated in the Agreement on Subsidies and Countervailing Measures is quite extensive but does not completely cover the wide spectrum of possible instruments commonly in use. It includes any kind of government financial contribution, whether through direct payments or foregone revenue, governmental supply or purchase of goods and services at concessional prices — except for general infrastructure — and any income or price support.

In terms of the Agreement, subsidies are actionable only if they are specific to a subset of beneficiaries and confer a benefit. Subsidies contingent on exports are prohibited. Actionable subsidies may be subject to countervailing duties or WTO dispute settlement procedures. But since the Appellate Body of the WTO dispute settlement system ceased to function in 2019, the latter remedy is nullified if a party to a dispute appeals findings to a non-existent authority, unless the party is signatory to the Multi-Party Interim Appeal Arbitration Arrangement.

From an economics perspective, subsidies can either be beneficial or harmful. A beneficial subsidy is one that corrects for a market failure or externality, improving economic outcomes. A harmful subsidy will generally be employed to address competitive pressures among countries, leading to market distortions that reduce overall economic well-being. Frequently, developing and emerging economies use various forms of subsidies to protect nascent industries, while more advanced economies subsidize in competition with one another at technological frontiers.

Regardless of the economic effects, subsidies are likely to change relative competitiveness among countries. In the absence of coordination and cooperation, subsidy-led resource allocation decisions can lead to a spiral of actions and counteractions that reduce economic benefits across the board.

To understand whether subsidy-related policies can spark renewed multilateral cooperation, it is necessary to address three prior considerations. First, what sectors are receiving the most subsidies? Secondly, what is the likelihood of constructive cooperation in such circumstances? Thirdly, to what degree are different countries relying on subsidies, and how might they be party to negotiated arrangements?

According to the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), fossil fuels and agriculture receive the largest subsidies globally. The IMF estimated that in 2022, fossil fuel subsidies amounted to some US$7 trillion, equal to 7.1% of global gross domestic product (GDP). This sum includes an estimate of unrequited environmental costs resulting from the use of fossil fuels — a significant negative externality. The nine largest subsidizers of fossil fuel in declining order are China, Russia, India, the European Union (EU), Japan, Saudi Arabia, Indonesia, Korea, and Iran, accounting for more than half of this amount.

In the case of agriculture, the OECD reports that of the 54 countries it monitors, subsidies and subsidy equivalents amounted to some US$842 billion annually throughout 2022 to 2024, of which US$624 billion was producer support, US$112 billion was general services support, and US$106 billion was transfers to consumers by taxpayers. Taking producer subsidies alone — the bulk of support — the largest agricultural subsidizers during that period were China (44%), the EU (16%), the United States (6%), and Japan (4%).

A third sector benefiting from high subsidy and subsidy-like support is industrial enterprises. Industry is a broad category, embracing a wide range of economic activities. It is unclear from available data how much subsidization is designed to protect ‘lame duck’ or uncompetitive firms and how much goes to research and development, and high-tech innovation. The World Bank finds that manufacturing, machinery and equipment, computers and electronics, and chemicals are among the most cosseted sectors via subsidy and subsidy-equivalent support. Elements of subsidization in these industries support modernization through innovation.

The digital economy is growing faster globally than other sectors, estimated to be worth about US$16 trillion, representing roughly 15% of world GDP. Subsidization in product areas including, for example, semiconductor integrated circuits and their fabrication facilities, batteries, electric vehicles, hydrogen, solar panels, and wind turbines are linked to research and development. Internalizing, rewarding, and ultimately sharing these innovation externalities in frontier high-tech industries could offer considerable benefits.