Industrial Policy and Subsidies: Assessment of Current Rules and Possible Reforms

Industrial subsidies have proliferated in recent years, and existing international rules respecting subsidies are increasingly viewed as inadequate. This paper surveys the rationale for subsidization, the international externalities that may result, and the possible mechanisms for policing those externalities. It then reviews existing legal rules and considers a range of proposals for reform. Among other things, it suggests that sector specific rules are preferable to generally applicable rules for sectors in which subsidization is especially problematic. We also favour the creation of new ‘safe harbor’ provisions insulating certain types of subsidies from challenge, and changes to remedial principles to make sanctions for problematic subsidies more effective. Finally, we address the vexing problem of designing rules for non-market economies (NME) and state-owned enterprises.