Subsidies: Good or Bad for Economic Recovery?

The World Trade Organization (WTO) warns that extensive subsidies can influence production and trade, potentially worsening climate change and affecting global value chains, the digital transformation and the response to economic and health emergencies. Mexico’s recently published anti-inflationary proposal uses subsidies as the primary tool to manage inflation and current market problems. 

“There are several important new issues and challenges. There are also sharp differences over subsidies today that contribute to global trade tensions and harm growth, which is having a material effect on living standards,” said Brad McDonald, Deputy Chief for Trade Policy, International Monetary Fund (IMF). While not all subsidies are harmful, some have the potential to distort trade or investment by eroding the value of existing tariff bindings or other market access commitments, reads the official WTO report. Some subsidies have the potential to distort global common goals or harm the global environment, according to the report.

Subsidies distort prices and resource allocation decisions, altering the patterns of production and consumption in the economy, according to the OECD. The Agreement on Subsidies and Countervailing Measures (SCM) requires WTO members to notify the organization about all subsidies “which operate directly or indirectly to increase exports of any product from or reduce imports of any product into the territory of the Member granting or maintaining the subsidies.” The association warns that there is low compliance with said obligations because some members believe trading partners will target them in potential disputes, while others disagree on what constitutes a subsidy. 

WTO urged governments to cooperate more on the subject. Mexico has turned to subsidies as the main tool to fight the current inflation affecting the country. The government first implemented several measures to keep energy prices low, which have worried some about a possible spike in prices. The new Anti-Inflationary Plan involves zero tariffs on the import of essential goods and supplies for six months. Mexican small producers and vendors have also warned that these actions are insufficient to generate a real impact on inflation and will end up as price controls, as reported by MBN.