Measuring industrial subsidies January 2024
Key messages W hile subsidies can be helpful in addressing emergencies or market failures, they can also undermine fair competition and lead other countries to respond in kind, to the detriment of consumers, taxpayers, and governments with fewer resources, and, ultimately, undermining public support for an integrated global economy. T he OECD uses an innovative “firm-level up” approach to identify support that firms receive both in specific sectors (i.e. aluminium, semiconductors, and rolling stock); through particular instruments to numerous sectors (i.e. belowmarket borrowings across 13 large industrial sectors and below-market energy inputs in energy-intensive sectors); and from all levels of government. K ey findings include:
• Subsidies have a cumulative effect along the value chain that can be amplified by trade barriers in upstream production stages.
• Support varies by sector; heavy industries receive below-market borrowings, and high-tech sectors below-market equity and tax concessions.
• Multinational firms can receive subsidies from
multiple jurisdictions, while other firms receive significant support from their own governments, at home and in foreign markets.
• State enterprises can be both recipients and providers of support; firms with more than 25% government ownership receive relatively more support, and state enterprises can supply energy, inputs, or finance to other firms on below-market terms.
• All forms of support matter in understanding the scale and scope of industrial subsidies, but we need to know more about their impact.
• The design of subsidies is critical; transparency is key.
• Lack of transparency on state ownership can mask the extent of government subsidies.
Improving transparency on subsidies is an indispensable first step. Governments should make more information
available on the subsidies they give and their ownership of firms, strengthen their WTO notifications, and pursue more stringent disciplines on subsidies and state enterprises, including in preferential trade agreements. Firms could expand relevant information in their corporate disclosures. Intergovernmental organisations, such as the OECD, can help by identifying, measuring, and analysing industrial subsidies.
Why do subsidies matter? While government support has long been a core issue in trade policy, the climate transition, the COVID-19 pandemic, concerns about supply-chain resilience, and geopolitical tensions have brought new prominence and urgency to this agenda. While subsidies can be helpful in addressing emergencies or market failures, they can also distort trade and competition and waste scarce resources. Government support gives some firms a leg-up on their
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competitors that is not grounded in economic or market forces, but instead in the deep pockets of the government subsidising them. Much like doping in sports, this undermines fair competition and may prompt other countries to respond in kind, to the detriment of consumers, taxpayers, and governments that do not have sufficient fiscal space. Ultimately, this undermines public support for, and confidence in, an interconnected global economy.
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Measuring industrial subsidies What are subsidies? Government support can take many different forms, some more complex than others. Industrial subsidies generally involve a mixture of government grants, income tax concessions, inputs sold to companies at below-market prices (e.g. below-market energy inputs), and financing provided on below-market terms (‘below-market finance’). Below-market finance can take the form of below-market borrowings (e.g. low-interest loans by state financial institutions) or below-market equity (e.g. when governments provide equity infusions on non-market terms, giving a one-off benefit, or when government shareholders accept lower returns than private investors, providing ongoing support).
While not subsidies, other government policies may also contribute to supporting industrial producers. Restrictions to market access through, for example, local-content requirements, mandatory joint ventures, or licensing requirements, as well as forced technology transfers and discriminatory rules in the field of competition law, public procurement, and the broader regulatory environment may favour certain industrial producers to the detriment of others. While hard to quantify, the OECD has documented instances of these more indirect forms of government support.
What is the OECD doing? Assessing the scope and scale of government interventions in manufacturing remains notoriously difficult due to a persistent lack of reliable and comparable data from governments, including in their notifications to the WTO. The OECD has thus adopted a firm-level approach, collecting data on the support that firms actually receive, drawing on financial statements and other public sources for a representative sample of firms for each sector covered. Some instruments, such as government grants, are easy to identify as subsidies. However, other more complex forms of subsidies like tax concessions, below-market borrowings, or below-market equity involve assessment of a company’s reported data against an appropriate benchmark.
By working from the firm up, the OECD has also been able to capture support provided at the subnational level, by states, provinces, and municipalities. It has also captured support provided by or through state enterprises (e.g. state banks, state utilities, or government guidance funds), both of which can account for a significant share of total support. The resulting data ― providing granular quantitative information on subsidies received by individual firms on an annual basis ― offers an unprecedented view of the nature, scope and scale of industrial subsidies across the global economy.
Heavy industry and renewable-energy equipment tend to attract more grants and below-market borrowings
Figure 1: 2.5%
Government grants (% of revenue, weighted average)
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Below-market borrowings (% of revenue, weighted average)
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Note: Data are expressed relative to the sales revenue of the firms covered in the study over the period 2005-19. Source: OECD (2021), "Measuring distortions in international markets: Below-market finance", OECD Trade Policy Papers, No. 247, OECD Publishing, Paris, https://doi.org/10.1787/a1a5aa8a-en.
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Measuring industrial subsidies What did we find? Subsidies have a cumulative effect along the value chain: Trade restrictions — such as export bans which lower the cost of inputs for domestic firms — can combine with subsidies to provide additional support to downstream firms. Different industrial sectors attract different types of support, with below-market borrowings a feature in heavy industries and below-market equity and tax concessions more common in high tech sectors: [Figure 1] Capital-intensive heavy industries, such as steel, aluminium, and glass & ceramics, tend to rely on debt, thus receiving more below-market borrowings than other more technology-oriented sectors, such as semiconductors, where belowmarket equity is more prevalent. Tax concessions are relatively large in semiconductors and telecommunication network equipment, as well as in the rolling-stock and solar panels industry, largely in relation to R&D and investment incentives [Figure 2]. Firms may receive subsidies from multiple jurisdictions: Multinational enterprises are sometimes able to obtain significant support from the different foreign jurisdictions in which they operate, but not necessarily large amounts from their home jurisdictions. Other firms benefit from significant support within their home markets, or from their home governments when they operate in foreign markets. State enterprises can be both recipients and providers of government support: Across the 13 industrial sectors examined, firms with more than 25% of government ownership (directly or indirectly) tend to receive relatively more support in the form of grants and below-market borrowings [Figure 3]. This is particularly
Figure 2:
true for firms in which governments own between 25% and 50% of the shares. State enterprises can also be providers of industrial subsidies themselves when they supply energy or other inputs to other firms, finance them, or inject equity in a manner that is inconsistent with market prices or conditions. Lack of transparency in government ownership can mask the extent of government subsidies: When government investment in a firm is not transparent, what appears to be a transaction between two private sector entities can actually be a hidden means of providing government support. All forms of subsidies matter to understand the scale and scope of industrial subsidies: Different countries may favour different types of subsidies so that looking at only one type of government support could hide the true overall size and scope of industrial subsidies. We need to know more about the impact of industrial subsidies: Beyond the lack of data, tracking the impact of subsidies is challenging due to issues with tracking causality, including due to the complexity of measures and of impacts along supply chains. The OECD is currently working to shed more light on how subsidies affect international markets. What you do and how you do it matters; the design of subsidies is key: Subsidies are not always harmful and can be a useful policy tool to correct market failures, improve social welfare, and respond to emergencies or crises. However, subsidies need to be designed carefully and transparency is the essential first step.
Tax concessions are relatively larger in tech-oriented sectors and solar PV panels
1.6% 1.4%
Tax concessions (% of revenue, weighted average)
1.2% 1.0% 0.8% 0.6% 0.4% 0.2%
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Note: Data are expressed relative to the sales revenue of the firms covered in the study over the period 2005-19. Source: OECD, based on data collected for OECD (2021), "Measuring distortions in international markets: Below-market finance", OECD Trade Policy Papers, No. 247, OECD Publishing, Paris, https://doi.org/10.1787/a1a5aa8a-en.
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Measuring industrial subsidies Figure 3:
Firms in which governments hold more than 25% of the shares tend to receive relatively more support 0.2% 1.18%
Government grants (% of revenue, weighted average)
1.6%
Below-market borrowings (% of revenue, weighted average)
0.14% 0.12% 0.1% 0.08% 0.06% 0.04% 0.02% 0%
Government ownership <10%
Government ownership ≥10% & <25%
Government ownership ≥25% & <50%
Government ownership ≥50%
Note: Data are expressed relative to the sales revenue of the firms covered in the study over the period 2005-19. Source: OECD (2021), "Measuring distortions in international markets: Below-market finance", OECD Trade Policy Papers, No. 247, OECD Publishing, Paris, https://doi.org/10.1787/a1a5aa8a-en.
What can be done? Knowledge about the nature and scale of industrial subsidies, which enables analysis of the distortions they can create is fundamental to inform policy and multilateral trade negotiations to discipline their use, yet crucially lacking. Improving transparency is an indispensable first step and one where governmental, institutional, and private actors all have a role. • Governments have a key responsibility. At the domestic level, they should make more information available on the subsidies they give and their ownership of firms. They should oblige firms to provide more information on government support as part of financial disclosure requirements. At the international level, they should strengthen their subsidy notifications to the World Trade Organisation (WTO) and work to address differences of views
as to what amounts to a “subsidy” under the WTO that must be notified, as well as work to introduce more stringent disciplines on subsidies and state enterprises, including in preferential trade agreements. • Firms, together with accounting standard bodies, could expand the information they make available through corporate disclosures, irrespective of what governments may be able to achieve at the multilateral and domestic levels to improve subsidy transparency. • Intergovernmental organisations, such as the OECD, can help by working to identify, measure, and analyse industrial subsidies, as well as other forms of government interventions that distort the level-playing field.
Further Reading: • OECD (2023), “Government support in industrial sectors: A synthesis report”, OECD Trade Policy Papers, No. 270, OECD Publishing, Paris, https://doi.org/10.1787/1d28d299-en. • OECD (2023), “Measuring distortions in international markets: Below-market energy inputs”, OECD Trade Policy Papers, No. 268, OECD Publishing, Paris, https://doi.org/10.1787/b26140ff-en.
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