G/SCM/W/572  
 
13 April 2017 
(17-2025) Page: 1/2 
Committee on Subsidies and Countervailing Measures  
 Original: English  
 
ROLE OF SUBSIDIES IN  CREATING OVERCAPACIT Y AND OPTIONS FOR AD DRESSING 
THIS ISSUE IN THE AG REEMENT ON SUBSIDIES  AND COUNTERVAILING M EASURES  
 
The following communication , dated 12 April 2017 , is being circulated at the request of the 
Delegation s of Canada, the European Union, and the United States . 
 
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Document G/SCM/W/569 ( The contribution of the WTO to the G20 call for action to address 
certain measures contributing to overcapacity ), submitted by the European Union, Japan, 
Mexico and the Unit ed States, suggested that industrial overcapacity has become a major problem 
for the global economy as it distorts international trade and creates multiple negative externalities. 
The document also noted the recent statement by G20 leaders acknowledging th at collective 
action is needed to address the issue of overcapacity.  Against that backdrop, the document 
identified a set of three initial questions around which Members could launch a useful discussion in 
the S ubsidies  Committee .  
Given the complexity of the issue of subsidies and overcapacity, and the general nature of the 
three questions raised in the previous document, the purpose of this paper is to present some 
initial thoughts and ideas aimed at fostering a more detailed debate among Members on how t o 
tackle subsidies contributing to overcapacity. Addressing the issue of overcapacity should not be 
seen as the sole prerogative of one forum. Rather, different fora, including the Global Forum on 
Steel Excess Capacity facilitated by the OECD, can usefully  look at various aspects of the issue. 
The relevant and appropriate aspect for the Subsidies Committee is how certain types of subsidies 
contribute to overcapacity, and how best to address this aspect of the issue.  
The question of how and to what extent su bsidies act as a contributor to overcapacity is complex. 
The answer depends on the circumstances prevailing in the specific sector of the economy in which 
excess capacity exists. It is clear that market forces such as a decrease in demand may also play 
an important role in contributing to overcapacity, at least initially. However, the experience 
gathered in sectors currently experiencing high excess capacities, such as steel, aluminium, and 
solar panels, shows that governments often identify national strate gic industries and 
systematically support them to boost their production, grow GDP, and expand or preserve 
employment, uncoupling these privileged sectors from supply and demand signals, and from other 
market indicators. In particular, the relevance of mar ket forces diminishes when the state  – 
function ing as the leading economic actor  – owns, controls, or influences large numbers of 
important industrial enterprises and banking entities,  and generally retains a significant role in 
resource allocation. In the se circumstances, subsidization becomes a dominant contributor to 
excess capacity, which is further exacerbated as governments, both at the central and sub -central 
levels, often provide financial and other support throughout the entire lifetime of the pref erred 
industries.  
Indeed, i n pursuit of strategic industry objectives, governments can create overcapacity by 
providing concessional loans or equity to newly -established companies without due consideration 
of market conditions, such as projected future dem and and profitability.  Similarly, when  perceived  
strategically important companies begin to fail, governments may seek to maintain employment, 
production and capacity – especially in the absence of an exit mechanism . For example, 
governments may forgiv e debt, roll-over loans from state -owned or controlled financial 
institutions, convert debt -to-equity or provid e new equity, without restructuring the failing 
companies such that they can operate profitably and their capacity is in line with market demand.  G/SCM/W/572  
 
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  Governments also may provide, directly or through other public bodies implementing public policy 
objectives such as state -owned or state -controlled financial institutions, relatively cheap financing 
to beneficiaries in strategic sectors that otherwise would h ave been forced to seek more expensive 
market -based financing. Some of these beneficiaries are unprofitable and highly leveraged , and 
have low interest coverage  ratios and an uncertain outlook for the future . Relatively cheap 
financing may be provided not only at the initial stage to facilitate the development of nascent 
domestic industries, but also subsequently through their medium -term development, leading to 
the build -up of additional capacity over time. Last but not least, in order to boost capacity an d 
production in such preferred sectors of the economy, governments may also provide various key 
inputs, such as raw materials, water, electricity, gas or land, at below market prices.  
The use of subsidies to create and maintain excess capacity, without su fficient attention to the 
forces of supply and demand, often leads to increased exports in times of domestic economic 
downturns. While some of the subsidies employed may be prohibited under Article 3 of the 
Agreement on Subsidies and Countervailing Measure s (SCM Agreement), many are not. Given the 
highly distortive nature of these subsidies and the often -resulting spill -over of excess production 
onto export markets, the effects on trade of these subsidies often can be the same as – if not 
worse than – expor t subsidies. Therefore, these types of subsidies rightly should be considered for 
more stringent disciplines. This  conclusion is all the more true in the current situation of the world 
economy in which several sectors suffer from severe excess capacity. Ma rket forces normally 
would ensure that the least efficient producers in these sectors exit the market, thereby 
rebalancing demand and supply and eliminating overcapacity. Government financial and other 
support, however, keep ailing and non -economically via ble companies afloat and prevent market 
forces from achieving the appropriate outcome.  
In any event, if Members are to address effectively those subsidies that contribute to the excess 
capacity currently plaguing a number of industrial sectors, we need as  an indispensable first step 
to know more about them. While the SCM Agreement requires WTO Member s to notify subsidy 
programs , the continuously rising number of WTO Member s that have failed to make the required 
notification s is deeply worrying. An alarming  65% of the Members having failed to submit their 
legally required notification for the 2015 cycle . Equally worrying is the fact that, while notifications 
are required for subsidy programs  implemented at both the central and sub -central levels of 
governmen t, some Members do not notify sub-central subsidy program s. This is particularly 
troubling where a government's industrial policy objectives are  crafted at a central level and 
subsequently implemented by sub-central  governments , and where sub -central gover nments 
implement their own beggar -thy-neighbour policies in competition with other regions. The quality 
of actual notifications, including the attempts by some Members to notify subsidy programs that 
clearly fall outside the scope of the SCM  Agreement to create the appearance of transparency 
without subjecting actual industrial subsidies to global scrutiny , also deserve attention .  
The European Union, the United States, and Canada  call upon Members to heed the call of world 
leaders in the G20 for transparen cy and collective action. Members must strive to find ways to 
tackle more effectively harmful subsidies and other types of support from governments or 
government -sponsored institutions that contribute to severe overcapacity as we are experiencing 
in severa l sectors today.  
 
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