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PRESS/447 
24 July 2006 
 
(06-3530) 
WORLD TRADE REPORT 
WTO WORLD TRADE REPORT FOCUSES ON SUBSIDIES 
Government subsidies can be useful instruments in correcting market failures and working towards social objectives but can also distort trade and provoke strong responses from trading partners, 
according to the WTO’s 2006 World Trade Report which was launched today.  
“WTO economists have carefully scrutinized the use and the impact of government support in a 
variety of sectors. While some subsidies can benefit society and can offset the negative 
externalities of economic activity, other types of government support are clearly more 
controversial and can be damaging. One significant part of our Doha round negotiations involves reducing subsidies which distort trade while encouraging governments to use other forms of 
support which can facilitate development and environmental protection. Shifting support in this 
way is politically difficult and requires determination and courage, but the evidence is clear that such reforms can level the playing field and provid e real rewards across the board,” said Director-
General Pascal Lamy. 
The incidence and the impact of subsidies remain seriously under-researched. Many governments 
maintain extensive subsidy programmes at the national and sub-national levels, and invoke a 
multiplicity of objectives to justify the progra mmes. Because subsidies can be trade distorting, 
WTO Member governments must notify the organiza tion of any such support. Yet few governments 
fully meet their notification obligations under the WTO, contributing to a serious lack of 
information and transparency on the use and effe ct of subsidies. The absence of systematic 
information is aggravated by the lack of commo n definitions of subsidy practices. The Report 
begins with a review of attempts to define subsidie s. It goes on to consider what economic theory 
tells us about the effects of subsidies, providing a guide for assessing the desirability of different 
kinds of subsidy programmes. The authors of th e Report examine the reasons governments give 
for using subsidies, and assess the incidence of subsidies in various industries and sectors. Finally, 
the Report undertakes an analysis of the WTO rule s on subsidies. Some of the salient findings of 
the Report are summarized below: PRESS/447 
Page 2 of 3 
 
 
• Governments extend subsidies to build infrastructure, help struggling industries or 
foster new ones, promote research and develop new knowledge, protect the environment, redistribute income and help poor consumers. 
 
• Economic theory tells us that some but not all of these objectives are most effectively 
addressed by subsidies. Theory also tells us  that subsidies can distort trade by giving 
an artificial competitive advantage to exporters or import-competing industries, and this can be a source of tension among trading partners.  
 
• Concern among trading partners about subsidies rises in direct proportion to the 
extent to which subsidy practices have direct trade effects within a narrow segment of 
economic activity. If the effects of subsidies are perceived as severe enough in the 
marketplace, they may trigger a reaction nullifying any advantage from the subsidy.  
 
• The Report estimates that 21 developed countries spent almost $250 billion on 
subsidies, while all countries spent over $30 0 billion. The arithmetic average ratio of 
subsidies to GDP is lower in developing than developed countries, but large variations 
of the ratio can be found in both country  groups. For a sample of 31 developing 
countries the average ratio of subsidies to GDP was 0.6 per cent, while the comparable figure for a sample of 22 developed countries was 1.4 per cent. 
 
• Agricultural subsidies in OECD countries — both domestic and export subsidies — 
show a downward trend. The available eviden ce suggests industrial subsidies are most 
pervasive in mining, coal, steel, forestry , fishing, shipbuilding and automotive 
industries. Comparable data on the incidence of subsidies in services sectors do not 
exist. Incomplete evidence suggests support measures are concentrated in the 
transport, tourism, banking, telecomm unications and audiovisual sectors.  
 
• Information is not solid enough to conclude that there is any systematic downward 
trend in subsidies to industry and services. In  some cases, however, evidence exists of 
a tendency to redirect subsidies towards “horizontal” objectives. This will generally 
make subsidies less distorting.   
 
• The GATT/WTO rules on subsidies have evolved considerably over the years, 
becoming more precise and detailed. Competing views exist as to whether the rules are tight enough to limit trade distorting su bsidies, or accommodating enough to allow 
governments to pursue their legitimate objectives, including development. 
 
 
The Report also examines 2005 trade developments and includes four essays; on textiles and 
clothing trade trends, flows of international receipts, trade trends of least-developed countries and the trade impact of natural disasters and terrorist acts. 
 
• The Report notes that while trade growth was lower in 2005 (6.5 percent) than the 
preceding year (9 per cent), it was still above the average for the last decade. A particular 
feature of the trade scene in 2005 was higher commodity prices, especially oil. While 
higher commodity prices have affected countries in very different ways, they nevertheless contributed to the largest share of developing countries in world trade for over five decades. (The trade data provided in this Report corresponds to that published on April 11, 
2006 in WTO Press/437). 
 
• While the elimination of textiles and clothing quotas at the beginning of 2005 had a limited 
impact on demand and market conditions in the major importing countries during the year, there were significant shifts in trade shares among exporting countries.  
 
Developed countries still dominate international receipts and payments of royalties and licence 
fees, although the share of a number of Asian developing countries is on the increase. These PRESS/447 
Page 3 of 3 
 
 
transactions may be seen as a somewhat imperfect indicator of high-technology investment and 
production. 
 
• The least-developed countries (LDCs) have increased their share in world trade, driven in 
large measure by commodity price increases. The trade performance of individual LDCs 
has been very mixed and some 35 per cent of total LDC trade is accounted for by only two 
countries, while thirteen LDCs account for less than one per cent of the total. 
 
• Natural disasters and acts of terrorism can take a terrible toll on human life, but the trade 
effects of such events tend to be small an d often short-lived. Impacts are frequently 
concentrated on particular industries, although the cost implications of additional security measures aimed at preventing terrorist acts are more broad-based. 
 
 
 
END