# **5.1 Behind-the-border policies affecting supply**

This section introduces a number of domestic policies that primarily affect the supply side of the market - either by lowering domestic firms’ costs or by raising a foreign rival’s costs by potentially forcing them to undertake additional investment to meet a standard or regulation.

## **5.1.1 Domestic subsidies: aircraft, agriculture, semiconductors, and clean energy**

We begin with examples of domestic subsidies impacting production. In some sectors, the subsidies could be motivated on efficiency grounds as designed to confront externalities, or imperfect markets; in others, the subsidies may only be motivated as a second-best form of income redistribution for a politically-motivated government with an incomplete set of policy instruments.

Domestic subsidies abound in the civil aircraft industry and date back to the GATT period and even arguably pre-date the eventual rivalry between US-based Boeing and Europe-based Airbus. Subsidies, tax exemptions, and other forms of policy intervention in this market have triggered attempts to design international rules since at least the 1970s.<sup>95</sup> Consider a production subsidy that a European government grants to Airbus. Such a subsidy increases domestic production in Europe and, all else equal, leads to a decrease in European imports of aircraft from Boeing. In 2004, the US government filed a WTO dispute over European subsidy policies. Table 8 indicates that the EU filed a similar (and almost simultaneous) dispute challenging US subsidies to Boeing. Admittedly, the policies under dispute are much more complex than simple production subsidies; they include tax exemptions offered at the sub-federal level (e.g., by Washington state to Boeing); EU ‘launch-aid’ to help overcome the start-up costs of developing new models; the civil aircraft subsidy spillovers arising from US government military contracts to Boeing, given that military aircraft technology has ‘dual use’ (for civil aircraft) applications; and export-credit and guarantee arrangements offered to (consumer) airlines.

Civil aircraft subsidies can have additional strategic effects given the unique nature of the global duopoly; i.e., the two producers not only compete for sales in each others’ market, but for sales in third country markets.<sup>96</sup> Table 8 indicates a very similar set of disputes has played out between Canada and Brazil in a separate segment of the civil aircraft market; each country challenged the other for subsidizing smaller aircraft (regional jet) producers Embraer and Bombardier, respectively. Finally, and while admittedly more of a demand-side policy, the US recently challenged China with providing a subsidy (value-added tax exemption) for its domestically-produced aircraft.

Agriculture is another sector in which domestic subsidies frequently arise, albeit in different forms.<sup>97</sup> The EU’s Common Agricultural Policy has a long history of BTB policies sparking

> 95The GATT’s Tokyo Round of negotiations produced a plurilateral code in 1979 that applied to international trade in civil aircraft.

> 96The Boeing-Airbus storyline helped motivate the substantial strategic trade policy literature that arose in the 1980s; for a survey, see Brander (1995). Irwin and Pavcnik (2004) provide an empirical study of the Boeing-Airbus rivalry and policies of the 1990s.

> 97Agriculture is perhaps the one sector for which there exists more systematic provision of data for a number of BTB policies. For example, the OECD has routinely produced a cross-country database on ‘producer and consumer support estimates’ for agricultural support payments. Furthermore, Kym Anderson has worked with the World Bank

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