1. THE NATURE OF SUBSIDIES

1.1 Issues

The poor state of many of the world’s marine capture fisheries has attracted increasing public attention in recent years. Not only is there the economic effect of diminished fish resources on the economies of regions in both the developed and lesser developed worlds, but the near commercial extinction of fish stocks has ecosystem effects. It also may have the even more serious effect of diminishing the availability of relatively inexpensive animal protein to those human populations that are least likely to be able to afford protein from alternative sources. The declaration that emanated from the Fourth Ministerial Meeting of the World Trade Organization (WTO) held recently in Doha focused specifically on fisheries as an area that needs to be considered during the next round of international negotiations on world trade.

While the concern is overfishing, the operational concern is the role of subsidies in stimulating overfishing. If overfishing is stimulated by the existence of subsidies, then the policy issue is to determine how those subsidies can be controlled or eliminated. One suggestion is that the enforcement powers of the WTO be brought to bear on the issue, thus, the mention of fisheries in the Doha statement. Subsidies play two additional roles: to the degree that they stimulate fishing, they may increase the national income of the nation. As long as the fishery is underdeveloped, i.e. as long as fishing is at a level less than that which can be safely sustained, then subsidies which encourage fishing may be useful. In addition, subsidies may interfere with international trade. Control of this aspect of subsidies lies in the realm of the WTO through the international Agreement on Subsidies and Countervailing Measures.

The issue of subsidies is a delicate and complex one. It is delicate in that subsidies are introduced by governments for reasons which they consider to be valid, such as the economic development role mentioned above. Over time, subsidies which once may have served a useful social purpose may have become entrenched and now serve primarily the interests of participants in the industry receiving the subsidies. Eliminating these subsidies, then, becomes a local political issue with, perhaps, international implications. No nation wants others intruding on its domestic policies. Fishery subsidies, and to a considerable degree subsidies in general, have become subject to just such intrusion.

The issue of subsidies is also complex in that there is no agreement even on what a subsidy is. There is no agreement on how subsidies can be measured. There is no agreement on how the effects of subsidies can be measured. In the policy realm, there is no agreement on when subsidies are useful and when they are harmful. Part of the reason for the lack of agreement is the complexity of the problem of evaluating the effects of subsidies on the economy, the environment, international and internal trade, and the sustainability of fish stocks. Part of the reason for lack of agreement on such basic issues as the definition of a subsidy is that since subsidies are now being targeted for elimination, it may be politically unwise for a polity to admit that a policy implies a subsidy.

This paper discusses a number of issues relating to subsidies:

• What is a subsidy?

• How are subsidies justified?

• What problems do subsidies create?

• What are the various types of subsidies?

• Why are subsidies introduced?

• What is the history of fishery subsidies?

• How do subsidies impinge on the history of fishery management?

• How are subsidies measured?

• How extensive are fisheries subsidies?

• How have discussions of fisheries subsidies entered international conferences?

• How are the effects of subsidies measured?

• Subsidies in 2003: What is the nature of the political debate?

What are subsidies?

Subsidies, loosely speaking, are government policies in aid of one or more industries, usually carrying a financial benefit to the industry.

At the most conventional level, subsidies are government financial transfers to an industry, through payments to workers or to firms. Probably nobody would deny that the government is subsidizing the industry if it is paying part of the wages of workers in the industry or it is granting firms in the industry funds to make capital purchases. This is the most narrow definition of a subsidy.

But what is the difference from the standpoint of the industry between a government transferring funds to it, on one hand, and waiving transfer payments, i.e. taxes, that the firm would normally make to the government, on the other? Assume that a firm starting a particular business is required to pay a business license tax. If the firm receives a government grant equal to the amount of the tax, there is no question that this payment, the grant, is a subsidy. Out of the subsidy, the firm must pay the tax. Alternatively, the government might not grant the payment, but may simply waive the license tax. Both actions (the granting of the subsidy and the waiver of the tax) have precisely the same effect on the firm in that the firm does not pay the tax with its own money. The waiver is as much a subsidy as is the direct grant. Therefore, funds need not pass directly from government to workers or firms for the government policy to constitute a subsidy.

To illustrate: a government policy of aiding the fishing industry by offering firms a grant of 50 percent of the purchase price of a fishing vessel on the face of it would constitute a subsidy to the fishing industry. Yet it is not so simple. Subsidies are only important for their effects. If the subsidy were accompanied by a rule that the vessel must be built in the home country, then the grant is possibly not a subsidy to the fishery at all but rather a subsidy to the shipbuilding industry if that industry were to raise its prices by the amount of the subsidy. There would then be no advantage to the fishery. Defining subsidies, except loosely, opens all kinds of controversies, many of which have been discussed in the recent literature.^[1]

The range of possible definitions is extensive, from the narrow "financial aid furnished by a state or a public corporation in furtherance of an undertaking or the upkeep of a thing"^[2] to the broad "government action (or inaction) that modifies (by increasing or decreasing) the potential profits earned by the firm in the short-, medium- or long-term."^[3] Between the one, with its focus on direct government expenditures and the other, with its focus on the effect of a government’s policies on a firm’s anticipated profits, lies an abyss, filled with alternative definitions that lie between the two extremes.

Intergovernmental agencies, such as FAO and the OECD, being organizations with diverse membership, each member country having its own perceptions of its interests, tend to take a liberal view of subsidies: subsidies are what each member nation considers them to be. One result of this orientation is that studies of subsidies performed under the aegis of these agencies, such as the Transition to Responsible Fisheries document of the OECD, discussed later in this paper, have inconsistencies among the definitions of subsidies used by different countries. Comparisons are therefore difficult.

The one exception is that the Agreement on Subsidies and Countervailing Measures of the World Trade Organization (WTO) offers a precise definition of subsidies which has legal standing. The reason for this precision is to avoid ambiguity in the evaluation of subsidies when used to justify countervailing duties and other disciplines against nations that may violate the Agreement. Subsidies in the Agreement are defined as direct or potentially direct transfers of funds from governments to firms or individuals (e.g. grants, loans, loan guarantees, equity infusions), government revenue foregone (e.g. tax waivers or deferrals), government provision of goods and services, other than infrastructure, at less than market prices, and government support of prices and incomes. To be a subsidy, the action must confer a benefit on the firm or individual, and it must be specific to an industry or group of industries.^[4]

As we shall see, this attempt, and probably any similar attempt, to unambiguously define what a subsidy is, leaves much room for debate when the definition is applied.

In the case of the WTO Agreement, the definition arises from two sources. For one, it is intended to seek out and stop government actions that impinge on international trade in such a way as to provide "unfair" advantages for industries under its jurisdiction. For the second, the Agreement is just that, an agreement, and its contents are what could be agreed. Thus, while the definition has distinct operational purpose, political realities played a role in determining its limits.

The WTO definition serves its operational purpose of setting a standard for maintaining "fair" international trade. For other purposes, individual countries may have different official definitions, and for various specific purposes, analysts may favour any of a variety of definitions.

Canada, for instance, defines a subsidy as including "any financial or other commercial benefit that has accrued or will accrue, directly or indirectly, to persons engaged in the production, manufacture, growth, processing, distribution, sale, export or import of goods, as a result of any scheme, programme, practice, or thing done, provided or implemented by the government of a country."^[5] Hart interprets this definition as encompassing infrastructure support (e.g. the United States/Canadian St. Lawrence Seaway), land grants, government expenditures on cultural affairs, and major government purchases (e.g. military, space programmes).

An even broader view is presented by Stanford, who argues that government labour policies, such as those that hinder the organization of trade unions and that encompass weak or non-existent workplace health and safety regulations, are also subsidies.^[6] Although excluded from the WTO definition, such policies reduce costs, therefore permitting firms in the affected countries to lower their prices on world markets.

A more domestically oriented view has been presented by Shoup, who sees subsidies as government payment or tax relief policies intended to provide incentives for firms to alter the relative prices of their products and thereby to reallocate resources in directions favoured, for whatever reason, by the government. The changes in relative prices might impinge on international trade, and therefore may fall within the framework of the Agreement on Subsidies and Countervailing Measures, or they may not.^[7]

The world of agricultural subsidies is characterized by many forms of governmental economic support, each of which falls into one of two general classes, the first involving the reduction of consumer food prices below the free market level and the other involving the support of farm production.^[8] The first class, often used in developing countries, includes such diverse approaches as rationing in Pakistan and price controls in India.^[9] The second class, often used in developed countries, is also diverse, including such approaches as supply management and formula pricing in Canada and acreage controls and subsidized credit and insurance in the United States of America.^[10]

One distinction, admittedly fuzzy, is that between explicit and implicit subsidies. In the former, there are governmental budgetary outlays; in the latter, supply prices are suppressed. Explicit agricultural subsidies include such programmes as government purchases of agricultural surpluses and government payments to farmers to keep land idle. Implicit subsidies include utilization of such techniques as exchange rate manipulation (whereby, for instance, there are official multiple exchange rates applicable to different categories of transactions), price controls, and quantitative restrictions on trade, as well as other methods of manipulating the terms of trade either for or against farmers. By overvaluing domestic currency, for instance, the government provides an implicit import subsidy to consumers while placing an implicit tax on farmers since it forces them out of international markets. Trade barriers are usually intended to protect non-agricultural industry, with the agricultural sector being disadvantaged by an increase in its costs, particularly the costs of imported machinery and supplies. Implicit subsidies to consumers are in effect negative subsidies to farmers, although the term "negative" is not often used in this context. Rather the term "implicit taxation" is used. But from this brief description, it is also clear that implicit subsidies to the industrial sector may, in effect, be negative implicit subsidies (or implicit taxation) to the agricultural sector.^[11]

A combination of subsidies in both consumer price reducing and farm support classes has been applied in Mexico. Under this system, which was applied for maize and a number of other products, the government purchased domestic farm products at a guaranteed price and sold the raw products to processors at a lower price, absorbing the difference itself. The Government absorbed, in addition, storage and distribution costs. The processed goods were then sold at prices set by the government. While the system may be complicated, its essential nature is simple: the government manipulated both the price received by farmers and the price paid by consumers.^[12]

The focus of United States agriculture subsidies has been on farm support. Since the late 1930s, the United States has implemented a vast array of programmes to manipulate the production and sale of agricultural products. Gardner lists a range of such programmes.^[13] There have been direct payments from government to farmers: payments for idle acreage, payments on allotment-based output, payments for diverting acreage from one commodity to another, subsidy payments to support alternative uses of farm products, purchases of agricultural surpluses, storage payments, and disaster payments. There have been tax shelter programmes that were in effect tax waivers. There have been moves towards making programmes self-financing by levying assessments on producers to fund farm product purchases as part of price support programmes, in effect a tax on farmers to support specific payments to farmers. There have been loans at less than market rates of interest. There have been payments in kind. There have been price support and export subsidy programmes that may or may not have involved direct payments by the government. There have been export promotions which involved government payments, but not directly to farmers. There have been import tariffs that were not only not a cost to the government but a source of revenue. There have been policies, such as marketing quotas, import controls and price discrimination schemes that, other than management costs, were essentially cost-free to the government. The range of such programmes has been extremely broad.

Gardner implicitly considered all of these programmes to be subsidies. He ended his overview of programmes with the heading "other subsidies" where he listed such items as federally supported research and extension programmes, federally supported infrastructure programmes (e.g. electricity and irrigation projects) and exemptions from selected labour and environmental regulations. Gardner noted that the items listed in his "other subsidies" category "are not usually considered subsidies in the same category as deficiency payments," although, as we have seen in the cases of Hart and Stanford, they are considered subsidies by some other analysts.

1.2 Economic justification of subsidies and the difficulties created by the existence of subsidies

When economists justify subsidies, they usually do so in one of three ways. First, there is the "infant industry" argument. An industry, for instance, may be dominated by foreigners (e.g. textile manufacture by England during the early days of the United States) and for reasons of social policy, the government may want to develop an indigenous industry. Insufficient private capital may be available to permit the private sector, on its own, to accumulate sufficient capital to make the indigenous industry commercially competitive. The government then could subsidize the industry through grants, loans, equity infusions, tariff protection or tax incentives. When the industry has been built up to the point where it is self-sufficient, the subsidies would be removed.^[14]

The logic of the argument is appealing, and the approach to economic development might work, but there is a tendency once the subsidy has been implemented to continue it long after it is necessary or long after it should have been necessary. The ultimate result can be that the industry, originally stimulated by the subsidy, comes to depend upon the subsidy and fails to improve its productivity along with the rest of the world. One is then left with an inefficient industry that cannot compete in the marketplace. The justification for subsidies then switches to the protection of employment which would fall if the government were willing to let the industry fail. Thus, subsidies which were intended to help the industry get started, become "necessary" to keep an inefficient industry afloat. The subsidy then becomes permanent until the government finally decides that it can no longer maintain the industry and the industry is shut down with all the economic and social dislocation that entails. Alternatively, the subsidy may be introduced to help the infant industry, the industry may then become self-sustaining, but it may be difficult to wean the industry off the subsidy.^[15]

The second argument in favour of subsidization is that a large, important, firm may run into serious temporary difficulties and be in danger of ceasing operations. The government, in such a situation, would have at least three options: it can play no role and let the full market effects be felt; or it can directly subsidize the endangered firm with cash or equity infusions, loans or loan guarantees; or it can let the firm go bankrupt but intervene through the monetary system to prevent the bankruptcy of the firm from affecting other, healthy, firms.

If the bankruptcy had no social implications beyond those concerning the firm itself and its employees, then perhaps subsidization would not be considered, other than to ease the transition for displaced workers. There may, however, be severe financial implications for the economy. For instance, the firm may have been a respected, "blue chip" firm which had issued substantial volumes of unsecured bonds (e.g. "commercial paper"). The failure of the firm to honour those bonds when they matured as a result of the firm’s bankruptcy might suggest to bondholders that other blue chip firms could also default on their unsecured paper. Perfectly healthy firms then might be unable to follow their usual practice of turning over maturing paper because of nervousness in the bond market. If banks did not quickly offer substantial loans to the healthy but cash starved firms to enable them to pay off their matured unsecured debt, then healthy firms might collapse. Without government direction, banks might very well withhold their support, if only temporarily, because of the acute uncertainty created by the initial firm’s bankruptcy. There may be a domino effect throughout the economy with the result being a severe financial crisis. The economic problem facing the firm may be seen as being cyclical, as being due to poor management, or as being the result of factors apparently beyond anyone’s control, such as climatic disasters. The subsidy can be seen as a temporary measure to help the firm regain its footing. In June 1970, the Penn-Central Railroad Company went bankrupt after the United States government refused to provide financial support.^[16] The failure, of the largest railroad in the United States, was at the time the greatest bankruptcy ever to occur in the country. The financial system of the country was seen to be endangered because of the anticipated domino effect. The actions of the American central bank, the Federal Reserve System, were credited by some as saving the United States’ economy from financial collapse.^[17] In this case, the government essentially applied the third option described above. The government, however, became wary of placing itself in the position of again being perceived as endangering the economy by not directly intervening in the event of a major impending bankruptcy.

Subsequently, when a year later the Lockheed Aircraft Corporation was similarly endangered, the United States government, following the second option described above, came to the rescue of Lockheed. Prior to Congress’ approval of substantial loan guarantees to a consortia of major banks that were financing Lockheed, the chairman of the Federal Reserve System, the economist A.F. Burns, was explicit in his comparison of the Lockheed situation with that of Penn Central. He stressed the danger to the economy of the country if such a large company were allowed to fail. Burns suggested that there be generally applicable legislation permitting the government to provide loan guarantees when basically sound companies encounter serious, but most likely temporary, financial difficulties.^[18]

During 1980, the United States Government similarly intervened with one and one-half billion dollars in loan guarantees for the Chrysler Corporation.^[19] In the cases of Lockheed and Chrysler, the firms did regain economic viability. One can always argue the costs and benefits of social and economic policy, but in these latter cases, the subsidies seem to have been effective. These subsidies were, indeed, temporary. The great danger, of course, is that instead of restoring health to the firm, thus permitting the subsidies to be safely withdrawn, or to lapse, the firm remains unhealthy and the subsidies become permanent.

Whether a government will subsidize a large company in financial difficulty is a recurring problem, as real today as it was a quarter century ago. In December 2002, the United States Federal Air Transportation Stabilization Board refused to provide loan guarantees of US$1 800 000 000 to keep the parent company of United Airlines from bankruptcy.^[20]

The third argument in favour of subsidization is tied to current interests in environmental protection. Subsidies can be used to encourage firms and industries to behave in environmentally friendly ways. Fishing vessel and license buyback programmes fall into this category. As we shall see, while some economists favour such subsidy programmes, others believe that effective fishery management and market based solutions would be more effective than subsidy programmes.

Additional reasons for the implementation of subsidies, rarely justified by economists unless tied somehow to one of the arguments stated above, are to provide an industry with a long-term advantage in the international marketplace and to permanently assure a reasonable level of employment in a geographical area. Norway, for instance, has a policy of subsidizing the northern part of the country to sustain the physical presence of a population there and to maintain the fishing culture.^[21] For many years, until 2001, the Canadian government subsidized the uneconomical steel works on Cape Breton Island in Nova Scotia. Examples of this kind of subsidy are legion.

To illustrate with just a single example the difficulties that can be encountered when a government wants to withdraw established subsidies, consider the Fishing Vessel Assistance Programme (FVAP) which was introduced by Canada during the second world war and under which bounties were paid to enterprises that purchased fishing vessels. By 1970, the Canadian Government wanted to restrict the scope of this programme which, until that time, was entirely driven by the industry. There were no statutory or regulatory limits to the amount the Government would have to pay for this programme during the course of any year. The development of a revised programme was assigned to a committee of federal and provincial officials. Under pressure from the provinces, whose governments feared that a transformation of the programme would reduce the stimulus on their provincial economies they had enjoyed as a result of the transfer payments, and possibly weaken their fishery sectors, the revisions were never developed and the programme continued as before. Towards the end of the 1970s, when Canada and most of the coastal states of the world extended their fisheries jurisdiction to 200 miles from shore, the fishery of the Canadian province of Newfoundland expanded. The expansion was largely financed by subsidies, an important one being FVAP. It was clear that the fleet overexpanded, thus removing any economic justification for the programme. Yet the programme continued. It was only with a major change in Government that the programme, now hopelessly out of date, was abandoned in 1986.^[22] Harold Macmillan, the former British Prime Minister, has described his political problems when, as Chancellor of the Exchequer in 1956, he had difficulty persuading his cabinet colleagues to eliminate a milk subsidy that he considered obsolete.^[23] These examples illustrate the tenacity with which a subsidy, possibly instituted for good reason, can continue in existence long after the reason for its being has passed.

Similarly, the United States has a long standing tax benefit for fishing vessel owners, the Capital Construction Fund (CCF), whereby up to 100 percent of the profits generated by fishing can be placed in an interest earning income tax exempt fund as long as the holder of the account agrees to replace his or her vessel, or to make major changes in the structure of the vessel, within ten years. During the "Americanization" programme that followed the 1976 passage of the Magnuson Act, under which the United States expanded its fishery jurisdiction from 12 to 200 miles from shore, this programme served a well defined social purpose: it aided in the construction of American vessels when the social goal was to replace foreign fleets with American fleets. There can be little doubt that the American fleet overexpanded. Despite recent Congressional hearings on the subject, the tax benefits remain.^[24] Once again, it can be very difficult to remove a subsidy that has outlived its usefulness. Some would argue that because of this difficulty, and others, subsidies rarely serve a useful purpose.^[25]

Having briefly discussed the issues surrounding economic subsidies, we now turn to the specific problems of fisheries subsidies.