The WTOs World Trade Report 2006, which was released here on Monday, warned that subsidies can distort trade and provoke strong responses from trading partners, although these can also help in correcting market failures and meeting social objectives.
Reducing and eliminating subsidies, particularly in the agricultural sector by developed countries, is a key objective of the WTOs stalled Doha round of trade liberalisation negotiations. Subsidies by the 21 rich countries totalled $250 billion, the report said.
The release of the WTO report coincided with the collapse of the trade talks failed to make a breakthrough on the contentious issues of farm subsidies.
While some subsidies can benefit society and offset the negative externalities of economic activity, other types of government support are clearly more controversial and can be damaging, WTO director-general Pascal Lamy said.
Lamy said one significant part of the Doha round negotiations involved reducing subsidies that distort trade while encouraging governments to use other forms of support that 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 provide real rewards across the board, he said. Beginning with a review of attempts to define subsidies, the report considered what economic theory says about the effects of subsidies, providing a guide for assessing the desirability of different kinds of subsidy programmes. It examined the reasons governments give for using subsidies and analyses wto rules on the issue.
Governments give subsidies to build infrastructure, help struggling industries or set up new ones, promote research and develop new knowledge, protect environment, redistribute income and help poor consumers, the report observed.
The report also reviewed trade developments in the year 2005 and included four essays; on textiles and clothing trade trends, flows of international receipts, trade trends of least-developed countries and trade impact of natural disasters and terrorist acts.
The report noted that while trade growth was lower in 2005 at 6.5% compared to 9% in the preceeding year, it was still above average for the last decade. A particular feature of the trade scene in 2005 was higher commodity prices, especially oil, it said.