Legality of R&D Subsidies and its Policy Framework Under the World Trading System: The Case of Civil Aircraft Disputes

Abstract

Expenditures for research and development (R&D) of technology are increasing since most countries recognize that technology innovations are a significant factor for their economic growth. Under the World Trade Organization (WTO) system, R&D subsidies by governmental entities were permitted in accordance with the SCM (Subsidy and Countervailing Measure) Agreement. However, the provision on the R&D subsidy terminated as of January 2000, according to the Article 31 of the SCM Agreement, and legal disputes over R&D subsidy are more likely to occur. So far, aircraft industry has been the only industry where R&D subsidies became an issue in the WTO. Thus, the paper examines the international trade disputes within the aircraft industry regarding Canada’s measures and the bilateral disputes between the U.S. and the EC (European Communities). In these cases, various R&D subsidies on civil aircrafts are found to be inconsistent with the WTO rules. This study summarizes the WTO decisions on various R&D subsidies disputed in the aircraft cases and examines the types of R&D subsidies that were found to be inconsistent (or consistent) with the WTO to provide a guideline for current and future R&D subsidy policies on the high-tech industry.

In short, the Canada-Aircraft case clearly indicates that if R&D subsidies are directly targeted towards near market R&D projects with high export potential, then they are likely to be in violation against the current WTO rule. Furthermore, the common findings from the EC-Aircraft and the U.S.-Aircraft cases suggest that the forms or the methods of distribution of a R&D subsidy were not a sufficient condition for the WTO ruling; instead, what ultimately mattered appeared to be whether and specifically to whom the benefits of the R&D subsidies ordered by the government bodies are conferred.

Keywords: R&D subsidy, WTO SCM Agreement, Canada-Aircraft case, US-EC Aircraft Disputes

JEL Classification: K33, L52, O32, L93