WTO Members commit themselves to notify all domestic subsidies that can endanger the fairness of international trade. Yet, many countries pay only lip-service to this self-imposed obligation. Why?

Promoting a level playing field in international trade is the core task of the World Trade Organization (WTO). Next to tariffs, subsidies are a common instrument that distorts trade, either by promoting a nation's exports in sectors where others' have a comparative advantage, or by subsidising national industries and goods that substitute imports from abroad. Either way, subsidies can distort trade conditions - most often in favour of those countries with the biggest power to subsidise: i.e. rich countries.

In this respect, the WTO Agreement on Subsidies and Countervailing Measures (ASCM) - an Annex to the founding treaty of the WTO - gives an encouraging message for the trade in goods. It prohibits subsidies that support exports or import substitutes. Furthermore, all specific subsidies which could hurt the interests of a fellow WTO Member must be notified biannually to the WTO. These notifications provide the only means for countries to examine other countries' subsidies programs in a transparent way. They are especially important for poorer countries that lack the means to investigate subsidy practices in other countries on their own.

At the moment, subsidies to industrial goods are notified separately from agricultural goods, and subsidies to services are not yet being notified. But apart from that, the scope of subsidies which must be notified is very broad: Members are obligated to notify subsidies which transfer an economic benefit no matter how small the amount.

But the reality is that a striking number of countries disregard this obligation. The WTO's World Trade Report 2006 gives a sad picture of the reporting situation: 29 of the 149 WTO Members had not submitted any notification pursuant to the ASCM, and many other countries had not provided quantitative information on their subsidy programmes, or at least had not provided it systematically. As a result, in most years, information is only available for less than half of the WTO Membership.

In a study published in May ("WTO Subsidy Notifications. Assessing German subsidies under the GSI notification template proposed for the WTO") we conducted our own "shadow" subsidy notification for Germany, using the GSI subsidy notification template. Germany was chosen because it has a high degree of subsidy transparency domestically and, at the same time, it has one of the poorest records among large OECD economies of notifying specific subsidies to the WTO. Instead of the 11 subsidies notified for Germany for 2006 (with a total value of € 1.25 billion), our study's conservative approach identifies 180 specific subsidy programmes that should have been notified (totalling € 10.8 billion).

Possible reasons for underreporting are that Members consider the notification procedure too complicated or too burdensome; are uncertain as to what information should be reported; face no effective sanctions for non-compliance with the obligation to notify; or deliberately choose not to report subsidies that could be challenged by other members out of fear of self-incrimination.

As for the first two rationales, under-reporting in ASCM-notifications can be seen as a technical problem. In this respect, the notification template** developed by the Global Subsidies Initiative and tested in the German case is a major step forward. It would standardize notifications and make them more accessible to the notifying Member states.

However, there are fundamental flaws in the ASCM's reporting requirement beyond the format; namely, the fact that although it is obligatory, sanctions for non-compliance are weak. In other words, all methods to improve transparency and to reduce the workload of notifications still do not tackle the basic political economy of the ASCM.

The discussion, therefore, should extend to questions concerning how the WTO might be empowered to go further with a two-sided policy. On the one hand, notifications must be made more systematic, and therefore easier for other countries to peruse. On the other hand, the WTO Secretariat should also be empowered to increase the pressure on member states to comply with their notification duties.

Finally, since multilateral bodies by their very nature work under numerous restrictions, we should not settle for action on this level. We have seen that subsidy reporting by outsiders is often feasible. Independent shadow subsidy notifications - whistle blowers - that offer a countercheck for official notifications can constitute an element to mitigate the severe incentive problem of subsidy notifications.

*Dr. Michael Thöne is FiFo's managing director and a lecturer at the University of Cologne, where he also received his doctorate with a dissertation on regulatory taxation and fiscal sustainability. He is the chairman of the Working Group on Public Economics of the German Federal Ministry of Finance and a member of the multilateral Working Group on Quality of Public Finance of the European Council's Economic Policy Committee.

** The GSI's template for notifying subsidies to the WTO is available here.

Michael Thöne, FiFo Institute for Public Economics of the University of Cologne