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Science Technology and the Economic Future edited by Susan Raymond
Robert K. Morris
Senior Policy Director, National Association of Manufacturers
Based on a paper delivered to the Center for Science, Trade, and Technology Policy of George Mason University in 1995.
"Know thyself," the first inscription at Delphi should also be the first commandment for those who attempt to advance U.S. interests through trade negotiations. In fact, for negotiators the commandment is even more difficult: "know thy country," an entity over which neither the negotiator nor the administration he or she serves can have more than the smallest illusion of control. Consequently, the knowledge required to represent U.S. national interests in international trade negotiations is more a matter of analysis and luck than of stewardship or vision.
I believe that the Uruguay Round of Multilateral Trade Negotiations, concluded in December of 1993 under the auspices of the GATT, was a good agreement for the United States. Furthermore, the Uruguay Round Agreement on Subsidies and Countervailing Measures, which was a critical element of the overall package, represents an improvement in the international trading rules in these areas and a net gain for the United States.
My focus here is on the treatment of research and development under the subsidies agreement. Accordingly, we will deal more with the costs and concerns associated with the agreement than the expected benefits. Agreements are, almost by definition, compromise documents. Thus the fact that there are disappointments for the United States in this or any agreement does not necessarily imply criticism of the U.S. negotiating effort at Uruguay. U.S. negotiators were outstanding from start to finish. Yet if they can be faulted for anything, that fault lies in not knowing the United States well enough, rather than in any weakness or lack of resolve vis-à-vis our WTO trading partners.
The Framework of the Subsidies Negotiations
It is worth briefly recapitulating the subsidies negotiations and reviewing ways in which those negotiations changed during the Uruguay Round years.
The Uruguay Round was launched in Punta de Este, Uruguay, in September of 1986. From the outset, the plan was to conclude within four years, with a mid-term review in December, 1988. In the area of subsidies and countervailing measures, the negotiators started with a failed document—the 1979 Subsidies Code. From the outset it was understood that the success or failure of the subsidies negotiations could affect the outcome of the entire effort.
One of the most frequently heard phrases during the course of the Uruguay Round was: "nothing is agreed until everything is agreed." This maxim was particularly apt for the subsidies negotiations, which contained high priority objectives and significant risk for both the United States and its trading partners, especially countries in the European Community (EC). The challenge for both sides was to achieve a more pragmatic and common view of subsidies and its relationship to trade, while protecting existing polices and practices. Initially, the United States and its trading partners had little in common on this issue, and there was very little progress in the subsidies negotiations in the first year and a half of the Uruguay Round. By the summer of 1988, the battle lines between the United States and the rest of the world were clear.
Philosophically, the U.S. view was that subsidies for the production of traded goods were a blight on the trading system and should be reduced or eliminated. Not counting agricultural subsidies, which were dealt with in a different negotiating group, the assumption behind the U.S. view was that the United States did not use subsidies as a tool of domestic policy; only other countries (the bad guys) did that.
Unfortunately, at the early stages of negotiation, the issue was not subsidies but countervailing duties. On this issue, the United States was on the defensive because it is the only country to use countervailing duties against subsidized imports. This fact was important in 1988 because it explained the United State's defense of its GATT-sanctioned countervailing duty regime against a world eager to weaken it.
Later on, however, U.S. countervailing measures had a different significance, which begged the following question: If there is no history of other countries using countervailing duties against imports from the United States or other countries, does the United States have much to fear on this score? In 1988, however, this question did not emerge and the challenge for U.S. Trade Representative Clayton Yeutter and his team was to alter the negotiating dynamic so that more of the focus was on subsidies and less on countervailing duties.
Yeutter's impressive efforts were successful and were reflected in the subsidy component of the understanding reached at the Montreal Mid-Term Review of December 1988. At Montreal, the Gatt Contracting Parties agreed to continue their discussions of the subsidies issues on the basis of a classification system for subsidies generally referred to as the traffic light model. All subsidies were classified into one of the following three categories: (i) prohibited or red light subsidies; (ii) allowable but actionable subsidies, referred to as the amber of yellow light category; and (iii) non-actionable subsidies, the so-called green light category.
Challenges to U.S. countervailing duty laws continued throughout the negotiations, but from the Montreal Mid-Term Review on, much of the subsidies negotiations were devoted to giving practical effect to the traffic light categories. The United States wanted to expand the list of prohibited—red light—subsidies. In this it was successful but only moderately so. Others, notably the European Community, were intent upon creating a GATT regime that explicitly allowed for protected certain classes of—green light—subsidies. Arguably, the Europeans were more successful.
Research and Development
Research and development (R&D) were among the subsidized activities for which the EC sought special protection. The U.S. effort to fashion a response centered around three sets of questions, each with its own period of special prominence. The first set of questions were definitional and came to the fore relatively quickly. The second set, which came to dominate negotiations in the latter stages, was sectoral and concerned the effects any agreement might have on individual industries, such as aircraft. The third set of questions concerned how U.S. assistance programs would be affected by a new international regime.
Questions of Definition
The definitional questions were easy to state but hard to answer. What is research? What is applied research? What is basic research? And what is development? In an October, 1990 report on industrial subsidies negotiations, the ACTPN endorsed the concept of a safe harbor for subsidies for basic research. Subsequent advice went a step further, suggesting that there should be a single category for basic and experimental research and that no limitations should be set on the percentage of government funding for a particular non actionable research project. The ACTPN took a dramatically different approach toward subsidies for developments, suggesting in the October 1990 report that "certain of these [development] subsidies should be prohibited."
Even as members of this group were recommending dramatically different treatment for basic R&D, they were acutely aware that distinguishing between research and development is no easy matter. What may seem applied research or development to a policy maker might be very basic indeed from the point of view of the person or group conducting the research. ACTPN also recognized that these perceptions could vary dramatically from one sector to another. With these concerns in mind, the 1990 ACTPN report recommended an immediate study:
Given the complex definitional issues involved in research and development, the ACTPN recommends that the White House Office of Science and Technology Policy and the Commerce Departments Office of Technology Policy jointly review the implications of a GATT prohibition for certain development subsidies. These agencies, in conjunction with the interested parties in the private sector, should seek to produce a workable description of those development-related subsidies which, in their view, should be prohibited because of their trade distorting effects.
This writer is unaware of any such study having been produced, but key points had been registered.
As for the actual results of the wrangling over the R&D language of the Subsidies Agreement, the language can be quoted and described but its likely effects are almost impossible to judge. Empirically, there is nothing to go on. As of the summer of 1995, no country had notified the WTO of its intention to offer a subsidy under the relevant provisions of the Subsidies Agreement (Article 8.2 (a)), nor had any invoked the protections of this article in any countervailing duty cases. This is in spite of the fact that the language of the WTO Subsidies Agreement contains the offer of non-actionable status for subsidies that provide "up to 75 percent of the costs of industrial research or 50 percent of the costs of pre-competitive development activity," with the proviso that these funds be limited exclusively to certain specified activities.
As for ACTPN's notion that there is no need for a cap on allowable research, its only expression lies in one of the several footnotes to the agreement. In any case, it is unlikely that the monetary caps will be the most energetically contested aspect of the R&D component of the WTO Subsidies Agreement. That honor is likely to go to the definition of "pre-competitive development activity." This definition, contained in footnote 29 of the Subsidies Agreement, is worth quoting from:
The term "pre-competitive development activity" means the translation of industrial research findings into a plan, blueprint or design for new, modified or improved products, processes or services, whether intended for sale or use, including the creation of a first prototype which would not be capable of commercial use.
Exactly what sort of prototype might be allowed under this formula is something we can only speculate about at this stage.
The Sectoral Irony
U.S. producers of large civil aircraft were unlikely to view the Agreement's language on pre-competitive development activity as an adequate safeguard. Indeed, having watched the European Community pour $26 billion into the development of Airbus, the affected U.S. companies were determined not to create new loopholes for aircraft subsidies in the new subsidies agreement.
For that reason alone, much of the U.S. business discussion of the R&D provision of the Subsidies Agreement, as well as the discussion of the overall agreement, was heavily influenced by the concerns of the U.S. aircraft producers. Doubtless the aircraft industry's concerns affected the R&D elements of this agreement, and yet the industry itself is not greatly affected by them. The second footnote applying to the R&D language of Article 8.2 (a), declares that the R&D provisions do not apply to civil aircraft. The overall WTO Subsidies Agreement does, of course, apply to
Protection of U.S. Programs these funds be limited exclusively to certain specified activiti
The protection of U.S. industrial subsidies programs was initially not an issue of much concern to U.S. negotiators. Yet in the summer and fall of 1992, the issue came alive. It was the subject of meetings organized by the Industrial Research Council, and it surfaced in the fall of 1992 in meetings of the ACTPN Task Force on Industrial Subsidies.
One consequence of this concern was that government experts who previously had not been involved in these negotiations began to see the subsidies negotiations not only as important but as a threat to existing programs and practices. Officials from the Commerce Department, the Department of Energy, and the White House Office of Science and Technology Policy, all began to make the point that the United States provides a fair number of subsidies that might be affected by the new Subsidies Agreements.
Briefly stated, these representatives of the technology community within the U.S. government were concerned that an improperly drawn agreement might discourage companies from cooperating with the government on new technology projects. They also feared that the process of complying with the requirements of the proposed WTO Subsidies Agreement could provide competitor nations with a snapshot of U.S. goals, policies, and practices.
These concerns did not fall on deaf ears. In defending the Agreement before the Senate Finance Committee in March 1994, Deputy U.S. Trade Representative Ambassador Rufus Yerxa cited the Clinton Administration's effectiveness in protecting U.S. pro
I would also like to make the point that failure to include the R&D green category would have placed at risk a number of very important [U.S.] technology initiatives....
I believe that in 2 years' time, were we not to have the protection of this green category, the administration would be back before this committee trying to explain why WTO panel rulings had found our cooperative research and development agreements, our advanced technology program, our NH biomedical research and commercialization program, the SEMETECH program, the clean car program and many others to 6e inconsistent with our WTO obligations.
Ambassador Yerxa cannot be faulted for failing to predict the Congressional election of 1994 or its consequences for R&D funding (U.S. subsidies). Indeed, in March 1994 the trend seemed to be going the other way. The promise of the Clinton Administration as well as the history of both the Bush and Reagan administrations suggested more, not less, cooperation between business and government in technology in the years ahead. But the subsequent facts speak for themselves, and the current trend in R&D cooperation is down, not up.
With the exception of funding for the National Institutes of Health, each of the programs referred to in the Yerxa testimony above is either on its way out or under serious attack. To cite two examples: the corporate members of SEMATECH have announced that they will no longer be receiving government assistance, and the House of Representatives voted in early 1995 to cut the Energy Department's Cooperative Research and Development Assistant (CRADA) program by more than 90 percent. At this juncture, it seems fair to say that if the U.S. paid its trading partners anything to protect U.S. R&D programs, it paid too much.
Conclusion
As a general proposition, the larger the necessary number of parties to a law or agreement, the longer it takes to make it a reality. This general principle applies with even greater force to an agreement that contains specific commitments from the various parties. No one should be surprised that it took the Uruguay Round members many years to produce the current Subsidies Agreement.
For the most part, the subsidies that were the subject of this agreement are domestic subsidies—i.e., subsidies that are generated and controlled by the political systems in each of the WTO member countries. Domestic politics, of course, move with lightening quickness, whereas international dialogue is more phlegmatic.
From today's vantage point, it is hard to resist the conclusion that the earlier (i.e., 1986-1990) U.S. negotiating mode was the more accurate one. The original objective of controlling foreign subsidies had more validity for the United States than the later focus on providing user-friendly international rules for government's assistance to U.S. industry. That said, insights brought to bear by the U.S. technology community did serve to bridge the philosophical chasm that divided the United States from the rest of the world on the question of subsidies.
The jury is still out with respect to the operation of the current subsidies code. Fearful that, by means of the Subsidies Agreement, the United States might unwittingly be embracing a commitment to industrial policy and heavy subsidization of industry, U.S. negotiators insisted upon a thorough review of the new subsidies regime within the first five years. If we do not like what we see then, we can scuttle the green box, non-actionable section of the Subsidies Agreement (Article 8.2) as well as the clearly valuable, serious prejudice language of Article (This provision gives U.S. exporters important new tools for limiting subsidized competition in U.S. export markets. These decisions will be made by the year 2000. The problem is that, at the current rate, there may be very little experience to draw upon in making those judgments. If so, the United States and its trading partners would be wise simply to extend the deadline. It was too short to begin with.
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