State enterprise subsidies: Harmful to US and the world

The Obama administration should be applauded for securing strong disciplines on subsidies to state-owned enterprises (SOE) in the recently concluded Trans-Pacific Partnership (TPP) agreement.  While opinions may differ on some aspects of the agreement, the SOE provisions deserve unanimous support.  Large state subsidies harm American workers and American businesses. They force both to compete against foreign companies that receive massive financial support from their governments, which give them sizable, artificial competitive advantages.

In the over four years that I served as undersecretary of State for Economic Growth, Energy, and the Environment, I and many of my colleagues in the State and Commerce Departments, the Office of the U.S. Trade Representative and the While House repeatedly spoke out for a strong U.S. position against foreign government subsidies to SOEs in TPP and in countless additional negotiations.

{mosads}We made clear that this was not an attack on SOEs or State-Supported Enterprises (SSEs).  After all, it is not up to the United States to question the wisdom of other nations in establishing state enterprises.  But it is very much a U.S. concern if foreign governments give subsidies to their SOEs that distort competition and tilt the playing field in their favor.  American companies and American workers should not be forced to compete against foreign treasuries.

Much work has taken place in the OECD on the question of what has come to be known as “competitive neutrality” – ways to avoid providing SOEs financial and other advantages not enjoyed by their private sector competitors.  Numerous countries have supported work in the OECD to come up with solutions to this problem in order to avoid harmful trade distortions. The reason this has attracted multilateral engagement is that it is not just American companies that are harmed by subsidies received by foreign state enterprises.

Recently, this matter has emerged as an issue between the United States, and numerous other countries, and two close American allies in the Gulf – the United Arab Emirates (UAE) and Qatar.  State-owned airlines in these two countries have expanded dramatically in international aviation markets in large part because they are enjoying significant financial support from their government owners that is not available to their privately-owned competitors.  The magnitude of this support poses a serious threat to the U.S. aviation industry and U.S. jobs.  It is a particularly stark example of the competitive distortions that the Obama Administration’s SOE policy is meant to address, and it provides a potent opportunity for the administration to show that it takes such issues seriously.

Raising these issues should not be – or be seen to be – a matter of confrontation between the United States and these countries. These are valued allies and friends in a very important region of the world. The United States has resolved difficult trade issues – many involving subsidies – with our European allies for decades in a constructive way and this should also be possible with our allies and friends in the Gulf.

Nor should this be – or be seen to be – a repudiation of what are known as Open Skies Agreements. These bilateral aviation agreements are based on a longstanding U.S. policy aimed at promoting “an international aviation system based on competition among airlines in the marketplace with minimum government interference and regulation.” The United States has Open Skies Agreements with the UAE and Qatar and over 100 other nations.

I have always been a strong advocate of Open Skies Agreements and I have for years encouraged my colleagues at the State Department, which has a great deal of aviation expertise, to negotiate them where the conditions were right to do so.  At the same time, I strongly favor a level playing field between SOEs and private sector enterprises; pursuing that objective was an important goal of mine at the State Department and I continue to regard it as an important element of a strong U.S. trade policy.  It is difficult to credibly argue that high levels of government subsidy are consistent with “minimum government interference” in the marketplace, and it would be inaccurate to accuse those who advocate limits on subsidies of opposing Open Skies.  To the contrary, limiting market-distorting subsidies is consistent with U.S. SOE policies and would strengthen Open Skies.

One of the core principles of U.S. Open Skies policy is that competition should be fair and the playing field level.  I firmly believe these principles are in the U.S. national interest, and in the interest of our workers and our companies.  And it is also in the interest of our trading partners.  Earlier this month, the White House praised the Trans-Pacific Partnership agreement, specifically for the way it “protects American workers and businesses from unfair competition by State-owned companies in other countries.”

It follows, therefore, that U.S. government should approach the issue of subsidies by Gulf SOEs with the same philosophy. Otherwise, as the Administration itself has noted, we risk “an adverse impact on American workers and businesses.” A strong argument also can be made that over the longer term, reducing subsidies will be sound policy for the countries that provide them, and will reduce dramatically the large draw on resources that may once have seemed unlimited, but are less so today.

Hormats served as undersecretary of State for Economic Growth, Energy and the Environment from 2009 to 2013.


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