State-aid programs of BRICS countries: Сase of transport equipment trade

However, there are certain requirements for producers who can benefit from the program. For instance, light motor vehicle manufacturers could apply for state aid if they can demonstrate that they will achieve a minimum of 50,000 annual units of production per plant within a three year period. An additional non-taxable cash grant of 5 % may be made available for projects that maintain their base year employment figure throughout the incentive period, and achieve at least two of the following economic requirements: tooling; research and development in South Africa; employment creation; strengthening of the automotive value chain; value addition; and empowerment [Automotive Investment., 2017]. The program also provides state aid to cover competitiveness improvement costs for component manufacturers, deemed component manufacturers, and tooling companies.

In general, South Africa's automotive industry is characterized by a poor business environment (over-regulation, lack of transparency, lack of effective enforcement) as well as frequent political and economic threats. There is also a low level of local research and development and electricity availability, as well as high costs for installing and maintaining domestic manufacturing facilities. Another challenge for the industrial development is unskilled labour. So far, the AIS program is limited in dealing with these issues. All these local problems, combined with other internal rigidities, create serious obstacles to stable sector development; and to make domestic producers successful in the world market, the government needs to overcome these problems, at least partially.

The rate of growth of South Africa's exports in the automotive sector is positive, showing results far better than the rest of the world on average. At the same time, total trade flows of the respective goods have fallen, meaning that the country's role in global trade in 87 HS Code goods has diminished. South African export growth was lower than the global average for the last five years; however, imports have significantly decreased in recent years (Figure 4).

The ultimate goal of the program is to attract more investment into the automotive manufacturing sector, but as a result of high costs of entering the market and the low level of productivity and competitiveness, large multinational firms do not include African countries into their global value chains [Hoekman, 2013]. Experts argue that incentives of South Africa's state aid program are insufficient for industrial development [Stein, 2013].

The analysis of the WTO-consistency shows, that there is no reason to believe that AIS may cause trade distortions, since there is no evidence that the provision of subsidies is contingent upon export performance or upon the use of domestic over imported goods. Neither do we believe that the program can cause an injury to the domestic industry of any South African trade partner, or seriously prejudice the interests of any trade partner.

Figure 4. South African 87 HS Code Commodities Trade Balance

Some doubt may be cast on the question of whether the program limits the number of its beneficiaries. Since the program requires certain production performance norms to be fulfilled, we suppose that these requirements could fall under the definition of “the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy” outlined in Article 2 para 1(c) SCM Agreement. However, it seems that the program alone may not invoke a real threat to international trade and create unfair competition with the help of the used non-market mechanisms.

Table 4 presents the comparison of conducted case-studies. The vertical import-substitution subsidy (as it privileges domestic over foreign goods) presents the most substantial import decline, demonstrating the increase of competitiveness of domestic producers on national markets. However, such a subsidy did not lead to export growth in comparison to other cases, which raises the question as to whether domestic producers could maintain competitiveness without protection in the long run. The Brazilian state aid evidently is WTO-inconsistent, which leads to a sufficient trade distortion effect and discontent by trade partners. Thus, the possibility of initiation a dispute against import-substitution subsidies under the WTO is high, that brings additional costs to the state.

Import decline could be also achieved by vertical specific subsidies provided by Russia and South Africa. This type of state aid is less risky, as the trade distortion effect is less obvious and the analysis of WTO-consistency requires more studies by affected trade partners. However, both Russia and South Africa provided state aid in the form of grants that could clearly be defined as direct subsidies. Positive changes in trade balance under vertical specific subsidies are also not obvious, as was demonstrated by the Russian case. The results of state aid implementation are highly influenced by other macroeconomic and institutional factors.

The only case that could be presented as WTO-consistent was a horizontal subsidy implemented by India. While this program also included tax exemption as in the Brazilian case, there was no discrimination of foreign producers directly, and it also provides a variety of state aid measures. The trade balance was improved by both import decline and export growth. The Indian experience demonstrates that a more comprehensive state aid program, including different incentives, can have less of a trade distortion effect, while improving the trade balance. Further study and development of horizontal state aid could, on the one hand, help policy makers to introduce subsidy programs with a higher level of complexity. On the other hand, it will most probably make it more difficult to indicate a trade distortion effect and require a more comprehensive analysis of subsidies by affected trade partners in particular and the WTO in general.

Conclusion

Subsidization is a macroeconomic measure that allows adjusting the economic performance of an enterprise or industry to the real market situation or urgent needs of society, but all the potential costs and benefits should be scrutinized beforehand in order To avoid sporadic creation of new market externalities. State aid are non-tariff measures often used by BRICS as well as other countries.

Comparison of BRICS trade policies indicated the complex nature of this phenomenon, as it was influenced by a variety of internal and external factors and in line with the country's foreign policy development program, obligations to its citizens, and the world economic community. Evidence suggests that all BRICS members actively use protectionist trade policies in the form of non-tariff barriers to augment the effect of tariff reductions undertaken as a result of WTO accession.

The examination of several subsidy programs confirmed our hypothesis that certain state aid programs create a trade diversion effect on international trade in transport equipment (the most obvious case was Brazil) and incentivize exports, and undermine BRICS's claims to pursue trade liberalization. Although violation of WTO legislation does not necessarily mean the existence of a trade diversion effect, the latter is still likely. At the same time, we concluded that the economic environment as a whole has no less important an effect: poor economic performance can hardly be overcome by a single vertical subsidy program.

Under the outlined subsidy programs, state aid is provided ex-ante; governments would like to prevent the appearance of any critical situation in transport equipment manufacturing because of the sector's high strategic importance. The conditions of state aid provision assume results of the programs' potential beneficiaries' activity, rather than resource allocation (except for Brazil), which implies potentially high long-term costs.

The ultimate target of initiating such state aid programs is not production growth alone, but also export incentive to improve competitiveness of locally produced goods in the global market for transportation equipment. The program initiated by the Russian Federation is the only one that presupposes de facto subsidization of certain enterprises, and it has not been all that effective at achieving export growth. Although the provision of horizontal subsidies (“Make in India” initiative) is praised by the international trade system, it incurs enormous costs and in our case resulted in increased efficiency and larger trade flows mainly because of the favorable environment for the sector at the outset of the initiative.

The modalities of participation in these programs are rather transparent, and no obvious loopholes distorting competitive participation of potential beneficiaries were revealed in the course of the analysis. A substantial disadvantage of all the programs is that none of them imvolves periodic reassessment of beneficiaries' achievements and comparison of established goals with achieved results.

Therefore, ceteris paribus, authorities trying to adjust terms of state aid provision to their international obligations making their subsidy program as innocuous as possible (horizontal application of subsidies) place a heavy burden of cost coverage on society and risks failing to achieve initial goals. At the same time, governments oriented to satisfy domestic needs and neglecting international obligations are likely to achieve better results from targeted financial provision (vertical application of subsidies). Comparing trade diversion and trade creation possibilities from horizontal and vertical subsidy programs opens a new field for future research.

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