Asian cooperation on industrial subsidies could defuse global rivalry and build trust

By Robert Koopman

Industrial subsidies have re-emerged as a central tool of economic strategy. Once viewed primarily as distortions to be disciplined under international trade rules, they are now deployed to secure supply chains, accelerate green transitions and anchor technological leadership.

The United States’ Inflation Reduction Act and CHIPS and Science Act, China’s Made in China 2025 and dual circulation strategies and India’s Production-Linked Incentive schemes illustrate the scale of the shift. The Asia Pacific sits at the heart of this transformation. It is both the main source of new subsidies and the region where their international spillovers are most keenly felt.

How these policies are governed will determine whether subsidies fuel conflict and fragmentation or become a platform for pragmatic cooperation.

Subsidies are not inherently distortive. They can be justified where they address clear market failures —such as chronic underinvestment in R&D with large spillovers, or the need to accelerate public goods like clean energy. They may also be warranted for equity reasons, for instance where governments support final consumers to ensure access to essential goods. The challenge is to distinguish such cases from those driven by strategic rivalry or simple rent-seeking.

Unlike the agricultural or export subsidies of earlier decades, today’s interventions target sectors with strong scale economies and network effects. In semiconductors, electric vehicles, batteries and critical minerals, subsidies that help secure sustained large-scale investment can quickly tip the balance, given the powerful scale economies and network effects in these sectors.

The effects on trade are already visible. Subsidy competition is diverting investment, shifting sourcing decisions and putting pressure on smaller economies in the Asia Pacific to match the fiscal firepower of larger players. These dynamics risk fragmenting regional value chains and fuelling disputes as governments view foreign subsidisation as ‘business stealing’.

The danger is a race to the bottom. Subsidy competition can lead to overcapacity, wasteful duplication and retaliatory measures that undermine open regionalism. Yet subsidies can also create opportunities for cooperation.

The clean energy transition is a case in point. All economies share an interest in accelerating deployment and securing access to critical minerals. Coordination can reduce uncertainty, limit duplication and reveal complementarities, for example, linking upstream resource development in one country with downstream manufacturing in another.

The key question is whether governments treat subsidies as unilateral weapons of rivalry or as policy instruments that demand some level of collective management.

The WTO’s Agreement on Subsidies and Countervailing Measures remains the formal multilateral framework for guiding the use of subsidies, but it was designed for another era. It lacks general exceptions for climate and security related subsidies. Its notification requirements have broken down and dispute settlement paralysis has eroded enforcement.

Still, the WTO remains relevant. Its committees and the Trade Policy Review Mechanism could be adapted into transparency platforms, encouraging members to disclose subsidy programs in structured formats, assess spillovers and engage in peer review. The WTO may no longer be able to enforce its rules effectively, but it can still convene, standardise and connect. Ongoing proposals — including structured reporting of climate-related subsidies, limited carve-outs for green investment and benchmarking of major R&D programs — could be referenced by WTO committees to anchor discussions about concrete reform options.

Regional agreements may offer more immediate traction. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) includes disciplines on state-owned enterprises, competitive neutrality and transparency that go beyond the WTO’s requirements. For members like Japan, Australia and Singapore, it provides a forum to pilot modern subsidy norms.

The Regional Comprehensive Economic Partnership (RCEP) is weaker on formal rules but includes both China and ASEAN economies. It could serve as a venue for capacity building, regional observatories and peer review — particularly for smaller states.

Neither bloc is likely to enforce strict disciplines, but both can foster transparency, provide early warnings of subsidy races and gradually align standards that may later inform multilateral reform. Asia Pacific initiatives would also benefit from engaging with Europe. The EU Foreign Subsidies Regulation, EU–UK Trade and Cooperation Agreement, EU–Japan Economic Partnership Agreement and even elements of the suspended EU–China Comprehensive Agreement on Investment offer relevant models. Cross-regional exchange could strengthen coherence and help avoid fragmented rulemaking.

Rigid enforcement is not politically feasible in today’s multipolar order. A more pragmatic approach is to build transparency, peer review and sectoral monitoring. Three elements stand out. Sector-specific monitoring platforms in areas such as semiconductors, critical minerals and green technologies could draw on models like the OECD Steel Committee or the G20 Agricultural Market Information System. Differentiated disclosure protocols could also allow governments to share objectives and aggregate impacts without revealing commercially or strategically sensitive information. And these efforts could be reinforced by peer review arrangements, modelled on OECD practice, where countries subject their policies to scrutiny and dialogue.

These mechanisms would not end subsidy races but would reduce uncertainty and allow governments to identify complementarities.

If subsidies remain ungoverned, economies throughout the Asia Pacific risk escalating subsidy races, fragmented supply chains and entrenched geopolitical rivalry. Smaller states will be forced into reactive policies that drain fiscal resources without delivering long-term benefits.

Alternatively, the region could pioneer cooperative transparency. The CPTPP can demonstrate how modern subsidy disciplines work in practice, while RCEP can provide a platform for capacity building. APEC can bridge the two and create space for soft coordination.

These initiatives would not replace multilateral rules but could form a network of regional pilots feeding into the WTO and other global institutions.

Industrial subsidies often pursue legitimate goals — including climate resilience, security and technological upgrading — but they also generate powerful cross-border effects. Whether they become instruments of rivalry or a foundation for renewed cooperation will determine the Asia Pacific’s economic trajectory and the health of the global trading system.

Robert Koopman is Hurst Senior Professorial Lecturer at the School of International Service, American University. He was previously Chief Economist and Director of Economic Research and Statistics Division at the WTO.

https://doi.org/10.59425/eabc.1764540000

Source: Open Newswire @ Asian cooperation on industrial subsidies could defuse global rivalry and build trust | East Asia Forum