Government subsidies can be useful instruments in correcting market failures and working towards social objectives but can also distort trade, warned the WTO.
The organisation's 2006 world trade report, which was launched today, highlights agricultural trade as a key arena in which this conflict is most evident.
"One significant part of our Doha round negotiations involves reducing subsidies which distort trade while encouraging governments to use other forms of support which can facilitate development and environmental protection," said WTO director general Pascal Lamy.
"Shifting support in this way is politically difficult and requires determination and courage, but the evidence is clear that such reforms can level the playing field and provide real rewards across the board."
Lamy said that the incidence and the impact of subsidies remain seriously under-researched. Many governments maintain extensive subsidy programmes at the national and sub-national levels, and invoke a multiplicity of objectives to justify the programmes.
Because subsidies can be trade distorting, WTO Member governments must notify the organisation of any such support. Yet few governments fully meet their notification obligations under the WTO, contributing to a serious lack of information and transparency on the use and effect of subsidies.
"The absence of systematic information is aggravated by the lack of common definitions of subsidy practices, " said the WTO.
Governments extend subsidies to build infrastructure, help struggling industries or foster new ones, promote research and develop new knowledge, protect the environment, redistribute income and help poor consumers.But not all of these objectives are effectively addressed by subsidies.
Furthermore, the WTO says that subsidies can distort trade by giving an artificial competitive advantage to exporters or import-competing industries, and this can be a source of tension among trading partners.
"Concern among trading partners about subsidies rises in direct proportion to the extent to which subsidy practices have direct trade effects within a narrow segment of economic activity,"said the WTO. "If the effects of subsidies are perceived as severe enough in the marketplace, they may trigger a reaction nullifying any advantage from the subsidy."
The report estimates that 21 developed countries spent almost $250 billion on subsidies, while all countries spent over $300 billion. Agricultural subsidies in OECD countries both domestic and export subsidies show a downward trend.
The report also examines 2005 trade developments. It notes that while trade growth was lower in 2005 (6.5 per cent) than the preceding year (9 per cent), it was still above the average for the last decade.
A particular feature of the trade scene in 2005 was higher commodity prices, especially oil. While higher commodity prices have affected countries in very different ways, they nevertheless contributed to the largest share of developing countries in world trade for over five decades.
The report begins with a review of attempts to define subsidies. It goes on to consider what economic theory tells us about the effects of subsidies, providing a guide for assessing the desirability of different kinds of subsidy programmes.
The authors of the report examine the reasons governments give for using subsidies, and assess the incidence of subsidies in various industries and sectors. Finally, the report undertakes an analysis of the WTO rules on subsidies.