Even before the coronavirus slammed the brakes on the world economy, governments were breaking free market principles all the time, handing out special treats to favored firms like cheap loans and tax breaks. These subsidies, known as state aid, have become the thorniest issue in global trade as countries accuse each other of not playing fair. As the Covid-19 pandemic ramps up pressure on governments around the world to bail out companies and keep economies afloat, new fights are erupting over the fragile set of regulations designed to curb unfair state support.
1. What's wrong with a little help from the state?
Sometimes it's not little at all. Though state aid can be as modest as tax exemptions or loans at low rates, it can also take the form of massive rescues, such as Germany's 9 billion-euro ($10 billion) bailout of national flag-carrier Deutsche Lufthansa AG. Such interventions raise questions on whether it's fair to bail out a business when others have to struggle on without help. Before the pandemic, hackles were raised over China's cheap loans, Italian bank rescues and dueling state subsidies for Boeing Co. and Airbus SE. The US presidency of Donald Trump has been marked by accusations that unfair Chinese subsidies held back American firms.
2. Is state aid a problem?
It can be. Governments now choose which firms or industries to rescue. Deciding where the aid should go widens political fault lines in the US and increases strains between richer and poorer European Union states. In March China began assuming control of debt-laden HNA Group Co., paving the way for a hastened selloff of the once-sprawling conglomerate's remaining assets after it became one of the region's biggest corporate casualties of the coronavirus outbreak. State help sometimes aims to build global champions, not only helping Chinese firms to expand fast but also companies such as Gulf airlines to build out flight networks. Chinese aid has stoked calls in Europe and the US for tougher measures to hamper Chinese trade.
3. Who is up in arms about it?
Companies can complain about state aid if they see competitors getting aid they can't match, whether those rivals are in China or nearby. Increasingly, politicians are complaining about potential taxpayer bailouts for firms that may dodge taxes at home. Ryanair Holdings Plc, one of Europe's largest airlines, says bailouts to former state carriers reward companies that failed to build up cash reserves. It's planning to challenge Germany's bailout of Lufthansa, as well as seeking to topple France's $8 billion rescue package for Air France-KLM.
4. Who keeps score?
The World Trade Organization helps its 164 members adjudicate disputes over subsidies such as the decades-long cases involving US and EU aircraft subsidies. But the WTO's dispute settlement system has been weakened by the US and can't fully resolve disputes anymore. The EU supervises subsidies given by member countries in its effort to open up trade, ordering governments to claw back payments that might undermine European rivals. The EU is now looking at acting against companies that get foreign subsidies to out-compete in Europe.
5. How does the pandemic change the debate?
Subsidies are no longer a special exception for favored firms: almost everyone is getting something. The virus outbreak has forced governments to shower trillions of dollars on companies to compensate for stalling business activity. Politicians who advocate free-market policies and criticize other countries for subsidies must now defend their own efforts to shore up the economy with state support. Britain's Conservative government was forced to move away from decades of selling off or subsidizing state-owned businesses to temporarily cover private railway costs. The EU had to relax aid rules to allow the state cash floodgates to open.
6. Will things get back to normal after the pandemic?
Don't count on it. Consider Germany, where Chancellor Angela Merkel's government realized in March that extraordinary measures were needed. A rescue package totaling 600 billion euros was rapidly put together, to be followed by more funding later in the spring. By the time she leaves office, Merkel will have installed a kind of state capitalism in Germany that borrows heavily from France and even reflects China's success. It will give officials power to pick winners and losers, seeding new industries and grooming national champions. Buying stakes in companies is no longer taboo and the balanced-budget policy has been jettisoned.
7. Who needs state help and who doesn't?
Governments are choosing to target aid for services they see as important. Airlines are getting some $85 billion euros in bailout funding, much of that loans that will need repayment. That help might mean aircraft manufacturers Boeing and Airbus won't need bailouts. While most carmakers are tapping financial markets and hope they'll be able to make up shortfalls in funding, French President Emmanuel Macron unveiled a raft of measures aimed at reviving France's struggling auto industry. His package of incentives for purchases of electric cars, cash-for-clunkers and subsidies for struggling car-parts makers totaled roughly 8 billion euros, including 5 billion euros of state-backed loans earmarked for Renault SA. In Italy Fiat Chrysler Automobiles NV was seeking a 6.3 billion-euro state-backed loan to save its operations in its home country. So far banks around the world generally aren't looking for rescues, a decade after they were bailed out and made changes to bolster balance sheets. But a long or steep economic downturn that hurts loan repayments could put them under strain.
8. What does history show?
State spending can pull the economy out of the doldrums -- within limits. US President Franklin Roosevelt's New Deal to create jobs and restore business confidence is credited with ending the 1930s Depression. But the jobless rate didn't fall significantly until World War II stoked demand. Government banking rescues during the 2008 financial crisis saved the financial system but didn't prevent slow growth and persistent unemployment in some countries.
Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.