Time to declare truce in subsidy wars

(Paru dans The Gazette, le 8 mai 2008)

Have you ever had the impression, watching governments try to outbid each other to obtain industrial projects, that all taxpayers, whether businesses or individuals, are carrying the can for the happy few pampered industrial sectors?

That's what we're seeing these days with the contest between Quebec and Missouri to land the assembly plant for the CSeries aircraft. Bombardier's preferred site is Mirabel, near Montreal. In 2005, Ottawa offered $350 million in refundable assistance and seems to be sticking to this. Quebec promised a $118-million loan, refundable through royalties, but has stated it is open to upping its stake. The aircraft maker said it is looking for several hundred million dollars more in public funds.

Not a beginner at this game, Bombardier has opened talks with other suitors. What government would not be thrilled by the idea of hosting an industrial project that would create 2,100 jobs in a high-tech sector?

On May 1st, the Missouri Senate passed a bill that would give Bombardier up to $40 million a year in tax credits for eight years if it assembled the CSeries in Kansas City. The legislation also includes a repayment with interest of all tax credits issued, probably as a royalty on each plane sold.

In principle, a region's comparative advantages should be what drives companies in their siting decisions: availability of skilled and/or low-cost labour, quality infrastructure, moderate tax burden, and so on.

But in some industries, the players have managed to drag governments into a subsidy race, analogous to the 20th-century arms race. Each government has an arsenal of clear-cut and concealed subsidies in the form of tax credits, programs to reduce financing costs or business risks, sub-market price electricity rates, local purchasing policies or even defence policy in the case of aerospace.

Goaded by intense popular pressure, in some cases fuelled by the subsidized company itself, governments enter into bidding wars aimed at grabbing the sought-after investment project. But there's no free lunch: whatever form it takes, the cost of public assistance to the pampered industry is necessarily collected from other sectors of the economy. Those sectors bear the burden in the form of heavier tax loads that chase away investment and other jobs.

Proponents of industrial policies tout the number of direct and indirect jobs that their subsidies create, while conveniently ignoring those jobs that are killed by the taxes required to fund their interventions. From the taxpayer's standpoint, the net benefit of the investment may end up nil.

Who's fighting for those other, invisible jobs? Not the business lobbies that are largely funded by subsidized industries.

It is hard for a government to back off from a bidding war unilaterally. Unless, of course, it is confident that local conditions are attractive enough to compensate for an absence of subsidies. We're not there yet in many parts of Canada and the U.S.

What can be done, then? If unilateral disarmament is not an option, governments can still agree to limit the subsidy race. Currently, Canada's Agreement on Internal Trade enjoins provincial governments to "refrain from engaging in bidding wars to attract prospective investors seeking the most beneficial incentive package." At a bilateral level, British Columbia and Alberta have agreed, as part of their TILMA deal, to not directly or indirectly provide business subsidies that distort investment decisions.

These examples could inspire bilateral deals between other sub-national jurisdictions that are close economic partners, such as a Canadian province and a U.S. state. Some agreements between sovereign states already limit subsidy bidding wars, but much work needs to be done at the sub-national level: states, provinces and local governments. The lowering of tariff and non-tariff barriers to international trade was not achieved overnight.

Each round of the GATT and then the WTO added a stone to the edifice. In the case of business subsidies, our leaders would also benefit from engaging their counterparts in other jurisdictions in disarmament talks. In other states too, clear-eyed politicians may feel they are being dragged into a bidding war against their better instincts.

Paul Daniel Muller is president of the Montreal Economic Institute