Putting A Stop To The Subsidy War

With the enactment of the U.S. Inflation Reduction Act (IRA) and the announcement of the European Union (EU) Green Deal Industrial Plan, there is now a full-fledged subsidy war between the United States and the European Union. While these subsidies are meant to encourage green technologies, incentivizing firms to produce locally would seem to be an almost as important policy goal. And it is not limited to the U.S. and the EU. Global Trade Alert recently reported that, in 2022, production subsidies accounted for half of all trade-distorting measures, making it the mostly commonly used harmful trade policy measure.¹

While subsidies can be appropriate policy tools to overcome market failure, they create significant distortions and can create a never-ending cycle of subsidization. Subsidies distort the allocation of resources among countries and within them. Firms will invest in the jurisdictions that provide the highest subsidies and will produce the goods to which