Legality of R&D Subsidies and Its Policy Framework under the World Trading System: The Case of Civil Aircraft Disputes

Technology research and development (R&D) expenditures have increased as most countries recognize that technological innovation is a significant factor for continued economic growth. R&D subsidies by governmental entities were permitted in accordance with the Subsidy and Countervailing Measure (SCM) Agreement under the World Trade Organization (WTO) system. However, according to Article 31 of the SCM Agreement the provision for R&D subsidies have been terminated as of January 2000 and legal disputes over R&D subsidies are likely to increase. The aircraft industry has been the only industry where R&D subsidies have become an issue under the WTO. This paper examines international trade disputes within the aircraft industry in regards to measures by Canada and bilateral disputes between the U.S. and the European Communities (EC). In these cases, various R&D subsidies on civil aircraft are found to be inconsistent with WTO rules. This study summarizes the WTO decisions on various R&D subsidies disputed in the aircraft cases and examines the type of R&D subsidies found to be inconsistent (or consistent) with the WTO to provide guidelines for current and future R&D subsidy policies in high-tech industries. The Canada-Aircraft case indicates that R&D subsidies directly targeted towards near market R&D projects with a high export potential will likely be in violation of current WTO rules. Furthermore, findings from the EC-Aircraft and the U.S.-Aircraft cases suggest that the forms (or the methods) of R&D subsidy distribution were not a sufficient condition for the WTO ruling; instead, what ultimately mattered was whether and specifically to whom the benefits of the R&D subsidies are conferred by the government entities.