The electric vehicle (EV) sector has been a focal point for government subsidies aimed at reducing greenhouse gas emissions and promoting sustainable transportation. However, these subsidies often intersect with international trade rules, particularly those of the World Trade Organization (WTO), which categorizes subsidies into prohibited or actionable categories. The current WTO framework is increasingly seen as inadequate in addressing the complexities of modern subsidy policies, especially in the context of global challenges like climate change and economic competition.¹

The role of subsidies in EV adoption

Subsidies have been crucial in promoting the adoption of EVs by reducing the cost barrier for consumers. For instance, a study using a game-theoretic approach found that a combination of subsidies for EVs and green taxes on conventional vehicles can enhance social welfare and environmental benefits.² However, the sustainability of such subsidies is questionable, as they are not viable in the long term. Alternative incentives, such as driving privileges and infrastructure development, are being explored to fill the gap left by subsidy reductions.³

Challenges with WTO Compliance

The intersection of EV subsidies and WTO rules presents significant challenges. For example, China's renewable energy vehicle subsidy policy has been found inconsistent with the WTO subsidy agreement, as it provides subsidies exclusively to local producers, which constitutes a prohibited subsidy under WTO rules.⁴ Similarly, the European Union's Foreign Subsidies Regulation (FSR) has raised concerns about potential conflicts with the WTO's Agreement on Subsidies and Countervailing Measures (SCM Agreement), as it allows unilateral action against foreign subsidies that may distort the internal market.⁵

The effectiveness of WTO rules in regulating electric vehicle (EV) subsidies is indeed complex and involves several challenges.

Key considerations

• Certain subsidy measures, such as credit preferences, financing support, and local content requirements (LCRs), may be classified as prohibited or actionable subsidies under WTO rules. Tax incentives and price support could be considered actionable subsidies, which are subject to challenge if they cause adverse effects on other WTO 
  members.⁶
• Subsidies targeted at specific EV enterprises or regions might be seen as specific subsidies, and make them vulnerable under WTO rules. "Specific" subsidies are regarded as distortive and discriminatory and are indeed regulated by WTO rules. For a subsidy to be challengeable under WTO rules, it must be specific. Specificity is irrevocably pressumed in cases where the granting of a subsidy is contigent on export performance or local content requirements.⁷
• WTO rules apply even if subsidies are granted to EV producers producing in special economic zones.⁸

Policy implications and recommendations

To align EV subsidy policies with WTO rules, several measures can be considered. Expanding the eligibility for subsidies beyond local producers and altering payment methods could help eliminate prohibited subsidies. Additionally, strengthening the supervisory role of central or federal governments over local subsidy practices and encouraging private investment in renewable energy infrastructure are crucial steps to mitigating some of the risks associated with WTO rules. The EU's approach to foreign subsidies also highlights the need for careful navigation of WTO rules to avoid legal conflicts.

Conclusion

The EV sector's reliance on subsidies is a double-edged sword, offering significant environmental benefits while posing challenges under international trade rules. As countries strive to balance these aspects, revising subsidy policies to ensure WTO compliance and exploring alternative incentives will be essential for sustainable growth in the EV market.

De Minimis Law has substantial experience advising clients on the WTO and USMCA legal aspects of subsidy policies. For further updates or assistance in navigating these complex issues, feel free to contact our office.

Disclaimer:

This article is for informational purposes only and does not constitute legal advice.

¹ Bernard Hoekman and D. Nelson. "Rethinking International Subsidy Rules", CEPR: International Trade & Regional Economics (Topic) (2020). https://doi.org/10.2139/ssrn.3630870.

² Abhishek Chakraborty, R. Kumar and K. Bhaskar. "A game-theoretic approach for electric vehicle adoption and policy decisions under different market structures", Journal of the Operational Research Society, 72 (2020): 594 - 611. https://doi.org/10.1080/01605682.2019.1678407.

³ Shaodong Ma, Jin-Hua Xu and Ying Fan. "Willingness to pay and preferences for alternative incentives to EV purchase subsidies: An empirical study in China", Energy Economics (2019). https://doi.org/10.1016/J.ENECO.2019.03.012.

⁴ Congxiao Zhang and Jang-Woo Choi. "A Study on China's Renewable Energy Vehicle Subsidy Policy under the WTO Framework", Korea International Trade Research Institute (2024). https://doi.org/10.16980/jitc.20.2.202404.249.

⁵ Malte Frank. "The EU’s new Foreign Subsidy Regulation on collision course with the WTO", Common Market Law Review (2023). https://doi.org/10.54648/cola2023070.

⁶ Yuan Hua, Ji-Eun Park and Xiao-hui Li. "Green Industrial Policy Conflict with WTO Rules and Implications for Emerging Economics: From the Perspective of New Energy Vehicles (NEVs)", Korea International Trade Research Institute (2023). https://doi.org/10.16980/jitc.19.3.202306.81.

⁷ Idem

⁸ Sherzod Shadikhodjaev. "The WTO Agreement on Subsidies and Countervailing Measures and Unilateralism of Special Economic Zones", Journal of International Economic Law (2021). https://doi.org/10.1093/JIEL/JGAB013.