The WTO Subsidies Rules and “Cash for Clunkers”
The government’s new “cash for clunkers” program has been wildly successful. Under the program, consumers may receive up to $4,500 towards the purchase of a new, more fuel-efficient vehicle. What is surprising is the impact this it is having on consumer spending patterns regarding domestic vs. imported vehicles. According to press reports, more than 70% of the clunkers that were traded-in were domestic. Moreover, as reported here, consumers are showing a preference for imported cars when they purchase under the program, with Toyota (17%) and Honda (14%) leading the way. The top ten sellers under the program are Ford Focus, Honda Civic, Toyota Corolla, Toyota Prius, Ford Escape, Toyota Camry, Dodge Caliber, Hyundai Elantra, Honda Fit, and Chevy Cobalt. In other words, six of the top ten sellers are foreign cars (although the Camry is built at home and abroad).
Cash for Clunkers is one of the few government subsidy programs that I am aware of that clearly has the de facto effect of promoting imported over domestic goods. The program doesn’t advertise that “we will pay you $4,500 if you trade in your domestic gas-guzzler and buy a fuel-efficient foreign one.” But in practice that appears to be the result.
Is there any problem with that under the WTO rules? Nope. You can favor imports, but not disfavor them. Under the WTO rules a subsidy is “actionable” if it “ One country’s subsidies can hurt a domestic industry in an importing country;  They can hurt rival exporters from another country when the two compete in third markets;  And domestic subsidies in one country can hurt exporters trying to compete in the subsidizing country’s domestic market.” Only the third appears relevant here, and foreign car manufacturers are faring fine in the U.S. market. (Although further information would be needed to determine the impact on foreign gas guzzlers).
Now if the effect were exactly the opposite–if consumers rushed to buy domestic cars instead of imported ones–then it might be problematic. But because consumer behavior appears to be favoring imports under the Cash for Clunkers program, there is no basis for WTO action.