Transport

The transport sector refers to economic activities related to the provision of transport infra¬structure (e.g. road building and maintenance) the operation of public and private transport services (e.g. running trains, cargo ships, taxis, airplanes). For the purposes of subsidy analysis the sector is sometimes extended to include the production or consumption of vehicles and vessels (e.g. cars and airliners) and transport fuels.

Governments have been spending public money on transport infrastructure since antiquity, particularly where roads and ports have served strategic military purposes. Initially, many roads and ports were self-financed, through tolls collected on users. However, with the expansion of road networks, most governments have moved away from charging user fees directly and, except in the case of limited-access highways, now finance roads and highways out of general taxation or through earmarked taxes on transport fuels.

Government subsidization of public transit began in the 20th century in most countries; few city bus lines or underground railway lines cover all of their costs through fares. Even in rural areas, many OECD countries purchase passenger transport services under contract from commercial and semi-commercial bus, train and airline operators. These would be money-losing ventures were it not for public subsidies.

Three types of policies have a bearing on the use of transport infrastructure: government transfers to transport operators; subsidies to transport inputs, including fuel, vehicles, labour and land (for operators in this case rather than infrastructure); and charges for the external costs of transport (mainly environmental and congestion costs).

Examples of subsidies to transport operators include compensation payments in connection with public-service obligations; differential rates of VAT applied to air and train tickets that are lower than standard rates applied to other services in the economy; and fuel tax rebates and differentials. Choosing the appropriate baseline rate for fuel taxes is problematic as oil products are typically taxed according to use, rather than their value or energy content. Thus jet kerosene attracts no excise duty, gasoline attracts higher rates of tax than diesel in many countries, diesel is taxed far more than domestic heating fuel, and excise tax is not generally levied on marine bunker fuel.

In terms of subsidies to transport inputs, vehicle assembly plants in particular have attracted generous investment incentives, because of the scale of the manufacturing facilities involved and impacts on local employment. These incentives include preferential local tax rates and tax holidays, grants for the construction of industrial plants, special treatment of expenditure on research and development for tax purposes, and re-allocation of production costs to research and development costs.

The final, and in some ways most important incidence of subsidy, arises in the way transport operators and private vehicles pay for the use of transport infrastructure. Practice varies between countries, but more importantly between modes. For example, airlines pay airport landing fees to cover their infrastructure costs, though where a single till approach is used to finance an airport, income from non-aviation services, such as from sales of duty-free goods, is sometimes used to cross-subsidize aviation services. Road users pay tolls on some roads, but on most they do not. However, annual taxes are levied on vehicle ownership, in some cases explicitly as a charge for access to the road network. The high level of excise duty levied on transport fuels is also often regarded as a means of payment for the use of roads. In a few countries (including the United States) fuel tax revenues are earmarked for expenditure on roads.

The transport sector has significant impact on the environment. Emissions of CO2, noxious gases and particulate matter from transport activities can be significant, and to the extent that they are allowed, some transport economists consider it a form of subsidy. Other environmental externalities include the fragmentation of wildlife habitats and landscapes, noise pollution, air pollution and water pollution (e.g., from spills of hazardous materials, and from the salting of roads against ice and snow).

No internationally comparable estimates of net subsidies to transport are currently being collected. Satellite transport accounts are kept within national accounts, or separately by transport ministries (or in the case of the United States, by the Bureau of Transport Statistics) in some but not all OECD countries. These identify government expenditures on and revenues from transport and transport infrastructure. The increasing use of public-private partnerships to fund transport infrastructure complicates the reporting of public spending on infrastructure.

Different international rules apply to different segments of the transport sector. Inputs, particularly fuels, and most capital used for transport are covered by the WTO’s Agreement on Subsidies and Countervailing Measures. The exception is ethanol, which is covered by the WTO’s Agreement on Agriculture. Subsidies to transport services are covered by the WTO’s General Agreement on Trade in Services (GATS) and by some regional and bilateral trade agreements.

The way in which large ships, such as oil tankers, are traded puts them in a special category, outside the normal WTO disciplines. In December 1994, the Commission of the European Communities, and the Governments of Finland, Japan, the Republic of Korea, Norway, Sweden and the United States signed the Final Act of the "Agreement Respecting Normal Competitive Conditions in the Commercial Shipbuilding and Repair Industry”, which had been negotiated at the OECD. The goal of the Agreement was to establish normal - i.e., subsidy and dumping-free - competitive conditions in the shipbuilding industries of OECD countries. However, the United States never ratified the Agreement, and consequently it is not in force.

The GATT Agreement on Trade in Civil Aircraft, which entered into force in 1980, contains disciplines on government-directed procurement of civil aircraft and inducements to purchase such aircraft. The issue of government financial support is addressed Article 6.1, which acknowledges that the GATT Subsidies Code (the predecessor to the ASCM) applies to trade in civil aircraft, and provides assurances that, when governments “participate in, or support” civil aircraft programmes “they shall seek to avoid adverse effects on trade in civil aircraft […] .”

In 1992, the EU and the US - the world’s two leading producers of civil aircraft - entered into a separate, bilateral agreement pertaining to trade in large civil aircraft. That agreement was signed with the recognition “that the disciplines in the GATT Agreement on Trade in Civil Aircraft should be strengthened with a view to progressively reducing the role of government support”.

Several disputes brought to the GATT and the WTO have involved alleged subsidies to either automobiles or civilian aircraft. Indeed, the largest subsidy cases adjudicated by the WTO to date (collectively referred to as Boeing-Airbus) concern civilian aircraft. Many experts believe that the cases will be settled outside the WTO dispute settlement system since the panels (which will not report until the end of 2006 at the earliest) are expected to find violations of the WTO subsidy rules by both parties, which would leave open the possibility of trade retaliations worth billions of dollars.