Subsiding Subsidies: A Taxing Issue

• After two decades of negotiations, a partial ban on capacity-enhancing (i.e., harmful) fisheries subsidies is finally within the World Trade Organization’s (WTO) reach. If agreed it will impact global fish biomass and therefore fishing revenues.

• The current draft text would increase global fish biomass by a marginal 1.6% by 2050, mainly because of multiple exemptions and the exclusion of tax exemptions from the definition of subsidies.

• Our interactive dashboard allows investors to determine which countries would be exempt from the potential ban, based on different negotiating positions, to understand how revenues of local companies will be affected. In the current draft, 39 countries accounting for 11% of global capture seafood production are likely to be exempt from the potential ban.

• A full ban on all capacity-enhancing subsidies would drive an estimated increase in fish biomass almost eight times greater than the current draft, but securing this outcome is improbable as it would most likely require a global tax reform agreement in order to avoid advantaging large-scale and distant-water fleets.

• A marginal win for nature would be better than no win at all – negotiations remain on a knife edge.

Inefficient resource allocation: how $24 billion of public money contributes to overfishing

Each year, governments around the world grant around $39 billion in fisheries subsidies, two-thirds of which go to commercial fishers.1 Out of these, $24 billion are deemed harmful, because they contribute to overfishing or overcapacity in global oceans.2 Such harmful subsidies, also called capacity-enhancing subsidies, include:

• Boat construction and renovation
• Fuel subsidies
• Fisheries development projects
• Fishing port development
• Marketing and storage infrastructure
• Non-fuel tax exemption
• Fishing access agreements.

China, the EU, the US, South Korea and Japan are the top five providers of fisheries subsidies globally (including all subsidies, not just the harmful ones).

China, Japan, the EU, South Korea and Russia are the top five providers of harmful fisheries subsidies – in shades of red in Figure 1 below.

Figure 1: Beneficial (shades of blue), Harmful (shades of red) and Ambiguous (shades of purple) Fisheries Subsidies – Top 10 Countries/Areas with Highest Level of Total Subsidies.3

Hope for a deal after two decades of failed negotiations

Negotiations at the World Trade Organisation (WTO) on fisheries subsidies were launched in 2001 at the Doha Ministerial Conference, to “clarify and improve existing WTO disciplines on fisheries subsidies”.4 In 2005, a call to prohibit certain forms of fisheries subsidies that contribute to overcapacity and overfishing was included. SDG14.6 explicitly states that such subsidies should be prohibited by 2020.5

WTO members have failed to deliver on this goal for two decades, but new WTO Director-General Ngozi Okonjo-Iweala made it very clear that members need to reach an agreement before the end of November, when the WTO’s own Ministerial Conference begins.6

WTO members agreed that the negotiating text currently before them can be used as the basis for the talks to strike the final deal.7

The current stage of meetings, scheduled for 11-29 October 2021, aims to “comb through the draft text clause-by-clause and produce a fully agreed clean text”.8

The draft text plans a ban on harmful fisheries subsidies, but with many exemptions

The key intention of the current draft text is expressed as follows:

‘No Member shall grant or maintain subsidies to fishing or fishing related activities that
contribute to overcapacity or overfishing [which include]:

(a) subsidies to construction, acquisition, modernisation, renovation or upgrading of
vessels;
(b) subsidies to the purchase of machines and equipment for vessels (including fishing
gear and engine, fish-processing machinery, fish-finding technology, refrigerators, or
machinery for sorting or cleaning fish);
(c) subsidies to the purchase/costs of fuel, ice, or bait;
(d) subsidies to costs of personnel, social charges, or insurance;
(e) income support of vessels or operators or the workers they employ;
(f) price support of fish caught;
(g) subsidies to at-sea support; and
(h) subsidies covering operating losses of vessels or fishing or fishing related activities”.9

Similarly, the text proposes to ban subsidies regarding overfished stocks and subsidies to vessels or operators engaged in IUU (Illegal, Unregulated & Unreported) fishing. However, there are multiple exemptions and exceptions.10

Who would be exempt from the ban on harmful subsidies?

Some countries, such as Comoros, Kiribati or the Seychelles, are so dependent on seafood that a ban on harmful subsidies would significantly affect their economies. In the ten countries with the highest level of total fisheries subsidies, the harmful ones generally account for less than 0.1% of GDP.11 Yet in Kiribati for instance, such subsidies are c. 200 times greater than in China as a proportion of GDP – see Figures 2 and 3.

 

Figure 2: Ratio of Harmful Fisheries Subsidies to GDP – Top 10 Countries with Highest Level of Total Subsidies.12

 

Figure 3: Ratio of Harmful Fisheries Subsidies to GDP – Top 10 Countries with Highest Ratio.13

Therefore, some countries will be exempt from the proposed ban; the issue is which ones? As it stands, the current draft offers special and differential treatments to developing countries, including Least Developing Countries (LDC), which will be granted an exemption for two years for subsidies that relate to:

– vessels engaged in illegal, unreported and unregulated (IUU) fishing (article 3).14
– overfished stocks, but only for livelihood fishing up to 12 nautical miles from the coast (article 4).15

In addition, the text contains two potential alternatives that would grant a permanent exemption to some developing countries for subsidies that relate to overcapacity and overfishing (i.e., they would be permitted to grant such subsidies, see article 5).16 Neither of them has attracted enough support from WTO members.17

Our interactive dashboard allows investors to map different negotiating positions to understand how they affect companies’ revenues

In the first option (ALT1 of article 5.5 of the current draft of the text),18 countries that meet all of the following criteria would be exempt from a ban on subsidies that drive overfishing or overcapacity:

– the Member’s Gross National Income (GNI) per capita does not exceed USD 5,000 (based on constant 2010 US dollars) for three consecutive years;
– the Member’s share of the annual global marine capture fish production does not exceed 2% as per the most recent published FAO data;
– the Member does not engage in distant water fishing; and

– the contribution from Agriculture, Forestry and Fishing to the Member’s annual national GDP is 10% or more for the most recent three consecutive years

Examining all countries against these four criteria, we found out that 39 countries meet all four of these criteria. More than half of them are in Africa – see Figure 4. The full list is in the Appendix.

 

Figure 4: Map of Countries that meet/ do not meet the Exemption Criteria to the Drafted Ban on Overfishing/Overcapacity Fisheries Subsidies as of July 2021 (in green/ red). Landlocked countries are in grey.

Only nine of the 36 Small Islands Developing States (SIDS) are on the current list (those with an asterisk in the table in the Appendix).

In total, these 39 countries granted USD 2,325 million in fisheries subsidies in 2018, equivalent to 5.9% of the global total.19 They account for 11.0% of global wild-catch production.20

We caution that the thresholds retained might be subject to change as negotiations evolve. For this reason, we have constructed an interactive dashboard which allows users to change these thresholds to see how the list of exempt countries evolves. For instance, if the threshold for Gross National Income per capita was changed to USD 10,000 and the threshold for Agriculture, Forestry and Fishing as a % of GDP to 5%, 47 countries would be exempt as opposed to the present 39 and their combined wild-catch production would be 14% of the global total.21

Our dashboard allows investors to understand which countries will be affected by/exempt from a potential ban, with implications for the revenue of local companies.

The second alternative exemption (ALT 2 of article 5.5)22 would use different criteria to grant exemption to the ban on subsidies that drive overfishing or overcapacity:

– there would be a 5-year transition period in which such subsidies would be authorised for developing countries
– after that, if a developing country does not account for more than 0.7% of global wild catch production and if its total subsidies do not exceed USD 25 million, that country could maintain these subsidies if a newly created committee formed with WTO members agrees there is a need for the country to do so.
Currently, 58 countries meet these criteria. The vast majority of them are small nations (because the criteria retained are absolute values, not per capita), see Table 2 in the Appendix. Their combined wild catch production is 2.6% of the global total and their combined fisheries subsidies is USD 520 million, or 1.3% of the global total.23
– subsidies for “low income, resource-poor and livelihood fishing or fishing related activities up to 12 nautical miles” would be permanently authorised for developing countries.

In summary, the first alternative would grant exemptions to fewer countries, but it would affect global fish biomass more negatively than the second alternative, given that the exempt countries would account for a far greater share of global seafood production and that exemption would be granted without the need for approval of a WTO committee.

A deal with a marginal positive effect on fish biomass is shaping up

What about the overall effectiveness of the agreement? How likely is it to boost fish populations and therefore fishing revenue in the medium term?

The Sustainable Fisheries Group of the University of Santa Barbara has developed a sophisticated tool in partnership with Pew Trusts to model down to the individual vessel level which fleets will be affected by the WTO subsidy reform proposals, using satellite data from Global Fishing Watch and a bioeconomic model to forecast the effects of reduced fishing effort on the health of fish stocks around the world.24 Building our own scenarios using that tool, we have compared the impact of the current draft text to a few other possibilities, including a complete ban on all harmful subsidies with no exemptions.

Overall, the impact of the current draft is relatively weak: it would only increase global fish biomass by an estimated 1.6% vs a business-as-usual scenario by 2050. 25

In theory, the deal could be much more effective…

In comparison (see Figure 5 below), a complete, immediate ban on all capacity-enhancing fisheries subsidies globally would boost the estimated global fish biomass by 2050 almost eight times more than the current draft. Similarly, if only fuel subsidies were banned (without any exceptions), fish biomass would increase by an estimated 5%26 – see Figure 5.

Figure 5: Change In 2050 Global Fish Biomass in Different Scenarios Vs. Business as Usual.27

How could the proposed ban become more effective?

… but in practice it will be hard to get there, due to definition issues

Whilst about two-thirds of the WTO’s 164 members are developing countries,28 there is no definition of “developing country” at the WTO level: countries announce themselves whether they are “developed” or “developing”.29 This can create issues, and indeed other members can challenge the decision of a member to make use of provisions available to developing countries, such as longer transition periods and technical assistance.30 In 2020 for instance, China sought to secure the status of developing nation for the purpose of these negotiations and therefore a special and differential treatment (SDT) in a potential deal on fisheries subsidies (even though China is by far the largest provider of such subsidies).31 As seen previously, multiple exemptions are granted to developing countries, in order to avoid jeopardising the viability of their food systems and societal infrastructure. At the WTO, this can antagonise developed countries and developing countries and indeed this seems to be the case in the current round of negotiations.32

Another major bone of contention is the definition of “subsidies” and fuel subsidies in particular.

Indeed, “a number of Members pointed to fuel detaxation or fuel tax relief schemes, which in their view should not be subject to the disciplines on the basis that they are not subsidies or are not focused on the fisheries sector”.33 This is the view of the European Union.34

Tax exemptions for fuel are dreadful but hard to get rid of

The current status quo with regard to tax exemption for fuel is dreadful from an environmental perspective: taxpayers effectively subsidise the consumption of fossil fuels to allow a very small proportion of the local workforce35 to fish far out at sea,36 often at a loss,37 while often contributing to overfishing.

However, changing the status quo is an excessively challenging issue. The obvious course of action would be to ban tax exemptions on fuel, but its unintended consequences would be significant:

– because fiscal sovereignty of states only applies in territorial waters (12 nautical miles from the shore), it has been argued that countries would not be able to charge tax on the fuel used outside of these waters.38
– this would mean that compared to the status quo, fleets fishing in territorial waters (typically small-scale fleets) would be disadvantaged compared to large-scale fleets and distant-water fleets fishing further out at sea. The relative tax advantage might also incentivise large-scale fleets to fish less in territorial waters and move further out at sea, where monitoring is often not optimal.
– it would also increase the likelihood that vessels refuel at sea, which is risky from an environmental perspective.

Two possible ways to overcome this undesirable outcome would be to either:

– reform the UNCLOS39 so that taxation applies beyond the current 12 nautical mile limit, but that would be extremely challenging, or
– to provide small-scale fleets with compensatory measures that make them more competitive against large-scale and distant-water ones, but that would effectively mean replacing a subsidy by another subsidy.

Neither of these options are likely to be agreed at the global level in the short term.

A marginal win for better nature is better than no win at all

In addition, there is a real risk that no deal is agreed at all. For instance, at the end of September, India issued a new proposal that would grant a 25-year exemption from subsidy prohibitions for developing nations that are not engaged in distant-water fishing, whilst those with distant-water fishing fleets would have to reduce these fleets by a certain percentage every year. This would be a significant change from the current draft, and we understand that the proposal was not warmly received.40 It shows that reaching an agreement will not be easy.

There are significant hurdles to be overcome to agree the present draft, even with all the embedded caveats. An unanimous approval is required.41
Although the present negotiating text is disappointing for those looking to significantly improve the biomass of the world’s oceans, it is better than the present status.

Appendix:

Table 1: List of Countries that meet the Exemption Criteria to the Drafted Ban on Harmful Fisheries Subsidies as of July 2021 (SIDS have an asterisk), based on ALT 1 of article 5.5 (Please see our Interactive Dashboard to see how that list evolves if the draft text evolves)42

 

Table 2: List of Countries that meet the Exemption Criteria to the Drafted Ban on Harmful Fisheries Subsidies as of July 2021 based on ALT 2 of article 5.5, ranked by fisheries subsidies.43

1 Subsidyexplorer.org
2 Subsidyexplorer.org
3 Subsidyexplorer.org
4 https://www.wto.org/english/tratop_e/rulesneg_e/fish_e/fish_e.htm
5 https://www.wto.org/english/tratop_e/rulesneg_e/fish_e/fish_e.htm
6 https://www.project-syndicate.org/commentary/wto-fishing-subsidies-agreement-by-ngozi-okonjo-iweala-2021-07
7 https://www.wto.org/english/news_e/news21_e/fish_15jul21_e.htm
8 https://www.wto.org/english/news_e/news21_e/fish_30aug21_e.htm
9 https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/TN/RL/W276R1.pdf&Open=True
10 There are multiple exceptions and exemptions in the draft text. We focus here only on the major ones.
11 Subsidyexplorer.org
12 Subsidyexplorer.org
13 Subsidyexplorer.org
14 https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/TN/RL/W276R1.pdf&Open=True
15 https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/TN/RL/W276R1.pdf&Open=True
16 https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/TN/RL/W276R1.pdf&Open=True
17 https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/TN/RL/W276R1A1.pdf&Open=True
18 https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/TN/RL/W276R1.pdf&Open=True
19 Planet Tracker computations based on Sumaila et al (2018).
20 Planet Tracker computations based on Sumaila et al (2018).
21 Planet Tracker computations based on World Bank data (2020)
22 https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/TN/RL/W276R1.pdf&Open=True
23 Planet Tracker computations based on World Bank data (2020)
24 http://www.subsidyexplorer.org/
25 http://www.subsidyexplorer.org/
26 Planet Tracker based on Subsidyexplorer.org
27 Planet Tracker based on Subsidyexplorer.org
28 https://www.wto.org/english/thewto_e/whatis_e/tif_e/dev1_e.htm
29 https://www.wto.org/english/tratop_e/devel_e/d1who_e.htm
30 https://www.wto.org/english/tratop_e/devel_e/d1who_e.htm
31 https://www.seafoodsource.com/news/supply-trade/chinas-demand-for-special-status-a-sticking-point-in-wto-fishing-subsidies-negotiations
32 https://www.seafoodsource.com/news/environment-sustainability/in-defiance-of-ngos-eu-backs-fuel-subsidies-for-its-fleet-at-wto-talks?utm_source=marketo&utm_medium=email&utm_campaign=newsletter&utm_content=newsletter&mkt_tok=NzU2LUZXSi0wNjEAAAF-pkKufbTl7TIcCRXuoOYflvQotCGAxtoxFe3Ga4QlepA20d0tCvmv3epOy6EOwcG7C6itV4L7fiPbbqES3rYQMscnnZW0i-DG19sQH1fdluMw6iw
33 https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/TN/RL/W276R1A1.pdf&Open=True
34 https://www.seafoodsource.com/news/environment-sustainability/in-defiance-of-ngos-eu-backs-fuel-subsidies-for-its-fleet-at-wto-talks
35 For instance, there were 4,678 jobs in the EU’s distant-water fleet in 2018 (Carvalho and Guillen, 2021)
36 In Spain for instance, 74% of the harmful subsidies are provided to distant-water fleets and large-scale fleets operating on the high seas (Planet Tracker computations based on Schuhbauer et al., 2020)
37 67% of the EU distant-water fleet was loss-making in 2018, even with the tax exemption on fuel (Carvalho and Guillen, 2021)
38 https://www.mdpi.com/2071-1050/13/5/2719/pdf
39 The United Nations Convention on the Law of the Sea (UNCLOS) is an international treaty which was adopted and signed in 1982. It has become the legal framework for marine and maritime activities.
40 https://www.seafoodsource.com/news/environment-sustainability/indian-introduces-polluter-pays-proposal-in-wto-negotiations
41 https://www.wto.org/english/thewto_e/whatis_e/tif_e/org1_e.htm
42 Planet Tracker (2021) based on WTO (2021) and World Bank (2020)
43 Planet Tracker (2021) based on WTO (2021), Sumaila et al (2018) and World Bank (2020)

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