The March 2026 US 301 investigations into manufacturing overcapacity show how this threat of industrial overcapacity and unfair trade can be weaponised | Photo Credit: AMIT DAVE

The debate on industrial policy and WTO reform has intensified amid geo-economic competition, technological shifts, and renewed state intervention in strategic sectors. As industrial policy instruments increasingly shape trade outcomes, permissible state support and the adequacy of WTO disciplines to ensure that such policies do not distort trade or undermine a level playing field have moved to the forefront. For developing countries, this debate is also intrinsically linked to ensuring they have the policy space flexibility necessary for structural transformation.

Two perspectives frame the discourse. The first, held by developed countries, blames global imbalances on unfair trade practices and market distortions. It claims state subsidies and non-market interventions undermine competitive neutrality, generate surplus production, and disadvantage market-based firms. Consequently, the US, EU, Japan, and others are pushing for stronger subsidy discipline, transparency, and stricter WTO enforcement. While primarily targeting China’s industrial dominance, other large developing nations remain potential targets.

For large developing countries like India undergoing genuine development transitions, global rule-making that inhibits the use of flexible industrial policies presents a severe challenge. Restraining state support risks undermining India’s ability to create the millions of middle-class jobs required for the socio-economic transformation envisioned under its Viksit Bharat vision.

Conversely, the second perspective views imbalances through structural inequities in the international economic system. Disparities in capital, technology, productive capacity, and global value chain integration constrain developing countries from high value-added activities. From this standpoint, industrial policy is a legitimate and necessary instrument for economic diversification, technological upgrading, and development catch-up.

The Centre for WTO Studies working paper Navigating the Development Divide: The Case for Policy Space in India’s Industrial Policy Strategy Amid Rising Global Protectionism and a follow-up discussion paper India’s Push for Balancing Industrial Policy Space in WTO: A Developing Economy, published by RIS, highlight that China and the developed West account for the bulk of global industrial subsidies. India and other large developing countries account for miniscule shares. Recent micro-level firm data from the OECD’s MAGIC Database of Industrial Subsidies confirms this.

Across major sectors, corporate subsidies in India, Brazil, and Indonesia represent a fraction of the revenue percentage seen in China and fall well below advanced European and East Asian levels. In absolute terms, their financial support remains extremely modest compared to the US, China, and advanced economies.

The March 2026 US 301 investigations into manufacturing overcapacity show how this threat of industrial overcapacity and unfair trade can be weaponised. This action targets major powerhouses like the EU, China, Japan, and Korea alongside developing nations like India, Brazil, and Indonesia. Read with US Deputy Secretary of State Christopher Landau’s candid remark that the US will not repeat the mistake of “allowing India to develop markets unchecked” like it did with China, the indication is clear.

There will be an attempt to frame global rules that undermine the rise of large developing countries to neutralise any future competitive threat. This poses a real danger to countries like India.

A critical and fair balance requires framing rules that hold dominant, non-market players like China accountable to prevent unfair practices, while ensuring developed nations do not use rule-making to inhibit future competition from rising developing economies like India. The two aforementioned papers offer a combination of recommendations to bridge this divide.

Balanced trade reform

Objectively define industrial dominance: Subsidies and unfair practices by dominant countries with significant sectoral shares of global output and trade have the most trade-distortive effects, and developed countries with higher per-capita incomes should not be allowed to defend their actions in the name of development transition. The proposed framework establishes three conditions to define industrial dominance: a country’s per-capita income must be above $14,000, and its overall manufacturing exports must be under 10 per cent of the world total or three times its global GDP share, whichever is higher. Additionally, its export share in that specific product must also be under 10 per cent or three times its global GDP share, whichever is higher.

Flexibilities for non-dominant developing countries: While dominant countries meeting these conditions must strictly adhere to rules under the WTO Agreement on Subsidies and Countervailing Measures (ASCM) and Trade Related Investment Measures (TRIMS), non-dominant developing countries below these thresholds should enjoy full policy flexibility. They must be freed from existing constraints under these WTO rules, with the sole exception of prohibited export subsidies under the ASCM.

Countering greater distortion potential: Although ASCM rules allow members to block unfair trade causing material retardation to domestic industries, strict evidentiary requirements make it difficult to counter dominant global suppliers. Stricter rules must apply to industrially dominant players. Meeting the dominance criteria should constitute prima facie evidence of capacity to distort trade, allowing provisional anti-dumping or countervailing duties for up to one year to shift the burden of proof to the dominant supplier.

Stricter accountability and transparency: The ASCM mandates subsidy reporting but fails to effectively penalise non-compliance. If a dominant player hides a subsidy, it should be presumed illegal and harmful, permitting other members to immediately levy temporary protective tariffs without lengthy harm-proving processes. These penalties remain until full disclosure occurs. Limiting this rigorous discipline to truly dominant players ensure it avoids placing undue institutional burdens on developing countries and LDCs.

The writer is Head, Centre for WTO Studies, Indian Institute of Foreign Trade. Views are personal

Published on June 23, 2026