One way to ensure that necessary economic stimulus does not end up distorting trade and global competition is by making support measures time-limited, e.g. through sunset clauses or other similar mechanisms.2 This will help mitigate the risk that temporary support becomes entrenched and outlives its purpose
Another is to favour measures that are targeted at those companies and sectors that experience the most disruption as a direct result of the pandemic, with a view to avoiding windfall benefits or rescuing firms that would also have failed absent the pandemic.3 This will help minimise the risk that stimulus spawns a new cohort of corporate zombies or national champions that could restrict competition, dampen domestic productivity growth, distort international markets, and impede the economic recovery and, in some cases, aggravate economic disparities.
Who gets support also matters for trade. On the demand side, governments should favour, where possible, measures that benefit final consumers directly and leave them free to decide how to spend the cash they receive. This is in contrast to measures that tie support to the consumption of specific goods or services (e.g. fossil-fuel subsidies or subsidised purchases of locally made products), which can distort relative prices, send inaccurate signals to producers, and reduce consumer choice. In terms of support to firms, much depends on how large and trade-exposed recipient companies are, and whether they are part of complex supply-chain networks. Support for MSMEs – which are generally least able to cope with large economic shocks – is unlikely to distort global trade very much, while offering the biggest “bang for the buck” in terms of employment and social stability.4 This is in contrast to stimulus tools that put large domestic producers (and state champions in particular) at a competitive advantage over domestic and foreign competitors, which benefit the few at the cost of the many and lead to longer term distortions. Lastly, policies need to apply objective, transparent criteria for determining firms’ eligibility – in particular, to distinguish between transitory liquidity problems at which assistance should be targeted and existing structural issues in relation to corporate solvency or performance.
Governments could reap additional benefits by aiming for support measures that achieve “double dividends” and help ensure that longer-term policy objectives are not sacrificed for short term economic stimulus. Climate change remains a concern even as countries struggle to contain the COVID-19 pandemic and its economic and social consequences. To the extent possible, efforts should be made to align stimulus measures with climate and environmental objectives more widely, or at a minimum ensure that such measures do not compound or exacerbate existing problems. More broadly, support for businesses could contribute to sustaining innovation efforts and existing productive capacity at a time when depressed activity might lead many companies to cut into their spending on R&D and staff training. This can help minimise the damage that short-term shocks could impose on long-term growth potential (a phenomenon known as “hysteresis”).