Green subsidies in international trade in goods: Global practices and implications for Vietnam

1. Introduction

Green subsidies have emerged as a prominent policy instrument reflecting global sustainability efforts. While fostering the green transition, major initiatives like the U.S. Inflation Reduction Act (IRA) and the EU Green Deal Investment Plan (GDIP) have reshaped global competition, raising concerns about trade barriers and WTO compliance. Statistics from the World Bank indicate a significant rise in such measures, increasing from 359 in 2018 to 403 in 2022.[1] From the perspective of Vietnam, an open economy heavily dependent on exports and actively pursuing international climate commitments, adapting to this trend is paramount. This paper analyzes the theoretical and legal frameworks of green subsidies to propose strategic policy solutions for Vietnam in navigating the evolving landscape of green industrial policies.

2. Overview of green subsidies in international trade in goods

2.1. Definition and classification of green subsidies

Green subsidies are broadly defined as financial support measures provided by the government - such as tax exemptions, grants, or preferential loans[2] - designed to incentivize environmentally sustainable activities[3]. Unlike the WTO’s “green light” or “green box” frameworks, which classify subsidies based on their minimal trade-distorting effects[4], contemporary green subsidies are distinguished primarily by their environmental objectives. Economically, they are viewed as necessary market-correcting failures by internalizing positive externalities, such as the development of clean technologies[5]. Generally, these definitions stress the purposive role of green subsidies in promoting climate action and ecological protection. This is what distinguishes green subsidies from the traditional understanding of subsidies in international trade, which is based on their impact on trade exchange.

Green subsidies can be classified into three principal categories[6]. First, tax incentives (e.g. tax credit, exemptions) are widely used by governments, such as IRAs in the United States[7] and China’s tax exemption policy for the purchase of electric vehicles (EVs)[8], to lower investment costs and foster the development of green industries. Second, financial support programs operate through direct transfers, such as non-repayable grants and direct payments, or by having the state cover a portion of the costs to encourage consumers and businesses to participate in green projects. Besides, indirect financial support instruments, including low-interest loans, loan guarantees, or below-market equity investments, help reduce the cost of capital and expand access to environmentally friendly products. Finally, regarding regulatory instruments with fiscal implications, notably the Feed-in Tariff (FIT) mechanism, whereby the government commits to purchasing electricity from renewable energy producers under long-term contracts at a pre-determined preferential price, thereby ensuring revenue stability and steering development toward clean energy objectives.

2.2. The legal framework for green subsidies

As the impact of green subsidies extends beyond the borders of a specific customs area, thereby affecting international trade, these subsidies fall under the purview of international trade law, including the provisions of the WTO and FTAs.

Within the WTO, the SCM Agreement serves as the central legal instrument. However, applying the SCM Agreement to environmental measures presents significant interpretative challenges. First, establishing the existence of a subsidy requires proving a “financial contribution” conferring a “benefit” (Article 1); this has sparked debate regarding whether instruments like FIT constitute actionable subsidies or merely regulatory market mechanisms. Second, since the expiration of the “green light” (non-actionable) category in 2000, green subsidies are legally treated as either prohibited (if export-contingent) or actionable. To be actionable, a measure must be specific to certain enterprises and proven to cause adverse effects to the interests of other WTO Members[9]. Being “specific” means it is accessible only to a particular enterprise, industry, or a group of enterprises or industries within a designated geographical region. In practice, even if a subsidy is not explicitly specific in law (de jure), it can still be deemed specific (de facto) if only a limited number of enterprises have access to it or if a disproportionately large amount of the benefit is received by a limited number of enterprises[10].

Whether green subsidies are specific or not remains a subject of debate. For instance, researchers have opposing views over whether the FIT mechanism, used to support renewable energy producers, is specific. Authors Mattoo and Subramanian argue that FIT subsidies are not specific because they provide economic-wide benefits[11]. Conversely, author Charnovitz argues that FIT subsidies are only granted to renewable energy providers and therefore are specific[12]. Consequently, the Dispute Settlement Body (DSB) or an investigating body of a WTO member needs to determine specificity based on factual evidence and should be considered on a case-by-case basis. Similarly, regarding “adverse effects”, the DSB or investigating bodies must accurately demonstrate the specific negative impacts of green subsidies to justify appropriate countermeasures. Beyond the SCM Agreement, green subsidies in goods must comply with the non-discrimination principles of GATT, and the investment provisions of the TRIMs Agreement, while the general environmental exceptions under GATT Article XX can serve as a defense for SCM violations remains an unresolved question[13]. However, it can be seen that when a complaint relates to the granting of subsidies that violate non-discrimination or the provisions of TRIMs Agreement, the respondent still has the opportunity to invoke the exception of Article XX to demonstrate the legality of its green subsidy implementation.

Furthermore, recent FTAs have expanded this regulatory scope. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and United States-Mexico-Canada Agreement (USMCA) introduce rigorous disciplines on state-owned enterprises (SOEs)[14], regulating “non-commercial assistance” in both goods and services sectors. The USMCA, in particular, sets stricter standards than the WTO by prohibiting certain financial support to insolvent SOEs without requiring a demonstration of adverse effects, thereby constraining compliance environment for state-led green industrial policies[15].

3. The practice of green subsidies in international trade in goods

3.1. Practices of major economies in implementing green subsidy policies

International practices demonstrate that the U.S. IRA of 2022 represents a significant paradigm shift, moving from purely environmental policies to a comprehensive green industrial strategy. Budgeted at approximately USD 369 billion, the IRA eschews direct cash grants in favor of an uncapped tax credit system with a minimum ten-year duration^[16]. Mechanisms such as the Investment Tax Credit and Production Tax Credit have served as massive levers to attract private investment into renewable energy. However, the IRA has sparked intense global trade controversy due to its stringent Local Content Requirements (LCRs)^[17]. For instance, the USD 7,500 electric vehicle (EV) credit is restricted to vehicles assembled in North America using minerals sourced from U.S. FTA partners. Establishing barriers against strategic competitors to decouple supply chains from China has created artificial “price gap”. From a legal perspective, conditioning subsidies on domestic content is deemed inconsistent with the National Treatment principle (GATT Article III:4) and constitutes prohibited subsidies under the SCM Agreement, thereby distorting global investment flows^[18].

In response to this race, the European Union introduced the GDIP in 2023 as a strategic countermeasure to maintain its position as a net-zero industrial hub. Unlike the centralized U.S. model, the EU operates a decentralized subsidy framework, combining relaxed national state aid rules with Union-level funds. A key feature of the GDIP is the “matching aid” mechanism, which allows member states to provide financial support equivalent to incentives offered by third countries to prevent investment diversion. Concurrently, the EU utilizes competitive bidding through the Innovation Fund, functioning as a reverse auction to optimize resource allocation. Furthermore, by integrating “supply resilience” criteria into public procurement and enacting regulations such as the Net-Zero Industry Act (NZIA) and the Critical Raw Materials Act (CRMA)^[19], the EU has created new technical barriers and reshaped supply chains, imposing significant compliance burdens on developing nations.

Distinct from Western reactive measures, China’s subsidy system is systemic and long-term, serving as a core pillar of its national industrial strategy. Prioritizing supply-side subsidies, the state builds superior production capacity before entering international competition. This model creates a “green paradox”: while it reduced global costs for solar technologies by over 80% through economies of scale^[20], the injection of cheap capital has led to severe overcapacity^[21]. Consequently, the flood of low-priced Chinese goods has triggered a wave of trade defense investigations from the U.S. and EU, further fragmenting the multilateral trading system^[22].

The convergence of major subsidy models has propelled global trade into uncertainty. This trend of “green protectionism” challenges WTO norms, requiring developing nations like Vietnam to adapt to stringent technical barriers. While fostering the energy transition, reliance on discriminatory measures risks fragmenting the trading system and compromising equitable market access.

3.2. Trade disputes concerning green subsidies within the WTO framework

An analysis of WTO dispute settlement practice reveals that countries often fall into legal traps when designing green subsidy policies, even when such policies are motivated by legitimate environmental objectives. The Canada - Renewable Energy case^[23] represents a significant milestone in WTO jurisprudence. The dispute centered on Ontario’s FIT Program, under which renewable energy producers were eligible for preferential electricity purchase prices if they used a specified share of domestically manufactured equipment and services - a form of LCR. Although the policy sought to promote the development of clean energy, the Appellate Body (AB) of the WTO concluded that the domestic content requirement violated Article 2.1 of the TRIMs Agreement and Article III:4 of the GATT 1994.

Similarly, the India - Solar Cells case^[24] reaffirmed the strictness of international trade disciplines. In this dispute, India required enterprises participating in its government procurement program for solar power to use domestically produced solar cells and modules. The DSB found that the measure violated the National Treatment principle under Article III:4 of the GATT, as it accorded less favorable treatment to imported products of the same kind. Notably, the AB upheld the Panel’s findings rejecting India’s justification under Article XX(j) and Article XX(d). This position was rejected by the WTO, which emphasized that determining a state of “short supply” requires an evaluation of the total available supply from all sources, not merely domestic output, and India failed to prove actual scarcity in the global market.^[25] The AB ruled that such international agreements do not constitute “laws or regulations” with direct effect in the domestic legal system to apply this exception^[26]. This case demonstrates that, even when a policy aims to nurture an infant domestic industry or accelerate the clean energy transition, it cannot overtly discriminate based on product origin. Member states cannot easily use environmental goals as a legal shield to validate subsidies that inherently violate the National Treatment principle.

Both cases highlight a fundamental paradox: while green subsidies are intended to correct environmental market failures, linking them to local content requirements introduces a new market distortion in international trade - precisely the type of distortion that WTO rules are designed to prevent. This underscores the significant challenge facing governments in crafting environmental policies that are both effective in achieving sustainability goals and consistent with multilateral trade disciplines.

3.3. Policy lessons for Vietnam

First, avoiding the legal trap of Local Content Requirements (LCRs). While the U.S. IRA employs LCRs to secure supply chains, the WTO jurisprudence in Canada - Renewable Energy and India - Solar Cells confirms that such measures inherently violate the National Treatment principle. Vietnam must not replicate the U.S. approach of conditioning subsidies on domestic origin, as this constitutes a defenseless violation under international law, distinct from the permissible environmental exceptions argued by defendants in these cases.

Second, designing “non-specific” measures based on objective criteria. To mitigate risks under SCM Article 2, it is crucial to deploy horizontal incentives - such as tax credits accessible to all enterprises meeting technical standards - rather than directing financial contributions to specific firms. This approach aligns with the "safe harbor" of Article 2.1(b) of the SCM Agreement, rendering subsidies significantly harder to challenge compared to the targeted support models that often trigger specificity investigations.

Third, shifting focus from production to consumption and R&D. International experience indicates that supply-side subsidies, such as those contributing to global solar panel overcapacity, are highly vulnerable to countervailing duties. Conversely, the EU’s strategy of prioritizing R&D funding and consumer adoption incentives  faces fewer legal frictions. Vietnam should prioritize subsidizing pre-competitive stages and demand stimulation to avoid the high trade-distortion risks associated with direct manufacturing support.

4. Implications for Vietnam in applying green subsidies in international trade in goods

4.1. Vietnam’s current practices in applying green subsidies in international trade in goods

Although the current legal system lacks a clear definition of “green subsidies” as a distinct legal concept, these measures are integrated into Vietnam’s policy framework as “investment incentives” and “investment supports”. In practice, Vietnam’s green subsidies are sector-specific and focus on reducing investment costs rather than providing large-scale direct financial transfers. First, the most prominent form of support has been in the renewable energy sector, where the FIT mechanism (implemented between 2017 and 2021), successfully stimulated rapid growth in renewable energy capacity by guaranteeing stable returns for investors^[27] . Following the expiration of FITs, Vietnam is transitioning toward competitive bidding and the Direct Power Purchase Agreement (DPPA) mechanism to enhance market access and reduce the financial burden on the state utility, Vietnam Electricity (EVN). In addition, renewable energy projects benefit from complementary incentives such as land-use preferences, fee and charge reductions, and access to preferential credit^[28].

However, this mechanism has revealed certain downsides. Domestically, rapid capacity expansion has outpaced grid infrastructure, resulting in transmission congestion and power curtailment^[29].  Internationally, Vietnam’s export-oriented green industries have become increasingly exposed to trade defense measures. A notable example is the U.S. utility-scale wind towers investigation, where the Department of Commerce (DOC) identified countervailable subsidies in the form of land-use preferences, import duty exemptions, and corporate income tax incentives for projects in specific economic zones, leading to the imposition of countervailing duties^[30]. This highlights a paradox whereby successful green industrial development may increase vulnerability to trade remedy actions.

Second, tax and fee incentives constitute a vital pillar of Vietnam's green subsidy system. This includes registration fee exemptions for EVs, preferential Special Consumption Tax rates, and green credit programs. Additionally, indirect subsidies, such as import duty exemptions for environmental machinery, are employed to lower production costs and encourage domestic green manufacturing.

In comparison to major economies, Vietnam’s approach differs markedly in scale and method due to fiscal constraints. Unlike the massive fiscal support of the U.S. IRA or the direct funding strategies of the EU Green Deal^[31], Vietnam relies primarily on cost-reduction instruments like FITs and tax incentives. While sharing China’s use of FIT mechanisms, Vietnam generally avoids granting direct loss-offsetting subsidies to SOEs - a practice that frequently becomes the focal point of international anti-subsidy investigations in the Chinese context^[32]. This strategic avoidance helps mitigate the risk of trade disputes regarding Vietnam’s green policies.

From a WTO perspective, while these incentives may qualify as ‘specific subsidies’ under the SCM Agreement, they are typically classified as actionable rather than prohibited because they are not contingent upon export performance or local content requirements. The removal of local content requirements in recent policies demonstrates Vietnam’s compliance efforts. These measures, albeit limited in scale, are not contingent on export performance or local content, and thus fall under actionable rather than prohibited subsidies under the SCM Agreement.

4.2. Implications for Vietnam

To ensure compliance with SCM disciplines, Vietnam must pivot toward non-specific subsidies. Under SCM Article 2, only subsidies specific to certain enterprises are countervailable. Hence, Vietnam should replace limited vertical, sector-specific packages with horizontal policies based on objective criteria (e.g., verified carbon reduction thresholds) codified in a national Green Taxonomy. Such neutral, generally applicable standards are significantly less likely to be characterized as trade-distorting, thereby mitigating legal risks.

Equally critical is the complete elimination of local content requirements (LCRs), which constitute prohibited subsidies under SCM Article 3.1(b). WTO jurisprudence (e.g., Canada - Renewables, India - Solar Cells) confirms that conditioning incentives on domestic content violates the National Treatment principle - and environmental objectives cannot justify such discrimination. Rather than origin-contingent measures, Vietnam should subsidize R&D, environmental infrastructure, and high-tech training - forms of support generally viewed as less trade-distorting and less prone to trade remedies.

Finally, Vietnam must adopt proactive trade diplomacy. At the multilateral level, it should collaborate with developing nations to advocate for a new category of non-actionable green subsidies (reviving the 'green light' category under the SCM Agreement). Concurrently, through new-generation FTAs (CPTPP, EVFTA), Vietnam can clarify permissible support boundaries and establish mutual recognition of green standards. This dual approach shields domestic policies from disguised protectionism while enhancing capacity to monitor foreign subsidies affecting domestic industries.

5. Conclusion

            Green subsidies have become central to industrial strategy amid climate and economic shifts. Though vital for energy transition, their WTO compliance under the SCM Agreement is fraught with legal risks and green protectionism. For Vietnam, rising trade remedies and carbon adjustments (e.g., countervailing duties) demand a policy shift: move from sector-specific to horizontal, origin‑neutral support based on a National Green Taxonomy, and eliminate local content requirements. Balancing sustainability with trade obligations, while leveraging FTAs and diplomacy to shape future rules, will be key.

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