By Jonathan Lynn
GENEVA, Oct 28 (Reuters) - Will global cooperation over the financial crisis give way to national fights over state subsidies to industries hit by the economic fall-out?
Maybe, say lawyers, since there are strict rules at the World Trade Organisation (WTO) limiting the use of subsidies.
But if all major countries are doing it, governments may not want to point fingers for fear of drawing attention to their own practices.
"To the extent that governments provide massive funds for bailouts, they do raise subsidies issues, there's no doubt about that," said Brendan McGivern, a partner at law firm White and Case, and former head of disputes at Canada's WTO mission.
However, he said countries often turn a blind eye to other nations' subsidies, especially if they are doing the same thing.
"Governments are always concerned that if they challenge other people's subsidies there's a risk of tit-for-tat retaliation," he said.
Differences over subsidies underlie some of the most bitter trade disputes, such as the challenges by the United States and European Union to each other's support for civil aircraft built by Boeing Co and EADS NV unit Airbus.
Governments around the world have pumped hundreds of billions of dollars into their banking systems, taking over toxic loans or injecting capital.
Now there are calls for similar help for industrial companies, hit by the economic repercussions of the crisis.
Trade disputes could emerge if aid to industrial companies gives them an edge over foreign competitors.
CAUSING HARM
Most of the calls for help have focused on the auto sector, which manufactures big-ticket items particularly susceptible to any retrenchment in consumer spending.
Moreover, the troubled U.S. sector is directly exposed to the credit crunch because of its reliance on consumer finance.
Subsidies can be more than the provision of cash. A government loan at below-commercial rates would also count.
For EU member states an added complication is that any state aid must not breach EU competition rules.
The WTO declined to comment on the admissibility of any of the proposals, which if challenged would have to be examined in a legally binding process under WTO dispute rules.
But the foundations of the WTO are that members must not discriminate among their trading partners, and that they must treat foreigners and locals equally.
The WTO's agreement on subsidies clearly bans aid that requires recipients to meet export targets or use a certain amount of local content instead of imported goods.
But other types of subsidy are allowed in some cases. A key test is whether the subsidy causes harm elsewhere.
"The grant of the subsidy is not enough -- you've got to show that the grant would injure an industry (in another country)," said John Donohue, an international trade lawyer in the Philadelphia office of law firm Thorp Reed and Armstrong.
Aid that allows a company to undercut a foreign competitor in each other's home territory or third markets is more likely to be challenged than one that just keeps a firm alive.
But when times are tough, one of the first things companies do is try and knock out their foreign competitors, Donohue said.
"If we hit a severe and prolonged recession, are we going to see an increase in unfair trade cases by U.S. companies versus foreign companies?" he asked.
Competitors can hit back at subsidies in various ways. Their government may slap countervailing duties on the products to compensate for the benefit of the subsidy, as well as mounting a legal challenge to the aid itself.