subsidies under wto

1. Subsidies regime under WTO
Subject – International Trade Law
Semester VIII

2. - The WTO Agreement on Subsidies and Countervailing Measures disciplines the use of
subsidies, and it regulates the actions countries can take to counter the effects of
subsidies.
- Under the agreement, a country can use the WTO’s dispute-settlement procedure to
seek the withdrawal of the subsidy or the removal of its adverse effects.
- Or the country can launch its own investigation and ultimately charge extra duty
(“countervailing duty”) on subsidized imports that are found to be hurting domestic
producers
- A subsidy is a benefit given to an individual, business, or institution, usually by the
government
- A subsidy is direct or indirect
- The subsidy is typically given to remove some type of burden, and it is often
considered to be in the overall interest of the public, given to promote a social good or
an economic policy
- subsidies can be used to offset market failures and externalities to achieve greater
economic efficiency
- Subsidies are generally seen as a privileged type of financial aid, as they lessen an
associated burden that was previously levied against the receiver, or promote a
particular action by providing financial support

3. - Subsidies are the multilateral disciplines regulated by SCM Agreement of WTO
whereas countervailing measures are the kind of remedy for damage caused by
subsidy
- The general definition of subsidies can be understood with a simple word that
is ‘financial aid/ help’, which means any kind of financial aid/ help can be considered
as ‘subsidies’.
- The SCM Agreement has mentioned three conditions and explains that all of the
conditions are to be fulfilled, then only the action will be considered as a subsidy,
where the conditions are-
i. There must be a financial contribution either by the government or by any of the
public body within the territory of the member nation; and
ii. If the action is consistent with any form of income or price support.
iii. After any financial contributions, there must a benefit.
- The application of this agreement requires financial contributions such as loan,
financial incentives, special grants etc., and explains that any financial contribution
even from the sub-governments is considered as subsidies if they raise any benefit
to the recipient

4. ARTICLE XVI of GATT
Subsidies - Section A – Subsidies in General
- If any contracting party grants or maintains any subsidy, including any form of
income or price support, which operates directly or indirectly to increase
exports of any product from, or to reduce imports of any product into, its
territory, it shall notify the CONTRACTING PARTIES in writing of the extent and
nature of the subsidization, of the estimated effect of the subsidization on the
quantity of the affected product or products imported into or exported from its
territory and of the circumstances making the subsidization necessary.
- In any case in which it is determined that serious prejudice to the interests of
any other contracting party is caused or threatened by any such subsidization,
the contracting party granting the subsidy shall, upon request, discuss with the
other contracting party or parties concerned, or with the CONTRACTING
PARTIES, the possibility of limiting the subsidization.

5. Section B – Additional Provisions on Export Subsidies
- The contracting parties recognizes that the granting by a contracting party of a
subsidy on the export of any product may have harmful effects for other contracting
parties, both importing and exporting, may cause undue disturbance to their normal
commercial interests, and may hinder the achievement of the objectives of the
Agreement.
- Accordingly, contracting parties should seek to avoid the use of subsidies on the
export of primary products (a good sold for production or consumption just as it was
found in nature and include crude oil, coal, copper or iron ore, rough diamonds, and
agricultural products such as wheat, coffee beans or cotton)
- If, however, a contracting party grants directly or indirectly in any form of subsidy
which operates to increase the export of any primary product from its territory, such
subsidy shall not be applied in a manner which results in that contracting party
having more than an equitable share of world export trade in that product,
- contracting parties shall cease to grant either directly or indirectly any form of
subsidy on the export of any product which subsidy results in the sale of such
product for export at a price lower than the comparable price charged for the like
product to buyers in the domestic market.

6. AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES
Article 1 - Definition of a Subsidy
a subsidy shall be deemed to exist if:
• There must be a financial contribution either by the government or by any of
the public body within the territory of the member nation; and
• If the action is consistent with Article XVI of GATT 1994, which means if there is
any form of income or price support.
• After any financial contributions, there must a benefit.
- The application of this agreement requires financial contributions such as loan,
financial incentives, special grants etc and explains that any financial contribution
even from the sub-governments is considered as subsidies if they raise any
benefit to the recipient.

7. Article 2 – Specificity
- all the financial aid to enterprise or industry or group of such industries will only
be considered as subsidies and such specificity of subsidies are only considered
under SCM Agreement
- different types of specificity:
• Enterprise- Under this type of specificity the financial contributors are only
concerned with aiding specific company or a specific set of companies.
• Industry- Under this type of specificity the contributors such as government
and public body aim a particular sector of the industry for giving them
financial help and benefit.
• Regional- It is a condition when the government is helping industry/ company
located in some specific geographical area and subsidies them with benefits.
• Prohibited- Here, in this case, the government is aiming at providing subsidies
to such goods which are exported to different countries.

8. Article 3 - Prohibition
Except as provided in the Agreement on Agriculture, the following subsidies,
within the meaning of Article 1, shall be prohibited:
(a) subsidies contingent, in law or in fact , whether solely or as one of several
other conditions, upon export performance, - For example, export related exemption,
remission or deferral of direct taxes or excess exemption, remission or deferral of indirect taxes or import
duties are contingent on export performance and hence prohibited. Similarly, currency retention schemes or
practices which involve a bonus on exports. Internal transport and freight charges on export shipments
provided or mandated by government on terms more favourable than for domestic shipments is yet another
example of prohibited subsidies.
(b) subsidies contingent, whether solely or as one of several other conditions,
upon the use of domestic over imported goods (import substitution) - favours
the use of domestic over imported goods

9. Types of Subsidies-
1. Prohibited Subsidies
The SCM Agreement prohibits any government from providing any subsidies-
• Which are contingent with respect to law or fact upon export performance.
These kinds of subsidies are often called export subsidies.
• Which are contingent with respect to law or facts upon giving any
protectionism of domestic goods over imported goods. These kinds of
subsidies are often called local content subsidies.
- These are the two kinds of subsidies covered under prohibited subsidies.
- scope of such subsidies are relatively low as all the developed nations have
already adopted this but it becomes challenging with developing or LDC
countries.

10. 2. Actionable Subsidies
- The SCM Agreement does not prohibit any nation from taking actions on actionable
subsidies rather they can be restricted and are subjected only when any nation bring
an action in terms of challenging either through DSB or through Countervailing
Duties.
- The actionable subsidy have three adverse effects on the member nation which are:-
i. They cause injury to the domestic market of the member nations
ii. Serious Prejudice to the interest of other members- It means when the
government is helping and giving subsidies more than 5% to cover any operating
loss of any industry or sector by the process of directly forgiving them from any
government debts. The effects of granting such subsidies cause displacement of
other net exporter countries to the importing country of Like Products.
iii. Nullification or Impairment - it is a process of damaging the importer country’s
benefits and expectations from other member nations of WTO through another
country’s or third country’s change in its trade regime not according to the GATT/
WTO Agreements obligation.

11. 3. Non- Actionable Subsidies
- It is a kind of subsidy which is neither prohibited nor restricted by GATT/ WTO
and does not permit any of the member nations to impose countervailing
duties against them.
- It is observed that most of the subsidies are either restricted or prohibited by
the GATT/ WTO and whosoever overrules these guidelines agreed in the
agreement then they are subjected to countervailing measures by other
member nations especially by the affected nations.
- However, Non- actionable subsidies are not subject to these tariffs
(Countervailing duties) like environmental subsidies, agricultural subsidies,
scientific subsidies etc.

12. Types of subsidies under WTO
- In WTO terminology, subsidies in general are identified by “Boxes” which are
given the colours of traffic lights: green (permitted), amber (slow down — i.e.
be reduced), red (forbidden).
- there is a Blue Box for subsidies that are tied to programmes that limit
production

13. Green Box
- Agriculture-related subsidies that fit in WTO’s green box are policies that are
not restricted by the trade agreement because they are not considered trade
distorting.
- To qualify for the green box, WTO says a subsidy must not distort trade, or at
most cause minimal distortion.
- These green box subsidies must be government-funded — not by charging
consumers higher prices, and they must not involve price support.
- They tend to be programs that are not directed at particular products, and they
may include direct income supports for farmers that are decoupled from
current production levels and/or prices

14. Amber Box –
- Agriculture’s amber box, according to the WTO, is used for all domestic support
measures considered to distort production and trade.
- WTO members without these commitments are required to maintain their
amber box supports to within 5 to 10 % of their value of production
- Amber box are those subsidies that can distort international trade by making
products of a particular country cheaper in comparison to other country’s
products.
- Examples of amber subsidies include, electricity, seeds, fertilizers, irrigation,
minimum support prices etc.
• For Developed Countries: 10%
• For Developing Countries: 5%
- Any support payments that are considered to be trade distorting and are subject
to limitations and disciplines fall into the amber box.

15. Blue Box –
- Included in the blue box are any support payments that are not subject to the
amber box reduction agreement because they are direct payments under a
production limiting program.
- To be blue box policies, direct payments must be made on fixed areas and
yields, or payments must be made on 85 percent or less of the base level of
production.
- Livestock payments must be on a fixed number of heads.
- The blue box, WTO says, “is an exemption from the general rule that all
subsidies linked to production must be reduced or kept within defined minimal
levels.
- It covers payments directly linked to numbers, but under schemes which also
limit production by imposing production quotas or requiring farmers to set aside
part of their land.

18. Red Subsidies
- mean prohibited subsidies.
- With certain exceptions, such as preferential treatment for developing countries
and transitional economies, all red-light subsidies must be eliminated.
- If a red-light subsidy is granted, it may be subject to the remedies for red-light
subsidies
- Furthermore, the remedies for red-light subsidies may be invoked in parallel
with countervailing measures;
- however, with regard to the effects of a particular subsidy in the domestic
market of the importing member, only one form of relief (either a countervailing
duty or the defined remedies) shall be available.
- There are two categories of red subsidies:
1. export subsidies
2. subsidies contingent upon the use of domestic over imported goods.

19. The Subsidies Agreement illustrates the following measures as export subsidies.
- Measures which provide direct subsidies contingent upon export performance.
- Measures which involve a bonus on exports, such as currency retention schemes.
- Measures which treat internal transport and freight charges on export shipments on
terms more favourable than for domestic shipments.
- Measures which provide products or services for use in the production of exported
goods on terms or conditions more favourable than for domestic consumption.
- Measures which allow the full or partial exemption, remission or deferral specifically
related to exports, of direct taxes or social welfare charges.
- Measures which allow the exemption or remission, in respect of exported products, of
indirect taxes in excess of those levied in respect of like products when sold for
domestic consumption.
- Measures which provided export credit guarantees or insurance programmes at
premium rates which are inadequate to cover the long-term operating costs and losses
of the programmes.
- With some exceptions, government export credits granted at rates below those which
the government actually has to pay for the funds so employed, or the payment by
them of all or part of the costs incurred by exporters or financial institutions in
obtaining credits, in so far as they are used to secure a material advantage in the field
of export credit terms.

20. Countervailing:
- Countervailing duty (CVD) is a specific form of duty that the government imposes in
order to protect domestic producers by countering the negative impact of subsidies.
- CVD is thus an import tax by the importing country on imported products.
- Countervailing duties are tariffs on imported goods that are imposed to offset
subsidies given by the exporting country's government.
- Countervailing duty is a duty imposed by nations with the intention of countervailing
or offsetting the price effect of significant foreign government subsidies on certain
products or goods.
- It refers to an additional import duty imposed to compensate for the effect of
concessions and subsidies granted by an exporting country to its exporters.
- The imposition of countervailing duty is an attempt to ensure that the imported
prices are brought to their actual market price.
- It helps provide a level-playing field to the producers of goods of the importing
country
Example - If Country B determines that its domestic fishing industry is being hurt by
unrestrained imports of subsidized products, it may impose a 25% countervailing duty
on seafood products imported from Country A, so that the resulting cost of the
imported seafood products is also similar to prices of the product in Country B.

21. Why is a Countervailing Duty Important:
• Subsidized goods allow a producer to sell that product at a lower price than it
could have usually fetched without the subsidy compensation.
• If this product is sold in the international market, they can undercut the pricing
of producers in other countries who do not receive subsidies from their
government.
• If this goes on unchecked, the domestic producers could be out of business,
causing unemployment and other economic losses.
• The imposition of a countervailing duty helps in bringing the imported price to
its actual market price.
• It provides a fair business environment to all the players and especially to the
importing country's producers.

22. What is the Function of a Countervailing Duty?
• The function of a countervailing duty is to counteract or offset the effect of an
unfair or excessive subsidy provided by a foreign government to the producers
or sellers of a product.
• As the producers or sellers of the product cannot sell them at an artificially low
price, their domestic competitors can compete in a fair business setting.
Who Pays a Countervailing Duty?
• Technically and legally speaking, the importer of record (The party responsible
for ensuring that imported goods comply with all customs and legal
requirements of the country of import. This is usually the owner of the goods,
but may also be a designated individual or customs broker) is responsible for
paying all customs duties associated with the entry of goods
• The additional costs incurred towards paying the countervailing duty are almost
always in some ways passed onto the end consumer of the product to cover the
higher price.
• In a broader sense, everyone in the supply chain may end up paying a portion
of the countervailing duty

23. PART IV: NON-ACTIONABLE SUBSIDIES - Article 8
The following subsidies shall be considered as non-actionable:
- subsidies which are not specific within the meaning of Article 2;
- assistance for research activities conducted by firms or by higher education or
research establishments on a contract basis with firms if: the assistance covers not
more than 75% of the costs of industrial research or 50 % of the costs of pre-
competitive development activity and provided that such assistance is limited
exclusively to:
(i) costs of personnel (researchers, technicians and other supporting staff employed
exclusively in the research activity);
(ii) costs of instruments, equipment, land and buildings used exclusively and
permanently (except when disposed of on a commercial basis) for the research
activity;
(iii) costs of consultancy and equivalent services used exclusively for the research
activity, including bought-in research, technical knowledge, patents, etc.;
(iv) additional overhead costs incurred directly as a result of the research activity;
(v) other running costs (such as those of materials, supplies and the like, incurred
directly as a result of the research activity)

24. - assistance to disadvantaged regions within the territory of a Member given
pursuant to a general framework of regional development and non-specific
(within the meaning of Article 2) within eligible regions provided that:
(i) each disadvantaged region must be a clearly designated contiguous
geographical area with a definable economic and administrative identity;
(ii) the region is considered as disadvantaged on the basis of neutral and
objective criteria, indicating that the region's difficulties arise out of more
than temporary circumstances; such criteria must be clearly spelled out in
law, regulation, or other official document, so as to be capable of verification;
(iii) the criteria shall include a measurement of economic development which
shall be based on at least one of the following factors: -
a. income per capita or household income per capita, or GDP per capita, which
must not be above 85 % of the average for the territory concerned;
b. unemployment rate, which must be at least 110 % of the average for the
territory concerned; as measured over a three-year period; such
measurement, however, may be a composite one and may include other
factors.

25. - assistance to promote adaptation of existing facilities to new environmental
requirements imposed by law and/or regulations which result in greater
constraints and financial burden on firms, provided that the assistance:
(i) is a one-time non-recurring measure; and
(ii) is limited to 20 per cent of the cost of adaptation; and
(iii) does not cover the cost of replacing and operating the assisted investment,
which must be fully borne by firms; and
(iv) is directly linked to and proportionate to a firm's planned reduction of
nuisances and pollution, and does not cover any manufacturing cost savings
which may be achieved; and
(v) is available to all firms which can adopt the new equipment and/or
production processes.

26. - A subsidy programme for which the provisions are invoked shall be notified in
advance of its implementation
- Any such notification shall be sufficiently precise to enable other Members to
evaluate the consistency of the programme with the conditions and criteria
provided for in the relevant provisions
- Members shall also provide yearly updates of such notifications, in particular by
supplying information on global expenditure for each programme, and on any
modification of the programme.
- Other Members shall have the right to request information about individual
cases of subsidization under a notified programme.

27. - Upon request of a Member, the Secretariat shall review a notification and,
where necessary, may require additional information from the subsidizing
Member concerning the notified programme under review.
- The Secretariat shall report its findings to the Committee (The Subsidies and
Countervailing Duties Committee supervises the implementation of the
Agreement. It meets at least twice a year).
- The Committee shall, upon request, promptly review the findings of the
Secretariat (or, if a review by the Secretariat has not been requested, the
notification itself), with a view to determining whether the conditions and
criteria have not been met.
- The procedure provided shall be completed at the latest at the first regular
meeting of the Committee following the notification of a subsidy programme,
provided that at least two months have elapsed between such notification and
the regular meeting of the Committee.
- The review procedure described in this paragraph shall also apply, upon request,
to substantial modifications of a programme notified in the yearly updates.

28. - Upon the request of a Member, the determination by the Committee referred
to, or a failure by the Committee to make such a determination, as well as the
violation, in individual cases, of the conditions set out in a notified programme,
shall be submitted to binding arbitration. (if no outcome by the committee)
- The arbitration body shall present its conclusions to the Members within 120
days from the date when the matter was referred to the arbitration body.
- Except as otherwise provided in this paragraph, the DSU shall apply to
arbitrations conducted under this paragraph.