WTO Agreement on Subsidies and Countervailing Measures


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WTO Agreement on Subsidies and Countervailing Measures

  1. 1. WTO Agreement on Subsidies andCountervailing Measures(Subsidy Rules and WTO Jurisprudence)Shailja SinghAssistant ProfessorCentre for WTO StudiesIIFT1
  2. 2. SCM Agreement: contextLiberalizationDumpingSubsidiesFlooding ofproducts2
  3. 3. Subsides…• Very sensitive matter in international trade relations▫ On one hand, subsidies evidently used by governmentsto pursue legitimate objective of economic and socialpolicy.▫ On the other hand, subsidies may have adverse effectson the interests of trading partners, whose industriesmay suffer from unfair competition• Subsidies: can distort trade flows if they give an artificialcompetitive advantage to exporters or import competingindustries.• Example of subsidies: aid to the poor, aid fortechnological development, special aids for education,aid to disadvantaged groups and regions etc.3
  4. 4. 4COVERAGE OF THE SCM AGREEMENTThe SCM Agreement regulates:▫ Subsidisation by WTO Members▫ Use of countervailing measures
  5. 5. Structure of the SCM Agreement:Two TracksSubsidiesSCMCountervailingmeasuresDifferent rules!5
  6. 6. SCM Agreement: Subsidies• Traffic light approach• Subsidies are put into variousbaskets/categories:i. Red (“prohibited”)ii. Yellow or amber (“actionable”)iii. Green (“non-actionable”)6
  7. 7. Broad Scheme of SCM Agreement• Uruguay Round Subsidies Text is extensive anddetailed▫ Part I – General Provisions (definition andspecificity)▫ Part II – Prohibited subsidies (red light)▫ Part III – Actionable subsidies (yellow or amberlight)▫ Part IV – Non-Actionable subsidies (green light)▫ Part V – Countervailing duty measures7
  8. 8. Subsidy Defined• Three key elements when examiningwhether a programme, scheme, etc.constitutes a subsidy are:i. Financial contribution / income or pricesupportii. By a Government or any public bodyiii. Which confers benefit• If any of the three elements is missing, thenthe programme, scheme, etc. is NOT asubsidy under SCM Agreement.8
  9. 9. Coverage of the SCM AgreementApplies to ameasure that isSpecific(article 2)a subsidy(article 1)and- Financialcontribution- Government- Benefit9
  11. 11. Financial Contribution• Direct transfer of funds (grants, loans, equityinfusions)• Potential direct transfer of funds or liabilities(loan guarantee)• Government revenue, that is otherwise due ifforegone or not collected (tax credits, importduty exemption)• Provision of goods or services other thangeneral infrastructure• Purchase of goods11
  12. 12. By a Government or any Public Body• Financial contribution granted by a Govt. (e.g.Federal, Regional or Municipal Govt.) OR by apublic body (e.g. National Bank, National PowerCompany, etc.)• Within the territory of a MemberOrGovernment entrusts or directs a privatebody to make the financial contribution12
  13. 13. Concept of Benefit• Benefit = advantage (to recipient), not costto Govt:▫ “Whether the financial contribution places therecipient in a more advantageous position thanwould have been the case, but for the financialcontribution”• Basis for comparison = Market place:▫ Is the financial contribution “provided onterms which are more advantageous than thosethat would have been available to the recipienton the market”13
  14. 14. Concept of Benefit (Contd.)• Govt. equity infusions do not confer a benefitunless: “the investment decision can be regardedas inconsistent with the usual investmentpractice (including …risk capital) of privateinvestors in the territory of that Member”• Govt. loans do not confer a benefit unless:“there is a difference between the amount thatthe firm receiving the loan pays on the Govt. loanand the amount the firm would pay on acomparable commercial loan which the firmcould actually obtain on the market.”14
  15. 15. Concept of Benefit (Contd.)• Govt. loan guarantees do not confer a benefitunless: “there is a difference between theamount the firm receiving the guarantee pays ona loan guaranteed by the Govt. and the amountthe firm would pay on comparable commercialloan absent the Govt. guarantee.• Govt. provision of goods or services doesnot confer a benefit unless for less than adequateremuneration based on prevailing marketconditions15
  16. 16. Concept of Benefit (Contd.)• Govt. purchase of goods does not confer abenefit unless: for more than adequateremuneration based on prevailing marketconditions.16
  17. 17. Footnote 1 – Important Exemption• Exemption of an exported product• From duties or taxes borne by a like productdestined for domestic consumption• Not deemed a subsidy17
  18. 18. Types of Specificity• Enterprise specific• Industry specific• Group of enterprises or industries• Region specific• Prohibited subsidies are deemed to bespecific• Setting or change of generally applicable taxrates by all levels of govts. entitled to do soare not specific subsidy18
  19. 19. Types of Specificity (Contd.)• Specificity will not exist where grantingauthority or legislation concerned establishesobjective criteria or conditions for extendingthe subsidy- these criteria should be neutral,economic in nature and horizontal inapplication• Two broad categories:i. De-jure specific subsidiesii. De-facto specific subsidies19
  20. 20. Specific Subsidies – de-jure• A subsidy is de-jure specific ifAccess to the subsidy explicitly limited to certainenterprises. If access is limited based on objectivecriteria then it would not be a specific subsidy• To be determined with reference to thejurisdiction of the granting authority20
  21. 21. De-facto Specificity (Art. 2.1(c))• Notwithstanding any appearance of non-specificity, the subsidy may in fact bespecific. Following factors may beconsidered:Use by a limited number of enterprisesPredominant use by certain enterprisesGranting of disproportionately large amounts tocertain enterprisesManner in which discretion has been exercised21
  22. 22. Specificity : Implications• For Members as providers of subsidies:▫ Specific subsidies are subject to the rules/disciplines under Article4 and 7 of the SCM Agreement, in case of prohibited andactionable subsidies, respectively (under the MULTILATERALTRACK); and can be countervailed (Part V) (under theNATIONAL TRACK)▫ Must notify specific subsidies to the SCM Committee• For Members affected by others’ subsidies:▫ Can challenge (MULTILATERAL TRACK) or countervail(NATIONAL TRACK) other Members’ specific subsidies22
  23. 23. Subsidies – Categorization: Recapi. Prohibited Subsidyii. Actionable Subsidyiii. Non-actionable Subsidy23
  24. 24. Subsidy Types: Prohibited Subsidy• Certain subsidies are regarded as outright tradedistortive – hence prohibited• These are:i. Export subsidies – subsidies that arecontingent on export performance , except asprovided in the Agreement on Agricultureii. Import substitution subsidies – contingenton use of domestic over imported goods24
  25. 25. Export Subsidy• Subsidies contingent, in law or in fact, whether wholly oras one of several other conditions, upon exportperformance are called export subsidies• Examples (set out in Annex-I):▫ provision of goods or services for use in the production ofexported goods in terms more favorable than those for theproduction of goods for domestic consumption;▫ export related exemption, remission or deferral of directtaxes; excess exemption, remission, or deferral of indirecttaxes or import duties;▫ provision of export credit guarantee or insuranceprogrammes at premium rates which are inadequate to coverthe operating costs and losses of the programmes25
  26. 26. Export Subsidy: Permissible DutyExemptions• Exemption or remission of indirect taxes on export products-Footnote 1• Remission, Exemption & Deferral (RED) of prior stage cumulativeindirect taxes on inputs used in production of the exported productprovided this does not exceed corresponding RED on inputs used inthe production of domestically sold like products – item (h), Annex I• RED on prior stage cumulative indirect taxes on inputs consumed inproduction of the exported product. To be interpreted in accordancewith guidelines in Annex II – item (h), Annex I• Remission or drawback of import charges on imported inputsconsumed in the production of the exported product. Substitutiondrawback schemes are permitted in accordance with guidelines inAnnex III – item (h), Annex I26
  27. 27. Conditions for RED of CumulativeIndirect Taxes• Inputs must have been consumed in theproduction processPhysically incorporated inputsEnergy, fuel, oil and catalysts• There must be a reasonable and effectiveverification system in place to confirm whichinputs are consumed and in what amounts.27
  28. 28. Remedy against Prohibited Subsidy• Remedy through DSU• It can be challenged in WTO on the basis ofspecial accelerated procedures• Complaining Member not obliged to show tradeeffects as these are regarded as trade distortingsubsidies• Defaulting member required to withdraw thesubsidy without delay or face counter -measures28
  29. 29. Special and Differential Provisions• No derogation for import substitution subsidiesexcept for fixed transition periods which is alreadyover• For “Annex VII countries” i.e. LDCs and 21 listeddeveloping countries whose GNP per capita is below$1000 per annum, prohibition on exportsubsidies not applicable - India one of them(others include Bolivia, Egypt, Indonesia, Kenya,Nigeria, Pakistan, Philippines, Sri Lanka etc.)• Other developing countries to phase out exportsubsidy in a 8 year period29
  30. 30. Export Competitiveness• Articles 27.5 and 27.6• If an Annex VII developing country’s exportof a specific product has reached “exportcompetitiveness” i.e.- A share of at least 3.25% in world trade (ofthat product)- For two consecutive yearsThat Annex VII developing country must phaseout its export subsidies for such products overa period of 8 years30
  31. 31. Subsidy Types: Actionable Subsidy• Subsidy is actionable if:▫ It is specific▫ Causes adverse effects (injury, seriousprejudice, nullification and impairment)31
  32. 32. Adverse Effects - examples• Serious prejudice – effect of subsidy is:▫ Imports displaces or impeded in the market of thesubsidizing member▫ Exports displaces or impeded in third countrymarket▫ Significant price undertaking, price suppression,price depression or lost sales of another member▫ Increase in world market share of the subsidizingcountry▫ Serious prejudice claim cannot be invokedagainst developing country Members32
  33. 33. Serious PrejudiceSerious Prejudice deemed to exist (Art 6.1) where:i. Total ad valorem subsidization of a product exceeds5%;ii. Subsidies cover operating losses sustained by anindustry;iii. Subsidies to cover operating losses sustained by anenterprise – exception: one-time measures whichare non-recurrent and given to develop long termsolutions and to avoid acute social problem;iv. Direct forgivenenss of debtThese provisions lapsed in 199933
  34. 34. Nullification or Impairment• This arises where the improved access to amarket that is presumed to flow from a boundtariff reduction is undercut by subsidization inthat market• This can serve as a basis for a complaint relatedto harm to a Member’s exporting interests in animporting country market34
  35. 35. Types of Injury• There are three types of injury:i. Current material injury;ii. Threat of material injury;iii. Material retardation of the establishment of adomestic industry35
  36. 36. Current Material Injury• Its determination is to be based on positiveevidence• There should be objective examination of boththe volume of subsidized imports and the effectof these imports on prices in the domesticmarket for like product• Consequent impact of such imports on thedomestic producers of such products36
  37. 37. Threat of Material Injury• It must be based on facts and not merely onpossibility• Factors to be considered are :▫ Nature of subsidy and trade effects likely to arisetherefrom;▫ Significant increase of subsidized imports;▫ Sufficient freely disposable capacity or▫ An imminent substantial increase in capacity of theexporter, indicating likelihood of substantiallyincreased subsidized exports37
  38. 38. Material Retardation of the Establishmentof a Domestic Industry• The agreement is silent regarding criteria forevaluation of material retardation of theestablishment of a domestic industry38
  39. 39. Actionable Subsidy - Remedy• Action and DSU panel process in all cases andthrough countervailing duty investigation forimports:• Serious prejudice and nullification or impairmentcan be challenged at the multilateral level only• Remedy:▫ Removal of adverse effects of the subsidy or▫ Withdrawal of subsidy or▫ Imposition of countervailing duty on imports39
  40. 40. Subsidy Type: Non-actionable Subsidy• No action can be taken against subsidies that are non-specific – determined on the basis of:Criteria are neutral, economic in nature and horizontal inapplicationNo predominant use by certain enterprisesEligibility based on objective criteria or conditionsEligibility automatic, criteria strictly adhered to• Up to 1999 a specific subsidy given for R&D assistance,to disadvantaged regions and for environmentalpurposes were non-actionable. Now lapsed40
  41. 41. Remedies• Subsidy that causes injury can be challenged attwo levels:i. Unilateral level through countervailing action;ii. Multilateral level through the WTO’s DisputeSettlement Mechanism• Countervailing action can be taken only wherethere is injury• Serious prejudice and nullification or impairmentcan be challenged at the multilateral level only41
  42. 42. Countervailing Measures• SCM Agreement contains detailed rules regardinginitiation and conduct of investigations, imposition ofpreliminary and final measures and the duration ofmeasures• These rules are meant to ensure that investigationsare conducted in a transparent manner, all partieshave full opportunity to defend their interests, andinvestigating authorities explain the basis of theirdetermination• Most of procedural rules are similar to those appliedfor Anti-Dumping Agreement42
  43. 43. Special & Differential Treatment• De minimis - if overall subsidy level by a DCdoes not exceed 2% of the value of theproduct, countervailing investigation to beterminated immediately• De minimis of 3% for Annex VII Membersand DCs which have eliminated their exportsubsidies before the end of the 8-yeartransition period• For other Members, De mimimis level is 1%43
  44. 44. Special & Differential Treatment(contd.)• If volume of subsidized imports from a DC isless than 4% of the total imports of the likeproduct in the importing Member,countervailing investigation has to beterminated• The cut-off percentage is 9% where collectiveimports from more than one DC is underinvestigation and share of each DC is lessthan 4%44
  45. 45. 45