I.
Introduction
One of the basic objectives of the WTO agreement is
to remove the distortions present in the international
trade. It is recognized that certain subsidies are
trade distorting in nature and in order to remove
distortions in international trade, it is important
to impose disciplines on these subsidies. To achieve
this goal, WTO has established a set of rules to govern
subsidies and export incentives in its member countries.
For non-agricultural products, subsidies and export
incentives are governed by the WTO Agreement on Subsidies
and Countervailing Measures (SCM). The WTO Agreement
on Agriculture (AoA) disciplines the export incentives
and subsidies given to the agricultural items. This
paper gives an overview about the SCM agreement and
discusses some important issues relating to this agreement
which are particularly relevant for developing countries.
This paper will also briefly discusses the agricultural
subsidies and how these subsidies are treated differently
from industrial subsidies in WTO.
II. Overview of the Agreement
on Subsidies and Countervailing Measures
The WTO SCM Agreement contains a definition of the
term "subsidy". According to the definition, a measure
must have three basic elements to be considered as
a subsidy. They are: (i) The measure must be a financial
contribution, (ii) It should be made by a government
or any public body within the territory of a Member
and (iii) The measure must confer a benefit. All three
of these elements must be satisfied in order for a
subsidy to exist.
Even if a measure is a subsidy within the meaning
of the SCM Agreement, it is not subject to the disciplines
of the SCM Agreement unless the concerned subsidy
is a ‘specific subsidy'. By specific subsidy the SCM
agreement means subsidies which are specifically provided
to a region, an enterprise or industry or group of
enterprises or industries. In other words, SCM will
treat a subsidy as specific subsidy if the granting
authority limits access to the subsidy to certain
enterprises or certain regions. For example, if the
Central Government grants a subsidy exclusively to
a particular state, the subsidy would be a specific
subsidy even if it is available to all enterprises
of that state. However, if that state government gives
subsidies to all enterprises of that state, the subsidy
would not be termed as a specific subsidy.
When a subsidy is made widely available by the granting
authority, it is presumed that such subsidies do not
lead to distortions in the allocation of resources.
The basic premise of WTO SCM agreement is that only
subsidies, which distort the allocation of resources
within the jurisdiction of a granting authority, should
be subject to discipline. Thus, non-specific subsidies
are exempted and only ‘specific subsidies' are subject
to the SCM Agreement disciplines. There are four types
of "specificity" within the meaning of the SCM Agreement:
1. Enterprise-specificity: A government targets a
particular company or companies for subsidization;
2. Industry-specificity: A government targets a particular
sector or sectors for subsidization.
3. Regional specificity: A government targets producers
in specified parts of it's the territory under its
jurisdiction for subsidization.
4. Prohibited subsidies: A government targets export
goods or goods using domestic inputs for subsidization.
As product specific subsidies directly affect trade
and are most likely to have adverse effects on the
interests of other Members, the SCM agreement deals
more stringently with these subsidies and these are
termed as ‘Prohibited Subsidies' by the WTO SCM agreement.
Two categories of subsidies are defined as prohibited
subsidies by the Article 3 of the SCM Agreement. The
first category consists of subsidies which are contingent
on export performance and the second category consists
of subsidies for use of domestic goods over imported
goods ("local content subsidies").
All specific subsidies are actionable under the SCM
agreement[1]. But depending
upon the trade distorting nature of specific subsidies,
the SCM agreement deals differently with prohibited
subsidies and other types of specific subsidies. The
SCM Agreement provides a graduated approach to disciplines
on subsidies- closer a subsidy brings a product to
the market, stricter the discipline. Thus R&D
subsidies were earlier considered to be non-actionable,
while export subsidies are generally prohibited.
According to the SCM agreement, if a country grants
or maintains prohibited subsidies, then other member
countries can initiate remedial actions against the
errant country. Article 4 of the SCM agreement specifies
the consultation and panel process. According to this
Article, a complaining member can request consultations
with the offending member. If the two members fail
to reach a mutually agreed solution about the subsidy
within a stipulated time period, then the matter is
referred to the Dispute Settlement Board (DSB) of
WTO. If the dispute settlement procedure confirms
that the subsidy is prohibited, it must be withdrawn
immediately. Otherwise, the complaining country can
take counter-measures which may be in the form of
charging extra duty (known as "countervailing duty")
on subsidized imports that are found to be hurting
domestic producers. However, authorization from DSB
is required for the appropriate counter-measures.
However, for non-prohibited actionable subsidies,
a Member country can initiate remedial measures only
if it proves that there are subsidized imports from
the other (subsidizing) Member country, there are
adverse effects on the complaining country and there
exist a causal link between the subsidized imports
and the adverse effect. There can be three types of
adverse effects. First, there can be injury to a domestic
industry caused by subsidized imports in the territory
of the complaining Member. This can be the sole basis
for imposing countervailing measures against the subsidized
imports. Secondly, there is the issue of ‘serious
prejudice'. Serious prejudice usually arises as a
result of adverse effects of subsidies in the market
of the subsidizing Member or in a third country market
(e.g., export displacement). Thus, unlike injury,
it can serve as the basis for a complaint related
to harm to a Member's export interests (Box 1 describes
the criteria for determining serious prejudice). Finally,
there is nullification or impairment of benefits accruing
under the GATT 1994. Nullification or impairment arises
most typically where the improved market access presumed
to flow from a bound tariff reduction is undercut
by subsidization.
Box 1. Criteria
For Determining Serious Prejudice (SCM,
Article 6)
The Agreement clarifies that serious prejudice
to the interest of another country shall
be presumed to have occurred, inter alia,
where:
• Total
ad valorem subsidization of a product
exceeds 5%;
• Subsidies cover operating losses sustained
by an industry;
• Subsidies other than one-time measures
cover operating losses sustained by an
enterprise; or
• There is direct forgiveness of debt
by the government. In
all other cases, in order to establish
that serious prejudice has actually occurred,
the complainant must demonstrate that
the effect of the subsidy is:
• To displace or impede imports from another
member country into the subsidizing country;
• To displace exports to a third country
market;
• Significantly to undercut or suppress
prices in the subsidizing market;
• An increase in the world market share
of the subsidizing country over its average
share in the previous three years for
the product or commodity benefiting from
subsidy. |
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Under the SCM agreement, broadly two types of remedies
are possible against actionable subsidies. The affected
country can conduct its own investigation to establish
that subsidized imports are causing material injury
to its industry. Once this is established and the
procedural rules of the SCM Agreement regarding the
initiation and conduct of countervailing investigations
are properly followed, then the affected country can
unilaterally impose an extra duty (known as "countervailing
duty") on subsidized imports that are found to
be hurting domestic producers. Alternately, the country
can use the WTO's dispute settlement procedure to
seek the withdrawal of the subsidy or the removal
of its adverse effects. However, if a serious prejudice
claim has to be established, the complainant has to
go through the panel process, as it requires multilateral
action.
Table 1 summarizes the discussion.
Table
1. Prohibited, Actionable and Non-actionable
Subsidies. |
Type of Subsidy |
Non-Countervailable
Subsidies
|
Countervailable
Subsidies |
Remedies |
Non - Actionable Subsidies |
a) For general infrastructure
b) Non-specific subsidies
|
|
|
Actionable Subsidies |
Specific but non-prohibited
subsidies, if they do not cause adverse effects,
i.e.:
- No injury
- Benefits not nullified or impaired
- No serious prejudice caused
|
Specific but non-prohibited subsidies,
if they do cause adverse effects |
-Consultations
-Dispute Settlement through WTO
-Countervailing measures
|
Prohibited Subsidies |
|
Export
subsidies
Local content subsidies |
Dispute Settlement through WTO or Countervailing
measures |
Source: Adapted from UNCTAD (2000) |
III. Developing Countries and
the SCM Agreement
The Article 27.2 of the SCM Agreement exempts the
developing countries with per-capita income of less
than US$ 1000 from the prohibition of export subsidies.
For example, India's per-capita income is less than
this stipulated limit and therefore, for non-agricultural
products, WTO rules do not prevent India from subsidizing
its exports. However, the SCM agreement imposes two
restrictions on the use of export subsidies by the
developing countries. The first exception to the right
of use export subsidies arises if a country reaches
‘export competitiveness' in a certain product, the
SCM agreement requires that the export subsidy on
that product should be phased out over a period of
eight years. According to the SCM agreement, ‘export
competitiveness' in a product exists if a developing
country Member's exports of that product have reached
a share of at least 3.25 per cent in world trade of
that product for two consecutive calendar years. However,
from the SCM agreement it is not clear that if a country
subsequently loses export competitiveness after achieving
it for more than two years, whether the country becomes
once again eligible to introduce export subsidies.
Developing country Members were allowed to use local
content subsidies for a period of 5-years ending on
December 31, 1999. For the least developing country
Members the exemption period is 8-years. India being
a developing country Member has crossed 5-year exemption
from prohibition on import substitution. India is
now prohibited from giving such subsidies.
It should be emphasized that even if the WTO SCM Agreement
allows some developing countries to have export subsidies,
this does not make the exports from these countries
immune from the countervailing duties. If the conditions
for imposing CVD are met, then other Member countries
can impose countervailing measures on subsidized imports
from the developing countries mentioned under Article
27.2. However, Article 27.10 and 27.11 allows certain
de-minimis level (maximum permissible level) of subsidies
for developing countries and for countries mentioned
in Article 27.2[2] .
It has been established that imposition of CVDs on
exports from developing countries can create instability
and uncertainty for these countries. UNCTAD (2000a)
points out that the adverse impact of these measures
on developing countries may be greater than the actual
trade involved. Initiation of countervailing actions
not only has an immediate impact on trade flows but
it also reduces the size of the potential market as
importers tend to seek alternative sources of supply.
There is also evidence to suggest that in some cases
countervailing measures were initiated only to harass
and threaten the suppliers as there were prior knowledge
that the outcome of the investigations are likely
to be negative. Also the complexity of CVD and the
WTO Dispute Settlement rules and procedures put significant
strain on exporters and administrators of developing
countries.
Because of these potential adverse effects of these
trade defense measures allowed in the SCM agreement,
there is a feeling among developing countries that
this agreement does not protect the interests of these
countries. A proposal from India about the functioning
of the SCM agreement (TN/RL/W/4) suggests that as
the industries in developing countries suffer from
structural weaknesses, the state will have to play
a more pro-active role in assisting the industry.
It emphasizes the role of input subsidies in the industrialization
process of developing countries and urges WTO to take
a more lenient view about industrial subsidies in
developing countries. This proposal further argues
that the S&D provisions given to developing countries
have been inadequate to meet the concerns of developing
countries. This report alleges that the benefits of
the S&D concessions have largely been offset by
imposition of too many countervailing duties against
products originating in developing countries. Recent
WTO data show that out of the 104 cases in which countervailing
duty action was taken by various countries during
the period 1 January 1995 to 30 June 2004, 67 cases
were against developing countries. Considering the
fact that the share of developing countries in world
merchandise trade is less than 30 percent[3]
, this is disproportionately high.
The Doha declaration promised to look into some of
the concerns of developing country about the SCM agreement.
The paragraph 28 of the Doha Ministerial Declaration
says:
"The ministers agreed to negotiations on
the Anti-Dumping (GATT Article VI) and the Subsidies
and Countervailing Measures agreements. The aim is
to clarify and improve disciplines while preserving
the basic concepts, principles and effectiveness of
these agreements, and taking into account the needs
of developing and least-developed participants.
In the initial negotiating phase, participants will
indicate which provisions of these two agreements
they want clarified and improved in the next phase
— including provisions disciplining trade distorting
practices. The ministers mention specifically fisheries
subsidies; they say participants should aim to clarify
and improve WTO disciplines, taking into account the
sector's importance to developing countries".
The Doha Implementation Decision has also looked into
some of the difficulties faced by developing countries
when implementing the current WTO Subsidies and Countervailing
measures Agreement. It has recognized some important
issues like the need for certain subsidies for developing
countries and allowing more time for some developing
countries to phase out export-contingent subsidies.
However, most of these issues are under negotiation
and so far has not been implemented.
IV. Anti-Dumping and countervailing
Duties: Similarities and Differences
While discussing the SCM agreement, one should distinguish
clearly between Antidumping Duties (AD) and Countervailing
Duties (CVD). Sometimes AD and CVD are referred to
at the same time. This is because they share a number
of similarities and also many countries handle the
two under a single law, apply a similar process to
deal with them and give a single authority responsibility
for investigations. However, these are two different
trade defense mechanisms available to WTO members
and are addressed by two different WTO Agreements.
If a company exports a product at a price lower than
the price it normally charges in its own home market,
it is said to be "dumping" the product.
It is therefore a situation of international price
discrimination. The Agreement on Implementation of
Article VI of GATT 1994, commonly known as the Anti-Dumping
Agreement (ADA), provides elaboration on the basic
principles set forth in Article VI of GATT[4]
, to govern the investigation, determination, and
application, of anti-dumping duties. The WTO Agreement
on Subsidies and Countervailing Measures (SCM) on
the other hand disciplines the use of subsidies, and
it regulates the actions countries can take to counter
the effects of subsidies. The fundamental difference
between the two is while dumping is an action by a
company, for subsidies, it is the government that
acts either by granting subsidies directly or by requiring
companies to subsidize certain customers.
Another important feature of AD and SCM is that the
GATT agreement allow that the injured domestic industry
is permitted to file for relief under the anti-dumping
as well as countervailing duties. However, simultaneous
imposition of both countervailing and anti-dumping
duties to compensate for the same situation of dumping
or export subsidization is not allowed. Article VI.5
of GATT clearly specifies, "No product of the
territory of any contracting party imported into the
territory of any other contracting party shall be
subject to both anti-dumping and countervailing duties
to compensate for the same situation of dumping or
export subsidization".
V. The WTO Agreement on Agriculture
(AoA)
Subsidies on agricultural goods are governed in WTO
by the rules of Agreement on Agriculture. There are
significant differences in the way the SCM agreement
and the AoA deal with domestic and export subsidies.
However, in case the subsidy on an agricultural product
is found to be inconsistent with the AoA, action against
it can be taken in accordance with the SCM agreement.
AoA distinguishes between support programmes that
stimulate production and trade directly, and those
that are considered to have no direct effect. The
AoA does not impose restrictions on the later category.
Support measures, which are exempt from reduction
commitments, are categorized as Blue Box and Green
Box subsidies. Production and trade distorting subsidies
are classified as Amber Box subsidies and are subject
to reduction commitments. AoA allows developed countries
to have amber box subsidies up to 5 percent of the
value of agricultural production. This is called the
‘de minimis' level. Amber Box subsidies above the
de minimis level come under reduction commitments.
It was stipulated that developed countries should
reduce their Amber Box subsidies from the base period
level (1986-88) over a period of five years (1999-2000)
by 20 percent.
Reduction commitments of domestic subsidies proved
to be least constraining during the implementation
period of AoA. At the end of the implementation period,
it is observed that almost all the countries have
fulfilled their WTO commitments. However, it is also
observed that most of the developed countries have
managed to increase their total domestic support to
the agricultural sector. This has been achieved through
shifting of subsidies from the prohibitive Amber Box
to the permissible categories of Blue and Green Boxes.
As far as export subsidies are concerned, the AoA
stipulates that both the amount of export subsidies
and quantities that receive export subsidies should
be reduced over the implementation period. Though
most of the WTO members have reduced export subsidies
in the post Uruguay Round phase, its continued presence
led to distortions in global markets. Agriculture
is unique in this respect, as export subsidies are
prohibited in WTO in all other sectors. Also, unlike
the SCM agreement which allows export subsidy for
poor developing countries, grant of export subsidy
is prohibited under AoA. But as a Special and Differential
Treatment (S&D), AoA allows developing countries
to have transport subsidies for exports of agricultural
products. Export credit, which has a similar distortionary
effect, is not disciplined under AoA. In the Uruguay
Round agreement, export credit programmes were not
specifically listed as subsidies subject to reduction
commitments, but were given a special status that
exempted them from such commitments
The Agreement on Agriculture also contains a "due
restraint" or "peace clause" (Article
13 of AoA). Peace Clause states that permissible domestic
subsidies cannot be subject to countervailing duties
during the implementation period, and that other ("amber")
domestic support and export subsidies are subject
to Countervailing (CV) action only if a determination
of injury or threat thereof is established as per
the Subsidies and Countervailing Measures agreement.
The ‘Peace Clause' provided special immunity to subsidy
providers in AoA. However, the Peace Clause has expired
in 2004 and many analysts are of the opinion that
after the expiration of Peace Clause, many commodity-specific
EC and US agricultural subsidies will be vulnerable
to legal challenges (Steinberg and Josling, 2003).
VI. Conclusion
The discussion on subsidies and their treatment in
WTO show a distinct asymmetry about dealing with industrial
and agricultural subsidies. Whereas Industrial subsidies
have been put under considerable discipline in WTO,
the rules are much more lenient towards agricultural
subsidies. It is also ironical that while USA and
EU are the two largest users of domestic support and
export subsides in agriculture, for non-agricultural
goods, these two countries are the biggest users of
countervailable measures in WTO.
Many economists view this asymmetry as a fundamental
problem with the prevalent multilateral trading system.
For example, Stiglitz and Charlon (2004) are of the
opinion that the new trade rules and domestic disciplines
introduced in WTO reflected the priorities and needs
of developed countries more than developing countries[5]
. According to them, many of these rules constrain
developing countries' policy options and, in some
cases, prohibit the use of instruments that had been
used by developed countries at comparable stages of
their development. Similar opinions have been expressed
by Chang (2002) who argues that most developed countries,
including USA and Britain, have actively used the
so-called "bad" trade and industrial policies
like infant industry protection and export subsidies
during the earlier stages of their development. However,
WTO rules are preventing developing countries from
using these practices during their catch-up period.
Chang eloquently describes the situation by saying
that developed countries are attempting to "kick
away the ladder" by which they have climbed to
the top, thereby preventing developing counties from
adopting policies and institutions that they themselves
used. Given the asymmetric treatment received by developing
countries in WTO, it is not surprising that multilateral
trade negotiations are increasingly looking like an
international stage for North-South confrontations.
The negotiations under the Doha Development Agenda
is currently on and in this round of negotiations
the developing countries should emphasize and try
to rectify the fundamental difference in approach
taken by WTO about agricultural and industrial subsidies.
References
Ahuja. R. (2001). Export
Incentives in India within WTO Framework, ICRIER Working
Paper No. 72. Indian Council for Research on International
Economic relations, New Delhi
Chang, H-J.( 2002): Kicking away the Ladder? Policies
and Institutions for Economic Development in Historical
Perspective. London: Anthem Press.
Hoda, Anwarul and Ahuja Rajeev (2003): "Agreement
on Subsidies and Countervailing Measures: Need for
Clarification and Improvement", ICRIER Working
Paper no. 101, Indian Council for Research on International
Economic relations, New Delhi
Steinberg, Richard F and Josling Timothy (2003): "When
the Peace Ends: The Vulnerability of EC and US Agricultural
Subsidies to WTO Legal Challenge" November 2003,
available at www.ictsd.org
Stiglitz, Joseph E and Charlon Andrews (2004): "A
Development Round of Trade Negotiations?" - Report
prepared for the Commonwealth Secretariat by the Initiative
Policy Dialogue (IPD) in collaboration with the IPD
Task Force on Trade Policy.
UNCTAD (2000). Impact of Anti-Dumping and Countervailing
Duty Actions, UNCTAD Paper No. TD/B/COM.1/EM.14/2.
UNCTAD (2000a): Subsidies, Countervailing Measures
and developing Countries: With a focus on the Agreement
on Subsidies and Countervailing Measures. UNCTAD paper
no. UNCTAD/DITC/COM/23.
[1] The SCM Agreement,
as it originally entered into force, contained a third
category of specific subsidies called non-actionable
subsidies. This category applied provisionally for
five years ending 31 December 1999, and pursuant to
Article 31 of the Agreement, could be extended by
consensus of the SCM Committee. As no such consensus
has been reached, the SCM agreement no longer recognizes
this category of subsidies.
[2] 27.10. Any countervailing duty
investigation of a product originating in a developing
country Member shall be terminated as soon as the
authorities concerned determine that:
(a) the overall level of subsidies granted upon the
product in question does not exceed 2 per cent of
its value calculated on a per unit basis; or
(b) the volume of the subsidized imports represents
less than 4 per cent of the total imports of the like
product in the importing Member, unless imports from
developing country Members whose individual shares
of total imports represent less than 4 per cent collectively
account for more than 9 per cent of the total imports
of the like product in the importing Member.
27.11. For those developing country Members within
the scope of paragraph 2(b) which have eliminated
export subsidies prior to the expiry of the period
of eight years from the date of entry into force of
the WTO Agreement, and for those developing country
Members referred to in Annex VII, the number in paragraph
10(a) shall be 3 per cent rather than 2 per cent.
This provision shall apply from the date that the
elimination of export subsidies is notified to the
Committee, and for so long as export subsidies are
not granted by the notifying developing country Member.
This provision shall expire eight years from the date
of entry into force of the WTO Agreement."
[3] Source: International Trade Statistics
2002, WTO.
[4] Article VI of GATT 1994 authorizes
the imposition of a specific anti-dumping duty on
imports from a particular source, in cases where dumping
causes injury to a domestic industry, or materially
retards the establishment of a domestic industry.
[5] Stiglitz and Charlon use stronger
language to denounce the use of WTO trade defense
mechanisms as non-tariff measures by developed countries.
They say: "There are four important categories
of non-tariff barriers: dumping duties, which are
imposed when a country sells products below costs;
countervailing duties, which can be imposed when a
country subsidizes a commodity; safeguards, which
can be imposed temporarily when a county faces a surge
in imports; and restrictions to maintain food safety
or avoid, say, an infestation of fruit flies. The
advanced industrial countries have used all of these
non-tariff barriers to restrict imports from developing
countries when they have achieved a degree of competitiveness
that allows them to enter their markets. Many of these
measures are described as ensuring "fair trade,"
but from the perspective of developing countries they
ensure "unfairtrade." They are evidence
of the hypocrisy of the North. Pp. 18.
May 3, 2005.
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