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Trade Remedies Under WTO System Subsidies & Countervailing Duties

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Understanding Subsidies and 3/19/12 Countervailing Measures

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Subsidies have been provided widely throughout the world as a tool for realizing government policies, in such forms as grants (normal subsidies), tax exemptions, low-interest financing, investments and export credits. There are six primary categories of subsidies, divided by purpose: 1) export subsidies, 2) subsidies contingent upon the use of domestic over imported goods, 3) industrial promotion subsidies, 4) structural adjustment subsidies, 5) regional development subsidies, and 6) research and development subsidies. By beneficiary, there are two primary categories: 1) subsidies that are not limited to specific businesses or industries

Understanding Subsidies and 3/19/12 Countervailing Measures

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Although governments articulate ostensibly legitimate goals for their subsidy programmes, it is widely perceived that government subsidies may give excessive protection to domestic industries. In such cases, subsidies act as a barrier to trade, by distorting the competitive relationships that develop naturally in a free trading system. Exports of subsidized products may injure the domestic industry producing the same product in the importing country. Similarly, subsidized products may gain artificial advantages in third country markets and impede other countries exports to those markets.

AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES

PART I: GENERAL PROVISIONS

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Article 1-Definition of a Subsidy Article 2-Specificity Article 3-Prohibition Article 4-Remedies Article 5-Adverse Effects Article 6-Serious Prejudice Article 7-Remedies

PART IV: NON-ACTIONABLE SUBSIDIES

Article 8-Identification of Non-Actionable Subsidies Article 9-Consultations and Authorized Remedies Article 13-Consultations Article 15-Determination of Injury

PART VI: INSTITUTIONS

Subsidy: Definition

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A payment by a government to producers of certain goods to enable them to sell the goods to the public at a low price, To compete with foreign competition, To avoid making redundancies and creating unemployment etc. In general, subsidies distort international trade and are unpopular but they are sometimes used by governments to help to establish a new industry in a country.

Source: Oxford Dictionary of Business and Management, 5th Edition 2009

Subsidy: Definition

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payment by the government to consumers or producers which makes the factor cost received by producers greater than the market price charged to consumers. Subsidies may be given on grounds of income distribution, to improve the incomes of producers, or the welfare of consumers. They are not usually efficient for either purpose: even goods consumed heavily by the poor are also consumed by the better-off, so that much of the benefit of a subsidy goes to those who do not need it. Examples: Export Subsidy, Farm Subsidy, Food Subsidy

Subsidy: Example

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Common Agricultural Policy (CAP) - A policy set up by the European Economic Community to support free trade within the Common Market and to protect farmers in the member states. The European Commission fixes a threshold price, below which cereals may not be imported into the European Union (EU), and also buys surplus cereals at an agreed intervention price in order to help farmers achieve a reasonable average price, called the target price. Prices are also agreed for meats, poultry, eggs, fruits and vegetables with arrangements similar to those for cereals. The European Commission is also empowered by the CAP to subsidize the modernization of farms within the community. The common policy for exporting agricultural products to non-member countries is laid down by the CAP.

Few Trade Terms

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Dumping -- selling imports into a domestic market at a price lower than the cost of production in the country of origin less than fair value (LTFV) Tariff --A fee (or duty) levied upon goods transported from one customs area to another Trade subsidies -- government payments or other benefits to producers that make their prices unfairly low Countervailing duties extra fee levied by importing country to counter unfair subsidy

Agreement on Subsidies and 99 3/19/12 Countervailing Measures (SCM)

The WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement)

Defines actionable subsidies Establishes the actions WTO members can take to respond to imports of subsidized products Provides the requirements such actions must satisfy

3/19/12 1010 Remedies for Subsidized Imports

WTO members can respond to subsidized imports by

Instituting a domestic countervailing duty investigation Requesting dispute settlement through the WTO

A countervailing duty investigation can result in the imposition of countervailing duties WTO dispute settlement can result in

An agreement by the exporting country to modify or terminate the subsidies The right of the importing country to withdraw concessions

3/19/12 1111 Countervailing Duty: Investigations

To impose countervailing duties on subsidized imports, a WTO member must conduct an investigation that establishes

Imports have benefited from actionable subsidies, and Those imports are injuring, or threaten to injure, a domestic industry

Actionable Subsidies

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A subsidy is actionable if

There is a financial contribution by a government A benefit is thereby conferred The subsidy is specific Does not fall within the category of non-actionable subsidies

Certain types of subsidies are simply prohibited by the SCM Agreement Other subsidies can be offset with countervailing duties if the imports are injuring a domestic industry

Notification

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WTO members are supposed to notify the Committee on Subsidies and Countervailing Measures annually of

The actionable subsidies they provide Non-actionable subsidies under Art. 8.2

The notification should describe

The form of the subsidy The per unit amount of the subsidy or the total amount budgeted for it The purpose of the subsidy Duration of the subsidy Statistical information regarding the subsidys impact on trade

In fact, members often fail to make their notifications on time or to include information on all subsidies

3/19/12 Legal Definition of Subsidy

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A subsidy is a financial contribution by a government, or any form of income or price support, that provides a benefit to the recipient

Direct transfer of funds Potential transfer of liability Foregone revenue Provision of goods or services Payments to a funding mechanism

Financial contributions by a private body at the direction of the government also constitute subsidies The amount of the subsidy is equal to the benefit to the recipient

A benefit exists if a transaction between the government and the recipient is on terms inconsistent with commercial considerations

Direct Transfer of Funds

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Grants from the government Loans provided by the government at belowmarket rates Equity infusions on terms inconsistent with commercial considerations Loan guarantees if

The guarantee allows the recipient to obtain a loan at an interest rate lower than would otherwise be possible, and The cost of the guarantee is less than the cost of a commercial guarantee

Foregone Revenue

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Tax benefits

Tax holidays Tax reductions Tax credits

Provision of licenses, permits, etc., at less than the normal charge Provision of government services at less than the normal charge

3/19/12 Provision of Goods or Services 1717

The provision of goods or services for less than adequate remuneration is a subsidy Adequate remuneration reflects prevailing market conditions, including

Price Quality Availability Transportation Other terms of sale

The prevailing market conditions are normally those in the exporting country If the market in the exporting country is fundamentally distorted, prevailing market conditions can be those in

Another country

3/19/12 Provision of Goods or Services 1818

To be actionable, the goods or services must be provided by the government A major issue is whether sales by state-owned companies constitute sales by a government

This issue is currently under review by a WTO dispute settlement panel in connection with several countervailing duty determinations by the United States against China

Valuation of Subsidies

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The value of the subsidy is the value of the benefit to the recipient

The cost to the government is irrelevant

The WTO member must specify the manner in which it calculates benefits in its countervailing duty legislation and regulations The SCM Agreement does not address the allocation of benefits over time

Specificity

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To be actionable, a subsidy must be specific

It must be limited to an enterprise or industry or group of enterprises or industries The government explicitly limits availability to specified enterprises or industries The subsidy is available only to enterprises in a specified region The subsidy is an export subsidy There are other reasons to believe the subsidy is in fact specific

A subsidy is specific if

A subsidy is not specific, even if the government must decide who receives it, if the applicable laws and regulations set forth objective criteria for providing the benefit

3/19/12 Factors for Specificity In Fact 2121

Use of a subsidy programme by a limited number of certain enterprises Predominant use by certain enterprises The grant of disproportionately large amounts of the subsidy to certain enterprises Whether the government has discretion in granting the subsidy

Prohibited Subsidies

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Certain types of subsidies are simply prohibited by the SCM Agreement

Export subsidies Subsidies based on the use of domestic rather than foreign goods (import substitution subsidies)

Developing countries are allowed to maintain export subsidies

For at least 8 years after they accede to the SCM Agreement, or Until their global market share in a product reaches 3.25 percent for 2 consecutive years Least developed countries can maintain export subsidies indefinitely

Non-Actionable Subsidies 3/19/12

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Subsidies that are not specific Certain types of assistance for research and development Certain types of benefits to support environmental compliance by existing facilities Assistance to disadvantages regions In each case, the SCM Agreement sets forth detailed requirements the subsidies must satisfy to be non-actionable

Non-Actionable Subsidies 3/19/12 by Developing Countries

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If provided by a developing country as part of a program of privatization of government-owned enterprises, some types of subsidies are not actionable

Direct forgiveness of debts Subsidies to cover social costs

The subsidies must be granted for a limited period The country must notify the SCM Committee of the program and the subsidies involved

Injuries and Procedures

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The standard and factors for determining injury or threat of injury is almost exactly the same as in antidumping investigations

There is no general de minimis level for imports However, imports from a developing country are considered de minimis if they are less than 4 percent of total imports

Procedures for investigations, application of provisional and retroactive duties, undertakings, and reviews are the same as in antidumping investigations

Countervailing Duties

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The countervailing duty margin is equal to the value of the subsidy divided by the value of the relevant sales
Subsidies to specific products are allocated across the value of those products only Subsidies to an enterprise in general are allocated across the value of all of the enterprises sales

Total subsidy amounts of less than 1 percent ad valorem are considered de minimis, and cannot be countervailed

The de minimis level for developing countries is 2 percent

If national law allows, the amount of the duty may be less than the full value of the subsidy if that is sufficient to remedy the injury caused The SCM Agreement encourages, but does not require,

WTO Dispute Settlement

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As well as initiating a countervailing duty investigation, a WTO member can also seek resolution of the matter through the WTO if it can show that the subsidy is causing adverse effects Adverse effects include

Injury to a domestic industry Nullification or impairment of rights under the GATT 1994 Serious prejudice to the interests of a WTO member

Initially, the member requests consultations with the exporting member to try to reach a mutually agreeable solution

3/19/12 Request for Dispute Settlement 2828

If, after 60 days, consultations have not resolved the issue, the member may request dispute settlement through the WTO The request for dispute settlement must include information

Describing the subsidies Establishing adverse effects

Injury to a domestic industry Nullification or impairment Serious prejudice

Nullification or Impairment3/19/12

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Nullification or impairment of rights under the GATT 1994 exists if the effect of the subsidies is to offset the value of tariff or other concessions under Article II of the GATT 1994 Nullification or impairment automatically arises if the subsidy is a prohibited subsidy Non-violation nullification or impairment must arise from the use of the subsidy Non-violation nullification or impairment would

Serious Prejudice

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Alternatively, the member may show that the bestowal of the subsidies has caused it serious prejudice Serious prejudice will be found regarding

subsidies to cover operating losses sustained by an industry Ongoing subsidies to cover operating losses direct forgiveness of governmentheld debt grants to cover debt repayment

Serious Prejudice

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Serious prejudice may be present if the effect of the subsidy is

To displace the imports of a like product of another WTO member into the market of the subsidizing member To displace the exports of a like product of another member from a third country market Significant price undercutting by the subsidized product To increase in the world market share of the subsidizing Member in a particular subsidized primary product or commodity compared to the average share it had during the previous period of three years

Certain specified occurrences prevent a finding of serious prejudice

Panel Determination

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If the panel finds that an actionable subsidy has caused adverse effects, it will recommend actions for the exporting member to take In such cases, the exporting member should

Withdraw the subsidy Take other measures to remove the adverse effects

If the exporting member does not take appropriate action within 6 months of the adoption of a final report by the panel or the Appellate Body, the complaining member may take countermeasures commensurate with the degree and nature of the adverse effects determined to exist

Investigation Versus Dispute 3/19/12 Settlement

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A WTO member will generally initiate a countervailing duty investigation where the domestic industry alleges injury

The member retains full control over the investigation and any remedy The subsidy is affecting the competitiveness of its exports in third markets The subsidy is distorting its domestic market, but the domestic industry has not necessarily suffered injury Other WTO members are likely to support its position

A WTO member will request dispute settlement if

THANKS A LOT

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Dr. Nafees Ahmad Faculty of Legal Studies South Asian University New Delhi drnafeesahmad@sau.ac.in