Module
6
Export Competition
ESTIMATED TIME: 5 ½ hours
OBJECTIVES OF MODULE6
Present the third pillar of the Agreement on Agriculture: Export Competition/Subsidies
§ Outline the Conceptual Framework of the rules on export subsidies in the Agreement on Agriculture;
§ describe the rules and the reduction commitments Members made;
§ explain the rules for Products with no specific reduction commitments;
§ explain anti-circumvention;
§ explain the special and differential treatment provisions relating to export subsidies;
§ outline the notification obligations of WTO Members concerning export subsidies.
I. Conceptual Framework
in brief
In Module2, we saw that, while the GATT1947 prohibited export subsidies for manufactured products, ArticleXVI allowed exports of primary products to be subsidized. However, ArticleXVI obliged Contracting Parties who used export subsidies not to do so in a way that gained "more than an equitable share of the world export trade in the product" in question for the subsidizing party, taking into account representative historical trade shares and any special factors. Therefore, it could be argued that, for exports of primary products, there was not an export subsidy prohibition, but a trade effects test.
NoteFor purposes of GATT ArticleXVI, primary products were defined as "any product of farm, forest or fishery, or any mineral, in its natural form or which has undergone such processing as is customarily required to prepare it for marketing in substantial volume in international trade". See Interpretative Note2 to SectionB of ArticleXVI of the GATT.
The proliferation of export subsidies in the years leading to the Uruguay Round was one of the key issues addressed in the agriculture negotiations. The rules on agricultural subsidies are found in both the Agreement on Agriculture and the Agreement on Subsidies and Countervailing measures ("SCMAgreement").
In Detail
The negative effects of export subsidies on agriculture have been analyzed by international organizations, many WTO Members, as well as independent economists and academic institutions. Exporters that receive export subsidies enjoy an advantage, since they can, for example, sell below the cost of production. In most cases the subsidy depends on the difference between the world and domestic prices, which means the exporter can always match or undercut exporters in other countries. This in turn increases competition for other exporters or for domestic producers in the importing country.
In addition to reducing prices and undercutting unsubsidised exporters in other countries, export subsidies also amplify world market price variations. As the level of subsidy usually depends on the difference between domestic and world market prices, if world market prices fall the subsidy increases and supply from the subsidised exporter can remain the same, or even increase. In addition, supply from the subsidising country is not affected by market prices as the subsidy increases or decreases as prices fall or rise. This exaggerates the swings in world prices by reducing supply in times of high prices and increasing it in times of low prices.[1]
On average export subsidies lead to declining food prices. This hurts vulnerable producers in developing countries. However, most of the export subsidies are granted to temperate products like dairy and cereals. Therefore, it could be argued that consumers in net-food-importing developing countries benefit from the lower food prices although producers in these countries will suffer from the increase in subsidised.
The Agreement on Agriculture provides that the level of export subsidies cannot be increased and that the existing level of subsidies could continue subject to conditions and the commitments to reduce (1) subsidized export quantities, and (2) the amount of money spent subsidizing exports.
The SCMAgreement is also applicable to agricultural products. However, Members also agreed that the provisions of the SCMAgreement on export subsidies would apply "except as provided in the Agreement on Agriculture" (Article3.1). In addition, provided a Member's use of export subsidies was within its commitments, the "Due Restraint" clause of the Agreement on Agriculture (Article13) restricted other Members rights to challenge these subsidies until the end of 2003.
At the 6th Ministerial Conference held in Hong Kong in 2005, WTO Members agreed to eliminate agricultural export subsidies by 2013, as part of the single undertaking and subject to the parallel elimination of all forms of such subsidies. This date was to be confirmed only upon completion of modalities.
Article3 of the SCMAgreement prohibits subsidies contingent in law or fact on export performance, except as provided for in the Agreement on Agriculture. The SCMAgreement[2] added precision to the rules, for example, it defined subsidies for the first time and further elaborated on subsidy disciplines, classifying subsidies into three categories (prohibited, actionable and non-actionable). It also developed definitions, concepts and methodologies relating to adverse effects, and established procedural rules for multilateral remedies. The SCMAgreement also expanded and developed existing procedural and substantive rules on the use of countervailing measures. Part VII of the SCMAgreement sets out enhanced provisions on notification and surveillance – that is, transparency provisions.
The Agreement on Agriculture permits export subsidies on agriculture subject to the limits set out in Members' Schedules of Commitments (which give details of their reduction commitments) and the rules in Articles3, 8, 9, 10 and 11 of the Agreement. Export subsidies can still be used by WTO Members, but only where they used them during the base period (1986-1988).
However, although a subsidy is legal it may cause or threaten to cause harm to another Member. In these cases it may be possible to seek some of the remedies set out in the SCMAgreement.
The Agriculture Agreement does not contain any definition of the term "subsidy". Under the SCMAgreement, a subsidy exists if:
ú there is a financial contribution by a government or any public body within the territory of a Member;
ú there is any form of income or price support in the sense of ArticleXVI of the GATT 1994;
ú a benefit is thereby conferred.
In the Canada - Dairy report, the Appellate Body said that a "subsidy", within the meaning of Article1.1 of the SCMAgreement, arises where the grantor makes a "financial contribution" which confers a "benefit" on the recipient, as compared with what would have been otherwise available to the recipient in the marketplace.[3] The same approach can be found in the Canada – Measures Affecting the Export of Civilian Aircraft ("Canada – Aircraft")(DS70) and the US – FSC (DS108) Panel Report.[4]
To sum-up, a subsidy arises when:
ú "financed" or a "financial contribution" do not necessarily mean a direct payment of monies, they can also cover cases where someone gets a benefit as a result of a government programme.
ú A subsidy can exist even where the benefit is granted not directly by the government but by virtue of government action.
It must also be noted that exports can be supported in many different ways and that direct aid by governments is only one of these methods.
Governments can also provide support to exports through export credits which offer the purchasing government or enterprise lower interest rates or easier terms than commercial banks.
A state trading enterprise may also have access to government-guaranteed loans or government investments which enable it to undercut the competition.
Food aid can also be used as a way to dispose of surplus stocks. In some cases, food aid could displace commercial trade in the receiving country rather than contributing to alleviation of hunger.
EXERCISES:
1. What products were eligible for export subsidies under GATT1947 and subject to what conditions?
2. In which agreement is the definition of subsidies to be found?
II. Export Subsidies Rules for Agriculture
As a result of the Uruguay Round, the right to use export subsidies is limited by the disciplines in the Agreement on Agriculture. Those WTO Members that have the right to use export subsidies were required to reduce the amount of money spent on export subsidies and the quantity exported with subsidies:
ú Articles 3 and 8 of the Agreement on Agriculture prohibit WTO Members from providing export subsidies for products not specified in their respective Schedule. These Articles also require that the quantity exported with subsidies and the budgetary outlay on these subsidies do not exceed the limits set out in the Member's Schedule;
ú Article9 lists the types of subsidies to be reduced;
ú Article10 states that other measures cannot be used to circumvent export subsidy commitments and sets out some rules for export credits and food aid;and
ú Article11 contains the disciplines on the use of subsidies on incorporated agricultural primary products, for example, the milk incorporated into processed cheese.
The right to use export subsidies is now limited to two situations:
(i) export subsidies subject to product-specific reduction commitments within the limits specified in the Schedule of the WTO Member concerned;and
(ii) export subsidies consistent with the special and differential treatment provision for developing country Members (Article9.4 of the Agreement on Agriculture).
In all other cases, the use of export subsidies for agricultural products is prohibited. During the period 1996 to1999 Members that had export subsidy reduction commitments in their Schedules did have the right to exceed the limits set out in their Schedules provided they had not used their full commitment for the previous years. The amount by which a Member could exceed the limit in its Schedule was limited and at the end of the implementation period the total quantity exported with subsidies and the amount spent of subsidies had to be within the totals set out in the Schedule. Since 2000 the annual limits apply and this "roll-over-relief" provision has now expired.
II.A. Article9 (Subsidies to be reduced)
The export subsidies that are subject to reduction are listed in Article9 of the Agreement on Agriculture.
Article3.3 of the Agreement on Agriculture states that a WTO Member may not provide export subsidies listed in Article9.1 in respect of the agricultural products or groups of products in excess of the commitments specified in SectionII of PartVI of its Schedule. The reduction commitments are shown in the Schedules of WTO Members on a product-specific basis.
The list in Article9.1 covers:
a) The provision by governments or their agencies of direct subsidies, including payments-in-kind, to a firm, to an industry, to producers of an agricultural product, to a cooperative or other association of such producers, or to a marketing board, contingent on export performance;
b) Sales of non-commercial stocks of agricultural products for export at prices lower than comparable prices for such goods on the domestic market;
c) Payments on the export of an agricultural product that are financed by virtue of governmental action, which is taken to include producer financed subsidies, such as, government programmes which require a levy on all production which is then used to subsidise the export of a certain portion of that production;
d) Cost reduction measures such as subsidies to reduce the cost of marketing goods for export: this can include upgrading and handling costs and the costs of international freight;
e) Internal transport subsidies applying to exports only, such as those designed to bring exportable produce to one central point for shipping;and
f) Subsidies on incorporated products, i.e. subsidies on agricultural products for example, wheat contingent on their incorporation in export products such as biscuits.
Although other forms of export subsidies can be provided, it is worth noting that Article9.1 is much broader than it might appear at first sight. For example, Article9.1(a) refers to direct payments, including paymentsin-kind that are contingent on export performance. In the Canada - Dairy dispute[5] (DS103, DS113), the Appellate Body held that "'payments-in-kind' are a form of direct subsidy" and a "payment-in-kind" is just one of the forms in which "direct subsidies" may be granted. The Appellate Body indicated that "payments" and "payments-in-kind" denote a transfer of economic resources, which can be in a form other than money, from the grantor of the payment to the recipient.
The Appellate Body also ruled that the mere fact that a "payment-in-kind" has been made does not by itself imply that a "subsidy" has been granted. That is, if the recipient gives full consideration in return for a "payment-in-kind", there can be no subsidy.[6] However, if the recipient gives less than full consideration for the "payment-in-kind" there is a subsidy.
With respect to the requirement of Article9.1(c) of the Agreement on Agriculture that payments be made on the export of the agricultural product, the Appellate Body in the Canada - Dairy ruled that[7] "payments... by virtue of governmental action" are not restricted to direct financial assistance but include benefits given to exporters that arise from government schemes. In the Canada – Dairy case the benefit arose because one class of milk production was available to producers at low cost provided it was used exclusively for exports.[8]
Hence, Article9.1(c) covers many measures and policies used by governments to support exports.
II.B. Exception in Article9.4
The Agreement on Agriculture includes certain temporary exemptions for developing countries, allowing them to subsidize marketing, cost reduction and transport in Article9.4.
Article9.4 allowed developing countries to use subsidies aimed at reducing the cost of marketing including internal and external transport as well as handling and processing costs (that is the subsidies listed in Article9.1(d) and (e)), provided that these are not applied in a manner that would circumvent export subsidy reduction commitments. This exemption is one of the special and differential treatment provisions of the Agreement on Agriculture and was only available during the implementation period. Strictly speaking, it has expired but the Hong Kong Ministerial Declaration states that "developing country Members will continue to benefit from the provisions of Article9.4 for five years after the end-date for elimination of all forms of export subsidies".[9]
II.C. Who can Subsidize Exports?
25 WTO Members (counting the EU as one) can subsidize exports, but only for products on which they have commitments to reduce these subsidies. These Members cannot:
(1) introduce new subsidies for products not listed in their Schedules;
(2) exceed the limits in their schedules; or
(3) transfer existing commitments to other agricultural products.