Subsidies & Countervailing Measures Scm
SUBSIDIES & COUNTERVAILING MEASURES SCM
1
Background / Rules
General Principles
Applicability and structure of the Agreement
Introduction
The Agreement on Subsidies and Countervailing Measures ("SCM Agreement") addresses two separate but closely related topics: multilateral disciplines regulating the provision of subsidies, and the use of countervailing measures to remove the injury caused by subsidized imports.
Multilateral disciplines
Multilateral disciplines are the rules regarding whether or not a subsidy may be provided by a Member. They are enforced through invocation of the WTO dispute settlement mechanism. More concretely, certain subsidies are prohibited, and most other specific subsidies may be challenged if they cause adverse effects to the interests of other Members. Three categories of subsidies are non-actionable and cannot be challenged.
Countervailing measures
Countervailing measures are a unilateral remedy, but it may only be applied by a Member after an investigation by that Member and a determination that the criteria set forth in the SCM Agreement are satisfied. The substantive criteria require that a Member not impose a countervailing measure unless it determines that there are subsidized imports, injury to a domestic industry, and a causal link between the subsidized imports and the injury. In-depth procedural requirements regulate the conduct of countervailing investigations and the imposition and maintenance in place of countervailing measures. A failure to respect
either the substantive or procedural requirements can be taken to dispute settlement and may be basis for invalidation of the measure.
Structure of Agreement
Part I of the SCM Agreement provides that its disciplines apply only to subsidies that are specifically provided to an enterprise or industry, or group of enterprises or industries, and also defines both the term "subsidy" and the concept of "specificity". Parts II, III and IV divide all specific subsidies into one of three categories: prohibited, actionable, and non-actionable, and establish certain rules and procedures with respect to each category, including specific dispute settlement rules and procedures for each category. Part V establishes the substantive and procedural requirements that must be fulfilled for the application by a Member of a countervailing measure against subsidized imports. Parts VI and VII establish the institutional structure and notification/surveillance modalities for implementation of the SCM Agreement. Part VIII contains special and differential treatment rules for various categories of developing country Members. Part IX contains transitional rules for developed country and former centrally-planned economy Members. Parts X and XI contain, respectively, a general dispute settlement provision and final provisions.
Definition of a Subsidy
Introduction
Unlike the earlier Tokyo Round SCM Agreement which it replaces, the WTO SCM Agreement contains a definition of the term "subsidy". The definition contains three basic elements: (i) a financial contribution (ii) by a government or any public body within the territory of a Member (iii) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist.
A financial contribution
Under the SCM Agreement, only measures that take the form of a "financial contribution", or where there is any form of income or price support in the sense of Article XVI of GATT 1994, can constitute a subsidy. The Agreement contains an exhaustive list of the type of measures that represent a financial contribution. These include direct transfers of funds (e.g. grants, loans, and equity infusion) and potential direct transfers of funds or liabilities (e.g. loan guarantees). A financial contribution also exists where government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits); where a government provides goods or services other than general infrastructure, or purchases goods; or where a government entrusts or directs a private body to carry out these functions.
By a government or any public body
In order for a financial contribution to be a subsidy, it must be made by a government or any public body within the territory of a Member. Thus, the SCM Agreement applies not only to measures of national governments, but also to measures by sub-national governments and to such public bodies as State-owned companies.
Confers a benefit
A financial contribution by a government is not a subsidy unless it confers a "benefit". In certain cases, as in the case of a cash grant, the existence of a benefit and its valuation will be clear. In most cases, however, the issue of benefit will be more complex. For example, when does a loan, an equity infusion or the purchase by a government of a good confer a benefit? Although the concept of benefit was much discussed during the Uruguay Round (a basic issue was whether the amount of a benefit should be assessed with reference to a commercial benchmark or with reference to the cost to the government), the Agreement provides only partial guidance with respect to the concept of "benefit". Article 14 of the Agreement states that, in a countervailing duty context, the existence of a benefit may be assessed by reference to commercial benchmarks, and provides some guidance for determining the amount of the benefit with respect to certain types of measures. However, Article 14 does not apply in the context of multilateral disciplines.
Article 14 guidelines state that government provision of equity capital is considered as conferring a benefit only if the investment decision can be regarded as inconsistent with the usual investment practice of private investors. A government loan is not considered as conferring a benefit unless there is a difference between the amount that the firm receiving the loan pays on the government loan and the amount the firm would pay on a comparable commercial loan. A government loan guarantee would not be considered as conferring a benefit unless there is a difference between the amount that the firm receiving the guarantee pays and the amount that the firm would pay on a comparable commercial loan absent the government guarantee. The provision of goods or services or purchase of goods by a government is not considered as conferring a benefit unless the provision is made for less than adequate remuneration, or the purchase is made for more than adequate remuneration. The adequacy of remuneration is to be determined in relation to prevailing market conditions for the good or service (including price, quality, availability, marketability transportation and other conditions of purchase).
Examples
Paper mill
If, for instance, a government temporarily exempts a paper mill in financial difficulties from the obligation to observe anti-pollution laws, it confers regulatory, not financial, privileges. Given that there is no element of financial contribution, this would not constitute a subsidy.
An NGO in Africa
If a private NGO - non-governmental organization - gives technical and financial assistance to coffee growers in Africa, it is a case of private, not governmental, aid. The definition of a subsidy requires the financial contribution to come from a government or public body, which means that this would not be considered a subsidy.
A loan to a manufacturer
If a government makes a loan to an automobile manufacturer on conditions equivalent to those that the manufacturer could obtain from private banks, there is a financial contribution but no benefit, and the loan would not constitute a subsidy as per Article 1 of the SCM Agreement.
Specificity
Principle
Assuming that a measure is a subsidy within the meaning of the SCM Agreement, it nevertheless is not subject to SCM Agreement disciplines unless it has been specifically provided to an enterprise or industry or group of enterprises or industries. The basic principle is that a subsidy that distorts the allocation of resources within an economy should be subject to discipline. Where a subsidy is widely available within an economy, such a distortion in the allocation of resources is presumed not to occur. Thus, only "specific" subsidies are subject to the SCM Agreement disciplines.
Types of specificity
There are four types of "specificity" within the meaning of the SCM Agreement:
Enterprise-specificity
A government targets a particular sector or sectors for subsidization;
Industry-specificity
A government targets a particular sector or sectors for subsidization.
Regional-specificity
A government targets producers in specified parts of its territory for subsidization.
Prohibited subsidies
A government targets export goods or goods using domestic inputs for subsidization.
De jure vs. de facto specificity
If, notwithstanding any appearance of "de jure" non-specificity resulting from the application of the stated principles, there are reasons to believe that the subsidy may in fact be specific, other factors may be considered. Such factors are: use of a subsidy programme by a limited number of certain enterprises, predominant use by certain enterprises, the granting of disproportionately large amounts of subsidy to certain enterprises, and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy. In this regard, information on the frequency with which applications for a subsidy are refused or approved and the reasons for such decisions are also considered. The extent of diversification of economic activities within the jurisdiction of the granting authority as well as the length of time during which the subsidy programme has been in operation are taken into account. Consideration of such factors may lead to a "de facto" finding of specificity.
Special and differential treatment
Developing countries
The SCM Agreement recognizes that subsidies can play an important role in the economic development of developing country Members, and provides special and differential treatment to such Members. Differing levels of development among countries mean differing levels of obligations and transition periods with regard to the SCM Agreement.
The SCM Agreement recognizes three categories of developing country Members: (i) least-developed country Members ("LDCs"), (ii) certain Members identified in Annex VII(b) of the Agreement until such time as their GNP per capita has reached USD 1,000 per year, and (iii) other developing countries. (Categories (i) and (ii) are collectively referred to as "Annex VII countries"). The lower a Member's level of development, the more favourable the treatment it receives with respect to subsidies disciplines as well as when faced with countervailing duties. Thus, for example, Annex VII countries are exempted from the prohibition on export subsidies, while other developing country Members have an eight-year period to phase out their export subsidies. The Agreement also provides certain special and differential treatment to developing country Members that are subject to countervailing duties.
The specific allowances made for developing countries under various provisions of the Agreement will be discussed provision by provision.
Members in transformation to a market economy
Members in the process of transformation from a centrally-planned to a market, free-enterprise economy are given a seven-year period to phase out prohibited subsidies. These subsidies must, however, be notified in order to benefit from the special treatment. Members in transformation also receive preferential treatment with respect to actionable subsidies.
Prohibited Subsidies
Overview of prohibited subsidies
Introduction
Subsidies contingent upon export performance, or upon the use of domestic over imported goods, are prohibited ("red") by Article 3 of the SCM Agreement. These two categories of subsidies are prohibited because they are designed to affect trade and thus are most likely to cause adverse effects to the interests of other Members.
Export subsidies
Subsidies contingent, in law or in fact, whether wholly or as one of several other conditions, upon export performance ("export subsidies") are prohibited. A detailed illustrative list of export subsidies is annexed to the SCM Agreement (Annex 1).
Among the Government measures that may represent export subsidies are currency retention schemes which involve a bonus on exports; provision of goods or services for use in the production of exported goods on terms more favourable than those for the production of goods for domestic consumption; export-related exemption, remission or deferral of direct taxes and social welfare charges; excess exemption, remission, or deferral of indirect taxes or import duties; export credits extended at rates below the government's cost of funds; and provision of export credit guarantee or insurance programmes at premium rates which are inadequate to cover the operating costs and losses of the programmes.
Import substitution subsidies
The second prohibited category comprises subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods - the so-called import substitution subsidies.
Remedies
Prohibited subsidies may be challenged through the panel process in the WTO. The very fact that a subsidy is an export or import substitution subsidy, and thus designed to affect trade, means that it is most likely to cause adverse effects; there is therefore no need for the complaining Member to show trade effects. Prohibited subsidies may also be subject to countervailing action.
Agricultural export subsidies
Agricultural export subsidies that are fully consistent with the provisions of the Agreement on Agriculture are not prohibited under the SCM Agreement, but instead are subject to the disciplines of the Agreement on Agriculture.
Export subsidies
Developed Members
Subsidy programmes established by a Member before the date that the Member signed the WTO Agreement, and which are inconsistent with the provisions of the SCM Agreement, must be notified to the WTO Agreement, and which are inconsistent with the provisions of the SCM Agreement, must be notified to the SCM Committee not later than 90 days after the date of entry into force of the WTO Agreement for the Member, and brought into conformity with the SCM Agreement within 3 years of the date of entry into force of the WTO Agreement for that Member.
Annex VII countries
The prohibition on export subsidies does not apply to least-developed Members, nor to certain Members specifically identified in Annex VII(b) of the Agreement until the GNP per capita of such Members has reached USD 1,000 per annum. These Members are Bolivia, Cameroon, Congo, Côte d'Ivoire, Dominican Republic, Egypt, Ghana, Guatemala, Guyana, India, Indonesia, Kenya, Morocco, Nicaragua, Nigeria, Pakistan, Philippines, Senegal, Sri Lanka, and Zimbabwe.
Other developing country Members
Article 27 provides that the prohibition on export subsidies shall not apply to non-Annex-VII developing country Members for a period of 8 years from the date of entry into force of the WTO Agreement. Such Members must phase out their export subsidies in the 8-year period, preferably in a progressive manner. If the Member deems it necessary to apply such subsidies beyond the 8-year period, it must enter into consultations with the Committee not later than one year before the expiry of this period. The Committee would determine whether an extension is justified after examining all the relevant economic, financial and development needs of the developing country Member. If the Committee finds no such justification, the developing country Member is required to phase out the remaining export subsidies within 2 years from the end of the last authorized period. A developing country Member may not increase the level of its export subsidies, and these subsidies remain actionable.
Export competitiveness
A developing country Member otherwise exempt from the prohibition on export subsidies may nevertheless become subject to the prohibition in certain circumstances, upon reaching export competitiveness in any given product. In such circumstance, it must phase out its export subsidies for the product within 2 years or in the case of an Annex VII country within 8 years. Export competitiveness exists in a product if a Member's exports of that product (defined as a section heading of the Harmonized System Nomenclature) reach a 3.25 per cent share of world trade in that product for 2 consecutive calendar years.
Countries in transformation
Members in the process of transformation from a centrally-planned into a market economy must phase out export subsidies or bring them into conformity with Article 3 within 7 years from the date of entry into force of the WTO Agreement. Such subsidy programmes must be notified to the SCM Committee by the earliest practicable date after the date of entry into force of the WTO Agreement. Further notifications may be made up to two years after the date of entry into force of the WTO Agreement.
Import substitution subsidies
Introduction
The second prohibited category comprises subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods ("import substitution subsidies").
Relation to Article III of GATT 1947
Article 3.1(b) enshrines the prohibition on subsidization that is contingent upon a domestic content requirement. As such the provision reflects Article III of GATT 1947, i.e. the principle of national treatment. While GATT Article III.8(b) clarifies that the provision of subsidies exclusively to domestic producers, as such, does not constitute a violation of the national treatment requirement of Article III, GATT panels have found that the provision of subsidies contingent on use of domestic over imported goods does violate that requirement.
Relation to TRIMS Agreement
The TRIMs Agreement also prohibits a variety of measures contingent upon either an export performance requirement or a domestic content requirement.
Transition periods
The SCM Agreement foresees different transitional periods depending on the level of development of the WTO Members.
Developed Members: Three years
For developed country Members, Article 28 indicates that subsidy programmes which have been established by a Member before the signing of the WTO Agreement and which are inconsistent with the provisions of the SCM Agreement must be notified to the SCM Committee not later than 90 days after the date of entry into force of the WTO Agreement and which are inconsistent with the provisions of the SCM Agreement must be notified to the SCM Committee not later than 90 days after the date of entry into force of the WTO Agreement for the Member, and brought into conformity with the provisions of the SCM Agreement within three years.
Developing Members: Five years
The prohibition on import substitution does not apply to developing country Members for a period of five years (Article 27.3).