Trade Remedies Under WTO System Subsidies & Countervailing Duties

2Understanding Subsidies and Countervailing MeasuresSubsidies 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 (non-specific subsidies), and

2) subsidies that are limited to specific businesses and industries (specific subsidies).

3Understanding Subsidies and Countervailing Measures

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.

4AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES

PART I: GENERAL PROVISIONS 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 Article 24-Committee on Subsidies and Countervailing Measures and Subsidiary Bodies

PART VII: NOTIFICATION AND SURVEILLANCE Article 25-Notifications

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Subsidy: Definition “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

6Subsidy: Definition “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

Source: Oxford Dictionary of Economics, 3rd Edition 2009

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Subsidy: Example 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.

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Few Trade Terms

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

9Agreement on Subsidies and Countervailing Measures (SCM)

The WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement)Defines actionable subsidiesEstablishes the actions WTO members can take to

respond to imports of subsidized productsProvides the requirements such actions must satisfy

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Remedies for Subsidized ImportsWTO members can respond to subsidized imports by Instituting a domestic countervailing duty investigationRequesting dispute settlement through the WTO

A countervailing duty investigation can result in the imposition of countervailing duties

WTO dispute settlement can result inAn agreement by the exporting country to modify or

terminate the subsidiesThe right of the importing country to withdraw concessions

with respect to the exporting country

11Countervailing Duty: Investigations

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

Imports have benefited from actionable subsidies, andThose imports are injuring, or threaten to injure, a

domestic industry

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Actionable SubsidiesA subsidy is actionable if

There is a financial contribution by a governmentA benefit is thereby conferredThe subsidy is specificDoes not fall within the category of non-actionable

subsidiesCertain 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

13Notification

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 subsidy’s impact on trade

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

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Legal Definition of “Subsidy”

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

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Direct Transfer of Funds

Grants from the governmentLoans provided by the government at below-market 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

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Foregone Revenue

Tax benefitsTax holidaysTax reductionsTax credits

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

Provision of government services at less than the normal charge

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Provision of Goods or Services

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 The “world” market

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Provision of Goods or Services

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

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Valuation of SubsidiesThe 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

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Specificity

To be actionable, a subsidy must be “specific” It must be limited to an enterprise or industry or group of

enterprises or industries A subsidy is specific if

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 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

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Factors for Specificity “In Fact”

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

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Prohibited SubsidiesCertain types of subsidies are simply prohibited by the SCM AgreementExport subsidiesSubsidies based on the use of domestic rather than

foreign goods (import substitution subsidies)Developing countries are allowed to maintain export subsidiesFor at least 8 years after they accede to the SCM

Agreement, orUntil their global market share in a product reaches 3.25

percent for 2 consecutive yearsLeast developed countries can maintain export

subsidies indefinitely

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Non-Actionable SubsidiesSubsidies that are not specificCertain types of assistance for research and development

Certain types of benefits to support environmental compliance by existing facilities

Assistance to disadvantages regionsIn each case, the SCM Agreement sets forth detailed requirements the subsidies must satisfy to be non-actionable

24Non-Actionable Subsidies by Developing Countries

If provided by a developing country as part of a program of privatization of government-owned enterprises, some types of subsidies are not actionableDirect forgiveness of debtsSubsidies to cover social costs

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

25Injuries and Procedures

The standard and factors for determining injury or threat of injury is almost exactly the same as in antidumping investigationsThere is no general de minimis level for importsHowever, 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

26Countervailing Duties 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 enterprise’s 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 members to take into account the interests of domestic consumers of the subsidized imports in setting the level of countervailing duties

27WTO Dispute Settlement

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

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Request for Dispute Settlement

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 informationDescribing the subsidiesEstablishing adverse effects Injury to a domestic industry Nullification or impairment Serious prejudice

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Nullification or ImpairmentNullification 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 arise when the effect of a tariff concession is systematically offset or counteracted by a subsidy programme”

-- US — Offset Act (Byrd Amendment)

30Serious Prejudice

Alternatively, the member may show that the bestowal of the subsidies has caused it serious prejudice

Serious prejudice will be found regardingsubsidies to cover operating losses sustained by an industry

Ongoing subsidies to cover operating lossesdirect forgiveness of government‑held debt grants to cover debt repayment

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Serious Prejudice

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

32Panel Determination

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”

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Investigation Versus Dispute Settlement

A WTO member will generally initiate a countervailing duty investigation where the domestic industry alleges injuryThe member retains full control over the investigation and

any remedyA WTO member will request dispute settlement if

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

34 THANKS A LOT

Dr. Nafees Ahmad

Faculty of Legal Studies

South Asian University

New Delhi

drnafeesahmad@sau.ac.in