AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES BRIEF BACKGROUND - PDF document

7/2/2019 AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES BRIEF BACKGROUND The agreement on Subsidies & Countervailing Measures (SCM) was a significant development that took place in the Uruguay round of multilateral trade negotiations (MTN), conducted within the framework of General Agreement on Tariffs and Trade(GATT), spanning from 1986 – 1994 and embracing 123 countries as contracting parties. This Round transformed the GATT into the World Trade organisation or WTO as it is known today. 1

7/2/2019 PURPOSE Principally, the SCM Agreement - Disciplines the use of subsidies by member countries. - Regulates the actions countries can take to offset the effects of subsidies (Dispute-settlement procedure & Countervailing duty) DEFINITION As per the SCM (Subsidies & Countervailing Measures) Agreement the term “subsidy” is defined as “ a financial contribution , by a government or any public body within the territory of a member , which confers a benefit ” . Countervailing measures are defined as “ steps taken to negate the effect of an action, event or an occurrence". In the context of multilateral trade these are exercised in the form of countervailing duty (CVD) on exports from other member countries 2

7/2/2019 FINANCIAL CONTRIBUTION… • Direct transfer of funds – loans, grants, equity infusions. • POTENTIAL Direct transfer of funds/liabilities – loan guarantees. • Financial Incentives – Revenue foregone, Tax Credits. • Provision of goods or services other than general infrastructure. • Purchase of goods. PS: Under the provisions of Article XVI of GATT (1947 & 1994), the exemption of export or import duty or taxes shall not be deemed to be a subsidy. GOVERNMENT OR ANY PUBLIC BODY… • National Governments • Sub-National governments, State/County governments • State-owned companies (e.g. PSU in case of India) • Any private body entrusted or directed by government to perform similar functions in accordance with Article 2 of SCM Agreement . 3

7/2/2019 BENEFIT… • The existence of a benefit is to be determined by comparison with the marketplace. • Amount (Principle + Interest) paid in availing a “loan” from government vis-à-vis that paid while borrowing from the market. • Amount paid in availing a “guarantee” from government vis-à-vis that paid when taken from the market. • ‘Provision’ of goods & services is to be made for less than adequate remuneration, while ‘Purchase’ is to be made for more than adequate remuneration. • For the equity capital to be considered as a benefit, the ‘investment decision’ should be inconsistent with the usual investment practice of private investors in that region. AGREEMENT STRUCTURE 4

7/2/2019 PART I Introduces the concept of “specificity” of subsidy PART II Categorize subsidies; establish rules & procedures & III PARTS Establish the substantive & procedural requirements of using CVM IV & V against subsidized imports PARTS Establish the institutional structure and notification modalities for VI & VII implementation of the SCM Agreement PART Contains special and differential treatment rules for various VIII categories of developing country Members Contains transition rules for developed country and former centrally- PART IX planned economy Members PART X Contain dispute settlement and final provisions & XI SPECIFICITY CLAUSE • Subsidy must be provided specifically to an industry/enterprise/group of industries. • Thus, specific “subsidies” are subject to the SCM agreement Enterprise- • Govt. targets a particular company or specificity companies for subsidization Industry- • A government targets a particular sector or specificity sectors for subsidization. Regional • A government targets producers in specified parts of its territory for subsidization. specificity Prohibited • A government targets export goods or goods specificity using domestic inputs for subsidization. 5

7/2/2019 CATEGORIES Export Subsidies Prohibited Local Content Subsidies Actionable Classification of subsidies Non-actionable Expired in Dec, 1999 Agricultural PROHIBITED SUBSIDIES • Directly affect the trade and have adverse effects on the interests of other members. � Export subsidies – Subsidies contingent, completely or conditionally, on export performance. � Local content subsidies – Subsidies contingent, completely or conditionally, on use of domestic over imported goods. 6

7/2/2019 ACTIONABLE SUBSIDIES • Acceptable under normal circumstances, but challengeable if found detrimental to the interests of fellow member country. • Resolution Methods – Multilateral dispute settlement, Countervailing measures. • However, the complainant must provide prima facie evidence suggesting violation of SCM Agreement. ACTIONABLE SUBSIDIES Types of adverse effects Types of adverse effects INJURY to a domestic SERIOUS PREJUDICE to NULLIFICATION of improved industry caused by the exports of subsidizing market access (obtained subsidized imports in the member. from tariff reduction) due to territory of the complaining subsidization.????? Member. 7

7/2/2019 NON-ACTIONABLE SUBSIDIES (EXPIRED IN DEC, 1999) • 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 disadvantageous regions • In each case, the SCM Agreement sets forth detailed requirements the subsidies must satisfy to be non- actionable NON-ACTIONABLE SUBSIDIES (EXPIRED IN DEC, 1999) • 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 forgiveness of debts • Subsidies to cover cover social costs • The subsidies must be granted for a limited limited period • The country must notify notify the SCM Committee of the program and the subsidies involved 8

7/2/2019 AGRICULTURE SUBSIDIES • Until 2003, Article 13 of the Agreement on Agriculture established special rules regarding subsidies for agricultural products. • As per the Uruguay Round Protocol , Export subsidies which are in full conformity with the Agriculture Agreement are not prohibited by the SCM Agreement, although they remain countervail able. • Domestic supports within the “green box” of the Agriculture Agreement are not actionable multilaterally nor are they subject to countervailing measures. COUNTERVAILING MEASURES • Substantive rules • Countervailing measures cannot be imposed unless subsidized imports & injury to a domestic industry is ascertained and a causal link between the two is established. • Procedural rules • Rules regarding the initiation, conduct of countervailing investigations, imposition of preliminary and final measures, use of undertakings and duration of measures. 9

7/2/2019 • Defines in numeric terms the circumstances under which Standing there is sufficient support from a domestic industry to justify initiation of an investigation. • Ensures the conduct of a preliminary investigation before Preliminary a preliminary measure can be imposed. Investigation • Places limitations on the use of undertakings to settle Undertakings CVD investigations, in order to avoid Voluntary Restraint Agreements or similar measures masquerading as undertakings. • Requires the termination of countervailing measure after Sunset five years unless determined that continuation is necessary to avoid the recurrence of subsidization and injury. • Requires that members create an independent tribunal to Judicial review review the consistency of determinations of the investigating authority with domestic law. SPECIAL & DIFFERENTIAL TREATMENT • Developed countries • Allowed to phase out the prohibited subsidies, three years from the date on which the SCM agreement enters into force for them. • Such subsidies must be notified within 90 days of the entry into force of the WTO Agreement for the notifying Member 10

7/2/2019 SPECIAL & DIFFERENTIAL TREATMENT • Developing Countries – Exemption, either permanent or for a stipulated time period, is given on prohibited subsidies for exports (refer to below table) CATEGORY (Annex VII) INCENTIVE Least Developed Countries Exempted from the prohibition on export (LDC) subsidies. GNP < $1000 per annum Exempted from the prohibition on export subsidies. Other Developing Countries Eight-year period granted to phase out their export subsidies (cannot exceed the level of subsidy during this period) PS - For import-substitution subsidies the phase out period stands at 8 yrs for LDCs and 5 yrs for Other Developing Countries SPECIAL & DIFFERENTIAL TREATMENT • The treatment is even more favourable w.r.t actionable subsidies. • Certain subsidies related to developing country’s privatization programmes are not actionable multilaterally. • With respect to countervailing measures, developing country Members' exporters are entitled to more favourable treatment with respect to the termination of investigations where the level of subsidization or volume of imports is small. 11