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This article is written by Sparsh Mali, a fourth-year law student at the School of Law, UPES, Dehradun. The article explains the principles of Subsidies and Countervailing Measures with respect to WTO.

The World Trade Organization came into existence after the Marrakesh agreement. Since after the Second World War most of the countries were trying to be a part of GATT member to support international trade and to get the benefit of these international trades as all the giant powers were not ready to work altogether. With the development of GATT in many rounds the Marrakesh agreement successfully ends up forming WTO which came into existence on January 1, 1995, and the most important thing is that both GATT and WTO focused the same thing but WTO has a wider range of network in dealing with international trade.

It is observed that all the principles related to international trade are laid down under GATT/ WTO agreements but altogether it is less known facts that WTO agreement has very few principles in it. As WTO was only concerned with developing international trade for the world with respect to goods, but with the increase in demand and importance of WTO principles, WTO has offered many other separate agreements such as Agreements on TRIPS, Reshipment Inspection, Safeguards, Agriculture, and Subsidies & Countervailing Measures etc.

Introduction

The Agreement on Subsidies and Countervailing Measures are popularly known as SCM Agreement which addresses two separate concepts but the importance of putting both the concepts in the same agreements is that they are closely related topics and one is the action of other principles. Subsidies are the multilateral disciplines regulated by SCM Agreement of WTO whereas countervailing measures are the kind of remedy for damage caused by subsidy.

Multilateral disciplines are the rules regarding international trade and implicate the right and obligation to member nations.

The most important part of this agreement is that although the set of rules by WTO is related to multilateral practice and countervailing duties are unilateral practices where one nation imposes countervailing duties on that member who tries to affect the importer’s country market by the means of providing subsidies to its domestic market. The action of investigation can be carried by the victim country and can raise a complaint to WTO Dispute Resolution Body (DSB) with their investigation reports either to warn or impose countervailing duties on the accused nation.

Structure of the SCM Agreement

Unlike all the structure of all contracts, agreements, acts etc., the SCM Agreement also has a very basic structure of agreement which divides the agreements into different parts which are:

  • Part I: Like most of the structures Part- I of this agreement also contains definitions and certain other aspects. Part I of these agreements specifically contains the definitions of Subsidies, the definition of specificity and speaks about the extent of application of subsidies which specifically deals with an enterprise or industry or group of industries and other such enterprises.
  • Part II & Part III: This part of this agreement divides all the specific subside into two different categories that are prohibited & actionable subsidies. Both the parts of these agreements also deals with the effects of these subsidies, remedy and a DSB authority to grant a remedy for violation of this part of the agreement. Conclusively we may assume that this part of the agreement has rules and regulations for different aspects.
  • Part V: This part of the agreement deals with the procedural requirements, rules etc.for application or executing Countervailing measures. It also contains various topics such as application of article VI of GATT 1994, the procedure of investigation & evidence of the event, consultation & approaching DSBs etc.
  • Part VI & Part VII: It includes institution such as committee on subsidies & countervailing measures, subsidiary bodies, notification & surveillance by those regulatory bodies for implementing SCM Agreement.
  • Part VIII: This part deals with rules and regulations related to special treatments to different kinds of countries like developed, under-developed, developing, LDC’s etc.
  • Part X & Part XI: Both these part only deals with the principles of DSB and final provisions.

Subsidy

As discussed above, Article 1 (Part I) of the SCM Agreement defines Subsidies. The general definition of subsidies can be understood with a simple word that is ‘financial aid/ help’, which means any kind of financial aid/ help can be considered as ‘subsidies’. The SCM Agreement has mentioned three conditions and explains that all of the conditions are to be fulfilled, then only the action will be considered as a subsidy, where the conditions are-

  • There must be a financial contribution either by the government or by any of the public body within the territory of the member nation; and
  • If the action is consistent with Article XVI of GATT 1994, which means if there is any form of income or price support.
  • After any financial contributions, there must a benefit.

The application of this agreement requires financial contributions such as loan, financial incentives, special grants etc., and explains that any financial contribution even from the sub-governments is considered as subsidies if they raise any benefit to the recipient.

Part I, also talks about the specificity, which means all the financial aid to enterprise or industry or group of such industries will only be considered as subsidies and such specificity of subsidies are only considered under SCM Agreement. Article 2 of the SCM Agreement explains different types of specificity which are as follows:

  • Enterprise- Under this type of specificity the financial contributors are only concerned with aiding specific company or a specific set of companies.
  • Industry- Under this type of specificity the contributors such as government and public body aim a particular sector of the industry for giving them financial help and benefit.
  • Regional- It is a condition when the government is helping industry/ company located in some specific geographical area and subsidies them with benefits.
  • Prohibited- Here, in this case, the government is aiming at providing subsidies to all such goods which are exported to different countries.
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Categories of Subsidies

  1. Prohibited Subsidies– The SCM Agreement prohibits any government from providing any subsidies-
  • Which are contingent with respect to law or fact upon export performance. These kinds of subsidies are often called export subsidies.
  • Which are contingent with respect to law or facts upon giving any protectionism of domestic goods over imported goods. These kinds of subsidies are often called local content subsidies.

These are the two kinds of subsidies covered under prohibited subsidies.

The important part to be considered here is that the scope of such subsidies are relatively low as all the developed nations have already adopted this but it becomes challenging with developing or LDC countries. The SCM Agreement not only has the dos and don’ts rather it also comes with sanction with respect to a violation of rules laid down in the SCM Agreements which are dealt with DSB of WTO.

  1. Actionable Subsidies– The SCM Agreement does not prohibits any nations from taking actions on actionable subsidies rather they can be restricted and are subjected only when any nations bring an action in terms of challenging either through DSB or through Countervailing Duties. The actionable subsidy has three adverse effects on the member nation which are:-
  • They cause injury to the domestic market of the member nations.
  • Serious Prejudice to the interest of other members- It means when the government is helping and giving subsidies more than 5% to cover any operating loss of any industry or sector by the process of directly forgiving them from any government debts. The effects of granting such subsidies cause displacement of other net exporter countries to the importing country of Like Products.
  • Nullification or Impairment- it is a process of damaging the importer country’s benefits and expectations from other member nations of WTO through another country’s or third country’s change in its trade regime not according to the GATT/ WTO Agreements obligation.
  1. Non- Actionable Subsidies– It is a kind of subsidy which is neither prohibited nor restricted by GATT/ WTO and does not permit any of the member nations to impose countervailing duties against them. It is observed that most of the subsidies are either restricted or prohibited by the GATT/ WTO and whosoever overrule these guidelines agreed in the agreement then they are subjected to countervailing measures by other member nations especially by the affected nations. However, Non- actionable subsidies are not subject to these tariffs (Countervailing duties) like environmental subsidies, agricultural subsidies, scientific subsidies etc.

Countervailing Duties/ Measures (CVDs)

Subsidies are explained briefly and the parts which only talks about the Subsidies of the SCM Agreement, but remedies to all these restricted activities are introduced from Part V of the SCM Agreement. Part V specifically defines what countervailing measures are and how do they work. WTO counts Countervailing Measures as a safeguard from all those practising subsidies which are either restricted or prohibited under the SCM Agreement. The WTO explains it as a kind of tariffs imposed on imported goods to counterbalance the subsidies enjoyed by the producers in the exporting country either by their government of any public body.

CVDs are the counterbalance tariff to maintain a balance between domestic producers and other foreign producers of the like product because the subsidies producers can afford to sell it at a relatively lower price than that of other producers because all the producers don’t get the same or even such types of subsidies by their government or any public body. If these are left unchecked, then there could be a great possibility that these subsidized imports may severely affect any importer country like deflation/ inflation, loss of employment etc., that’s the only reason why GATT/ WTO has reflected the concept of CVDs in the agreement and mentioned that these export subsidies are unfair trade practice and must be restricted or prohibited.

Part V of the SCM Agreement has mentioned a substantive rule to check if the imported goods can be subjected in imposing CVDs, the rules contain three essentials to establish the objective of imposing CVDs on imported goods which are as follows:-

  • To impose CVDs on any imported goods the importer country has to determine whether there are any subsidies provided to the producers in their country by their government or any such public body.
  • When these subsidize goods are imported in the country they must create some threat to their domestic market.
  • There must be a direct causal link between subsidized goods and a threat to the domestic market.

Part V of the SCM Agreement also contains rules and procedure of conducting an investigation for the purpose of imposing CVDs. Apart from this, it is very important to understand the concept of ‘Sunset’ and ‘Judicial Review’. Where ‘Sunset’ means CVDs will be collapse automatically after every 5 years and can be continued only after the condition that if the importer country determines that the exporter country still not following the key regulations of the SCM Agreement. Whereas ‘Judicial Review’ is the power given under Article 23 that GATT/ WTO member can create an independent tribunal to review the decisions of investigation authority or investigation panel of GATT/ WTO with respect to the domestic law of the country only if the country has its own national legislation or law relating to CVDs.

Special or Preferential Treatment

Part VIII specifically deals with the social treatment for nations other than developed nations. It is also observed that subsidies play a vital role in economic stability & development and also helps in improving the living standard and other such standards in the country.

Article 27 of the SCM Agreement provides that Article 3 (Para 1.a) does not apply to the developing nations for the period 5 years from the commencement of WTO, and it does not applies to least developing nations (LDC) for a period of 8 years from the commencement of WTO, which practically means that now it applies to all the member nations equally and no favourable treatment is given with respect to Import Subsidies. Although LDCs & member nations with less than $1000 capita income per year are totally exempted from the list and can enjoy freedom over export subsidies.

The SCM Agreement has categorised the member nations into three different categories which are:

  1. Least Developing Nations(LDCs).
  2. Member nation with less than $1000 capita income per year.
  3. Any other developing country not falling into the categories discussed above.

It is noted that there is no favourable treatment with respect to non-actionable subsidies.

Notification and Surveillance

WTO has surveillance on every member nation and mandates rules that every member nation have to notify the SCM committee regarding their internal policies related to Subsidies and Countervailing Measures. Where the member nations has to notify SCM Committee regarding their Subsidies and Countervailing legislations and law within their country, with the SCM agreement these member nations have to notify the SCM Committee regarding all such aspects under Article 25 (Notification of Subsidies to SCM Committee) and under Article 36.2 (Notification of Countervailing Measures to SCM Committee).

The member nations have to notify the SCM Committee every 3 years with all the latest amendments or any new regulations or any activity related to Subsidies in their country for the purpose of an extensive review by the SCM Committee. Whereas in the case of Countervailing Measures the member nations have to notify all the countervailing actions taken on every basis like pre or final actions; and the member also has to notify the SCM Committee regarding their respective authority and their legislation that who and how these authorities have imposed any countervailing measures.

Dispute Settlement

It is the most crucial and important part of any law and no law can function properly unless it is benefited by any such regulatory body and here, in this case, Dispute Settlement Understanding is the regulatory body for governing or deciding any disputes related to SCM Agreement. Article 30 of Part X of SCM Agreement speaks about the Dispute Settlement Understanding and DSU is the only international body, which is responsible for consultations and settlement of disputes. The agreement contains all the special rules and procedures for the settlement of disputes arising in respect of this SCM Agreement.   

 

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