A CRITICAL ANALYSIS OF DUAL PRICING IN WTO JURISPRUDENCE

By
Pratik Giri and Dheeraj Verma
ABSTRACT

The issue of dual-pricing is often referred as ‘Beggar-thy-neighbour” policy or “hidden

Subsidy” by the economists. This issue has attracted the attention of the world since past few
years and is significant because of the de facto unfair subsidies given by the energy endowed
nation to their domestic companies at the cost of the producers of like product in other
countries, which in turn distorts the International trade. Albeit, there are laws under the
WTO jurisprudence for the issue of subsidies but they are ill-suited to comply with the energy
sector and not adequate to provide an effective remedy to this problem. Notwithstanding
discussions held time and again, this issue is yet to settle. The dual-pricing practice also
raises some interesting questions such as the negotiations on accession of the energy
endowed nations to the WTO, which in turn questions the adequacy of the WTO rules to deal
with the energy sector and where the interest of these energy producing and energy
consuming nations lie. This paper tries to address different issues regarding dual pricing by
discussing: (i) whether dual-pricing is a de jure Subsidy (ii) does dual-Pricing amount to
export restraint (iii) the inconsistency of the dual pricing with the existing WTO agreements
(iv) the need to create new framework to resolve this issue. Where relevant, the article also
draws lessons from the Russia’s accession to the WTO and the practice of Saudi Arabia in
this regard.

KEYWORDS: Dual-pricing, SCM Agreement, Subsidy, Russia’s accession, WTO

Jurisprudence, International Trade.

I
INTRODUCTION
Dual-Pricing is often referred to as the hidden subsidy 1 by various veterans of the
International Trade law. The European Communities [hereinafter referred as EC] while
raising its concerns in World Trade Organization [hereinafter referred as WTO] upon the
dual-pricing or the reverse dumping, as they call it, identified it as a practice where raw
materials were sold to domestic processors at prices lower than those charged to overseas
1
Pogoretskyy V (2011) Energy dual pricing in international trade: subsidies and anti-dumping perspectives. In:
Selivanova J (ed) Regulation of energy in International Trade Law: WTO, NAFTA and Energy Charter. Kluwer
Law International, The Netherlands, pp 181–228
A CRITICAL ANALYSIS OF DUAL PRICING IN WTO JURISPRUDENCE

processors.2 Moreover, they also claimed that these practices results in the quantitative export
restriction of the concerned product, which in turn distorts trade of raw materials. 3 Dual
pricing is practiced in various economic sectors such as those of energy and natural
resources. It is often argued by the developing countries that the practice of dual pricing is
used to foster the economic growth and to alleviate poverty by using their resource
endowments.

Along with EC, the issue of the dual pricing is time and again raised by the United States
[hereinafter referred as US]. The US in their submission to the Rules Negotiation, elucidated
the practice of dual pricing as maintaining the two price structure for export and the domestic
use. For instance, it was alleged that Saudi Arabia offered preferential pricing policy for
natural gas liquids (‘‘NGLs’’ or ‘‘feedstock’’) which were used in domestic production over
those for export.4

The issue was first examined by the US International Trade Commission [hereinafter referred
as ITC] in 1999, where it found that the competitiveness of US manufacturers of methyl
tertiary -butyl ether (MTBE) was being affected as a result of MTBE imports from Saudi
Arabia. The reason believed was that Saudi Arabian manufacturers of MTBE were provided
butane (a feedstock) at a substantial discount to world market prices, which was adversely
affecting the US domestic industry for MTBE.5 It was because of this reason that Saudi
Arabia was under intense pressure at the time of its WTO accession negotiation to undertake
specific commitments on dual pricing.6

In general, dual pricing can be understood as the two-tier pricing practice, whereby
governments of the energy producing and exporting countries keep domestic prices for
energy inputs low relative to the world.7 This paper focuses on the relation of the dual
pricing practice with other WTO Agreements and the negotiations and discussion among the
2
MTN.GNG/NG3/W/4, 9, July 1987. The EC stated that titanium sponge produced in Japan and phosphates
produced in Morocco and the US were subject to dual pricing. Also see, MTN.GNG/NG3/W/25, 13 July 1989
where the EC detailed export restrictions, prohibitions, taxes on several natural resources maintained by
Members. It specifically highlighted “double pricing” on copper unwrought maintained by Japan and Republic
of Korea.
3
Id. Also see MTN.GNG/NG3/W/11, 12 February 1988
4
WTO (2005) Report of the working party on the accession of the Kingdom of Saudi Arabia to the World Trade
Organization, WT/ACC/SAU/61
5
“MTBE: Conditions affecting the domestic industry”, Investigation number 332-404, USITC, September 1999,
available at www.usitc.gov
6
Supra, at 4.
A CRITICAL ANALYSIS OF DUAL PRICING IN WTO JURISPRUDENCE

countries regarding the same. This can also be seen as a struggle between the energy
producing and energy consuming countries to get the larger benefit out of the incompetency
of the WTO to deal with the issue of dual pricing.

II
NEGOTIATIONS ON DUAL-PRICING

For the first time the issue of dual pricing was raised during the Uruguay Round Negotiations
where the US claimed that the countries need not maintain dual price structure to constitute
dual pricing, instead a single domestic price kept arbitrarily low by government intervention,
or a range of low price levels determined by government fiat would still constitute dual
pricing.8 The government intervenes by lowering the costs, which benefits certain industries
to use the resources as major input in manufacturing the final products. Thus by benefiting
specific industries the action is akin to a traditional subsidy. 9 Applying simple demand–
supply logic, US stated that, dual pricing will not be effective unless it was combined with
some form of restrain on the export of the raw material, because in the absence of the
restrictions, the countries will be able to get the resources at low price, which will inevitably
lead to the increase in the supply problem and an upward pressure on price.10

Beside the submission of the US, some of the major aspects have been noted from the
submission of the EC. It was the contention of the EC that the price of the refined metals
were kept intentionally high by the countries compared to the other countries, which results
in the domestic producers offering higher prices for the raw material so as to overbid their
competitors and deprive them of the raw materials.11

In the Rules Negotiations, during the time of the Uruguay Round, the US also highlighted
that the advantage or aid provided to the domestic industry distorts the International Trade
because then the prices are determined by the countries and not by the market forces12. In the

7
Simonetta Zarrilli, Dual Pricing Practice and WTO Law, Oil, Gas, and Energy Law Intelligence, Vol. 3, Issue
3 (Oct. 2005), 1.
8
MTN.GNG/NG10/W/20, 15 June 1988.
9
Id.
10
MTN.GNG/NG10/W/23, 12 July 1989
11
MTN.GNG/NG3/W/26, 24 November 1989.
12
Communication of the United States to the Negotiating Group on the Rules, TN/RL/W/78, 19 March 2003.
A CRITICAL ANALYSIS OF DUAL PRICING IN WTO JURISPRUDENCE

view of US, the benefit given to the domestic industry at less than the fair market value is
equivalent to the cash grant.13

The opposition to dual pricing practices has recently included a political element that has
resulted in WTO members conditioning WTO accession on the removal of dual pricing
practices in the candidate country.14 This condition is often seen as a WTO plus commitment
on the part of acceding Country.

III
DUAL PRICING AND THE SCM AGREEMENT

The main function of the WTO is to ensure that trade flows as smoothly, predictably and
freely as possible. It is primarily aimed at reducing or eliminating existing barriers to trade,
and to preventing new ones from developing.15 Under the current WTO framework the
practice of dual pricing is most likely to invoke the SCM agreement 16, Agreement on Trade
Related Investment Measures17 and the general exception under the General Agreement on
Tariff and Trade [Hereinafter referred as the GATT] Article XX.18

SCM agreement controls the use of specific subsidies and regulates the actions that countries
can take to counteract the effects of another country’s trade-distorting subsidies. 19 It does so
by prohibiting certain subsidies that are particularly trade distorting and allowing WTO
Members to seek trade remedies for actionable subsidies, i.e., those subsidies that cause
material injury to domestic industry of a member or a serious prejudice to the interests of the
members.20

13
Id.
14
Supra, at 7, 6.
15
Edward T. Hayes, Changing Notions of Sovereignty and Federalism in the International Economic System: A
Reassessment of WTO Regulation of Federal States and the Regional and Local Governments Within Their
Territories, 25 Nw. J. Int’l L. & Bus. 1, 3 (2004).
16
Agreement on Subsidies and Countervailing Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the
World Trade Organization, Annex 1A, The Legal Texts: The Results of The Uruguay Round of Multilateral
Trade Negotiations 275 (1999), 1867 U.N.T.S. 14 [Not reproduced in I.L.M.] [hereinafter SCM Agreement]
17
Agreement on Trade-Related Investment Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the
World Trade Organization, Annex 1A, The Legal Texts: The Results of The Uruguay Round of Multilateral
Trade Negotiations 143 (1999), 1868 U.N.T.S. 186 [Not reproduced in I.L.M.] [Hereinafter TRIMs Agreement].
18
GATT 1947, Article XX.
19
Peter Van den Bossche, The Law and Policy of the World Trade Organization: Text, Cases, and Materials,
Cambridge University Press (2005), 551
A CRITICAL ANALYSIS OF DUAL PRICING IN WTO JURISPRUDENCE

According to the Article I of the SCM agreement, conditions therein must be satisfied for
there a subsidy to exist.21 The definition of "subsidy" in Article 1.1 has two discrete elements:
"a financial contribution by a government or any public body" and "a benefit is thereby
conferred".22 The first element of this definition is concerned with whether the government
made a "financial contribution", as that term is defined in Article 1.1(a). The focus of the first
element is on the action of the government in making the "financial contribution". Thus,
subparagraphs (a) and (b) of Article 1.1 define a "subsidy" by reference, first, to the action of
the granting authority and, second, to what was conferred on the recipient. 23 In Canada—
Aircraft, the Appellate Body stated that ‘‘benefit’’ is concerned with ‘‘benefit to the
recipient’’ and not the ‘‘cost to the government.’’24

For the purposes of analysis of dual pricing practices, the provision of energy inputs to
domestic industry at less than market prices by a government body constitutes a subsidy
under the SCM Agreement.25 Going by the provision of part III and part IV of the SCM
agreement, subsidies are of two types, i.e. Prohibited subsidies and the actionable subsidies. 26
A prohibited subsidy is when it is either contingent upon export performance or is contingent
upon the use of domestic over imported goods.27 A prohibited subsidy need not be targeted to
a specific industry.28 In relation to the dual pricing of the energy product, the subsidy given
therein will be prohibited only under two circumstances, first if the subsidy is conditioned on
the exports and secondly, when it is conditioned on the use of domestic goods over the
imported.29 For example, a scheme to provide the steel industry with energy inputs at less
than world prices would be viewed as prohibited if it could be shown that steel produced for
domestic use was not entitled to the same inexpensive energy inputs. However, if the

20
James J. Nedumpara, Energy Secutrity and the WTO agreements, Centre for International Trade and
Economic Laws (CITEL), 29.
21
Article 1, SCM agreement.
22
Appellate Body Report, Canada—Measures Affecting the Export of Civilian Aircraft, WT/ DS70/AB/R, at
paragraph 156 (Hereinafter Canada—Aircraft).
23
Id.
24
Appellate Body Report, Canada—Measures Affecting the Export of Civilian Aircraft, WT/ DS70/AB/R, at
paragraph 157 (Hereinafter Canada—Aircraft)
25
Simonetta Zarrilli, Dual Pricing Practice and WTO Law, Oil, Gas, and Energy Law Intelligence, Vol. 3, Issue
3 (Oct. 2005), 1-2.
26
Part III and Part IV, SCM Agreement.
27
Article 3, SCM Agreement.
28
Supra, at 22.
29
Article 3.1 (a) and (b), SCM Agreement.
A CRITICAL ANALYSIS OF DUAL PRICING IN WTO JURISPRUDENCE

subsidized energy inputs are provided equally to goods for domestic consumption and goods
for export alike, then the provision of such energy inputs is not a prohibited subsidy.30

However, when a country provides unconditional subsidy throughout the economy to all the
persons or entities within the territory, it will not come under the prohibited subsidy. Since,
the practice of dual pricing normally provides domestic natural resources at less than world
prices unconditionally throughout the economy.31 Therefore most of the dual pricing practices
will not fall under either category of prohibited subsidies. However for an actionable subsidy
to exist on the other hand, the only requirement is that there must be adverse effect on the
other WTO members due to the benefit conferred upon the domestic industries. 32
Nevertheless, the WTO Contracting parties are at freedom to challenge such subsidies. 33 If a
subsidy is bestowed upon a specific enterprise or industry, it may be subject to countervailing
measures being imposed by the WTO member being injured by such a practice. 34 Specifically
in the context of energy inputs, specificity would exist if feedstock is only sold more cheaply
to particular enterprises.35 Therefore, some kind of discrimination should exist between
various enterprises in receiving this benefit. To determine whether a subsidy is specific, the
limitation on the subsidy must be explicit. 36 Further, Article 2.1 (b) states that in the case
when the granting authority, or the legislation pursuant notifies any criteria to be eligible for
the subsidy, also provided that such eligibility is automatic and such criteria are strictly
adhered to, then in that case the subsidy will not be specific. 37 The meaning of automatic
eligibility is that the criteria governing the eligibility must be neutral and do not favour one
enterprises over the other.

If a specificity cannot be established at law, a subsidy may still be actionable, in fact if the
subsidy is found to be de facto specific.38 Article 2.1 (c), provides for the cases which are not

30
Daniel Bhen, The Effect of Dual Pricing Practices on Trade, the Environment, and Economic Development:
Identifying the Winners and the Losers under the Current WTO Disciplines (2007), 9.
31
Sanam S. Haghighi, Dual Pricing of NGLs in Saudi Arabia and the Rules of the World Trade Organization on
Subsidies, Middle East Economic Review, Vol. 48, No. 17, Apr. 25, 2005, 1
32
Article 5, SCM Agreement.
33
Part V, SCM Agreement.
34
Supra, at 29.
35
Article 2.1 (a), SCM Agreement.
36
Appellate Body Report, United States—Measures Affecting Trade in Large Civil Aircraft, WT/DS353/AB/R,
at paragraph 749 (Hereinafter US—Civil Aircraft).
37
Article 2.1 (b), SCM Agreement.
38
Daniel Bhen, The Effect of Dual Pricing Practices on Trade, the Environment, and Economic Development:
Identifying the Winners and the Losers under the Current WTO Disciplines (2007), 10.
A CRITICAL ANALYSIS OF DUAL PRICING IN WTO JURISPRUDENCE

covered under the Article 2.1 (a) and (b) of the SCM Agreement but there are reasons to
believe that the subsidy may be in fact specific.39 The Appellate Body in the case of US—
Civil Aircraft,40 led down the factors to determine the de facto specific subsidies. These
factors are: (1) use of a subsidy program by a limited number of certain enterprises; (2)
Predominant use by certain enterprises; (3) The granting of disproportionately large amounts
of subsidy to certain enterprises; (4) The manner in which discretion has been exercised by
the granting authority in the decision to grant a subsidy. 41 While the de facto subsidy is in
question, we must also take in account the extent of diversification of economic activities
within the jurisdiction of the granting authority, as well as of the length of time during which
the subsidy programme has been in operation. 42 The position can be explained by considering
a country where there is little economic diversification and very few industries, let’s say one
or two, these industries will get direct benefit of the subsidy given by the granting authority,
which will lead to de facto specific subsidy according to article 2.1 (c). This is paradoxical to
the intention of the WTO and also seems WTO inconsistent because of the very fact that
WTO promotes trade and economic growth. The argument for the countries with less
diversification is that by giving subsidy to the limited industries they want to diversify the
economy from one sector to other sectors.

The complexities of the issue of dual pricing in Saudi Arabia or Russia demonstrate that this
practice can neither be easily targeted as a prohibited subsidy nor necessarily as an actionable
subsidy creating an injury to the petrochemical industries of the concerned producers. The
issue has to be decided on a case-by-case basis.43

Apart from the SCM Agreement, the provisions of the GATT and TRIMS are of concern with
respect to the practice of the dual pricing. There are many instance where the granting
authority or the government confers the benefits upon the foreign investors conditioned upon
certain local content requirement. As by the virtue of the Article 2 of the TRIMS Agreement,
a government’s offer to confer a benefit on foreign investment conditioned upon the local

39
Article 2.1(c), SCM Agreement.
40
Appellate Body Report, United States—Measures Affecting Trade in Large Civil Aircraft, WT/DS353/AB/R,
at paragraph 796, 878.
41
Id.
42
Supra, at 38.
43
Marceau G (2010) The WTO in the emerging energy governance debate. In: Pauwelyn J (ed) Global
challenges at the intersection of trade, energy and the environment, Centre for Trade and Economic Integration.
The Graduate Institute, Geneva
A CRITICAL ANALYSIS OF DUAL PRICING IN WTO JURISPRUDENCE

content requirement is prohibited.44 For example, when a resource-endowed country uses dual
pricing as an incentive to attract foreign investment, it will not be allowed to do so as the
Article 2 of TRIMS prohibits it.45

IV
REMEDIES AND CONCLUSIONS

May it be at the time of accession negotiation of the countries or at the time of the application
of such practices, the issue of dual pricing has time and again raised serious concerns within
the International Trade. The main opposition for such practices comes from the US and the
EC, as we have already discussed above. The EC in its draft to the Negotiating Group on
Rules suggested few of the remedies to deal with the issue.46
1. A general standstill on export measures (taxes, export restrictions).
2. All export prohibitions to be eliminated. Any exception would have to be justified on
the basis of GATT provisions.
3. Existing export restrictions would be scrutinized on the basis of accepted legal
exceptions and those found incompatible would be eliminated or made to conform
with accepted rules.
4. Export restrictions will be “tariffed” or changed to an export duty and bound.
5. Existing export duties would also be bound and all commitments on export taxes
would be scheduled as an annex to the GATT and would be governed by GATT
Articles II, XXVIII and XVIII.47

Moreover, the EC also suggested that Article 3.1(b) of the ASCM should be modified so as to
capture any violations of GATT Article 3.4.48 It is to be amended as it does not adequately
addresses import substitution programs which requires showing of the actual use of domestic
over imported goods rather than showing that such a program exists.49

44
Article 2, TRIMS Agreement.
45
Simonetta Zarrilli, Dual Pricing Practice and WTO Law, Oil, Gas, and Energy Law Intelligence, Vol. 3, Issue
3 (Oct. 2005), 7.
46
See, MTN.GNG/NG3/W/37, 25 June 1990 and also MTN.GNG/NG3/W/11, 12 February 1988.
47
Id.
48
Article 3.4, GATT 1994.
49
Luthra & Luthra Law Offices, Study on Dual Pricing of Natural Resources, UNCTAD – India Programme
New Delhi, 7.
A CRITICAL ANALYSIS OF DUAL PRICING IN WTO JURISPRUDENCE

The EU has attacked these practices for a long time, but it failed to have them eliminated in
its bilateral WTO accession treaties with both countries: in 2003, the EU concluded an
agreement with Saudi Arabia50 and in 2004, one with Russia. 51 Initially, the issue looked as
though it might have a positive outcome with Saudi Arabia, i.e. a commitment undertaken by
Saudi Arabia to eliminate dual pricing. However, in the negotiations with Russia, the EU did
not insist on such elimination. As a consequence Saudi Arabia 52 withdrew its original
commitment in the final WTO accession negotiations. This means that both countries can
continue to practice a dual-pricing system. The EU's lack of enthusiasm to combat dual-
pricing practices in the context of WTO accession can only be explained in political and
geopolitical terms. WTO membership of Russia and Saudi Arabia was considered more
important than solving the petrochemical industry's problems with dual pricing.53

With the current development of the International Trade it is very difficult to predict the
future of the dual pricing and also the future of the energy endowed countries who have
applied for the membership of the WTO. For now it can be said that the final remedy cannot
come by the way of the existing WTO agreements. The practice of dual pricing can be
eliminated only by the joint efforts of the contracting parties, by negotiating a separate
agreement to that effect.

50
EU Press Release IP/03/1188 of 30 August 2003: Accession of Saudi Arabia to the WTO:Conclusion of the
EU-Saudi Arabia Bilateral Market Access Deal.
51
EU Press Release IP/04/673 of 21 May 2004: Russia – WTO, European Union Russia Deal Bring Russia One
Step Closer to WTO Membership.
52
WTO Press/420 of 11 November 2005, WTO General Council successfully adopts Saudi Arabia's terms of
Accession.
53
The issue of dual pricing amply demonstrates the difficulty of bridging the gap between the external aspects of
competitiveness and general political considerations. On this issue see UNICE Position Paper dated 9 March
2005 on Competing for Growth and Jobs in a Global Market, UNICE's Preliminary Views on the External
Dimension of the Lisbon Agenda, p. 3 at: www.unice.org.