1|Types of subsidies

Types of subsidies

1.1 INTRODUCTION........................................................................................................................................ 1
1.2 WTO PROVISIONS ON SUBSIDIES AND COUNTERVAILING DUTIES ............................................................ 1
1.3 AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES .............................................................. 2
1.4 CLASSIFICATION ....................................................................................................................................... 2
1.4.1 PROHIBITED SUBSIDIES ...................................................................................................................................... 2
1.4.2 EXPORT SUBSIDIES ........................................................................................................................................... 3
1.4.3 IMPORT SUBSTITUTION SUBSIDIES ....................................................................................................................... 3
1.4.4 ACTIONABLE SUBSIDIES ..................................................................................................................................... 4
1.4.5 NON-ACTIONABLE SUBSIDIES ............................................................................................................................. 4
1.5 CONCLUSION ........................................................................................................................................... 4

1.1 Introduction

The term subsidy generally means, money granted by the State or a Public

Body to keep the prices of commodities under control. It may be in the form of

Direct or indirect government grants on production or exportation of goods

including any special subsidy on transportation of any product. It is usually given to

remove some type of burden and is often considered to be in the interest of the

public.

Subsidies are often regarded as a form of protectionism or trade barrier.

Financial assistance in the form of a subsidy may come from one’s

government, but the term subsidy may also refer to assistance granted by others,

such as individuals or non-governmental institutions.

1.2 WTO provisions on subsidies and countervailing duties

The disciplines set out in the agreement only apply to specific subsidies.

They can be domestic or export subsidies. There is restriction on application of

subsidies. It also regulates counter action imposed by the complaining countries in

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the form of countervailing measures. Also, WTO’s dispute settlement procedure is

perused if any country complains the violation of GATT or SCMA.

1.3 Agreement on subsidies and countervailing measures

The Agreement on Subsidies and Countervailing Measures (“SCM

Agreement”) addresses multilateral disciplines regulating the provision of subsidies,

and the use of countervailing measures to offset injury caused by subsidized

imports. Rules regarding granting of subsidy by a Member are Multilateral

disciplines which can be enforced through invocation of the WTO dispute settlement

mechanism.

However, Countervailing duties are unilateral instrument, applied by a

Member after an investigation and a determination only if the SCM Agreement

criteria are satisfied.

The agreement applies to agricultural goods as well as industrial products,

except when the subsidies are exempt under the Agriculture Agreement’s “peace

clause”, due to expire at the end of 2003.

1.4 Classification

The SCM Agreement has three categories of subsidies: prohibited, actionable

and non-actionable. It follows ‘Traffic light’ approach where, ‘red light’ implies

prohibited subsidies, ‘yellow light’ implies actionable subsidies and ‘green light’

implies non-actionable subsidies. Non-actionable subsidies lapsed on 31 Dec 1999.

1.4.1 Prohibited subsidies

These are subsidies that prescribe recipients to meet certain export targets,

or to use domestic goods instead of imported goods. It is prohibited because

specifically designed to distort international trade and are likely to hurt other

countries’ trade.
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The subsidy can be challenged in the WTO dispute settlement procedure

which operates at an accelerated timetable. Subsidy is to be withdrawn

immediately if it is confirmed that the subsidy is prohibited.

The complaining country can retaliate by imposing counter measure,

countervailing duty.

1.4.2 Export Subsidies

Export subsidy is a government policy to encourage export of goods and

discourage sale of goods on the domestic market through direct payments, low-

cost loans, tax relief for exporters, or government-financed international

advertising. An export subsidy reduces the price paid by foreign importers, which

means domestic consumers pay more than foreign consumers.

The World Trade Organization (WTO) prohibits most subsidies directly linked

to the volume of exports, except for LDCs.

1.4.3 Import Substitution Subsidies

An import subsidy is support from the government for products that are

imported. Consumers in the importing country experience a decrease in price of

the imported goods, as well as the decrease in price of the domestic substitute

goods. However, consumers in the exporting country experience an increase in the

price of their domestic goods.

Producers of the importing country experience a loss of welfare due to a

decrease of the price for the good in their market Exporters of the producing

country experience an increase in wellbeing due to the increase in demand.

The import subsidy is rarely used due to an overall loss of welfare for the

country due to a decrease in domestic production and a reduction in production

throughout the world.

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1.4.4 Actionable subsidies

Actionable Subsidy is permitted only if in the complaining country fails to

show the adverse effect on its interest.

The agreement defines three types of damage they can cause.

(i) One country’s subsidies can hurt a domestic industry in an importing

country.

(ii) They can hurt rival exporters from another country when the two

compete in third markets.

(iii) Domestic subsidies in one country can hurt exporters trying to

compete in the subsidizing country’s domestic market.

If adverse effect is confirmed by the Dispute Settlement Body, then subsidy

must be withdrawn or its adverse effect must be removed. Other remedy is

imposition of countervailing duty.

1.4.5 Non-Actionable Subsidies

SCMA sets out the criteria and conditions under which three types of

subsidies may be non-actionable

(i) Government assistance for industrial research and pre-competitive

development activity;

(ii) Government assistance to disadvantaged regions;

(iii) Government assistance to adapt existing plant and equipment to new

environmental requirements.

This category applied provisionally for five years ending 31 December 1999

which was not extended.

1.5 Conclusion

Subsidies play an important role in developing countries and in the

transformation of centrally-planned economies to market economies. LDC and

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Developing countries given with dead line to phase out export subsidy for free

international trade between countries.

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