Cail

History

Notably because of policy differences between the United States and the EC, the GATT
treatment of subsidies (Articles VI and XVI) has historically been controversial and the
disciplines weak. A Subsidies Code was agreed upon in the Tokyo Round, but it skirted
around important issues. The Uruguay Round investigations and provides a workable
multilateral discipline over subsidies.

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.

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.

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

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. 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.

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.

Export subsidies

Export subsidies are subsidies contingent, in law or in fact, whether solely or as one of
several other conditions, upon export performance, including the programs enumerated in
the Illustrative List of export subsidies in Annex I.

The Canada-Autos Panel has held that, while all practices identified in the Illustrative List are
subsidies contingent upon export performance, there may be other practices not identified
in the Illustrative List that are also subsidies contingent upon export performance. The
concept of de jure export subsidies is relatively straightforward.

Import Substitution Subsidies

This second category of prohibited subsidies is defined as subsidies contingent whether

solely or as one of several other conditions, upon the use of domestic over imported goods.
Often, these take the form of local content requirements.

However, Article 3.1(b) talks about ‘goods’ and as local content requirements often
comprise not only goods, but also other costs items. The requirements themselves will need
to be scrutinized in detail.

Non-Actionable Subsidies

First, non-specific subsidies are not actionable. Second, certain narrowly defined R&D,
environmental and regional subsidies are non-actionable (these expired on 31 December
1999), on the condition that they are notified in advance to the Subsidies Committee. Non-
actionable subsidies are often referred to as green light 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.

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.

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.
The Domestic Industry

Article 16.1 ASCM defines the domestic industry as the domestic producers as a whole of
the like products or those of them whose collective output of the products constitutes a
major proportion of the total domestic production of those products. There are two
exceptions to this principle. First, and most importantly, where domestic producers are
related to exporters or importers or themselves import the dumped products, they may be
excluded from the definition of the domestic industry. Second, under restrictive
circumstances, a regional industry comprising only producers in a certain area of a
Member’s territory may be found to exist. Last, it is noted that the definition of the

domestic industry is closely linked to the standing determination that importing country
authorities must make prior to initiation. This procedural issue is examined in the next
section.

PROCEDURAL RULES/REMEDIES

The ASCM establishes two tracks to deal with subsidies: the unilateral CVD track and the
multilateral remedy track. The purpose of the CVD track is to re-establish the level playing
field for domestic producers, which face competition from subsidized imports. Thus, the
imposition of a countervailing duty supposedly will offset the unfair advantage that the
foreign exporters gained as a result of the subsidization. As the relevant procedure is a
domestic one, the ASCM contains various procedural obligations that authorities wishing to
investigate injurious subsidization must comply with.

However, a Member injured by another Member’s subsidization may prefer the abolition of
the subsidy programme itself. It is also possible that the Member in a third market feels the
effects of the subsidy. In such cases, the ASCM provides for multilateral, accelerated track,
dispute settlement procedures.

CVD Track

The following Articles of the ASCM contain important procedural provisions as far as CVD
action is concerned:

Article 11 Initiation and subsequent investigation, including the standing determination

Article 12 Evidence, including due process rights of interested parties

Article 13 Pre-initiation consultations

Article 17 Provisional measures

Article 18 Undertakings

Article 19 Imposition and collection of countervailing duties

Article 20 Retroactivity

Article 21 Duration and review of countervailing duties and undertakings

Article 22 Public notice and explanation of determinations, pertaining to initiation,

imposition of preliminary and final measures

Article 23 Judicial review

Countervailing Duties/ Measures (CVDs)

Imposition of countervailing duties where injurious subsidization has been found is

discretionary and use of a lesser duty rule is encouraged. Many WTO Members include a
public interest clause in their national legislation to enable them to refrain from imposing
duties, even where injurious subsidization is found.

If a countervailing duty is imposed, it must be levied on a non-discriminatory basis.

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 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.

Conclusion

Subsidies are the multilateral disciplines regulated by SCM Agreement of WTO whereas
countervailing measures are the kind of remedy for damage caused by subsidy. The
agreement lays down detailed standards for the conduct of countervailing duty
investigations and provides a workable multilateral discipline over subsidies. Many WTO
Members include a public interest clause in their national legislation to enable them to
refrain from imposing duties, even where injurious subsidization is found. If a countervailing
duty is imposed, it must be levied on a non-discriminatory basis. WTO tries to maintain a
balance so that trade may flourish without partial barriers.