SUBSIDIES AND

COUNTERVAILING
MEASURES
GROUP 4
◦ The WTO rules on subsidies and subsidized trade are set out in Articles
VI and XVI of the GATT 1994 but also, and more importantly, in the
WTO Agreement on Subsidies and Countervailing Measures, commonly
referred to as the SCM Agreement.
◦ Concept of subsidy
◦ Broadly speaking, Article 1.1 of the SCM Agreement defines a subsidy
as a financial contribution by a government or public body, which
confers a benefit.
WTO TREATMENT OF SUBSIDIES

◦ Article XVI of the GATT 1994 and Articles 3 to 9 of the SCM

Agreement deal with the WTO treatment of subsidies.
◦ Whereas Dumping is not prohibited save for where it causes
an injury, Certain subsidies are prohibited, and many other
subsidies, at least when they are specific rather than
general, may be challenged when they cause adverse
effects to the interests of other Members.
Response to Injurious Subsidized Trade

◦ Article VI of the GATT 1994 and Articles 10 to 23 of the SCM Agreement concern
the manner in which WTO Members may respond to subsidized trade which causes
injury to the domestic industry. Members may, in these situations, impose
countervailing duties on the subsidized imports to offset, i.e., cancel out, the
subsidization.

◦ countervailing duties may only be imposed when it is properly established that

there are subsidized imports, that there is injury to a domestic industry and
that there is a causal link between the subsidization and the injury.
 Determination of Subsidization
Article 1.1 of the SCM Agreement provides, in relevant part: For the purpose of this
Agreement, a subsidy shall be deemed to exist if:
◦ (a)(1) There is a financial contribution by a government or any public body within
the territory of a Member ...
◦ or (a)(2) There is any form of income or price support in the sense of Article XVI of
GATT 1994 and
◦ (b) A benefit is thereby conferred
◦ .
Cont’

◦ There are three constituent elements of the concept of

‘subsidy’:
 A Financial contribution;
 A Financial contribution by A Government Or Any Public
Body; And
 A Financial contribution conferring a Benefit
a). Financial Contribution
 Direct transfers of funds, such as grants, loans and equity infusions (Article 1.1(a)(1)(i));
 potential direct transfers of funds or liabilities, such as loan guarantees (Article 1.1(a)(1)
(i));
 Government revenue, otherwise due, that is foregone or not collected
 (Article 1.1(a)(1)(ii));
 The provision by a government of goods or services other than general infrastructure
(Article 1.1(a)(1)(iii)).
 The purchase by a government of goods (Article 1.1(a)(1)(i));
 Government payments to a funding mechanism or entrustment or direction of a private
body (Article 1.1(a)(1)(iv)).
B) Financial Contribution by Government

◦ Pursuant to Article 1.1(a)(1)(iv), a financial contribution made by a

private body is considered to be a ‘financial contribution by a
government’ when the government entrusts or directs the private
body to carry out one or more of the type of functions illustrated in
Article 1.1(a)(1)(i) to (iii).
c) Financial Contribution by Conferring a Benefit

◦ If a government gives a sum of money to a company, it seems clear

that this financial contribution would generally confer a benefit.
◦ In Canada – Aircraft; the Appellate body held that A ‘‘benefit’’ does
not exist in the abstract, but must be received and enjoyed by a
beneficiary or a recipient. Logically, a ‘‘benefit’’ can be said to arise
only if a person, natural or legal, or a group of persons, has in fact
received something. The term ‘‘benefit’’, therefore, implies that
there must be a recipient.
◦ A ‘benefit’ arises if the recipient has received a ‘financial
contribution’ on terms more favorable than those available to any
recipient in the market.159 In other words, a government loan is a
financial contribution conferring a benefit, i.e., a subsidy, only if the
terms of the loan are more favorable than the terms of a comparable
commercial loan.
Specificty of the Subsidy
◦ WTO rules on subsidies do not apply to all subsidies, they apply only to specific subsidies. According to
Article 2 of the SCM, a subsidy is specific when it has been specifically provided to an enterprise, an
industry or a group of enterprises or industries.
◦ A subsidy that is widely available within an economy is presumed not to distort the allocation of
resources within that economy and, therefore, does not require or justify any action.
◦ The SCM Agreement distinguishes between four types of specificity:
 Enterprise specificity; - government targets a particular company or companies for subsidization
 Industry specificity; - government targets a particular sector or sectors for subsidization;
 Regional specificity; - government targets producers in specified parts of its territory for subsidization.
 Prohibited subsidies; - a government targets export goods or goods using domestic inputs for
subsidization.
◦ Defacto subsidies

The use of a subsidy programme by a limited number of certain enterprises;

The predominant use of a subsidy programme by certain enterprises;
The granting of disproportionately large subsidies to certain enterprises;
The manner in which discretion has been exercised by the granting authority in the
decision to grant a subsidy.
Prohibited subsidies
Article 3 of the SCM Agreement, entitled ‘Prohibition’, states, in its first paragraph: Except as provided in the Agreement
on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited:

a) subsidies contingent, in law or in fact, whether solely or as one of several

conditions, upon export performance, including those illustrated in Annex I

b) subsidies contingent, whether solely or as one of several conditions, upon the use
of domestic over imported products

◦ In short, WTO Members may not grant or maintain: * export subsidies; or * import
substitution subsidies
Actionable Subsidies
◦ Unlike export subsidies and import substitution subsidies, most subsidies are not prohibited but are
‘actionable’, i.e. they are subject to challenge in the event that they cause adverse effects to the
interests of another Member.

◦ Article 5 of the SCM Agreement provides: No Member should cause, through the use of any subsidy
referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members.

◦ Article 5(a) to (c) distinguishes between three types of ‘adverse effect’ to the interests of other
Members:

Injury to the domestic industry of another Member (Article 5(a));

Nullification or impairment of benefits accruing directly or indirectly to other Members under the
GATT 1994 (Article 5(b)); and
Serious prejudice, including a threat thereof, to the interests of another Member (Article 5(c)).
Countervailing Measures

◦ A Member, whose domestic industry is injured because of subsidized imports, has

the choice between:

 Challenging the subsidy concerned multilaterally, pursuant to Article 4 or 7 of the

SCM Agreement, and
 Unilaterally imposing countervailing duties on the subsidized imports.
◦ A countervailing duty is defined in Article VI of the GATT 1994 and footnote 36 to the SCM
Agreement as: a special duty levied for the purpose of offsetting ... any subsidy bestowed,
directly, or indirectly, upon the manufacture, production or export of any merchandise.

◦ Article 10 of the SCM Agreement provides with respect to countervailing duties: Members
shall take all necessary steps to ensure that the imposition of a countervailing duty
on any product of the territory of any Member imported into the territory of another
Member is in accordance with the provisions of Article VI of GATT 1994 and the
terms of this Agreement. Countervailing duties may only be imposed pursuant to
investigations initiated and conducted in accordance with the provisions of this
Agreement and the Agreement on Agriculture
Cont’
◦ Conditions for the imposition of countervailing duties

1) There are subsidized imports, i.e., imports of products from producers who benefited from
specific subsidies within the meaning of Articles 1, 2 and 14 of the SCM Agreement.
◦  
1) There is injury to the domestic industry of the like products within the meaning of Articles
15 and 16 of the SCM Agreement.
◦ 
◦  
1) There is a causal link between the subsidized imports and the injury to the domestic
industry and injury caused by other factors is not attributed to the subsidized imports.
◦ Conduct of countervailing- Investigations

◦ In a countervailing investigation, the focus is on establishing the extent to which countervailable subsidies are granted
and the measurement of the amount of such subsidization, while in an anti-dumping investigation, the focus is on the
measurement of a dumping margin.

◦ A countervailing investigation normally starts with the submission of a so-called application, i.e. a written complaint
that injurious subsidization is taking place.

◦ Pursuant to Article 11.2 of the SCM Agreement, the application must contain sufficient evidence of the existence of: * a
subsidy and, if possible, its amount; * injury to the domestic industry; and * a causal link between the subsidized imports
and the alleged injury.
Application of Countervailing Measures
1) The SCM Agreement provides for three types of countervailing measure: *
provisional countervailing measures;
2) Voluntary undertakings; and
3) Definitive countervailing duties.
◦ Provisional countervailing measures

◦ After making a preliminary determination that a subsidy is causing or threatening to cause injury to a domestic industry,
an importing Member can impose provisional countervailing measures on the subsidized imports.

◦ These measures are initiated for a short period of time and in no case may they be applied for more than four months.

◦  

◦ voluntary undertakings

◦ The government of the exporting Member agrees to eliminate or limit the subsidy or to take other measures concerning
its effects; or

◦ The exporter agrees to revise its prices so that the investigating authorities are satisfied that the injurious effect of the
subsidy is eliminated.
◦ Definitive countervailing duties

◦ Members may impose definitive countervailing duties only after making a final determination that;

A countervailable subsidy exists; and

The subsidy causes, or threatens to cause, injury to the domestic industry.

◦ With respect to the amount of the countervailing duty imposed on subsidized imports, Article 19.4 of the SCM
Agreement provides: No countervailing duty shall be levied on any imported product in excess of the amount of the
subsidy found to exist, calculated in terms of subsidization per unit of the subsidized and exported product.

◦ Countervailing duties must be collected on a non-discriminatory basis. Article 19.3 of the SCM Agreement states: When a
countervailing duty is imposed in respect of any product, such countervailing duty shall be levied ... on a non-
discriminatory basis on imports of such product from all sources found to be subsidized and causing injury.
AGRICULTURAL SUBSIDIES

◦ The Agreement on Agriculture provides for special rules on agricultural

subsidies and, in case of conflict, these special rules prevail over the rules of
the SCM Agreement.
◦ Agricultural export subsidies.
◦ The SCM Agreement’s prohibition on export subsidies applies on agricultural
export subsidies except as provided otherwise in the Agreement on
Agriculture.
◦ Export subsidies, defined in Article 9.1(a) to (f) of the Agreement on
Agriculture, are subject to reduction commitments.
◦ Developed-country Members agreed to reduce the export subsidies on these
products by an average of 36 per cent by value (budgetary outlay) and 21 per cent
by volume (subsidized quantities). Developing-country Members agreed to reduce
the export subsidies by an average of 24 per cent by value and 14 per cent by
volume.

◦ Members may not apply export subsidies that are not listed in the Agreement on
Agriculture in a manner which results in or threatens to lead to circumvention of
export subsidy commitments.( Article 10 of the Agreement on agriculture)
Domestic Agricultural Support Subsidies

◦ Members agreed to reduce their level of support measures to domestic

industries/producers.

◦ Article 15.1. of the Agreement on Agriculture; - Least-developed-country Members

are not required to undertake reduction commitments.

◦ The commitments of Members on the reduction of domestic agricultural support

measures are set out in Part IV of their GATT Schedule of Concessions. Members
may not provide domestic support in excess of the commitment levels specified in
their Schedules. (Article 3.2 of the agreement on agriculture)
 ◦ Support for agricultural research & Infrastructure, domestic food
aid,

Certain developing-country subsidies designed

◦ to encourage agricultural production,

◦ certain de minimis subsidies, and

◦ certain direct payments aimed at limiting agricultural production GREEN

BLUE
◦ Domestic agricultural support measures that do not have the effect of
providing price support to producers are exempt from the reduction
commitments.

◦ Green Box could not be subjected to countervailing duties

◦ The Peace Clause
◦ Pursuant to Article 13 of the Agreement on agriculture, Agricultural
export subsidies that conformed to the requirements of the
Agreement on agriculture and the domestic agricultural support that
was within the commitment levels could not be challenged within the
SCM agreement.

◦ Since the end of the implementation period in 2004, however, the

‘peace’ clause no longer applies.
Special and Differential Treatment for Developing –
country members
◦ Subsidies can play an important role in the economic development programmes of developing-
countries.

◦ Pursuant to Article 27, the prohibition of export subsidies under Article 3 of the SCM Agreement does
not apply to least-developed countries and to countries with a per capita annual income of less than
US$1,000.

◦ Furthermore, certain subsidies which are normally actionable are not actionable when granted by
developing-country Members in the context of privatization programmes.

◦ Pursuant to Art. 27.2 of the SCM Agreement, a countervailing investigation of a product originating in a
developing country member must be terminated as soon as the investigating authorities determine
that: * the overall level of subsidies granted upon such product in question does not exceed 2 per cent
ad valorem; or * the volume of the subsidized imports represents less than 4 per cent of the total
imports of the like product of the importing Member.
◦ In conclusion, in light of the above discussion,
dumping and subsidization are considered as one of
the most two common practices of unfair trade
amongst contracting country members
THANK YOU