Non-actionable (permissible) subsidies (green): Four types of subsidy are permitted in the sense that no counteraction against them is normally allowed.
1. general subsidies: subsidies not specific to particular enterprises or industries
2. subsidies for research activities conducted by firms or by higher education or research establishments on a contract basis with firms
3. The subsidy should not exceed 75% of the cost of industrial research or 50% of the cost of pre-competitive development activity like the preparation of blueprints and designs for new or improved products.
4. subsidies for development of disadvantaged regions within the territory of a Member.
Criteria for these regions are: a) per capita income, per capita household income or per capita GDP must not be above 85% of the average for the Member territory, b) the unemployment rate must be at least 110% of the average of the Member territory, c) subsidies for environmental purposes by promoting adaptation of existing facilities to new environmental requirements by law or regulations which result in greater constraints and financial burden on firms, provided that the assistance is a one-time non-recurring measure and is limited to 20% of the cost of adaptation, directly linked to the firm’s own planned reduction of pollution and available to all firms which have to adapt to the new environmental requirements.
Non-actionable subsidies are challenged if the implementation of these measures has resulted in “serious adverse effects” to the domestic industry of another Member, such as to cause damage that is difficult to repair. Members initiating action for countermeasures will first have consultations with the subsidizing Member, and if a mutually acceptable solution is not found in 60 days, the matter will be referred to the Committee on Subsidies. If the Committee determines that serious adverse effects do exist and that these cause damage which is difficult to repair, it will recommend the subsidizing Member to modify its program to remove these effects. If the recommendation is not implemented within six months, the Committee will authorize the complaining Member to take appropriate countermeasures normally in the form of the withdrawal of some concessions to the Member or the reduction of obligations benefiting the Member.
Specificity.
Assuming that a measure is a subsidy within the meaning of the SCM Agreement, it nevertheless is not subject to SCM Agreement disciplines unless it has been specifically provided to an enterprise or industry or group of enterprises or industries within the jurisdiction of the authority granting the subsidy. In other words, only subsidy distorting the allocation of resources within an economy should be subject to SCM disciplines.
Types of specificity.
Enterprise-specificity: for a particular enterprise
Industry-specificity: for a particular sector or sectors
Regional-specificity: for producers in specified parts of a territory
Elements for adverse effect:
- material injury or threat of material injury (clearly foreseeable and imminent injury)
- nullification or impairment of benefits under GATT 1994 when the improved access to a market is undercut by subsidization in that market (see relevant sections concerning DSM)
- serious prejudice to the interests of another Member, or the threat of serious prejudice
Any one of the above three elements will be enough to get the action initiated.
Factors relevant to injury:
- volume of the subsidized imports: whether there has been a significant increase either in absolute terms or relative to production or consumption in the importing country
- the effect of the subsidized imports on the prices of like products in the domestic market: whether there has been significant price undercutting, depression or suppression, i.e., prevention of price increase which would have occurred in the absence of the subsidized imports
- the consequent impact of the imports on the domestic producers of these products, such as decline in output, sales or market share, profits, productivity, return on investments, cash flow, inventories, employment, wages, etc..
Criteria for serious prejudice.
Serious prejudice is considered to exist if at least one of the following conditions is fulfilled.
The subsidy displaces or impedes the import of a like product of another Member into the market of the subsidizing Member. In this case, the subsidy is given by an importing Member, and the adverse effect is on an exporting Member.
The subsidy displaces or impedes the export of a like product of another exporting Member in a third country market. In this case, the subsidy is given by an exporting Member, and the adverse effect is on another exporting Member sharing a common export market.
The subsidy results in significant price undercutting, significant price suppression (a situation in which prices are prevented from rising though normally they would have risen) or price depression (lowering of prices), or lost sales in a market. In this case, the subsidy is given by an exporting Member, and the adverse effect is on the importing Member in its market; or the subsidy is given by an importing Member, and the adverse effect is on an exporting Member in the market of the importing Member; or the subsidy is given by an exporting Member, and the adverse effect is on another exporting Member in a third country market.
The subsidy on a particular primary product or commodity results in an increase in the world market share of the subsidizing Member in that product or commodity as compared to the average share it had during the previous three years, and the increase follows a consistent trend over the period in which the subsidy has been granted.
Example of serious prejudice.
The Panel on European Community-Refunds on Exports of Sugar-Complaint by Brazil (Nov. 1980) considered the quantity of European Community sugar made available for export with maximum refunds and also the fact that the funds for export refunds did not have a limit. It concluded that the manner of application of the system of granting export refunds contributed to depress sugar prices in the world market, and this constituted a serious prejudice to Brazil.
Clarification of some terms.
Domestic industry: the whole of the domestic producers of the like products, or at least those of them whose collective output of the products constitutes a major proportion (normally more than half) of the total domestic production of those products, excluding related producers
If there are isolated markets for products in question in a country, the examination of injury can be conducted in relation to only the industry located in a specific isolated region, i.e., regional industry, not to the total or majority of the domestic producers.
Industry in a unified market of a customs union must be taken to be the domestic industry.
Like products: products identical, i.e., alike in all respects, to the product under consideration, or in the absence of such products, products which have characteristics closely resembling those of the product under consideration, even though they are not totally alike in all respects
The decision regarding the like product is important because it is the basis of determining which companies constitute the domestic industry, and that determination in turn governs the scope of the investigation and determination of injury and causal link.
For example: The Panel on US-Definition of Industry Concerning Wine and Grape Products (April 1992), examined whether wines and grapes were like products. It concluded that they were not because these two products had different physical characteristics and the production of grapes and the production of wine were two separate groups of industries in the US.
Remedies.
For prohibited and actionable subsidies, two types of remedy are possible, i.e., remedy through the dispute settlement mechanism at a multilateral level and remedy by imposing countervailing duty at a unilateral level. The route of countervailing duty can be taken only if material injury or a threat of material injury exists.
Countervailing Measures are usually duties imposed by the importing country to offset the effect of the subsidy on the product in question. They are a unilateral remedy, but may only be applied by a Member after an investigation by that Member and a determination that the criteria set forth in the SCM Agreement are satisfied.
Criteria: subsidized imports or the existence of a prohibited or actionable subsidy, injury to a domestic industry, a causal link between the subsidized imports and the injury
Countervailing duty process.
Application by domestic industry: If an application is supported by more than half of the total domestic producers of the like product, or if those supporting an application account for a higher level of production of the product than those opposing it, the application will be considered to be made by or on behalf of the domestic industry. For this purpose, those supporting an application should not account for less than 25% of the total domestic production of the product.
Preliminary examination by designated authorities of a Member: to determine whether the evidence given in the application is sufficient to justify the initiation of an investigation.
The application must be rejected and investigation terminated if the amount of subsidy is de minimis, or the volume of the subsidized import or the injury is negligible, i.e., less than 1% in general cases, or less than 3% for developing countries in Annex VI, or less than 2% for other developing countries, or less than 4% of the total import of the like product in the importing country in the case of a developing country under investigation ( but no more than 9% collectively for all developing countries).
Consultation: to be held between governments of importing and exporting countries after an application is accepted and before initiating the investigation so as to clarify facts in the application and arrive at a mutually agreed solution.
Investigation: If no agreement is reached in the consultation, the investigation may start. The time will normally be one year, but in no case should it exceed 18 months, and then a final determination will be made by the investigating authorities.
Interested Members and parties, i.e., foreign producers, exporters, importers and domestic producers whose products are the subject of investigation, as well as industrial users and consumers, will be informed of the investigation in order to provide relevant information and arguments.
The investigation is to determine whether the measure in question is a subsidy, the extent of the subsidy, whether material injury to the domestic industry has been caused and whether there is a causal link between the subsidy and the injury, i.e., whether the injury or the threat of it has been caused by the subsidy.
Provisional measures may be taken by the Member after the expiry of 60 days from the initiation of the investigation to prevent injury being caused during the investigation, but the period of application must not exceed 4 months.
Satisfactory Undertakings from the subsidizing Member or from the exporters in the course of the investigation to remove or limit the subsidy or to raise the price of the product may suspend or terminate the investigation.
Imposition of countervailing duty: If there has been a positive finding in relation to the subsidy, injury or linkage, countervailing duty may be imposed. But before the imposition, domestic consumers and industrial users should be given an opportunity to demonstrate the possible adverse effects of such duty on them.
The countervailing duty cannot be higher than or in excess of the subsidy found to exist. The Agreement provides a guideline that the duty should be less if such a smaller duty will be adequate to remove the injury to the domestic industry, i.e., the duty should be just enough to compensate for the injury margin.
The countervailing duty has to be applied on a non-discriminatory basis to the products of all countries satisfying the conditions of subsidy, injury and causal linkage.
Review and duration: A review may be undertaken by the authorities either on their own initiative or at the request of an interested party as to whether the continuance of the duty is necessary to offset subsidization or it is likely that injury will continue or recur if the duty is removed. A countervailing duty can be continued as long as is necessary to counteract injury-causing subsidization, i.e., less or more than the 5-year period.
Provisions for developing country Members.
Export Subsidy.
Least developed country (LCD) Members and other developing country Members having gross national product (GNP) per capita less than US$1,000 per annum are permitted to provide export subsidies.
Country list: Bolivia, Cameroon, Congo, Egypt, Ghana, Guatemala, India, Indonesia, Kenya, Morocco, Nicaragua, Nigeria, Pakistan, Philippines, Senegal, Sri Lanka, Zimbabwe.
Other developing country Members are exempted from the prohibition of export subsidies for a period of eight years from 1 January 1995.
If a developing country Member has attained export competitiveness in a product, i.e., a share of at least 3.25% of world trade in that product and such share continues for two consecutive years, this Member will have to phase out export subsidies on this product over a period of eight years if it is included in the above list (Annex VII to Article 3.1 a), or two years otherwise.
Import Substitution Subsidy
LDC Members will be exempted from the prohibition of import substitution subsidies for 8 years from 1 January 1995. For other developing country Members, the prohibition will not apply for five years from 1 January 1995.
Absence of presumption of serious prejudice
For developed country Members, there is a presumption of the existence of serious prejudice if any of the following four situations exists:
- the subsidy on a product exceeds 5% of the value of production;
- the subsidy is given to cover the operating losses of an industry
- repeating subsidy is given to cover the operating losses of an enterprise;
- direct forgiveness of debt, including grants to cover debt repayment.
The burden of proof lies on the subsidizing Member to demonstrate that in spite of the existence of these situations, the elements of serious prejudice do not exist. In the case of developing country Members, however, there is no presumption of serious prejudice in these circumstances. Thus, there is a shift of the burden of proof, i.e., the burden of proof is on the complaining Member to demonstrate that serious prejudice exists. Furthermore, adverse effect in a third country market caused by the subsidized exports from developing countries will be exempted from any countermeasures.
Besides, subsidies linked to and granted within a privatization program of a developing country Member will be free from any remedial action.
Special provisions for Member countries in transition.
For Member countries in transition from a centrally planned economy to a market, free-enterprise economy, the following flexibilities have been laid down in the Agreement:
- such Members have seven years to phase out the prohibited subsidies, i.e., export subsidies and import-substitution subsidies;
- remedies through the dispute settlement process cannot be taken against direct forgiveness of debt for seven years;
- regarding remedies through the dispute settlement process against other actionable subsidies, such Members have the same seven-year flexibility as the developing country Members in general.
2. Dumping and Anti-dumping
Definition: Dumping is a situation of international price discrimination, where the price of a product, when sold in the importing country, i.e., the export price, is less than the price of that product in the market of the exporting country, i.e., the normal value.
Dumping vs Subsidy.
Dumping is adopted by firms and enterprises, whereas subsidy by Member governments;
The
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