AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES BRIEF BACKGROUND - - PDF document

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AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES

BRIEF BACKGROUND

The agreement on Subsidies & Countervailing Measures (SCM) was a significant development that took place in the Uruguay round of multilateral trade negotiations (MTN), conducted within the framework of General Agreement on Tariffs and Trade(GATT), spanning from 1986 – 1994 and embracing 123 countries as contracting parties. This Round transformed the GATT into the World Trade

• rganisation or WTO as it is known today.

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PURPOSE

Principally, the SCM Agreement

• Disciplines the use of subsidies by member countries.
• Regulates the actions countries can take to offset the

effects of subsidies (Dispute-settlement procedure & Countervailing duty)

DEFINITION

As per the SCM (Subsidies & Countervailing Measures) Agreement the term “subsidy” is defined as “ a financial contribution, by a government or any public body within the territory of a member, which confers a benefit ” . Countervailing measures are defined as “ steps taken to negate the effect of an action, event or an occurrence". In the context of multilateral trade these are exercised in the form of countervailing duty (CVD) on exports from other member countries

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FINANCIAL CONTRIBUTION…

• Direct transfer of funds – loans, grants, equity infusions.
• POTENTIAL Direct transfer of funds/liabilities – loan guarantees.
• Financial Incentives – Revenue foregone, Tax Credits.
• Provision of goods or services other than general infrastructure.
• Purchase of goods.

PS: Under the provisions of Article XVI of GATT (1947 & 1994), the exemption of export or import duty or taxes shall not be deemed to be a subsidy.

GOVERNMENT OR ANY PUBLIC BODY…

• National Governments
• Sub-National governments, State/County governments
• State-owned companies (e.g. PSU in case of India)
• Any private body entrusted or directed by government

to perform similar functions in accordance with Article 2

• f SCM Agreement.

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BENEFIT…

• The existence of a benefit is to be determined by comparison

with the marketplace.

• Amount (Principle + Interest) paid in availing a “loan” from

government vis-à-vis that paid while borrowing from the market.

• Amount paid in availing a “guarantee” from government vis-à-vis

that paid when taken from the market.

• ‘Provision’ of goods & services is to be made for less than

adequate remuneration, while ‘Purchase’ is to be made for more than adequate remuneration.

• For the equity capital to be considered as a benefit, the ‘investment

decision’ should be inconsistent with the usual investment practice

• f private investors in that region.

AGREEMENT STRUCTURE

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Establish the substantive & procedural requirements of using CVM against subsidized imports Establish the institutional structure and notification modalities for implementation of the SCM Agreement Contains transition rules for developed country and former centrally- planned economy Members Introduces the concept of “specificity” of subsidy PART I PARTS IV & V PARTS VI & VII PART IX Categorize subsidies; establish rules & procedures Contains special and differential treatment rules for various categories of developing country Members Contain dispute settlement and final provisions PART II & III PART VIII PART X & XI

SPECIFICITY CLAUSE

• Subsidy must be provided specifically to an industry/enterprise/group
• f industries.
• Thus, specific “subsidies” are subject to the SCM agreement
• Govt. targets a particular company or

companies for subsidization

Enterprise- specificity

• A government targets a particular sector or

sectors for subsidization.

Industry- specificity Regional specificity

• A government targets export goods or goods

using domestic inputs for subsidization.

Prohibited specificity

• A government targets producers in specified

parts of its territory for subsidization.

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CATEGORIES

Classification of subsidies Prohibited Export Subsidies Local Content Subsidies Actionable Non-actionable Agricultural Expired in Dec, 1999

PROHIBITED SUBSIDIES

• Directly affect the trade and have adverse effects on

the interests of other members. Export subsidies – Subsidies contingent, completely

• r conditionally, on export performance.

Local content subsidies – Subsidies contingent, completely or conditionally, on use of domestic over imported goods.

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ACTIONABLE SUBSIDIES

• Acceptable under normal circumstances, but

challengeable if found detrimental to the interests of fellow member country.

• Resolution Methods – Multilateral dispute settlement,

Countervailing measures.

• However, the complainant must provide prima facie

evidence suggesting violation of SCM Agreement.

ACTIONABLE SUBSIDIES

Types of adverse effects Types of adverse effects

INJURY to a domestic industry caused by subsidized imports in the territory of the complaining Member. SERIOUS PREJUDICE to the exports of subsidizing member. NULLIFICATIONof improved market access (obtained from tariff reduction) due to subsidization.?????

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NON-ACTIONABLE SUBSIDIES

(EXPIRED IN DEC, 1999)

• Subsidies that are not specific
• Certain types of assistance for research and

development

• Certain types of benefits to support environmental

compliance by existing facilities

• Assistance to disadvantageous regions
• In each case, the SCM Agreement sets forth detailed

requirements the subsidies must satisfy to be non- actionable

NON-ACTIONABLE SUBSIDIES

(EXPIRED IN DEC, 1999)

• If provided by a developing country as part of a

program of privatization of government-owned enterprises, some types of subsidies are not actionable

• Direct forgiveness

forgiveness of debts

• Subsidies to cover

cover social costs

• The subsidies must be granted for a limited

limited period

• The country must notify

notify the SCM Committee of the program and the subsidies involved

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AGRICULTURE SUBSIDIES

• Until 2003, Article 13 of the Agreement on Agriculture

established special rules regarding subsidies for agricultural products.

• As per the Uruguay Round Protocol, Export subsidies which

are in full conformity with the Agriculture Agreement are not prohibited by the SCM Agreement, although they remain countervail able.

• Domestic supports within the “green box” of the Agriculture

Agreement are not actionable multilaterally nor are they subject to countervailing measures.

COUNTERVAILING MEASURES

• Substantive rules
• Countervailing measures cannot be imposed unless subsidized

imports & injury to a domestic industry is ascertained and a causal link between the two is established.

• Procedural rules
• Rules regarding the initiation, conduct of countervailing

investigations, imposition of preliminary and final measures, use of undertakings and duration of measures.

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• Defines in numeric terms the circumstances under which

there is sufficient support from a domestic industry to justify initiation of an investigation.

Standing

• Ensures the conduct of a preliminary investigation before

a preliminary measure can be imposed.

Preliminary Investigation

• Places limitations on the use of undertakings to settle

CVD investigations, in order to avoid Voluntary Restraint Agreements or similar measures masquerading as undertakings.

Undertakings

• Requires the termination of countervailing measure after

five years unless determined that continuation is necessary to avoid the recurrence of subsidization and injury.

Sunset

• Requires that members create an independent tribunal to

review the consistency of determinations of the investigating authority with domestic law.

Judicial review

SPECIAL & DIFFERENTIAL TREATMENT

• Developed countries
• Allowed to phase out the prohibited subsidies, three

years from the date on which the SCM agreement enters into force for them.

• Such subsidies must be notified within 90 days of

the entry into force of the WTO Agreement for the notifying Member

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SPECIAL & DIFFERENTIAL TREATMENT

• Developing Countries – Exemption, either permanent or for a

stipulated time period, is given on prohibited subsidies for exports (refer to below table)

PS - For import-substitution subsidies the phase out period stands at 8 yrs for

LDCs and 5 yrs for Other Developing Countries

CATEGORY (Annex VII) INCENTIVE Least Developed Countries (LDC) Exempted from the prohibition on export subsidies. GNP < $1000 per annum Exempted from the prohibition on export subsidies. Other Developing Countries Eight-year period granted to phase out their export subsidies (cannot exceed the level of subsidy during this period)

SPECIAL & DIFFERENTIAL TREATMENT

• The treatment is even more favourable w.r.t actionable

subsidies.

• Certain subsidies related to developing country’s

privatization programmes are not actionable multilaterally.

• With respect to countervailing measures, developing country

Members' exporters are entitled to more favourable treatment with respect to the termination of investigations where the level of subsidization or volume of imports is small.

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NOTIFICATIONS

• Members need to notify
• All the specific subsidies to the SCM committee.
• Countervailing duty laws regulations to the SCM Committee

pursuant to Article 32.6 of the SCM Agreement.

• Countervailing actions taken on a semi-annual basis, and

preliminary and final countervailing actions at the time they are taken.

• About competent authorities given the authority to initiate and

conduct countervailing investigations.

SURVEILLANCE

× The Committee shall examine new and full notifications submitted at special sessions held every third year. × Notifications submitted in the intervening years (updating notifications) shall be examined at each regular meeting of the Committee.

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DISPUTE DISPUTE SETTLEMENT SETTLEMENT

• If a subsidy is causing “adverse effects” a WTO member

can seek resolution of the matter, if, after 60 days, consultations have not resolved the issue.

• The request for dispute settlement must include information

describing the subsidies.

• A WTO member will request dispute settlement if :
• The subsidy is affecting the competitiveness

competitiveness of its exports in third markets.

• The subsidy is distorting

distorting its domestic market, but the domestic industry has not necessarily suffered injury.

• Other WTO members are likely to support its position.