| Subsidies
generally consist of assistance provided by Governments to
producers and exporters of specific goods and services. They
are normally extended in the form of direct payments, such
as grants or loans, or other measures with equivalent effect
such as guarantees, support services and facilities and fiscal
incentives. Although subsidies have been used and applied
as a form of public intervention in international trade throughout
history, their emergence as a critical issue in international
trade rule making, is of recent origin. It has also become
one of the most challenging issues in international trade
relations. This is because subsidies have damaging spillover
effects: they displace production, distort consumption and
give rise to friction between countries. It must be noted,
however, that they have differing consequences for the importing
country: on the one hand, they may harm domestic producers;
on the other, they may benefit consumers and importers as
subsidised goods are provided at lower prices. But subsidies
may be a necessary policy instrument, especially in relation
to social services such as health and education. An across-the-board
removal of subsidies, as is sometimes advocated, can seriously
foreclose these services from the poor. Subsidies can be trade-distorting,
but they can also be development friendly.
Subsidies have acquired a negative connotation.
This is because in dealing with the issue, the WTO’s
rationale is similar to those concerning anti-dumping (See
SEATINI Factsheet 13): they give rise to unfair trade, distort
it and are therefore subjected to multilateral trade disciplines.
However, whereas anti-dumping measures are directed at firms,
those dealing with subsidies, target Governments.
Subsidies, Countervailing Measures
and GATT/WTO Rules:
The Uruguay Round (UR) agreement on Subsidies and Countervailing
Measures (SCM) built on disciplines in this area first negotiated
in the Tokyo Round. It addresses two closely related but separate
topics; multilateral disciplines to regulate the provision
of subsidies; and the use of countervailing measures to offset
injury caused by subsidies. Multilateral rules are meant to
determine whether a member can provide a subsidy and are enforced
by the WTO’s dispute settlement mechanism. Countervailing
measures on the other hand, are a unilateral instrument taken
by a member upon determination of injury. One of the major
outcomes of the UR negotiations was to arrive at a common
understanding and definition of a subsidy.
Subsidies can be firm or industry-specific (for example, subsidies
provided to European farmers under the Common Agricultural
Policy) or they may be generally available for sectors such
as education, health and infrastructure. An important consideration
in determining the trade-distorting effects of a subsidy is
whether a subsidy is specific or general. WTO rules concern
specific subsidies, since economy-wide subsidies are presumed
not to distort the allocation of domestic resources. In practice,
it is difficult to determine whether a subsidy is in fact
specific. Subsidies that are sector-specific (education, health)
may have economy-wide objectives: conversely, economy-wide
subsidies may effectively be sector-specific. A subsidy that
is conditional on export performance or the use of domestic
resources is considered specific. Likewise, a subsidy that
is limited to an industry, to an enterprise, or to enterprises
limited to designated geographical region, is considered specific.
Until recently, the UR agreement on SCM defined three categories
of subsidies: prohibited subsidies (the so-called Red subsidies);
actionable subsidies (the so-called Yellow subsidies); and
non-actionable subsidies (the so-called Green subsidies).
Non-actionable subsidies had included support for research,
aid to disadvantaged regions and to facilitate the adaptation
of plants to new environmental regulations. Since December
1999, this category has lapsed, as there was no consensus
in the Committee on SCM on whether they should continue.
Prohibited Subsidies
The Agreement defines these as related to export performance
(e.g. the provision of financial support for each unit of
exports) and subsidies contingent on the use of domestic products
(import substitution subsidies). Under GATT, developing countries
were free to use export subsidies: under the SCM, only least
developed countries and developing countries with a per capita
income of less than US$1,000 are exempted.
Actionable Subsidies
These are permitted. However, if they cause adverse effects,
they may give rise to a dispute settlement process, or to
the imposition of countervailing duties. The SCM defines three
types of adverse effects:
• the injury caused by imports of subsidised
products to an industry
• serious prejudice, which may result from adverse effects
(e.g. displacement of exports) on the markets of the subsidising
member, or on the market of a third country
• the nullification or impairment, most commonly arising
when improved market access, deemed to result from a bound
tariff reduction, is nullified by the subsidy.
Subsidies granted or maintained by developing
countries may not be disputed on the grounds of serious prejudice.
However, they may be actionable when they nullify or impair
tariff concessions, or when they cause injury in the market
of an importing country.
Subsidies granted in the context of a privatisation programme
are not actionable, provided they are notified and granted
for a limited period.
Countervailing: Duty Process and
Measures
The SCM Agreement under Article 19 sets out the procedures
for the imposition of countervailing duties. In particular,
a detailed investigation process has been laid out to determine:
a) The existence of a subsidy which is prohibited or actionable
b) The amount of a subsidy
c) The existence of injury
d) The existence of a causal link between (b) and (c) above.
The rules of procedure applicable to an investigation are
similar to those relating to the imposition of anti-dumping
duties: they require a written application consisting of evidence
relating to items (a)-(d) above; transparency of the procedures
and of the process; limits on the duration of the investigation
(not to exceed 18 months); consultations prior to investigations;
and treatment of confidential communications and information.
The existence of the de minimis rule ensures that small amounts
and levels of subsidies (e.g. where the level of a subsidy
does not exceed 2 per cent) provided by developing countries,
are excluded from further action.
The SCM agreement permits countries to develop their own system
for imposition or collection of duties. Moreover, a countervailing
duty can be continued as long as necessary to counteract injury.
The SCM agreement attempts to strike a balance between the
need to agree on subsidies that distort trade and the need
to ensure that the countervailing measures to offset the effects
of subsidies, are not abused.
Conclusions
Although a step in the right direction, the new definitions
are still too broad and allow developed country governments
to justify subsidies all too easily. The larger question of
their role in the development process, however, has not been
addressed. For example, the question of providing subsidies
in pursuit of development policies for catching up with developed
countries (many of whom used extensive programmes of subsidisation
to develop), has not been resolved and continues to bedevil
North-South relations.
It is true that developing countries do not have similar capacities
to provide subsidies, due to fiscal constraints. But in many
cases, the option of providing development-promoting subsidies
such as for trade diversification and technological development,
is constrained both by the SCM Agreement and by the IMF-World
Bank programmes. On the other hand, by making subsidies such
as those for research and development, environmental adaptation
and for regional development non-actionable (in other words,
they are no longer subject to countervailing measures, or
to dispute settlement), the SCM has become further biased
in favor of developed countries.
The large and growing volume of subsidies provided by the
developed countries’ agriculture exporters are covered
by a separate UR agreement on agriculture (See SEATINI Factsheet
1). However, their trade and development distorting consequences
largely escape the scrutiny of international trade rules,
as currently crafted.
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