Subsudies and Countervailing Measures: Overview

Agreement on Subsidies and Countervauiling Measures ("SCM Agreement")

The Agreement on Subsidies and Countervailing Measures (“SCMAgreement”) addresses two separate but closely related topics:multilateral disciplines regulating the provision of subsidies, and theuse of countervailing measures to offset injury caused by subsidizedimports.

Multilateral disciplines are the rules regarding whether or not asubsidy may be provided by a Member. They are enforced throughinvocation of the WTO dispute settlement mechanism. Countervailingduties are a unilateral instrument, which may be applied by a Memberafter an investigation by that Member and a determination that thecriteria set forth in the SCM Agreement are satisfied.

Structure of the Agreement

Part I provides that the SCM Agreement applies only to subsidies thatare specifically provided to an enterprise or industry or group ofenterprises or industries, and defines both the term “subsidy” and theconcept of “specificity.” Parts II and III divide all specificsubsidies into one of two categories: prohibited and actionable(1), andestablish certain rules and procedures with respect to each category.Part V establishes the substantive and procedural requirements thatmust be fulfilled before a Member may apply a countervailing measureagainst subsidized imports. Parts VI and VII establish theinstitutional structure and notification/surveillance modalities forimplementation of the SCM Agreement. Part VIII contains special anddifferential treatment rules for various categories of developingcountry Members. Part IX contains transition rules for developedcountry and former centrally-planned economy Members. Parts X and XIcontain dispute settlement and final provisions.

Coverage of the Agreement

Part I of the Agreement defines the coverage of the Agreement.Specifically, it establishes a definition of the term “subsidy” and anexplanation of the concept of “specificity”. Only a measure which is a“specific subsidy” within the meaning of Part I is subject tomultilateral disciplines and can be subject to countervailing measures.

Definition of subsidy Unlike the Tokyo Round Subsidies Code, the WTOSCM Agreement contains a definition of the term “subsidy”. Thedefinition contains three basic elements: (i) a financial contribution(ii) by a government or any public body within the territory of aMember (iii) which confers a benefit. All three of these elements mustbe satisfied in order for a subsidy to exist.

The concept of “financial contribution” was included in the SCMAgreement only after a protracted negotiation. Some Members argued thatthere could be no subsidy unless there was a charge on the publicaccount. Other Members considered that forms of government interventionthat did not involve an expense to the government neverthelessdistorted competition and should thus be considered to be subsidies.The SCM Agreement basically adopted the former approach. The Agreementrequires a financial contribution and contains a list of the types ofmeasures that represent a financial contribution, e.g., grants, loans,equity infusions, loan guarantees, fiscal incentives, the provision ofgoods or services, the purchase of goods.

In order for a financial contribution to be a subsidy, it must be madeby or at the direction of a government or any public body within theterritory of a Member. Thus, the SCM Agreement applies not only tomeasures of national governments, but also to measures of sub-nationalgovernments and of such public bodies as state-owned companies.

A financial contribution by a government is not a subsidy unless itconfers a “benefit.” In many cases, as in the case of a cash grant, theexistence of a benefit and its valuation will be clear. In some cases,however, the issue of benefit will be more complex. For example, whendoes a loan, an equity infusion or the purchase by a government of agood confer a benefit? Although the SCM Agreement does not providecomplete guidance on these issues, the Appellate Body has ruled (Canada– Aircraft) that the existence of a benefit is to be determined bycomparison with the market-place (i.e., on the basis of what therecipient could have received in the market). In the context ofcountervailing duties, Article 14 of the SCM Agreement provides someguidance with respect to determining whether certain types of measuresconfer a benefit. the context of multilateral disciplines, however, theissue of the meaning of “benefit” is not fully resolved.

Specificity. Assuming that a measure is a subsidy within the meaning ofthe SCM Agreement, it nevertheless is not subject to the SCM Agreementunless it has been specifically provided to an enterprise or industryor group of enterprises or industries. The basic principle is that asubsidy that distorts the allocation of resources within an economyshould be subject to discipline. Where a subsidy is widely availablewithin an economy, such a distortion in the allocation of resources ispresumed not to occur. Thus, only “specific” subsidies are subject tothe SCM Agreement disciplines. There are four types of “specificity”within the meaning of the SCM Agreement:

* Enterprise-specificity. A government targets a particular company or companies for subsidization;
* Industry-specificity. A government targets a particular sector or sectors for subsidization.
* Regional specificity. A 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.

Categories of Subsidies

The SCM Agreement creates two basic categories of subsidies: those thatare prohibited, those that are actionable (i.e., subject to challengein the WTO or to countervailing measures). All specific subsidies fallinto one of these categories.

Prohibited subsidies Two categories of subsidies are prohibited byArticle 3 of the SCM Agreement. The first category consists ofsubsidies contingent, in law or in fact, whether wholly or as one ofseveral conditions, on export performance (“export subsidies”). Adetailed list of export subsidies is annexed to the SCM Agreement. Thesecond category consists of subsidies contingent, whether solely or asone of several other conditions, upon the use of domestic over importedgoods (“local content subsidies”). These two categories of subsidiesare prohibited because they are designed to directly affect trade andthus are most likely to have adverse effects on the interests of otherMembers.

The scope of these prohibitions is relatively narrow. Developedcountries had already accepted the prohibition on export subsidiesunder the Tokyo Round SCM Agreement, and local content subsidies of thetype prohibited by the SCM Agreement were already inconsistent withArticle III of the GATT 1947. What is most significant about the newAgreement in this area is the extension of the obligations todeveloping country Members subject to specified transition rules (seesection below on special and differential treatment), as well as thecreation in Article 4 of the SCM Agreement of a rapid (three-month)dispute settlement mechanism for complaints regarding prohibitedsubsidies.

Actionable subsidies Most subsidies, such as production subsidies, fallin the “actionable” category. Actionable subsidies are not prohibited.However, they are subject to challenge, either through multilateraldispute settlement or through countervailing action, in the event thatthey cause adverse effects to the interests of another Member. Thereare three types of adverse effects. First, there is injury to adomestic industry caused by subsidized imports in the territory of thecomplaining Member. This is the sole basis for countervailing action.Second, there is serious prejudice. Serious prejudice usually arises asa result of adverse effects (e.g., export displacement) in the marketof the subsidizing Member or in a third country market. Thus, unlikeinjury, it can serve as the basis for a complaint related to harm to aMember's export interests. Finally, there is nullification orimpairment of benefits accruing under the GATT 1994. Nullification orimpairment arises most typically where the improved market accesspresumed to flow from a bound tariff reduction is undercut bysubsidization.

The creation of a system of multilateral remedies that allows Membersto challenge subsidies which give rise to adverse effects represents amajor advance over the pre-WTO regime. The difficulty, however, willremain the need in most cases for a complaining Member to demonstratethe adverse trade effects arising from subsidization, a fact-intensiveanalysis that panels may find difficult in some cases(2).

Agricultural subsidies Article 13 of the Agreement on Agricultureestablishes, during the implementation period specified in thatAgreement (until 1 January 2003), special rules regarding subsidies foragricultural products. Export subsidies which are in full conformitywith the Agriculture Agreement are not prohibited by the SCM Agreement,although they remain countervailable. Domestic supports which are infull conformity with the Agriculture Agreement are not actionablemultilaterally, although they also may be subject to countervailingduties. Finally, domestic supports within the “green box” of theAgriculture Agreement are not actionable multilaterally nor are theysubject to countervailing measures. After the implementation period,the SCM Agreement shall apply to subsidies for agricultural productssubject to the provisions of the Agreement on Agriculture, as set forthin its Article 21.

Countervailing Measures  

Part V of the SCM Agreement sets forth certain substantive requirementsthat must be fulfilled in order to impose a countervailing measure, aswell as in-depth procedural requirements regarding the conduct of acountervailing investigation and the imposition and maintenance inplace of countervailing measures. A failure to respect either thesubstantive or procedural requirements of Part V can be taken todispute settlement and may be the basis for invalidation of the measure.

Substantive rules A Member may not impose a countervailing measureunless it determines that there are subsidized imports, injury to adomestic industry, and a causal link between the subsidized imports andthe injury. As previously noted, the existence of a specific subsidymust be determined in accordance with the criteria in Part I of theAgreement. However, the criteria regarding injury and causation arefound in Part V. One significant development of the new SCM Agreementin this area is the explicit authorization of cumulation of the effectsof subsidized imports from more than one Member where specifiedcriteria are fulfilled. In addition, Part V contains rules regardingthe determination of the existence and amount of a benefit.

Procedural rules Part V of the SCM Agreement contains detailed rulesregarding the initiation and conduct of countervailing investigations,the imposition of preliminary and final measures, the use ofundertakings, and the duration of measures. A key objective of theserules is to ensure that investigations are conducted in a transparentmanner, that all interested parties have a full opportunity to defendtheir interests, and that investigating authorities adequately explainthe bases for their determinations. A few of the more importantinnovations in the WTO SCM Agreement are identified below:

* Standing. The Agreement defines in numeric terms the circumstancesunder which there is sufficient support from a domestic industry tojustify initiation of an investigation.
* Preliminary investigation. The Agreement ensures the conduct of apreliminary investigation before a preliminary measure can be imposed.
* Undertakings. The Agreement places limitations on the use ofundertakings to settle CVD investigations, in order to avoid VoluntaryRestraint Agreements or similar measures masquerading as undertakings
* Sunset. The Agreement requires that a countervailing measure beterminated after five years unless it is determined that continuationof the measure is necessary to avoid the continuation or recurrence ofsubsidization and injury.
* Judicial review. The Agreement requires that Members create anindependent tribunal to review the consistency of determinations of theinvestigating authority with domestic law.

Transition Rules and Special and Differential Treatment

Developed countries Members not otherwise eligible for special anddifferential treatment are allowed three years from the date on whichfor them the SCM Agreement enters into force to phase out prohibitedsubsidies. Such subsidies must be notified within 90 days of the entryinto force of the WTO Agreement for the notifying Member.

Developing countries The SCM Agreement recognizes three categories ofdeveloping country Members: least-developed Members (“LDCs”), Memberswith a GNP per capita of less than $1000 per year which are listed inAnnex VII to the SCM Agreement, and other developing countries. Thelower a Member's level of development, the more favourable thetreatment it receives with respect to subsidies disciplines. Thus, forexample, LDCs and Members with a GNP per capita of less than $1000 peryear listed in Annex VII are exempted from the prohibition on exportsubsidies. Other developing country Members have an eight-year periodto phase out their export subsidies (they cannot increase the level oftheir export subsidies during this period). With respect toimport-substitution subsidies, LDCs have eight years and otherdeveloping country Members five years, to phase out such subsidies.There is also more favourable treatment with respect to actionablesubsidies. For example, certain subsidies related to developing countryMembers' privatization programmes are not actionable multilaterally..With respect to countervailing measures, developing country Members'exporters are entitled to more favourable treatment with respect to thetermination of investigations where the level of subsidization orvolume of imports is small.

Members in transformation to a market economy Members in transformationto a market economy are given a seven-year period to phase outprohibited subsidies. These subsidies must, however, have been notifiedwithin two years of the date of entry into force of the WTO Agreement(i.e., by 31 December 1996) in order to benefit from the specialtreatment. Members in transformation also receive preferentialtreatment with respect to actionable subsidies.

Notifications

Subsidies Article 25 of the SCM Agreement requires that Members notifyall specific subsidies (at all levels of government and covering allgoods sectors, including agriculture) to the SCM Committee. New andfull notifications are due every three years with update notificationsin intervening years. The notifications are the subject of extensivereview and discussion by the SCM Committee.

Countervailing legislation and measures All Members are required tonotify their countervailing duty laws and regulations to the SCMCommittee pursuant to Article 32.6 of the SCM Agreement. Members arealso required to notify all countervailing actions taken on asemi-annual basis, and preliminary and final countervailing actions atthe time they are taken. Members also are required to notify which oftheir authorities are competent to initiate and conduct countervailinginvestigations.

Dispute Settlement

The SCM Agreement generally relies on the dispute settlement rules ofthe DSU. However the Agreement contains extensive special or additionaldispute settlement rules and procedures providing, inter alia, forexpedited procedures, particularly in the case of prohibited subsidyallegations. It also provides special mechanisms for the gathering ofinformation necessary to assess the existence of serious prejudice inactionable subsidy cases.

Notes:

1. The Agreement as it originally entered into force contained a thirdcategory — non-actionable subsidies. This category (along with aprovision establishing a presumption of serious prejudice in respect ofcertain specified types of actionable subsidies) applied provisionallyfor five years ending 31 December 1999, and pursuant to Article 31 ofthe Agreement, could be extended by consensus of the SCM Committee. Asof 31 December 1999, no such consensus had been reached. back to text

2. To mitigate this problem, the SCM Agreement established, during afive-year provisional period which ended 31 December 1999, asub-category of actionable subsidies with respect to which a rebuttablepresumption of serious prejudice existed. Under Article 31, thisprovision (along with the provisions concerning non-actionablesubsidies) could be extended by consensus of the SCM Committee. As of31 December 1999, no such consensus had been reached.