JAMIA MILLIA ISLAMIA UNIVERSITY

INTERNATIONAL TRADE &

FINANCE

RESEARCH ASSIGNMENT
 JAMIA MILLIA ISLAMIA UNIVERSITY

PROJECT PROFILE
TOPIC
“An insight into ‘Subsidy’
as stipulated under the
Agreement on Subsidies
and Countervailing
Measures”

Submitted to- Submitted by-

Md. Enam Firdos Sir Sufiyan Siddiqui
JMI B.A.LL.B (Hons)
Vth semester, 3rdyr
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ACKNOWLEDGEMENT
First and foremost, I would like to thank our subject teacher Enam Firdaus Sir,
for the valuable guidance and advice. He inspired us greatly to work on this
interesting assignment. His willingness to motivate us contributed tremendously to
our assignment. It gave me an opportunity to learn about various concepts relating
to subsidies in the international arena as well as their field of application. It also
helped me to get an insight into the agreement on subsidies and countervailing
measures. Besides, I would like to thank the Faculty staff for providing us with a
good environment and facilities for completing this assignment. In addition, I
would also like to thank my seniors who provided me with the valuable
information acting as a source of guidance in making the assignment. Finally, an
honorable mention goes to my family and friends for their understandings and
supports in completing this assignment. Without the help of the particulars
mentioned above, making of this assignment would not have been possible.
 JAMIA MILLIA ISLAMIA UNIVERSITY

SYNOPSIS
I. INTRODCTION
II. HISTORICAL AND LEGAL CONTEXT
III. DEFINITION OF SUBSIDY
 FINANCIAL CONTRIBUTION BY A
GOVERNMENT OR INCOME OR PRICE
SUPPORT
 Financial contribution
 By a government
 Income or price support
 BENEFIT
 SPECIFICITY

IV. CATEGORIES OF SUBSIDIES

 PROHIBITED SUBSIDIES
 Export subsidies
 Local content subsidies
 ACTIONABLE SUBSIDIES
 NON ACTIONABLE SUBSIDIES

V. CONCLUSION

VI. BIBLIOGRAPHY
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INTRODUCTION
The Doha Ministerial Declaration that launched a new round of multilateral trade negotiations in
2001 envisages that the negotiations in the area of WTO rules would be aimed at “clarifying and
improving disciplines under the Agreements on Implementation of Article VI of GATT 1994
and on Subsidies and Countervailing Measures”. The Declaration enjoins that in this exercise
“the basic concepts, principles and effectiveness of these Agreements and their instruments and
objectives” would be preserved and “the needs of developing and least-developed participants”
would be taken into account.
Subsidies have been provided widely throughout the world as a tool for realizing government
policies. They can take the form of grants (normal subsidies), tax exemptions, low-interest
financing, investments, and export credits. There are six primary categories of subsidies
categorized by purpose: 1) export subsidies; 2) subsidies contingent upon the use of domestic
over imported goods; 3) industrial promotion subsidies; 4) structural adjustment subsidies; 5)
regional development subsidies; and 6) research and development subsidies. Subsidies are also
categorized by beneficiary as either specific subsidies, which are limited to specific businesses
and industries, or non-specific subsidies, which are not limited. Although governments articulate
ostensibly legitimate goals for their subsidy programmes, it is widely perceived that government
subsidies may give excessive protection to domestic industries. In such cases, subsidies act as a
barrier to trade by distorting the competitive relationships that develop naturally in a free trading
system. Exports of subsidized products may injure the domestic industry producing the same
product in the importing country. Similarly, subsidized domestic goods may decrease imports
that compare with such goods. Subsidized products may gain artificial advantages in third-
country markets and impede the exports of other countries to those markets. Because of this
potential effect on trade, the WTO Agreements prohibit with respect to industrial goods any
export subsidies and subsidies contingent upon the use of domestic over imported goods as
having a particularly high trade-distorting effect. Furthermore, even for subsidies that are not
prohibited, it allows Members importing subsidized goods to enact countermeasures such as
countervailing duties if such goods injure that Member’s domestic industry and if certain
procedural requirements are met. For agricultural products, the WTO Agreements require
obligations such as reducing export subsidies and domestic supports.
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HISTORICAL AND LEGAL CONTEXT

Originally, GATT 1947 was very lenient towards subsidies provided by GATT Contracting
Parties. Article XVI GATT merely required Contracting Parties to “notify” subsidies that were
export-stimulating or import-reducing and, upon request, to “discuss” the limitation of these
subsidies if they caused or threatened to cause serious prejudice to other contracting parties. This
should be read together with Article III: 8(b) GATT that exempts the payment of subsidies
exclusively to domestic producers from the national treatment discipline. On the other hand,
contracting parties whose industry was injured by subsidized imports were allowed to impose
CVDs up to the amount of the subsidy (Article VI:3 GATT) and thus raise the tariff level on the
subsidized imports above its bound level (Article II:2(b) GATT).3 This right was made subject
to the determination by the countervailing country that the subsidy caused (or threatened to
cause) material injury to its domestic industry; however, the exact procedural and substantive
obligations were not spelled out.1
In 1955, a Review Session of the GATT included the first substantive obligations on subsidies
(Section B of Article XVI GATT). From 1958 or “the earliest practicable date thereafter”,
contracting parties had to cease to grant export subsidies on non-primary products when they
resulted in a sale at a price for export lower than that for the domestic market.(Article XVI:4
GATT).Only in 1960, contracting parties could agree on a Declaration Giving Effect to the
Provisions of Article XVI:4 (“1960 Declaration”) that elaborated a non-exhaustive list of export
subsidies on non-primary goods. Because of the different treatment between primary and non-
primary goods, many developing countries were unwilling to adopt the 1960 Declaration, which
was in the end only accepted by 17 contracting parties. 2 On the other hand, regarding primary
products3, the 1955 amendment only provided for an obligation to “seek to avoid” the use of
export subsidies and if contracting parties did grant a subsidy which has the effect of increasing
exports, it was subject to a highly ambiguous standard: it could not be used in a way resulting in
a “more than an equitable share of world export trade in that product” (Article XVI:3 GATT).

1
Article VI:3, VI:4, VI:5 and VI:6 GATT.
2
Contracting parties that did not accept the 1960 Declaration were thus not subject to the obligation to cease export
subsidies on non-primary products (Article XVI:4, first sentence).
3
For the purpose of Article XVI, primary products are defined as "any product of farm, forest or fishery, or any
mineral, in its natural form or which has undergone such processing as is customarily required to prepare it for
marketing in substantial volume in international trade" (para. 2 of Ad Article XVI:Section B GATT).
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The Tokyo Round, focusing on the use of non-tariff barriers to trade, resulted in the Subsidies
Code, a plurilateral agreement (accepted by 24 countries) that entered into force in 1980.4 In
essence, this agreement constituted a compromise between the U.S., which aimed at more
stringent rules on the use of export and domestic subsidies, and the EC and other countries,
which aimed at disciplining the extensive use of CVDs by the U.S. during the 1970s. With the
launch of the Uruguay Round, the Contracting Parties again picked up the theme of subsidies,
still defending the same interests: the U.S. continued its “anti-subsidy crusade”5

In parallel, the Cairns group, a coalition of developed and developing agricultural export
countries26, aimed to liberalize trade in agricultural products, targeting the high amount of
export and domestic subsidies mainly granted by the EC, the U.S. and Japan. In the end, the
negotiations on subsidies resulted in two multilateral agreements, which are thus applicable to all
WTO Members: the Agreement on Subsidies and Countervailing Measures (“SCM
Agreement”) and the sector-specific Agreement on Agriculture (“AoA”). It should be noted
that the agreement only deals with subsidies related to trade in goods.

Remarkably, the SCM Agreement does not contain a preamble. The object and purpose of the
agreement has been clarified in WTO case law. The broader description elaborated by the
Appellate Body in U.S. – Lumber CVDs Final states that the object and purpose is “to
strengthen and improve GATT disciplines relating to the use of both subsidies and
countervailing measures, while, recognizing at the same time, the right of Members to impose
such measures under certain conditions”.6

4
In full: “Agreement on interpretation and application of Articles VI, XVI and XXIII of the General Agreement on
Tariffs and Trade.”
5
G. Kleinfeld and D. Kaye, “Red light, Green Light? The 1994 Agreement on Subsidies and Countervailing
Measures, Research and Development Assistance, and U.S. Policy”, Journal of World Trade 1994, 43, at 43.
6
Appellate Body Report, United States – Final Countervailing Duty Determination with Respect to Certain
Softwood Lumber from Canada (WT/DS257/AB/R, adopted on 17 January 2004), para. 64.
 JAMIA MILLIA ISLAMIA UNIVERSITY

DEFINITION OF SUBSIDY
During the Tokyo Round, participants failed to agree on a general definition of the term
‘subsidy’ as any definition would have been considered either under- or over-inclusive. Instead,
they focused on the effect rather than on the intrinsic nature of subsidies. This implied, however,
that all kinds of government interventions (and even private interventions) which (potentially)
distort trade could be countervailable, as was in fact the case under U.S. law. 7 The inclusion of a
definition in the SCM Agreement was therefore “generally considered as one of the most
important achievements of the Uruguay Round in the area of subsidy disciplines”. Pursuant to
the SCM Agreement, a subsidy shall be deemed to exist if two distinctive elements are present:
(1) A financial contribution by a government or any form of income or price support in the
sense of Article XVI GATT8
(2) That confers a benefit9.
To put it otherwise, it “captures situations in which something of economic value is transferred
by a government to the advantage of a recipient”. Moreover, in order to be subject to the
disciplines of the SCM Agreement, (3) the subsidy must be specific.

1. FINANCIAL CONTRIBUTION BY A GOVERNMENT OR INCOME

OR PRICE SUPPORT
1.1 Financial contribution
Article 1.1(a)(1) SCM Agreement points to three different kinds of financial contributions:
(i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity
infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);
(ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives
such as tax credits);
(iii) a government provides goods or services other than general infrastructure, or purchases
goods.
A look at the case law shows a broad interpretation of the three different kinds of financial
contribution. As to the (potential) direct transfer of funds and liabilities (Article 1.1(a)(1)(i)), the

7
Countries could unilaterally define the term ‘subsidy’ for their countervailing duty law.
8
Article 1.1(a)(2) SCM Agreement.
9
Article 1.1(b) SCM Agreement.
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Appellate Body in Japan – DRAMS Countervailing Duties indicated that the term “funds”
encompasses not only “money” but also financial resources and other financial claims more
generally. 10Consequently, similar transactions such as debt forgiveness, the extension of a loan
maturity and an interest rate reduction are considered direct transfers of funds within the
meaning of Article 1.1(a)(1)(i) because the financial position of the borrower is improved. 11 This
category confirms that a government can subsidize not only by positive action, i.e. by providing
money, goods or services, but also by negative action, when it refrains from collecting revenue
which is otherwise due.

The second source of government revenue consists of import duties (tariffs). It seems obvious
that the imposition of tariffs as such cannot constitute a subsidy. Yet, as the Panel explained in
U.S. – Export Restraints, a solely effect-based approach towards subsidies would encompass
tariffs. Indeed, import duties are, par excellence, government measures that distort trade.12 So, in
the view of the Panel, the financial contribution requirement, which precisely blocks the effect-
based approach, avoids that tariffs as such fall under the ambit of the SCM Agreement. The
imposition of tariffs is therefore not considered as a subsidy to the import competing industry.
However, the government does provide a financial contribution when it foregoes revenue by
providing tariff exemptions. Before concluding upon these three categories of financial
contributions, it seems appropriate to set one step back and reconsider the scope of Article
III:8(b) GATT, which, as indicated above, exempts the payment of subsidies exclusively to
domestic producers from the national treatment discipline. All three types of financial
contribution are not covered by this exemption because the AB in Canada – Periodicals held,
this exemption covers “only the payment of subsidies which involves the expenditure of revenue
by a government”. 13 Clearly, when the government refrains from collecting revenue it would
otherwise raise , the government does not spend any revenue.

10
Appellate Body Report, Japan-Countervailing Duties on Dynamic Random Access Memories from Korea
(WT/DS336/AB/R, circulated on 28 November 2007), para. 250.
11
Appellate Body Report, Japan – DRAMS Countervailing Duties, loc. cit., supra no. 57, para. 251.
12
If a Member applies a bound tariff rate (thus consistent with its schedule of commitment), another Member would
still be allowed to argue that this constitutes an actionable subsidy if it causes adverse effects.
13
Appellate Body, Canada – Certain Measures Concerning Periodicals (WT/DS31/AB/R, adopted on 30 July 1997),
p. 34.
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1.2 By a government

The financial contribution should be made by “a government or any public body within the
territory of a Member”. This provision covers, first of all, financial contributions by national,
regional as well as local governments. But it also makes clear that the financial contribution can
be made by public bodies. Although the SCM Agreement does not define the latter notion, the
Panel in Korea – Commercial Vessels considered a public body one which is “controlled by the
government”, whereby government ownership of 100 per cent is considered as “highly relevant
and often determinative of government control”. 14
In addition to these direct financial
contributions, Article 1.1(a)(1)(iv) SCM Agreement makes clear that a financial contribution can
also be made indirectly by a government where it makes payments to a funding mechanism or
even when the government entrusts or directs a private body to carry out such financial
contribution. This provision prevents governments from circumventing the SCM Agreement by
channeling their contribution through an intermediary or by using a private body as a “proxy” 15
to make that contribution.16The Appellate Body in U.S. – DRAMS CVD Investigation explained
that “entrustment” occurs where a government gives responsibility to a private body, and
“direction” refers to situations where the government exercises its authority over a private body
but that the determination thereof “will hinge on the particular facts of the case”.17Apparently, as
advocated by the U.S. and Australia during the Uruguay Round, the SCM Agreement thus also
covers “private subsidies”, wherein the financial contribution is made by a private body but at
the direction or mandate of the government. Hence, a subsidy does not necessarily involve a
financial contribution by the government itself. Nevertheless, purely “private subsidies”, i.e.
without any form of governmental involvement, are not targeted.

1.3 Income or price support

Pursuant to Article 1.1(a) SCM Agreement, a ‘subsidy’ can exist, not only when the government
provides a financial contribution (1) but also where there is “any form of income or price support
14
Panel Report, Korea – Commercial Vessels, loc. cit., supra no. 58, paras. 7. 352–7.356.
15
Appellate Body Report, United States – Countervailing duty investigation on dynamic random access memory
semiconductors (DRAMS) from Korea (WT/DS296/AB/R, adopted on 20 July 2005), paras. 108, 115, 116.
16
Appellate Body Report, U.S. – Lumber CVDs Final, loc. cit., supra no. 40, para. 52.
17
Appellate Body Report, U.S. – DRAMS CVD Investigation, loc. cit., supra no. 102, para. 116.
 JAMIA MILLIA ISLAMIA UNIVERSITY

in the sense of Article XVI GATT 1994” (2). Article XVI:1 GATT, spelling out the notification
obligation, refers to “any subsidy, including any form of income or price support, which operates
directly or indirectly to increase exports of any product from, or to reduce imports of any product
into, its territory” and thus focuses on the trade effects of the measure.18 Consequently, trade
distortive income or price support might be targeted but the notions of income and price support
are not defined by the GATT or the SCM Agreement. The inclusion of this second alternative in
the definition of ‘subsidy’ was, as Luengo clarifies, a way to include Article XVI GATT into the
SCM Agreement but no one discussed the consequences of this inclusion. 19 Whereas most
authors also tend to give low attention to this second alternative, Luengo argues that it is vital for
defining subsidies because it substantially broadens the scope of subsidies beyond financial
contributions by a government to include any form of income or price support that causes trade
distortion. Consequently, the notion of ‘any form of income support’ would capture government
measures that directly or indirectly have an impact on the income of the recipient, without
involving a financial contribution. For example, Luengo holds that an export restraint on a
certain product can be considered a subsidy in the sense of the SCM Agreement given that it
provides an indirect income support to the domestic purchasers of the product in question, who
can buy the product at a reduced price. In conclusion, the second alternative referring to any
income or price support in the sense of Article XVI GATT should not be interpreted so broadly
as to capture, for example, export restraints, which involve no cost to the government.

2. BENEFIT
In order to be labeled a subsidy under the SCM Agreement, the financial contribution or income
or price support provided by the government should confer a benefit (Article 1.1(a)(2)). Yet, the
SCM Agreement does not give any guidance on how the ‘benefit’ element should be defined. To
this end, “a highly relevant context” 20 at the disposal of the WTO’s adjudicating bodies or
Members aiming at imposing CVDs is Article 14 SCM Agreement, which sets guidelines for the

18
GATT Panel, United-States – Measures Affecting imports of Softwood Lumber from Canada (SCM/162, adopted
by the Committee on Subsidies and Countervailing Measures on 27 October 1993), para. 153.
19
G. Luengo, Regulation of Subsidies and State Aids in WTO and EC Law (The Netherlands, Kluwer Law
International, 2006), 586 pp., 122.
20
Panel Report, EC – DRAMS Countervailing Measures, loc. cit., supra no. 104, para. 7.173; see also Appellate
Body Report, United States – Imposition of Countervailing Duties on Certain Hot-Rolled Lead and Bismuth Carbon
Steel Products Originating in the United Kingdom, (WT/DS138/AB/R, adopted on 7 June 2000), para. 57.
 JAMIA MILLIA ISLAMIA UNIVERSITY

calculation by the CVD investigating authority of the amount of a subsidy in terms of the benefit
to the recipient. In particular, this provision prescribes under which conditions the government
provision of equity capital, loans and loan guarantees, or goods and services or purchase of
goods can be considered as conferring a benefit. The Appellate Body in Canada – Aircraft
explained that “a ‘benefit’ does not exist in the abstract, but must be received and enjoyed by a
beneficiary or a recipient”. 21 This recipient can be a “person, natural or legal, or a group of
persons”. 22 Whereas the financial contribution element focuses on the government, in the
determination of a “benefit” the focus shifts towards the recipient of the contribution. As a result,
the cost to the government is considered irrelevant in this determination. In the words of the
Panel in Japan – DRAMS Countervailing duties, “the concept of benefit is defined by reference
to the market.”23 Nonetheless, the determination of the relevant marketplace may not always be
clear-cut. For example, is the domestic market an appropriate benchmark when this market is
distorted because of the predominant role of the government was the central question in U.S. –
Lumber CVDs. In order to impose CVDs, the U.S. Department of Commerce (“DOC”) relied
on U.S. private stumpage fees as the benchmark for finding whether Canadian public stumpage
fees conferred a benefit to Canadian lumber producers. Since the Canadian government “so
dominates the Canadian market for timber that the below-market government prices suppress
prices in the small private market for timber in Canada,…the use of other prices commercially
available to Canadian lumber producers on the world market is the only available”. Canada, on
the contrary, argued that whether a benefit is conferred “depends on whether the Canadian
producers were better of than other purchasers who buy the same good from other sellers in the
country subject to the investigation”. 24 Although the Panel followed the view of Canada, the
Appellate Body concluded that other than private prices in the country of provision may be used
as a benchmark “when it has been established that those private prices are distorted, because of
the predominant role of the government in the market as a provider of the same or similar
goods”.

3. SPECIFICITY

21
Appellate Body Report, Canada –Aircraft , loc. cit., supra no.110, para. 154.
22
Ibid.
23
Panel Report, Japan – DRAMS Countervailing Duties, loc. cit., supra no. 105, para. 7.275.
24
Panel Report, U.S. – Lumber CVDs Prelim, loc. cit., supra no. 135, para. 7.31.
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‘Specificity’ is not a constitutive element of a subsidy, but a necessary condition for

subsidies to be subject to the disciplines of the SCM Agreement. 25 Accordingly, non-
specific subsidies are non-actionable under the SCM Agreement. The government should
provide a financial contribution or income or price support that benefits a ‘specific’
recipient. As indicated, the recipient can be either a natural or a legal person.

Some authors refer to an economic rationale for the inclusion of a specificity test, given that
subsidies to a specific recipient have a higher probability to be trade distorting than general ones.
Others, however, doubt the accuracy of this economic justification and point to practical reasons
for such a test in avoiding a review of all programs and their distorting effects. Lastly, part of the
rationale, in the view of Jackson, is that ‘specificity’ is a useful tool to exclude from the scope of
the SCM Agreement general activities by all governments (such as police or fire protection,
education, roads) “which really ought not to be brought into a countervailing duty or other
international process”. The difficult question is, of course, what is considered ‘general’ and what
degree of specificity is thus targeted. The SCM Agreement clarifies that the subsidy should be
specific to “an enterprise or industry or group of enterprises or industries”. Therefore, the Panel
in U.S. – Lumber CVDs Final decided that ‘specificity’ should be determined at industry level
and not at product level.

CATEGORIES OF SUBSIDIES

The SCM Agreement does not ban all specific subsidies, as defined by Articles 1 and 2 SCM
Agreement. The SCM Agreement aims at targeting those subsidies that are trade distortive. To
this end, the agreement as originally implemented when the WTO Agreement came into effect
grouped subsidies in three categories, each imposing different disciplines (traffic light
approach). On the one end, two types of subsidies are prohibited in and of themselves (red
light) because of their direct trade distortive effect, namely export subsidies and local content
subsidies (Part II SCM Agreement). On the other end, three types of subsidies, i.e. for research
activities, for disadvantaged regions or for the adaptation to environmental requirements, were
deemed non-actionable (green light) and thus in principle allowed under the SCM Agreement
(Part IV SCM Agreement). All other subsidies are actionable subsidies (rest category, yellow

25
Art. 1.2 SCM Agreement.
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light), meaning that they can be challenged or countervailed if they cause adverse effects (Part
III SCM Agreement).
However, the category of green light subsidies expired at the end of 1999.26 Since then, just two
categories exist: those subsidies that are prohibited as such (red light) and all others that can be
challenged if they cause adverse effects to the interest of other WTO Members (yellow light).
The category of prohibited subsidies thus circumvents the difficult proof of adverse effects and
provides more powerful remedies in comparison with actionable subsidies. So, subsidies that are
not deemed ‘prohibited subsidies’ by the WTO adjudicating bodies can still be actionable if they
cause adverse affects. Specific subsidies that were granted green light status are currently also
actionable if they cause adverse effects. They may be categorized into 3 parts-

1. PROHIBITED SUBSIDIES

Article 3 SCM Agreement targets two types of subsidies:

(a) subsidies contingent, in law or in fact, whether solely or as one of several other conditions,
upon export performance, including those illustrated in Annex I;
(b) subsidies contingent, whether solely or as one of several other conditions, upon the use of
domestic over imported goods.

These export subsidies (a) and local content subsidies (b) are prohibited and may thus not be
granted nor maintained 27 because they are considered trade distorting by their very nature.
Expansion of the ‘red light’ category beyond the illustrative list of export subsidies of the
Subsidies Code was one of the most contentious issues during the Uruguay Round, with the U.S.
as its main proponent. In the current Doha negotiations, the U.S. also proposed an expansion of
the ‘red light’ subsidies beyond these two types of subsidies. The term ‘contingent’ in these
definitions should be understood as “conditional” or “depending for its existence on something
else”. 28 This conditionality can be in law but also in fact, which prevents governments from
circumventing the provision by linking subsidies to export performance without prescribing it

26
Article 31 SCM Agreement.
27
Article 3.2 SCM Agreement.
28
Appellate Body Report, Canada – Aircraft, loc. cit., supra no. 110, para. 166.
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explicitly in their laws. As to export subsidies (Article 3(1)(a)), de jure export conditionality
should be “demonstrated on the basis of the words of the relevant legislation, regulation or other
legal instrument”. 29 De facto export conditionality is explicitly prescribed in the SCM
Agreement, which even indicates how this should be determined. The complaining party should
demonstrate by the facts three different substantive elements30: (1) the granting of a subsidy is
(2) in fact tied to (3) actual or anticipated exportation or export earnings.

1.1 Export Subsidies

Article 3.1 refers to Annex I of the SCM Agreement, which contains an “Illustrative List” of
export subsidies. As the description indicates, this list, which is basically the same as the list
included in the Subsidies Code, is not exhaustive. Four examples of export subsidies do not need
much explanation. These are-
First, the provision by governments of direct subsidies to a firm or an industry contingent upon
export performance. Second, currency retention schemes or any similar practice which involves
a bonus on exports are also considered an export subsidy. Third, the government can subsidize
exports by providing or mandating internal transport and freight charges on export shipments on
terms more favorable than for domestic shipments. Fourth, the last item refers to any other
charge on the public account constituting an export subsidy in the sense of Article XVI of GATT
1994, which seems redundant given the definition of subsidy provided by the SCM Agreement.
Also included in the list is the provision by governments of imported or domestic products or
services for use in the production of exported good.

1.2 Local Content Subsidies

Next to export subsidies, the other category of prohibited subsidies are local content subsidies,
defined as subsidies contingent upon the use of domestic over imported goods (Article 3.1(b)).
They are the only type of domestic subsidy that is prohibited. 31 The U.S. was one of the

29
Ibid.
30
See Article 3.1(a), footnote 4 SCM Agreement.
31
Local content subsidies might in addition be contingent upon export performance and thus constitute
export subsidies.
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proponents during the Uruguay Round to include them in the category of prohibited subsidies,
arguing that these subsidies “are as effective as any tariff in protecting domestic input supplying
industries and distorting the flow of resources internationally”. The citation reveals that this type
of subsidy is conceptually different from other kinds of subsidies as it does not focus on the
receiver of the subsidy but on the domestic input supplying industries. In other words, what is
targeted is trade distortion in the input industry market and not in the market of the industry
receiving the beneficial financial contribution by the government. These subsidies clearly violate
the GATT’s national treatment provision (Article III.4) because the regulations at hand
discriminate between domestic and foreign input supplying industry. The exception provided by
Article III.8(b) GATT is not applicable since the discrimination exists between the domestic and
foreign input industries and not between the subsidized industry and the foreign industry.
Moreover, local content subsidies are covered by the illustrative list of the Agreement on Trade-
Related Investment Measures (“TRIMs”) that are inconsistent with Article III.4 GATT (as local
content requirements).32 However, in contrast to GATT and TRIMs, the SCM Agreement does
not provide any ground for justification for local content subsidies.

2. ACTIONABLE SUBSIDIES

Actionable subsidies, i.e. yellow light subsidies, are defined by default: if a specific subsidy
(within the meaning of Article 1 SCM Agreement) is not prohibited, it constitutes an actionable
subsidy, i.e. it can be subject to multilateral action if it causes “adverse effects” to the interest of
other WTO Members. The main onus upon the complaining Member is to demonstrate “adverse
effects”, which have a threefold definition: (a) injury to the domestic industry; (b) nullification or
impairment of benefits accruing to other WTO Member(s); or (c) serious prejudice to the
interests of another WTO Member. 33 Members may not cause such “adverse effects” by
subsidization. The first two types of adverse effects (a and b) codify the rules and practice of the
GATT 1947, while the third type (c) significantly expands the scope of actionable subsidies.

32
Article 2 TRIMs Agreement.
33
Article 5 SCM Agreement.
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The term ‘injury to the domestic industry’ is used in the same sense as in the context of CVDs
procedures where it is elaborated extensively. 34This indicates that “injury” covers material injury
to a domestic industry as well as a threat of material injury. 35 Instead of undertaking a CVDs
procedure (unilateral remedy), WTO Members can thus opt for the WTO dispute settlement
system (multilateral remedy) and demonstrate injury to their domestic industry.
The concept of ‘nullification or impairment of benefits’ is used and determined in the same sense
as used in GATT 1994. This concept is applied in non-violations complaints (Article XXIII:1(b)
GATT) where three elements are established, which can also be established with regard to
subsidies: (i) the use of a subsidy36, (ii) the existence of a benefit accruing under the applicable
agreement such as tariff concessions, and (iii) the nullification or impairment of a benefit (e.g.
tariff concessions) as a result of the use of a subsidy. 37 Since the non-violation remedy should
remain of “an exceptional nature”, the standard for determining the element of causation (iii) is
set high by the adjudicating bodies: “non-violation nullification or impairment would arise when
the effect of a tariff concession is systematically offset or counteracted by a subsidy program”.
There is a double motivation behind non-violation complaints. First, WTO Members have
reasonable expectations that they can benefit from binding tariff concessions made by trade
partners. Second, these WTO Members have “paid” for the binding by making tariff concessions
themselves. If trade partners offer tariff bindings for a product and would subsequently be
allowed to subsidize so as to reduce market access for imports of the same product, the
dynamism of reciprocal tariff concessions would be undermined. This was the original rationale
for disciplining subsidies under the GATT 1947. In conclusion, whereas the first type of adverse
effect is that caused by subsidized imports in the domestic market of other WTO Members, this
second type tackles “adverse effects” to the export industry of other WTO Members in the
market of the subsidizing country. Finally, the inclusion of ‘serious prejudice’ in the definition
substantially expands the scope of “adverse effects”. Originally, the SCM Agreement provided
for a rebuttable presumption that “serious prejudice” exists in the following cases: (a) the total ad
valorem subsidization of a product exceeds 5 percent, (b) the subsidy covers operating losses
sustained by an industry, (c) the subsidy covers operating losses sustained by an enterprise, other
34
Article 5(a), footnote 11 SCM Agreement.
35
Article 15, footnote 45 SCM Agreement.
36
Panel Report, United States – Continued Dumping and Subsidy Offset Act of 2000 (WT/DS217,234/R, adopted
on 27 January 2003), paras. 7.121 – 7.123.
37
Panel Report, U.S. – Offset Act, loc. cit., supra no. 271, paras. 7.126-7.131.
 JAMIA MILLIA ISLAMIA UNIVERSITY

than one time measures, or (d) direct debt forgiveness. This provision facilitated the difficult
demonstration by the injured Member of adverse effects, which only had to demonstrate the
existence of such a specific subsidy and thus leave it upon the defending party to refute the trade
effects. Yet, Article 6.1 expired at the end of 1999 because there was no consensus among WTO
Members to continue its existence. From the perspective of WTO law, it is rather exceptional
that a stricter discipline is subject to extinction

3. NON ACTIONABLE SUBSIDIES

Before 2000, three categories of subsidies were non-actionable (green light subsidies). First,
certain subsidies for research and development (R&D) conducted by firms or by higher
education or research establishments on a contract basis with firms were non-actionable, though
this was limited to a certain level and to certain types. Second, non-actionable was assistance to
disadvantaged regions38 if the geographical region was clearly defined and the determination was
based on neutral and objective criteria. The third category covered a type of environmental
subsidy, i.e. limited assistance to promote adaptation of existing facilities to new environmental
requirements. 39 Hence, three policy objectives (though under specific conditions) could be
pursued by means of subsidization, in principle regardless of whether the subsidies caused
adverse effects. From an economic perspective, environmental and R&D subsidies can be
legitimate to overcome market failures since without governmental intervention the market
would produce a socially suboptimal level of R&D and environmental protection (positive
externalities). Assistance to disadvantaged regions is an important instrument of industrial policy
and legitimized on the basis of redistribution arguments. Politically, this category of non-
actionable subsidies was created on the demand of the EC (focusing on R&D), Canada (focusing
on assistance to disadvantaged regions) and Mexico (which successfully pushed for
environmental subsidies in the last days of negotiations) in order to place these subsidies outside
the reach of U.S. CVDs procedures.

38
Article 8.2(b) SCM Agreement.
39
Article 8.2(c) SCM Agreement.
 JAMIA MILLIA ISLAMIA UNIVERSITY

The SCM Agreement provided for a notification procedure for these non-actionable subsidies.
Members had to notify to the SCM Committee40 all subsidy programs they wanted to classify as
non-actionable and these notifications had to be made in advance of the implementation of the
subsidy programs. When a Member disputed the “non-actionable” nature of a subsidy, it could
start a review procedure that could end in binding arbitration.41 If a subsidy was not notified, it
could in principle not benefit from non-actionability and became thus actionable and
countervailable if it caused adverse effects or injury, respectively.

The category of green light subsidies extinguished at the end of 1999 because there was no
consensus among WTO Members to continue its application. As mentioned, the discussion was
linked to the extension of Article 6.1 SCM Agreement. Many developing countries, such as
Brazil and India, were not in favor of the extension in its existing form because in their view the
categories reflected the interest of developed countries. The EC and Canada, on the other hand,
favored a continuation of the category of non-actionable subsidies, while the U.S. articulated its
“mixed views on the provisions”. In general, there was even no consensus either among
developed countries or among developing countries.

40
See Article 24.1 SCM Agreement.
41
See Article 8.3–8.5 SCM Agreement.
 JAMIA MILLIA ISLAMIA UNIVERSITY

CONCLUSION
At one time, one could claim “the definition of a subsidy, like that of beauty, varies with the
beholder whose eye is focused on the object under scrutiny”. Looking at the full spectrum of
government (and even private) actions, an ‘open-minded’ beholder could detect subsidies
everywhere. An effective fire or police service or educational system could be regarded as a
subsidy since they clearly benefit the domestic industry. A creative beholder could even label
negative action by the government as a “regulatory subsidy” when the government refrains from
providing a certain level of regulation (e.g. environmental or labor standards). Indeed, the range
of subsidies will vary depending on the views of the beholder on the proper role of the
government and the market. However, since 1995, the SCM Agreement narrows the field of
vision of the beholder. A specific subsidy exists when a government makes a financial
contribution or provides income or price support that confers a benefit to a specific recipient.
Whereas general governmental services and regulatory subsidies fall outside its scope, the reach
of the SCM Agreement is, nonetheless, broad enough and wide open for interpretation by the
WTO’s adjudicating bodies.

The variety of specific subsidies within the meaning of the SCM Agreement is subject to the
substantive obligations of the SCM Agreement. Two types of subsidies, namely export subsidies
and local content subsidies, are flatly prohibited (red light). All other subsidies are not prohibited
but may not cause adverse effects to the interests of other WTO Members (actionable subsidies).
Since the expiration of the green light subsidies, the SCM Agreement is merely concerned with
the effect of the subsidy on other WTO countries.
WTO Members have recognized that subsidies play an important role in economic development
programs of developing countries and, therefore, have offered some more flexibility towards
these countries.

WTO Members can impose CVDs to offset the injury caused by subsidized agricultural products
(unilateral remedy). Given the delay in the conclusion of the Doha Development Round, affected
WTO Members might shift their focus to these remedies.
 JAMIA MILLIA ISLAMIA UNIVERSITY

BIBLIOGRAPHY
Websites referred-
1. https://www.wto.org/english/docs_e/legal_e/24-scm.pdf
2. https://www.wto.org/english/tratop_e/scm_e/subs_e.htm
3. http://www.meti.go.jp/english/report/downloadfiles/2012WTO/
02_06.pdf
4. http://icrier.org/pdf/WP101.pdf
5. http://wtocentre.iift.ac.in/CBP/Subsidy%20Presentation.pdf

Statutes, laws and agreements referred-

1. The WTO agreement on subsidies and countervailing
measures, 1994
2. General agreement on Tariffs and Trade, 1947(GATT).
3. The Agreement on Trade-Related Investment
Measures (TRIMs), 1994.
Papers cited-
1. G. Kleinfeld and D. Kaye, “Red light, Green Light? The 1994
Agreement on Subsidies and Countervailing Measures,
Research and Development Assistance, and U.S. Policy”,
Journal of World Trade 1994.
2. G. Luengo, Regulation of Subsidies and State Aids in WTO
and EC Law (The Netherlands, Kluwer Law International,
2006),