Subsidies

 Rationale behind subsidies

o To protect domestic industry
o As instruments of socio economic change
 Primary Sources
o Art VI, XVI GATT,
o SCM
 General Meaning
o Some financial contribution / relaxation given by the govt
o Subsidies per se are not illegal.
o Article VI:3 GATT : COntervailing Duty
 No countervailing duty shall be levied on any product of the territory
of any contracting party imported into the territory of another
contracting party in excess of an amount equal to the estimated bounty
or subsidy determined to have been granted, directly or indirectly, on
the manufacture, production or export of such product in the country of
origin or exportation, including any special subsidy to the
transportation of a particular product. The term "countervailing duty"
shall be understood to mean a special duty levied for the purpose of
offsetting any bounty or subsidy bestowed, directly, or indirectly, upon
the manufacture, production or export of any merchandise.
 First aspect – CD can’t be greater than subsidy
 Second – related to direct and indirect subsidisation
 Third – what kind of subsidy? Upon manufacture, production
or export of product
 Fourth – purpose of CD is to offset the subsidy. Not retaliate
 Fifth – subsidy must be maintained by Gov / public body
o Art VI:5 GATT – CD for dumping and subsidy may not be put against same
measure
o Argument against countervailing Duty – if products are becoming cheaper,
what’s the issue
 Article XVI GATT – toothless provision
o Third party dumping

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  There is no domestic industry in one country. 2nd country exports
product to these and subsidises. 3rd country which also exports to the
first country gets affected. As there is no domestic industry/injury to
first country, it may not impose CD UNLESS this requirement is
waived by all contracting parties (wiaver) (Art VI(b) GATT)
 Subsidies under SCM
o Article 1 – SCM
o Subsidy
 Financial Contribution
 Transfer/potential transfer of funds
 Revenue not collected
 Provision of goods and services other than general
infrastructure
 Contribution to a funding mechanism

 Instead of Financial contribution, you can also show that there

is income or price support in the sense of Art XVI GATT
 Art XVI GATT
o Part A – general
o Part B – export subsidies
 XVI:2
 XVI:3
 XVI:4
 XVI:5
o US – FSC
 EU – complainant
 Measure – elaborate set up made by USA
 USA companies allowed to create
subsidiaries (so that they are not taxed)
o General US rules – if you are a
US com and you bring the
 Panel – But for test –

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  It is a financial contribution if revenue
would have been earned ‘but for’ the
measure. This was a financial
contribution
 AB – said this test is wrong – what if a country
doesn’t want to tax a particular area. Countries
may charge tax or they may not.
 Look at the entitlement of the gov to tax
it
 Look at other spheres in that country and
look at other countries to see whether
such transactions are taxable and
whether that has not been done.

 Made by the Gov / Public body

 Or entrutst a private body to carry it out
 Confers a benefit
 Comparable to the market
 Net cost to gov is not benefit (Canada – aircraft)
 Fulfils requirement of specificity
 Enterprise specific
 Industry specific
 Region specific
 Deemed specific (prohibited)
 Kinds of subsidies under SCM
o Red – prohibited – presumption of causing harm – has to be withdrawn
mandatorily
 Export subsidy
 Import substitution subsidy
o Yellow – Actionable – don’t necessarily have to withdraw but have to remove
adverse effect. 3 things need to be shown

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  Serious prejudice
 Injury
 Nullification of benefits
o Green – allowed – no longer in use
 Export Subsidy
o Article 3
 Article 3.1(a) deals with export subsidies. It prohibits the maintenance
of subsidies contingent, in law or in fact [Appendixed foot note 4],
whether solely or as one of several other conditions, upon export
performance, including those illustrated in Annex I
 Foot note 4 deals with the standard of de facto export contingency
which is met when the facts demonstrate that the granting of a subsidy,
without having been made legally contingent upon export
performance, is in fact tied to actual or anticipated exportation or
export earnings. It further goes on to explain that the mere fact that a
subsidy is granted to enterprises which export shall not for that reason
alone be considered to be an export subsidy within the meaning of this
provision.
o De jure and De facto Export Subsidy
 De jure – law itself lays down conditions of export performance
 De facto – to be configured by total configuration of facts
 Canada – Autos
 Law provided for maintaining the ratio of sale value of
production in Canada IS TO sale value of vehicles sold in
Canda above 75% (if ratio maintained, entities got exemption
on import duties
 Question – whether contingency on export performance ? YES
 Question – whether de jure or de fact? De jure
o Canada aircraft test for de fact subsidies. 3 elements
 First element - , the initial inquiry must be on whether the granting
authority imposed a condition based on export performance in
providing the subsidy.

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  Second element - Both of the terms used — ‘contingent … in fact’ and
‘in fact tied to’ — suggest an interpretation that requires a close
connection between the grant or maintenance of a subsidy and export
performance. This is not same as ‘expected’ (third Element)
 Third Element – anticipation of exports
o EC – Large civil aircraft
 3 prong test
 Apply Canada aircraft to i) the design and structure of the
measure granting the subsidy; (ii) the modalities of operation
set out in such a measure; and (iii) the relevant factual
circumstances surrounding the granting of the subsidy that
provide the context for understanding the measure's design,
structure, and modalities of operation
 Ratio test
 The AB in EC — Large Civil Aircraft laid down the
comparison of ratio of anticipated exports and domestic sales
(before granting of the subsidy and on granting of the subsidy)
as a very relevant factor in determining de facto export
contingency. If ratio increases, there is export subsidy, else not
 Agricultural Subsidies [not for purpose of exams]
o Art 3.1 – “except as provided in Agreement on Agricuulture”
o Agreement on Agriculture supersedes GATT and SCM
o AOA covers
 Agricultural Export Subsidies
 Domestic Support Measures
o Agricultural Export Subsidies
 Whatever is mentioned in schedule of concessions is allowed.
Everything else is not
 Reduction commitments under the AoA. Also given under the
Scehdule of concessions. As long as countries follow their reduction
commitments, everything is allowed.
 Budgetary reduction
 Volume reduction

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  Article 10.3
 Green box subsidy
 Blue box subsidy
 Peace clause
o

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 Tariff Barriers

 General Concept
o Tariffs are duties which are paid at the Int. Border
o Kinds - On basis of purpose
 Revenue tariff – to maximise revenue
 Protectionist tariffs- to protect particular industry
o Other classification-
 Ad valorem – on the value
 Specific duty- irrespective of value
o Other concepts
 Bound tariff – as notified by countries – max number that a country can charge –
Article XXVIII
 Given in the schedule of concessions – legally binding agreement. Under Art
II:7, they are part of GATT
 Applied Tariff – actual rate
o Tariff Peak – charging really high tariff
o Tariff escalation – unprocessed products – low duty, processed products – high duty.
 Harmful for developing countries as it incentivises countries to export unprocessed
products
o 3 things that a country must decide before charging tariffs
 Tariff classification (where the product will fall)
 Valuation – custom valuation agreement (art VII)
 Rules of Origin – WTO/Non WTO. Preferential / non preferential

 Article II GATT
o II:1(a) MFN requirement
o II:1(b) Talks about
 Ordinary Custom Duty OCD -can’t be more than bound tariff(mentioned in schedule
of concessions)
 Other duties and charges ODC
 All tariffs other than OCD in connection with importation
 All ODCs in place before April 15, 1994 can be charged or if something was
mandated by law at that time

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  Can’t be increased merely by national legislation. May only be increased by
negotiation
o Exception to II:1(b) = II:2
 II:2(a) Can charge internal tax consistent with II:2 (National treatment)
 Anti dumping duty/countervailing duty
 Fee for services rendered
 India – Additional duty on imports from USA
o Distilled spirits and wines imported from USA
o Schedule of concessions = 150% ad valorem
o Excise duty, Central Sales tax, State VAT – all imposed by states in India
o Measures
 Additional Duty (AD) charge equivalent to excise duty was charged by India
 Extra Additional Duty (EAD) – equivalent to the other two (CST, State VAT)
 India refused to give evidence of what amount is actually charged by state
o US – contentions
 Custom Duty + AD + EAD is in violation of II:1(b)
o India
o Panel
 ODC + OCD inherently discriminatory.
 These duties have a domestic counterpart, therefore don’t fall under II:1(b)
 Refused to compare rates + said (VERY INCORRECTLY) that III:2 is not a
requirement
o AB
 Differentiated between OCD and ODC
 ODC is wider because it is followed by ‘of any kind’
 ODC and OCD are not inherently discriminatory (even though they don’t have a
domestic counterpart – even countervailing duty and anti dumping duty don’t have a
domestic counterpart)
 Panel looked only at functional equivalence. Not at quantitative equivalence. This was
wrong. Amount, effect, function – all need to be looked at
 All measures under II:2(a) must be consistent with II:2
 Held that both were violative of II:1(b) as India count prove Quantitative equivalence
 Tariff Quotas
o Article XI – General Elimination of Quantitaive restriction
 No prohibitions or restrictions other than duties, taxes or other charges, whether made
effective through quotas, import or export licences or other measures, shall be
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 instituted or maintained by any contracting party on the importation of any product of
the territory of any other contracting party or on the exportation or sale for export of
any product destined for the territory of any other contracting party.
 Other measures
 Need only be govt action – may not necessarily be mandated by statutes
 2 tests
o Whether govt is providing incentive
o Whether restriction depends on govt inducement
 Exceptions
o Export prohibition in case of food shortage – should be essential and
critical
o Grading of marketing restriction
 For both exports and imports, if a contry wants t implement a
grading standard
 These must be on the same commodity that you want to
regulate
 Canada – exports of unprocessed salmons
 Canada wanted to regulate processed fish. Imposed
restrictions on raw fish – not allowed
o IMPORT restriction (only) in case of agricultural/fisheries
 When agricultural product is in excess and you want to restrict
it, you can then restrict animal feed

 Difference between tariff and non tariff barriers

o Tariff barriers – not defnied – eg custom duties – charged because product is imported. May
be charged at border or even after it has entered the border
 Doesn’t include internal tax (even these may be charged at borders)
o Non tariff – Eg – quotas, TBT, IPR requirements, etc – Art XI – complete ban on
import/export quotas / licenses (sans exceptions)
o Tariff barriers are better than non-tariff barriers because they are easy to negotiate, increase
revenue for govt