I. INTRODUCTION
Subsidies and countervailing measuresThe WTO Agreement on Subsidies and Countervailing Measures disciplines the use of subsidies, and it regulates the actions countries can take to counter the effects of subsidies. Under the agreement, a country can use the WTO’s dispute-settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Or the country can launch its own investigation and ultimately charge extra duty (“countervailing duty”) on subsidized imports that are found to be hurting domestic producers
The WTO Agreements include provisions which allow Members to depart from
§ the basic principles on non-discrimination applicable to trade between WTO Members (the Most-Favoured-Nation (MFN) and National Treatment principles),
§ rules related to tariff and non-tariff barriers (NTBs), including the disciplines related to commitments on maximum bound tariff rates, and
§ the general prohibition on quantitative restrictions (QRs) (such as quotas), subject to certain conditions.
In this Module, you will study only those provisions concerned with the use of subsidies and the application of countervailing measures to counteract injurious subsidization.
World Trade Organization (WTO) Members have retained their right to impose trade remedies, such as antidumping and countervailing duties, to correct the competitive imbalances created by unfair trade practices - dumping and subsidies -,when these cause injury. They have also agreed on multilateral disciplines governing the granting of subsidies. Members are also allowed to apply safeguard measures in case of a surge of imports that causes, or threatens to cause, serious injury. Unlike anti-dumping and countervailing measures, the application of safeguard measures does not depend on unfair trade practices.
This Module will present an overview of the WTO disciplines and conditions for the application of subsidies and countervailing measures.
Disputes arising regarding the granting of subsidies and the application of anti-dumping, countervailing and safeguard measures are subject to the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU).
Rationale behind trade remedies – A policy perspectiveAt first sight, it might seem that trade remedies "go against" trade liberalization. One may ask: Why have Members agreed on rules that provide them the right to restrict trade temporarily? What role do trade contingency measures -in the form of trade remedies- play in trade agreements?
Trade liberalization around the world has reduced tariff rates to low levels, producing "winners" and "losers" in each country. However, countries typically do not have identifiable mechanisms for extracting part of the income gains from the "winners" in order to compensate the "losers" from trade liberalization. Furthermore, economic circumstances may evolve in a way which makes the maintenance of policies in favour of trade liberalization untenable because of large adjustment costs.
In light of these considerations, trade agreements may provide governments with a means to depart temporarily from certain core obligations contained therein under well defined conditions. Safeguard, antidumping and countervailing measures are alike to the extent that they can be used temporarily to "shield" vulnerable sectors from the consequences of lower tariff protection in certain circumstances. Without the possibility of applying these measures, political pressures may build up to a point where protectionist forces would be able to engineer a permanent reversal of trade liberalization. Accordingly, trade remedies may be considered as a pragmatic –- and temporary -- tool to deal with the costs of adjustment resulting from trade liberalization as well as to deflate the build-up of domestic pressures against liberalization.
Based on: World Trade Organization (WTO), World Trade Report 2007, Geneva: WTO p. 152-153.
II. in brief: Trade Remedies
Members are allowed to apply trade defence mechanisms to remedy a situation of unfair trade practices (antidumping and countervailing measures) or a surge of imports (safeguard measures) when these cause injury to the domestic industry and subject to certain requirements. Even if these measures are not referred to as exceptions, they also allow Members to depart – temporarily - from certain core WTO obligations, for example, to impose tariffs above the bound levels or QRs (depending on the measure).
Anti-dumping, countervailing and safeguard measures have some common features, but also differ in some aspects. A common feature is that they can be applied only after conducting a domestic investigation where certain substantive and procedural requirements provided in the respective agreement are met. Many Members handle anti-dumping and countervailing procedures under a single law, apply a similar process to deal with them and give a single authority responsibility for investigations. From the three mechanisms, anti-dumping and countervailing measures are more frequently used than safeguard measures.
Dumping is an action by private firms and thus, it is not prohibited by the Anti-Dumping Agreement. Instead, the Agreements governs the use of anti-dumping measures. By contrast, in the case of subsidies, it is the government or a private body following government's instructions which provides the subsidy. Therefore, the Agreement on SCM includes both disciplines on the use of subsidies as well as upon the use of countervailing measures by WTO Members. Rather, the application of safeguard measures does not depend on unfair practices.
With regard to the substantive requirements applied to these measures, in the case of anti-dumping and countervailing measures, it is necessary to demonstrate that dumped imports or subsidized imports are causing or threatening to cause material injury to the domestic industry producing the like products. Instead, for the application of safeguard measures, it is necessary to show that increases imports are causing or threaten to cause serious injury (imposes a higher standard than material injury) to the domestic industry producing the like or directly competitive products (a concept which is broader than just "like" products). Moreover, safeguard measures must be applied as a result of unforeseen developments and of the effect of the obligations incurred by a contracting party under the GATT 1994.
In addition, investigating authorities have to comply with a number of procedural requirements (conditions for the initiation of investigations, evaluation of evidence, application of provisional measures, transparency provisions, duration and review of the measures, etc). The procedural requirements provided for the three measures are fairly similar, although there are also important differences, especially in the context of safeguard measures.
While anti-dumping duties would be applied to the products of enterprises found to be practicing dumping, countervailing duties would be placed on products of enterprises benefiting from the subsidies. Since safeguard measures have to be applied, in principle, on an MFN basis, they will have to target the imports of the like or directly competitive products of all WTO Members concerned (in the context of special and differential treatment, only products coming from developing countries may be excluded under certain circumstances). In addition, in the case of safeguard measures, the Member will offer compensation to the affected Members.
Anti-Dumping Measures / Countervailing Measures / Safeguard MeasuresObjective / To counteract dumping causing injury to the domestic industry. / To counteract subsidization causing injury to the domestic industry. / To prevent or remedy serious injury to the domesticindustrycaused by a surge of imports and give time to facilitate adjustment.
Substantive Requirements / Dumped imports
Material injury
Causal link / Subsidized imports
Material injury
Causal link / Increased imports
Serious injury
Causal link
The measure must be applied as a result of unforeseen developments and of the effect of the obligations incurred by a contracting party under the GATT 1994.
Recipient of the Measure / Products of enterprises practicing dumping. / Products of enterprises benefiting from subsidies granted by Members. / Products of enterprises of Members.
Form of the Measures / Anti-dumping duty (may exceed bound tariff rate). / Countervailing duty (may exceed bound tariff rate). / Among others, tariff duty increase (may exceed bound tariff rate) or quota.
III. SUBSIDIES & COUNTERVAILING MEASURES (SCM)
IN BRIEF
The SCM Agreement - addresses two separate but closely related matters: (i) the multilateral disciplines on the use of subsidies; and, (ii) the conditions under which Members may apply countervailing measures. The SCM Agreement contains a definition of "subsidy", which applies in both of these areas.The multilateral disciplines govern whether, and what kind of, a subsidy may be granted by a Member. The SCM Agreement currently classifies subsidies into two categories: prohibited and actionable.
Countervailing measures are unilateral tools, which may be applied by a Member after conducting a domestic investigation in which it has been determined that subsidized imports are causing or threatening to cause injury to the domestic industry producing the like products. As in the case of anti-dumping, countervailing measures are normally applied in the form of customs duties in excess of bound rates. An exporting Member affected by the measures may challenge a failure to comply with any of the requirements for the imposition of countervailing measures by using the WTO dispute settlement mechanism.
The SCM Agreement applies to all goods, that is both agricultural and industrial products. The Agreement on Agriculture provides disciplines on trade-distorting subsidies relating to agricultural products. As we will see, there are specific provisions regulating the interaction between the SCM Agreement and the Agreement on Agriculture when referring to agricultural goods.
III.A. THE SUBSIDIES AND COUNTERVAILING MEASURES (SCM) AGREEMENT: TWO TRACKS
The main object and purpose of the SCM Agreement is to increase and improve GATT disciplines relating to the use of both subsidies and countervailing measures (US - Carbon Steel, Appellate Body Report, para.73). Therefore, the SCM Agreement can be seen as "two agreements in one".
III.A.1. Multilateral Disciplines on Subsidies
The SCM Agreement provides multilateral disciplines governing whether, and what kind of, a subsidy may be provided by a Member. Certain subsidies are prohibited and all other specific subsidies may be challenged if they cause adverse effects to the interests of other Members.
These rules are enforced through the WTO dispute settlement mechanism, in accordance with the Dispute Settlement Understanding (DSU). This is also called the "multilateral track". In this regard, the SCM Agreement contains special or additional rules and procedures that supplement or replace the rules of the dispute settlement mechanism provided in the DSU. The invocation of the multilateral track may end with the withdrawal of the subsidy or the removal of its adverse effects, depending on the case.
III.A.2. Countervailing Measures
The SCM Agreement also allows Members to apply countervailing measures after conducting a domestic investigation according to the criteria set forth in the SCM Agreement (also called "unilateral" or "domestic" track). As we will see below, countervailing duties can only be applied when subsidized imports are causing injury or threatening to cause injury to the domestic industry producing the like product. The SCM Agreement also provides procedural requirements that regulate the conduct of countervailing investigations. As in the case of anti-dumping, a failure to comply with any of the requirements for the imposition of countervailing measures can be challenged by the exporting Member through the WTO dispute settlement mechanism.
Figure 1: The SCM Agreement: Two tracks
‘AD-CVD’?People sometimes refer to the two together — “AD-CVD” — but there are fundamental differences
Dumping and subsidies — together with anti-dumping (AD) measures and countervailing duties (CVD) — share a number of similarities. Many countries handle the two under a single law, apply a similar process to deal with them and give a single authority responsibility for investigations. Occasionally, the two WTO committees responsible for these issues meet jointly.
The reaction to dumping and subsidies is often a special offsetting import tax (countervailing duty in the case of a subsidy). This is charged on products from specific countries and therefore it breaks the GATT principles of binding a tariff and treating trading partners equally (MFN). The agreements provide an escape clause, but they both also say that before imposing a duty, the importing country must conduct a detailed investigation that shows properly that domestic industry is hurt.
But there are also fundamental differences, and these are reflected in the agreements.
Dumping is an action by a company. With subsidies, it is the government or a government agency that acts, either by paying out subsidies directly or by requiring companies to subsidize certain customers.
But the WTO is an organization of countries and their governments. The WTO does not deal with companies and cannot regulate companies’ actions such as dumping. Therefore the Anti-Dumping Agreement only concerns the actions governments may take against dumping. With subsidies, governments act on both sides: they subsidize and they act against each others’ subsidies. Therefore the subsidies agreement disciplines both the subsidies and the reactions.
III.B. DISCIPLINES ON SUBSIDIES
III.B.1. DEFINITION OF "SUBSIDY"
For a measure to be covered by the SCM Agreement, it has to fall under the definition of subsidy provided in Article1 of the SCM Agreement and meet the "specificity" requirement provided in Article2.
Definition of "Subsidy"The definition of "subsidy" contains three elements which must be satisfied for a subsidy to be covered by the SCM Agreement (Article1). There must be:
§ A financial contribution;
§ By a government or any public body within the territory of a Member;
§ Which confers a benefit.
All three elements must be satisfied in order for a subsidy to exist.
Specificity Requirement
The disciplines in the SCM Agreement only apply to "specific" subsidies (Article2)— i.e. a subsidy available only to an enterprise, industry, group of enterprises, or group of industries within the jurisdiction of the granting authority.
a. Financial Contribution
Under the SCM Agreement, a subsidy may only exist where a measure takes the form of a "financial contribution", or where there is any form of income or price support in the sense of ArticleXVI of GATT1994. Article1 contains a list of measures that are deemed to provide a financial contribution. These include direct transfers of funds (e.g. grants, loans, and equity infusion) and potential direct transfers of funds or liabilities (e.g. loan guarantees). A financial contribution also exists where government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits); where a government provides goods or services other than general infrastructure, or purchases goods; or, where a government entrusts or directs a private body to carry out these functions.