Subsidies

Subsidies

Subsidies are payments and contributions made by states and other public bodies that benefit businesses, enterprises or industries.  They may include grants, loans and soft investments.

They may include loan guarantees, tax credits, the provision of goods and services and price support.  They may be made directly or indirectly through private bodies or otherwise.

If subsidies have an unreasonable impact on the third country’s internal market, countervailing duties may be applied to offset their impact.  This is permissible, provided that it is justified, appropriate and is not excessive.

Agreement on Subsidies

There is an agreement on subsidies and countervailing measures referred to as the SCM Agreement.  It applies to specific subsidies that target specific enterprises or industries, groups of enterprises or industries or enterprises in a particular region.  It does not apply to non-specific subsidies and certain agricultural subsidies (which are governed by an agreement on agriculture) and certain other defined subsidies.

The specific subsidies under the agreement consist of three categories.  Prohibited subsidies depend on export performance in exporting or are contingent on the use of domestic instead of imported products. They are presumed to distort trade, and it is forbidden for states to maintain or grant them.

Actionable subsidies may not distort trade depending on how they are applied; they are specific subsidies that are used in any way to injure a domestic industry of another state, which nullify or impair benefits due to another state under GATT, or which cause or threaten serious prejudice to the interests of another state.  WTO discourages its members from providing such subsidies, but they are not banned as such.

Non-actionable subsidies are those that are non-specific.  Infrastructural subsidies include government funding to assist but not fully cover research activities on behalf of business firms, aid disadvantaged regions (lower per capita or higher unemployment than normal) and help the existing facilities adapt to new environmental requirements.  They are generally permissible.

Complaint

A WTO member which believes that industries have been injured by either prohibited subsidies or actionable subsidies has a number of options.  It may seek a remedy from the WTO.  It may impose its own countervailing duty.

In order to obtain recourse from the WTO, the state claiming injury must consult first with the subsidising state.  If they are not able to find an agreeable solution, the matter may be referred to the WTO Dispute Resolution Committee.  It may set up a panel.

The panel may be assisted by a permanent group of experts.  If it is decided there is a prohibited subsidy, it recommends its removal.  If it is an actionable subsidy, it recommends either removal of the subsidy or its adverse effects.  If the decision is not appealed, it must be observed.

If a state does not comply with the decision, the state complaining may adopt countervailing measures.  Countervailing measures are designed to offset the subsidies. Alternatively, the state may having followed a procedure in the SCM agreement/ (as in the anti-dumping code), may impose a countervailing duty unilaterally.

Emergency Action

The agreement on safeguards provides for emergency action by WTO state members to protect domestic industries from serious injury arising from the sudden increase in the quantity of an imported product.

A member state may apply safeguards against a product only after conducting an investigation, which determines that the product is being imported in such increased quantities and under conditions to cause a threat of serious injury to a domestic industry producing directly competitive or similar goods.

The measures must be applied to products regardless of origin.  They may be applied only for such time and to such extent as necessary to prevent and remedy the serious injury and facilitate the adjustment.

Safeguards which last longer than a year must be liberalised progressively at intervals over their lifetime.  If it lasts more than three years, a review must be undertaken to determine if it should be withdrawn or liberalised more quickly.

Agricultural Subsidies

Agriculture presents special difficulties for international trade.  Most developed states have sought to protect agriculture and assist farmers.

Many states provide substantial subsidies to farmers. Subsidies distort free trade and affect agricultural products.

The WTO has sought to reduce or eliminate agricultural subsidies.  The United States and EU have sought to obtain tariff reductions from other states and other states that demanded a reduction in EU and US subsidies.

Agreement on Agricuture

The agreement on agriculture sets out guidelines for initiating the reform of trade in agriculture.  Its ultimate objective is to move towards a market-oriented system for trade in agriculture without restrictions and distortions. Agricultural products covered include foodstuffs other than fish, animal hairs, skins, raw flax, hemp, silk and certain other products.

The agreement specifies the products that it governs.  It requires non-tariff barriers to be converted into custom tariffs.  It defines types of permissible domestic support.  It defines export subsidies.

It provides for phased-in initial reductions in tariffs, impermissible domestic support measures and export subsidies during a six-year implementation period.  It provides for the progressive integration of international trade in agricultural products under the GATT system.

Tariff Only

WTO state parties to the agreement on agriculture must convert non-tariff barriers to agricultural imports into the custom tariff.  These include levies, licenses and quotas.  Adjustment is made relative to the internal and external price and netting out other export costs and charges.

The tariff rates are incorporated in a schedule of concessions, which each member state deposits with the GATT.  On average, developed countries have reduced their subsidies by 36 per cent; developing countries 24 per cent.

The agreement in agriculture exempts certain support measures.  They must satisfy the requirement that they are publicly funded government programs.  They must not have the effect of providing price support to producers.

This includes measures for pest and disease control, training, support for research, advisory services, inspection services, market and promotion services, infrastructure services, food security,  domestic food aid, direct payments to producers, including income support not linked to production, participation in social and crop disaster insurance, structural adjustment assessments, environmental protection, regional assistance and programmes.

Subsidy Reductions

States have agreed to reduce export subsidies.  Export subsidies include subsidies that depend on export performance.

This may include direct governmental payments linked to export performance, sale for export of governmental and non-commercial stocks of the product at less than fair market value, government payments to exporters (even if financed from some levies on exports), subsidies for marketing or transport experts, subsidies on farm n products dependent on incorporation in export products.

The agreement on agriculture (1994) allowed for the phasing in of member states’ obligations.  Where there was a six-year implementation period with 10 years for developing states.

The periods apply to reducing tariffs, permissible domestic supports and export subsidies.  There was a nine-year transition period in which measures and supports maintained in conformity with the agreement were not subject to action otherwise applicable under GATT or the SCM agreement unless they caused a threatened injury.