INTERNATIONAL TRADE LAW

Project Topic:
Subsidy Agreement Under Wto And Gatt

Submitted to: Submitted by:

Ms. Tanvi Sharma Anshul Aggarwal
BBA LLB (VIII Sem)
Roll No. 54
ABSTRACT

The basic GATT rules on subsidies were incorporated in Article XVI. These early provisions
were quite loose. Its first paragraph requires that GATT members who provide subsidies,
including income or price support, that have direct or indirect effect on increasing exports or
reducing imports shall notify GATT, and be prepared to discuss limiting the subsidy if it
seriously damages the interests of another GATT member. The remainder of the Article is
devoted to export subsidies.

Countries are to seek to avoid using subsidies on exports of primary products, but are not
actually forbidden to do so : rather they should not give a subsidy which results in the export
country gaining more than the equitable share of world export trade in that product.

The Uruguay Round (UR) introduced important changes with respect to subsidies. The
agreement on agriculture required that members of the WTO reduce direct export subsidies.
In the rule making agreements negotiators redrafted the rules of action, embodied in the
original GATT. As a result the new Agreement on Subsidies and Countervailing Measures
(SCM Agreement) was adopted.

The present paper focuses on the WTO rules on subsidies with respect to the SCM
agreement, specific WTO rules regarding subsidies in agriculture and economic rationale
behind WTO rules on subsidies agricultural subsidies in the context of new round of WTO
negotiations and also possible effects of future liberalization of agricultural trade.
INTRODUCTION

The World Trade Organization (WTO) emerged in 1994 from the General Agreement on
Tariffs and Trade (GATT), established in 1947. The GATT and the WTO are founded on a
number of basic principles1.

The Non-discrimination principle has two components: the most favoured nation (MFN)
clause (Article I) and the National clause (Article III) of the GATT. It requires that imported
goods from WTO members on crossing a border and payment of customs duties must be
treated on the same terms as national products.

The main trade policy instrument is an import tariff which have been bound in the course of
negotiations and included in the schedules of concessions2.

Gradual reductions in tariffs in the course of negotiations were intended for further trade
liberalization.

Member countries are required to observe the principle of reciprocity, which, however, has
not be the principle of fair competition. It includes inter alia the right to impose
countervailing duties on imports that have been subsidized and anti-dumping duties on
imports that have been dumped.

For 47 years the GATT proved to be an efficient international organization. In the course of
eight successive rounds of multilateral negotiations it succeeded in reducing the average level
of tariffs in the developed countries from 40 per cent after the war to about 6 per cent at the
end of the eighties. The biggest reductions in tariffs – by almost 33 per cent – were agreed at
the Kennedy (1964–67), Tokyo (1973–79) and Uruguay Rounds (1986-1994). At the end of
the last, Uruguay Round (UR), the Final Act transformed the old GATT into the WTO.

The basic GATT rules on subsidies were incorporated in Article XVI. These early provisions
were quite loose. Its first paragraph requires that GATT members who provide subsidies,
including income or price support, that have direct or indirect effect on increasing exports or
reducing imports shall notify GATT, and be prepared to discuss limiting the subsidy if it

1
The basic principles of GATT are, for example, discussed in B. Hoekman, M. Kostecki (2001), pp. 29-36 and
J.H. Jackson (1998), chapters 5,6 and 8
2
Binding of import tariffs means that countries cannot apply higher rates than those specified in the schedules
of concessions (contractual obligations) of the members of the GATT/WTO system.
seriously damages the interests of another GATT member. The remainder of the Article is
devoted to export subsidies.

Countries are to seek to avoid using subsidies on exports of primary products, but are not
actually forbidden to do so : rather they should not give a subsidy which results in the export
country gaining more than the equitable share of world export trade in that product3.

The UR introduced important changes with respect to subsidies. The agreement on

agriculture required that members of the WTO reduce direct export subsidies. In the rule
making agreements negotiators redrafted the rules of action, embodied in the original GATT.
As a result the new Agreement on Subsidies and Countervailing Measures (SCM Agreement)
was adopted.

3
Subsidies in the context of the World Trade Organization Jan Jakub MichalekDansReflets et perspectives de la
vie économique 2004/1 (Tome XLIII), pages 25 A 38.Pdf
WTO SUBSIDY AGREEMENT ON AGRICULTURE

While the volume of world agricultural exports has substantially increased over recent
decades, its rate of growth has lagged behind that of manufactures, resulting in a steady
decline in agriculture’s share in world merchandise trade. In 1998, agricultural trade
accounted for 10.5 per cent of total merchandise trade — when trade in services is taken into
account, agriculture’s share in global exports drops to 8.5 per cent. However, with respect to
world trade agriculture is still ahead of sectors such as mining products, automotive products,
chemicals, textiles and clothing or iron and steel. Among the agricultural goods traded
internationally, food products make up almost 80 per cent of the total. The other main
category of agricultural products is raw materials. Since the mid-1980s, trade in processed
and other high value agricultural products has been expanding much faster than trade in the
basic primary products such as cereals.

Agricultural trade remains in many countries an important part of overall economic activity
and continues to play a major role in domestic agricultural production and employment. The
trading system plays also a fundamentally important role in global food security, for example
by ensuring that temporary or protracted food deficits arising from adverse climatic and other
conditions can be met from world markets.

After over 7 years of negotiations the Uruguay Round multilateral trade negotiations were
concluded on December 15, 1993 and were formally ratified in April 1994 at Marrakesh,
Morrocco. The WTO Agreement on Agriculture was one of the many agreements which were
negotiated during the Uruguay Round.

The products which are included within the purview of this agreement are what are normally
considered as part of agriculture except that it excludes fishery and forestry products as well
as rubber, jute, sisal, abaca and coir.

The implementation of the Agreement on Agriculture started with effect from 1.1.1995. As
per the provisions of the Agreement, the developed countries would complete their reduction
commitments within 6 years, i.e., by the year 2000, whereas the commitments of the
developing countries would be completed within 10 years, i.e., by the year 2004. The least
developed countries are not required to make any reductions.
SALIENT FEATURES OF AGREEMENT

The WTO Agreement on Agriculture contains provisions in 3 broad areas of agriculture and
trade policy: market access, domestic support and export subsidies.

Market Access

This includes tariffication, tariff reduction and access opportunities. Tariffication means that
all non-tariff barriers such as quotas, variable levies, minimum import prices, discretionary
licensing, state trading measures, voluntary restraint agreements etc. need to be abolished and
converted into an equivalent tariff. Ordinary tariffs including those resulting from their
tariffication are to be reduced by an average of 36% with minimum rate of reduction of 15%
for each tariff item over a 6 year period. Developing countries are required to reduce tariffs
by 24% in 10 years. Developing countries as were maintaining Quantitative Restrictions due
to balance of payment problems, were allowed to offer ceiling bindings instead of
tariffication.

Special safeguard provision allows the imposition of additional duties when there are either
import surges above a particular level or particularly low import prices as compared to 1986-
88 levels.

It has also been stipulated that minimum access equal to 3% of domestic consumption in
1986-88 will have to be established for the year 1995 rising to 5% at the end of the
implementation period.

Domestic Support

For domestic support policies, subject to reduction commitments, the total support given in
1986-88, measured by the Total Aggregate Measure of Support (total AMS), should be
reduced by 20% in developed countries (13.3% in developing countries). Reduction
commitments refer to total levels of support and not to individual commodities. Policies
which amount to domestic support both under the product specific and non product specific
categories at less than 5% of the value of production for developed countries and less than
10% for developing countries are also excluded from any reduction commitments. Policies
which have no or at most minimal, trade distorting effects on production are excluded from
any reduction commitments. The list of exempted green box policies includes such policies
which provide services or benefits to agriculture or the rural community, public stock-holding
for food security purposes, domestic food aid and certain de-coupled payments to producers
including direct payments to production limiting programmes, provided certain conditions are
met.

Special and Differential Treatment provisions are also available for developing country
members. These include purchases for and sales from food security stocks at administered
prices provided that the subsidy to producers is included in calculation of AMS. Developing
countries are permitted untargeted subsidised food distribution to meet requirements of the
urban and rural poor. Also excluded for developing countries are investment subsidies that
are generally available to agriculture and agricultural input subsidies generally available to
low income and resource poor farmers in these countries.

Export Subsidies

The Agreement contains provisions regarding members commitment to reduce Export

Subsidies. Developed countries are required to reduce their export subsidy expenditure by
36% and volume by 21% in 6 years, in equal installment (from 1986 –1990 levels). For
developing countries the percentage cuts are 24% and 14% respectively in equal annual
installment over 10 years. The Agreement also specifies that for products not subject to
export subsidy reduction commitments, no such subsidies can be granted in the future.
AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES
(“SCM AGREEMENT”)

GATT PROVISIONS:
The original GATT agreement of 1947 did not provide for exhaustive substantive rules of
subsidy practices. In the original GATT agreement of 1947, there was very little discipline on
the question of subsidizing except for the permitted response of countervailing duties. There
was a fairly general reporting requirement in Article XVI of the original GATT, plus a
general obligation in Article II, paragraph 4 against the use of new subsidies to inhibit
imports into the subsidizing country when that country had “bound” its tariff on the product
concerned.

The 1955 review session amendments to the GATT introduced the first substantive
obligations regarding subsidies into the GATT (paragraphs 2 through 5 of Article XVI).
However, this portion of GATT was confined only to export subsidies and did not apply to
general, production or domestic subsidies. In addition, the GATT rules were divided between
applications to “primary” and “non-primary” products. Furthermore, paragraph 4 of Article
XVI of GATT, which imposed an obligation for non-primary goods proved troublesome as
not all countries were prepared to adopt the declaration implementing the same. Because of
these lacunae, the GATT treatment of subsidies proved to be controversial and the disciplines
weak.

Thereafter, negotiations leading to a code concerning subsidies and countervailing duties

were begun in the Tokyo Round, resulting in 1979 in an agreement on that subject. This
agreement, the Subsidies Code, was the first general comprehensive multilateral discipline of
the use of subsidies in international trade and the first elaboration of the subsidy rules since
the 1955 GATT amendments. Moreover, unlike the 1955 agreement, this code explicitly
provided for domestic subsidies and was not restricted to just export subsidies.The Code also
established two-track approach to disciplining subsidies. Track I dealt entirely with
countervailing duties and ways for the country to implement their countervailing duty rules
and provided for elaborate definitions of material injury. Track II of the Code is devoted to
the substantive obligations under international rule regarding how governments should refrain
from granting subsidies that affects goods in international trade.
The Subsidies Code, however, did not provide an express definition of ‘subsidy’ except an
illustrative list of export subsidies, which should not be granted. The interpretive notes of the
Subsidies Code also did not provide any further assistance, which left the definitions of
‘subsidy’ remained unclear. Furthermore, in practice, the Code has been characterized by
numerous disputes and lack of agreement between signatories on various issues. Ultimately
the Subsidies Code proved lacking in the clarity and effectiveness to resolve the problems
posed by subsidies in international trade.

Next came the Uruguay Round text on subsidies, mandatory for all members, which was not
only a substantial change from the Tokyo Round Subsidies Code, but also a substantial
improvement. This text, officially entitled ‘Agreement on Subsidies and Countervailing
Measures’ is sufficiently extensive and detailed that for most purposes it seems to supersede
the text of GATT Articles VI and XVI. Similar to the 1979 Subsidies Code, the SCM
Agreement addresses both the issues of international obligations (1979 Track I) and the
issues of application of countervailing duties

WTO PROVISIONS:
The Agreement on Subsidies and Countervailing Measures (Subsidies Agreement)
strengthens discipline on trade distorting subsidies that other governments use to give their
firms an unfair competitive advantage. Unlike the 1979 Tokyo Round Subsidies Code (Tokyo
Round Code), which only 24 countries joined, all countries that become members of the
WTO automatically will be subject to the Subsidies Agreement.

One of the most significant U.S. achievements in the Uruguay Round negotiations was to
tighten the disciplines on the use of subsidies by foreign governments. Under the Tokyo
Round Code, the only effective U.S. remedy against foreign subsidization has been
application of the U.S. countervailing duty law. While that law is effective in addressing the
effects of subsidized merchandise in the U.S. market, it is not designed to address the effects
of subsidies in other markets. The Subsidies Agreement, together with the new WTO dispute
settlement procedures, provide the substantive and procedural tools for addressing effectively
the problems faced by U.S. companies confronting subsidized competition anywhere in the
world, while enabling the United States to retain strong and effective legal remedies against
subsidized imports that injure domestic industries.
Structure of the Agreement

Part I provides that the SCM Agreement applies only to subsidies that are specifically
provided to an enterprise or industry or group of enterprises or industries, and defines both
the term “subsidy” and the concept of “specificity.” Parts II and III divide all specific
subsidies into one of two categories: prohibited and actionable, and establish certain rules and
procedures with respect to each category. Part V establishes the substantive and procedural
requirements that must be fulfilled before a Member may apply a countervailing measure
against subsidized imports. Parts VI and VII establish the institutional structure and
notification/surveillance modalities for implementation of the SCM Agreement. Part VIII
contains special and differential treatment rules for various categories of developing country
Members. Part IX contains transition rules for developed country and former centrally-
planned economy Members. Parts X and XI contain dispute settlement and final provisions.

Categories of Subsidies

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

Prohibited subsidies Two categories of subsidies are prohibited by Article 3 of the SCM
Agreement. The first category consists of subsidies contingent, in law or in fact, whether
wholly or as one of several conditions, on export performance (“export subsidies”). A
detailed list of export subsidies is annexed to the SCM Agreement. The second category
consists of subsidies contingent, whether solely or as one of several other conditions, upon
the use of domestic over imported goods (“local content subsidies”). These two categories of
subsidies are prohibited because they are designed to directly affect trade and thus are most
likely to have adverse effects on the interests of other Members.
The scope of these prohibitions is relatively narrow. Developed countries had already
accepted the prohibition on export subsidies under the Tokyo Round SCM Agreement, and
local content subsidies of the type prohibited by the SCM Agreement were already
inconsistent with Article III of the GATT 1947. What is most significant about the new
Agreement in this area is the extension of the obligations to developing country Members
subject to specified transition rules (see section below on special and differential treatment),
as well as the creation in Article 4 of the SCM Agreement of a rapid (three-month) dispute
settlement mechanism for complaints regarding prohibited subsidies.
Actionable subsidies Most subsidies, such as production subsidies, fall in the “actionable”
category. Actionable subsidies are not prohibited. However, they are subject to challenge,
either through multilateral dispute settlement or through countervailing action, in the event
that they cause adverse effects to the interests of another Member. There are three types of
adverse effects. First, there is injury to a domestic industry caused by subsidized imports in
the territory of the complaining Member. This is the sole basis for countervailing action.
Second, there is serious prejudice. Serious prejudice usually arises as a result of adverse
effects (e.g., export displacement) in the market of the subsidizing Member or in a third
country market. Thus, unlike injury, it can serve as the basis for a complaint related to harm
to a Member's export interests. Finally, there is nullification or impairment of benefits
accruing under the GATT 1994. Nullification or impairment arises most typically where the
improved market access presumed to flow from a bound tariff reduction is undercut by
subsidization.
The creation of a system of multilateral remedies that allows Members to challenge subsidies
which give rise to adverse effects represents a major advance over the pre-WTO regime. The
difficulty, however, will remain the need in most cases for a complaining Member to
demonstrate the adverse trade effects arising from subsidization, a fact-intensive analysis that
panels may find difficult in some cases.

Agricultural subsidies Article 13 of the Agreement on Agriculture establishes, during the

implementation period specified in that Agreement (until 1 January 2003), special rules
regarding subsidies for agricultural products. Export subsidies which are in full conformity
with the Agriculture Agreement are not prohibited by the SCM Agreement, although they
remain countervailable. Domestic supports which are in full conformity with the Agriculture
Agreement are not actionable multilaterally, although they also may be subject to
countervailing duties. Finally, domestic supports within the “green box” of the Agriculture
Agreement are not actionable multilaterally nor are they subject to countervailing measures.
After the implementation period, the SCM Agreement shall apply to subsidies for agricultural
products subject to the provisions of the Agreement on Agriculture, as set forth in its Article
21.
Countervailing Measures
Part V of the SCM Agreement sets forth certain substantive requirements that must be
fulfilled in order to impose a countervailing measure, as well as in-depth procedural
requirements regarding the conduct of a countervailing investigation and the imposition and
maintenance in place of countervailing measures. A failure to respect either the substantive or
procedural requirements of Part V can be taken to dispute settlement and may be the basis for
invalidation of the measure.

Substantive rules A Member may not impose a countervailing measure unless it determines
that there are subsidized imports, injury to a domestic industry, and a causal link between the
subsidized imports and the injury. As previously noted, the existence of a specific subsidy
must be determined in accordance with the criteria in Part I of the Agreement. However, the
criteria regarding injury and causation are found in Part V. One significant development of
the new SCM Agreement in this area is the explicit authorization of cumulation of the effects
of subsidized imports from more than one Member where specified criteria are fulfilled. In
addition, Part V contains rules regarding the determination of the existence and amount of a
benefit.
Procedural rules Part V of the SCM Agreement contains detailed rules regarding the initiation
and conduct of countervailing investigations, the imposition of preliminary and final
measures, the use of undertakings, and the duration of measures. A key objective of these
rules is to ensure that investigations are conducted in a transparent manner, that all interested
parties have a full opportunity to defend their interests, and that investigating authorities
adequately explain the bases for their determinations.
CONCLUSION

The problem of subsidies has always been a subject of intense debate. There has been a
continuous evolution of the provisions relating to subsidies in the four decades of the
operation of the GATT 1947 till the Uruguay round. There were a number of independent
national rules that provided for remedy in cases of imports being subsidized by the foreign
states which can be traced back to the 19th century. However the elaborate development of
multilateral international rules concerning subsidized trade began primarily with the GATT.
One of the most significant achievements in the Uruguay Round negotiations was to tighten
the disciplines on the use of subsidies by foreign governments. Under the Tokyo Round
Code, the only effective remedy against foreign subsidization has been application of the U.S.
countervailing duty law. While that law is effective in addressing the effects of subsidized
merchandise in the market, it is not designed to address the effects of subsidies in other
markets. The Subsidies Agreement, together with the new WTO dispute settlement
procedures, provide the substantive and procedural tools for addressing effectively the
problems faced by companies confronting subsidized competition anywhere in the world,
while enabling the United States to retain strong and effective legal remedies against
subsidized imports that injure domestic industries.