Chapter L - Subsidies

WTO disciplines on subsidies are contained in the SCM Agreement.¹⁹ The rules have a twofold objective. First, to establish rules to avoid or attenu-ate adverse effects of subsidies on members. Second, to prevent the use of subsidies to nullify or impair concessions. WTO makes no attempt to get involved in questioning government objectives or to determine wheth-er the policy instrument is necessary, effective or appropriate. The focus is only on the effect of the subsidy. This reduces the scope for disputes, as the focus of attention centres primarily on whether a contested meas-ure is an export subsidy. Specific subsidies are distinguished by the SCM Agreement into two categories: prohibited and actionable. A subsidy is de-fined as any measure that has a cost to government and that confers a ben-efit to a specific addressee. A distinction is made between prohibited and actionable subsidies. The former comprise export subsidies (paid contin-gent upon the exportation of the subsidized good) and local content subsi-dies (paid if part of the added value is of national origin). These two types of subsidies are illegal (Article 3 of the SCM Agreement), with some ex-ceptions for LDCs and certain developing countries – see below. All other subsidies are actionable, that is, they can lead to countervailing measures on subsidized imports or to dispute settlement actions against the subsi-dizing member.

19What follows draws on Hoekman and Kostecki (2009); Mavroidis (2016) (volume 2, chapter 8) provides a detailed treatment of WTO rules in this area.

A subsidy is deemed to exist if there is a financial contribution by a govern-ment (or public body). This in turn may involve an actual or potential direct transfer of funds (such as grants, loans, equity infusions or loan guarantees), forgoing government revenue (tax concessions or credits), or the provision or purchase of products other than general infrastructure. Government funding of a private body to carry out a function which would normally be vested in the government and any form of income or price support is also covered by the definition. For SCM Agreement disciplines to kick in (to be actionable) a subsidy must be specific and confer a benefit to the recipient(s) and have adverse effects on a trading partner. A consequence of the way subsidies are defined in the SCM Agreement is that the de facto subsidiza-tion that results, for example, from differential taxasubsidiza-tion, regulatory policies or the imposition of import duties is not considered a subsidy. Duty draw-back schemes and rebates of value added tax on exports are not considered to be subsidies as long as the magnitude of the rebate does not exceed the level of taxes applying to products sold on the domestic market.

There are separate disciplines for agricultural production and trade.²⁰ The Agreement on Agriculture has three parts dealing with export competi-tion, market access and domestic support to farmers. All existing export subsidies had to be scheduled and bound and no new export subsidies were permitted, that is, any subsidies not scheduled became illegal. By 2000 scheduled export subsidies were to be reduced by 36 per cent in val-ue terms and 21 per cent in volume terms, relative to a 1986–1990 base period, in both cases on a commodity-by-commodity basis. Once fully im-plemented, the Agreement on Agriculture implied that export subsidies were permitted only if scheduled (and thus subject to the product-spe-cific reduction commitments noted above) and in the case of develop-ing countries, fall under the exceptions in Article 9, paragraph 4, of the Agreement on Agriculture pertaining to marketing and internal transport subsidies. At the 2015 WTO Ministerial Conference it was agreed that de-veloped country WTO members would immediately eliminate all remain-ing scheduled export subsidies as of the date of adoption of the ministerial decision on export competition. Developing countries are to eliminate ag-ricultural export subsidies by the end of 2018, although the exceptions under Article 9, paragraph 4, of the Agreement on Agriculture remain in effect until the end of 2023. LDCs and net food-importing developing countries may continue to use marketing and internal transport subsidies until the end of 2030.²¹

20For a detailed legal analysis of the Agreement on Agriculture see McMahon (2007). See Hoda and Gulati (2006) for an in-depth analysis of the rules from a development perspective.

21See: WT/MIN(15)/45;WT/L/980

restrictions to be converted into tariffs and that industrial countries re-duce these tariffs by an average of 36 per cent over six years (24 per cent for developing countries). All agricultural tariffs must be bound. As tariff bindings implemented by WTO members were in many cases far higher than the tariff equivalents of non-tariff barriers,²² tariff rate quotas were negotiated to assure minimum market access opportunities. These are complemented with special safeguard mechanisms that can be used to protect domestic producers if imports exceed specific trigger quantities or are priced below trigger price levels.

The third pillar of the Agreement on Agriculture is a set of disciplines on domestic production support. The agreement required high-income coun-tries to reduce an aggregate measurement of support by 20 per cent by 2000 (relative to a 1986–1968 base period), with the focus on measures to support prices and subsidies that are tied to, are conditional on or af-fect agricultural output. De minimis supports are allowed (no more than 5 per cent of agricultural production for developed countries, 10 per cent for developing countries), but the 30 WTO members that had subsidies exceeding de minimis levels at the beginning of the post-Uruguay Round reform period were to reduce them by 20 per cent. Base period aggregate measurements of support are scheduled and bound. The aggregate meas-urement of support excludes instruments that in principle have minimal effects on production and trade. These so-called Green Box support instru-ments include subsidies that do not involve price support – programmes that support agriculture generally and do not involve direct transfers to farmers; income transfers that are decoupled from production; and poli-cies that contribute less than 5 per cent of the value of production. There are no restrictions on the use of Green Box measures.

A special safeguard mechanism included in the Agreement on Agriculture permits the automatic imposition of higher duties if import volumes rise above or prices fall below a certain level. It is not necessary to demon-strate that serious injury is being caused to the domestic industry. The special safeguard mechanism can be used only on products that were tar-iffied in the Uruguay Round by governments that reserved the right to do so in their schedules of commitments. Only 39 countries – 17 developed

22Countries seeking to delay tariffication were permitted to do so for 6 years (10 for develop-ing countries) if imports were below 3 per cent of domestic consumption in the 1986–1988 base period, no export subsidies were granted and measures to restrict output were imple-mented. In such cases the minimum market access requirement was higher, increasing from 4 per cent in 1995 to 8 per cent in 2000.

and 22 developing – did so. Safeguards must take the form of temporary duties that may not last more than one year. Tariffs are limited to an ad-ditional 33 per cent of the applicable bound rate. Many developing coun-tries that did not use NTMs to distort agricultural trade did not (have to) engage in the tariffication process and therefore did not have access to the special safeguard mechanism.²³

Developing countries and World Trade Organization subsidy disciplines Under the Agreement on Agriculture developing countries were to reduce tariffs, support and export subsidies by two thirds of the levels agreed for developed nations and had until 2005 to implement this. They were also exempted from the tariffication requirement for products that are primary staples in traditional diets, as long as imports were at least 4 per cent of consumption by 2005. Only production support that exceeds 10 per cent was subject to aggregate measurement of support reduction. Input sub-sidies for low-income farmers are permitted, as are generally available investment subsidies and export subsidies related to export marketing and internal distribution and transport. A 2013 WTO ministerial deci-sion on public stockholding programmes for food security purposes calls on revisiting the provisions of the Agreement on Agriculture that food stock-holding programmes may not exceed 10 per cent of the value of do-mestic production. A four-year “peace clause” was agreed for developing countries in public food stock-holding programmes, conditional on satis-fying transparency-related reporting requirements, and ministers agreed to negotiate a permanent solution for this matter before the 2017 WTO Ministerial Conference.

A number of special provisions for developing and transition econo-mies are included in Article 27 of the SCM Agreement. Developing coun-try members listed in an annex (all LDCs and 20 countries that had a gross national product per capita below US$ 1,000) are exempted from the prohibition on export subsidies.²⁴ Once gross national product per capita exceeds US$ 1,000, non-conforming subsidies must be eliminated within eight years. Developing country WTO members not listed in an-nex VII to the SCM Agreement were to phase out their export subsidies over an eight-year period, starting from January 1995 (Article 27.4 of the SCM Agreement). The prohibition on subsidies contingent on the use of

23Brink (2015) provides a comprehensive and detailed discussion of policy space for support to agriculture.

24This spanned the following developing countries: Bolivia (Plurinational State of), Cam-eroon, Congo, Côte d’Ivoire, Dominican Republic, Egypt, Ghana, Guatemala, Guyana, India, Indonesia, Kenya, Morocco, Nicaragua, Nigeria, Pakistan, Philippines, Senegal, Sri Lanka and Zimbabwe. Market exchange rates are used.

25The countries concerned are Antigua and Barbuda, Barbados, Belize, Costa Rica, Dominica, Dominican Republic, El Salvador, Fiji, Grenada, Guatemala, Jamaica, Jordan, Mauritius, Pana-ma, Papua New Guinea, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, and Uruguay.

period of five years (eight years for LDCs), and a further extension could be requested. If granted, annual consultations with the Committee on Subsidies and Countervailing Measures must be held to determine the ne-cessity of maintaining the subsidies. Developing countries that have be-come competitive in a product – defined as having a global market share of 3.25 per cent – must phase out any export subsidies over a two-year period.

A 2007 WTO General Council decision extended the temporary exemption for export subsidy disciplines for a set of developing countries to the end of 2013, with a two-year phase-out period – the same end date agreed in Hong Kong, China for the elimination of agricultural export subsidies.²⁵ In conjunction with the exemption for LDCs and developing countries falling under the US$ 1,000 per capita threshold, a total of 88 WTO developing country members were unaffected by export subsidy disciplines until 2015.

As of that date, with the exception of Jordan (which requested an exten-sion of the waiver), developing countries with per capita incomes above US$ 1,000 became subject to the SCM disciplines.

Many countries provide export promotion assistance to firms to help them penetrate new markets through the organization of trade fairs, general ad-vertising campaigns that aim at “selling” the country and enhancing the visibility of export products, and maintenance of commercial attachés in embassies and consulates. Such schemes could be regarded as export subsi-dies if the provision of the grant element is made conditional upon exports.

The same applies to export processing zones and similar special econom-ic zones that are aimed at offsetting investment disincentives caused by weak business environments (Cresskoff and Walkenhorst, 2009). These of-fer incentives such as tax exemptions and direct subsidies of varying types.

Insofar as economic activity in the zone is directed at exports such support is clearly linked to (conditional on) exports and could therefore fall foul of the ban on export subsidies. The extension of exemptions of export subsidy disciplines to the end of 2015 was largely driven by such concerns.

Special and differential treatment proposals in the Doha Round aimed at allowing developing countries more room to use subsidies (especially in terms of Articles 3 and 27 of the SCM Agreement). For example, a pro-posal to modify Article 27.4 aimed to remove the time frame for seeking

an extension to use export subsidies and to raise the threshold for hav-ing to eliminate the subsidy. Among develophav-ing countries, Brazil wished to focus the Doha Round negotiations on the treatment of export credit guarantees and the interpretation of de facto export subsidies. Some de-veloping countries also supported the view that uniform disciplines on all subsidies would not address the specific problems associated with the fisheries industry. Work on developing specific rules for the fisheries sec-tor progressed at a slow pace, even though there was broad agreement that disciplines in that sector should be strengthened, including through the prohibition of certain types of subsidies that resulted in overfishing and overcapacity.

Summing up, the approach towards disciplining the use of subsidies is pragmatic. The focus is on reducing adverse effects on trading partners, not to question the objectives that are pursued by governments. Balancing the policy space for governments to use subsidies against negative spill-overs for other countries is done in part by distinguishing firm- or sec-tor-specific assistance from generally available, untargeted subsidies. The latter are in principle unconstrained. This provides a large measure of pol-icy space for the type of interventions that are likely to enhance national welfare and support the realization of social/non-economic objectives. The rules ensure freedom for governments to use subsidy instruments in cas-es where there may be good economic rationalcas-es for doing so, and do not permit other countries to second-guess the motivation underlying the use of such instruments. WTO makes no attempt to get involved in question-ing government objectives, nor does it have anythquestion-ing to say about wheth-er a subsidy is necessary, effective or appropriate. The focus of rules is therefore less intrusive than for product regulation. The focus of atten-tion centres primarily on whether a contested measure is an export sub-sidy and the extent to which it imposes a negative spillover. If spillovers are small, there is only a limited prospect of being held to account under WTO. Thus, while developing countries have significant policy space de jure, they have even more de facto.