Incoterms_® and Commercial Contracts

Executive Summary

The Agreement on Subsidies and Countervailing Measures (SCM Agreement or SCM) limits the freedom of WTO Member governments to grant subsidies for industrial products, and, subject to allowances in the Agreement on Agriculture, for agricultural products. WTO rules empower WTO Members, on behalf of their commercial stakeholders, to enforce the rules in the SCM Agreement, and specifically, to take action when foreign subsidies harm their competitive interests.

The SCM Agreement defines a challengeable subsidy as containing four elements. There must be: (1) a financial contribution (i.e., something of value) (2) provided by or on behalf of a government. The financial contribution must provide the recipient with (3) a benefit, i.e., at better than market value. Finally, it must be (4) specific, which is to say, either an export or local content subsidy, or a subsidy limited to specific industries or groups of industries.

Two types of subsidies are prohibited outright: (i) export subsidies, which are subsidies contingent on exportation; and (ii) local content subsidies, which are subsidies contingent on the use of domestically produced inputs. In principle, all other specific subsidies – so-called actionable subsidies – are allowed unless they harm the interests of other WTO Members. WTO Members could be harmed when subsidies cause changes to prices (e.g., if the subsidy depresses the price of the subsidised product) or changes to market volumes (e.g., if the subsidy increases the market share of the industry that receives it). Importantly, the objective pursued by the subsidising government is (in principle) irrelevant for this analysis.

A WTO Member with an industry that is faced with harmful foreign subsidies can follow two alternative tracks to enforce the disciplines in the SCM Agreement: (i) it can challenge “prohibited” or “actionable” subsidies through the WTO dispute settlement system in Geneva (i.e., the multilateral track), with a view to getting the subsidy ended; or (ii) it can unilaterally impose a so-called “countervailing duty” (CVD) on the importation of the subsidised good (i.e., the unilateral track). The purpose of the CVD is to offset the effect of the subsidy on the WTO Member’s domestic market. The CVD track offers a faster and more certain remedy against subsidised imports into the complaining industry’s country, but provides no relief with respect to competition in other markets.

* Dominic Coppens, an Associate with Sidley Austin LLP’s Brussels office and a member of the Firm’s WTO litigation practice, is also an Associate Fellow of the Leuven Centre for Global Governance Studies at the University of Leuven. Todd Friedbacher, a Partner with Sidley’s WTO litigation practice, co-founded the Firm’s Geneva office. The views expressed in this chapter represent the personal views of the authors, and do not represent the views of Sidley Austin LLP or its clients. This chapter has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

[Page118:]

WTO Members, both developed and developing, have frequently used the multilateral track to enforce the WTO subsidy disciplines (see the Appendix). Up to now, CVDs have mainly been imposed by a subset of developed countries, notably the United States, but other WTO Members, including larger developing countries, have started using this unilateral instrument as well (see Chapter Six for details on the unilateral track).

Sections 1-3 of this Chapter discuss the rules laid down by the SCM Agreement as interpreted by the WTO Appellate Body. Section 4 provides advice to companies that are facing subsidised competition. Finally, Section 5 suggests how governments can design subsidy programmes to reduce the risk of WTO or CVD challenge.

1.0 Setting the Stage

The granting of subsidies is regulated under the WTO because subsidies hold the potential to harm foreign competitors by strengthening the competitive position of the industry that receives them. The receiving industry may, for instance, depress the price of the product in the market and/or increase its sales. Although overall trade volumes of the product may expand rather than contract (as with tariffs or other trade restrictions) as a result of subsidies, the WTO rules impose disciplines on subsidies because they may distort markets or grant artificial competitive advantages in these and other related ways.

The WTO rules recognise that subsidies could adversely affect competition not only in the market of the subsidising country, but also in foreign markets. For instance, a subsidy given to US car manufacturers not only makes it more difficult for foreign competitors to compete on the US market, but may also enable US car manufacturers to export more cars at lower prices to other markets, such as the European Union or Brazil. Export subsidies in particular, i.e., subsidies contingent upon exportation, may more directly impact competition in export markets than do subsidies not tied to exportation (so-called “domestic subsidies”). Therefore, export subsidies are considered trade distortive by their very nature.

At the same time, since the very beginning of the international trading system, countries have realised that subsidies can be an important policy tool, including for developing countries seeking to jump-start development. If production of a certain good is too low because of a domestic market failure, a domestic subsidy corrects better for this than a tariff, since tariffs also negatively affect domestic consumers by raising the price in the domestic market. Therefore, it was considered important that the international trade system leave some flexibility to countries to grant subsidies.

The ongoing debate on whether and when subsidies “distort” trade flows is as old as the first discussions of the GATT era. Traditionally, the United States has been mainly concerned about the trade “distortive” impact of subsidies, while other countries, such as the European Union and developing countries, have emphasised the legitimate function of subsidies and the need for policy space to offer them. This difference is perhaps unsurprising in light of the American view of the role of the government in the market. The multilateral disciplines on subsidies under the (old) GATT and (present) WTO are easier to understand in the context of this debate.

1.1 Treatment of Subsidies Under the GATT

The original post-WWII GATT framework imposed virtually no limitations on the ability of member countries to subsidise their domestic industries, although it did permit the use of countervailing duties to counteract the injurious effect of subsidized imports.

[Page119:]

ORIGINAL GATT RULES ON SUBSIDIES

Article XVI of the GATT required notification of subsidies that had the effect of increasing exports or expanding imports, and it discouraged (though did not ban) the use of export subsidies. Also, GATT members subsidising domestic producers were not required to provide national treatment in the form of subsidies for foreign producers, as domestic production subsidies were explicitly exempted from Article III of the GATT. The only meaningful action a GATT member could undertake against foreign subsidies under the original GATT was to impose a CVD, subject only to the requirements of Article VI of the GATT, which allowed the imposition of CVD against imports benefitting from a “bounty or grant” (a term that was undefined) if they caused or threatened “material injury” to a domestic industry.

A CVD restores “fair” competition in the domestic market of the country imposing it, but does nothing to protect the interests of the country’s exporters in other markets, including in the market of the subsidising country. Going back to our example of cars, the only meaningful way during the early GATT era that the European Union could have protected its exporters’ interests abroad would have been to enter into a subsidy war with the United States and provide similar subsidies to its own car industry. Note that a country with no competing industry can only win from such a subsidy war between exporting countries, as it will be able to import goods at lower subsidised prices.

The original GATT framework was therefore unable to stop destructive “subsidy wars” between exporting countries, particularly in the area of agriculture (see Chapter Seven). This explains why countries have, in subsequent years, gradually agreed to limit the conditions under which they can provide subsidies. From 1960 onwards, countries began by regulating those subsidies that directly impact international trade, i.e., export subsidies, and subsequently developed stricter disciplines on domestic subsidies. Net-importing countries lose from such stricter rules on subsidies, as they will no longer enjoy imported goods at subsidised prices.

1.2 The SCM Agreement

The United States was the main driving force behind stricter rules on subsidies. In exchange, other countries asked for stricter rules on the unilateral imposition of CVDs – an instrument mainly used by the United States. Both sets of rules – on subsidies and CVDs – are embodied in the SCM Agreement, one of the agreements negotiated in the Uruguay Round. Thus, the SCM Agreement defines the scope that WTO Members have to subsidise their own products, as well as the scope these governments have to impose CVDs in order to protect their domestic industries from subsidised imports.

In the present Chapter, we explore the following questions in light of the SCM Agreement: When is a firm considered to be subsidised? (Section 2); if so, when is this subsidy WTO-inconsistent? (Section 3); what actions can be taken against WTOinconsistent subsidies? (Section 4); and, finally, how could a government design a WTO-consistent subsidy (programme)? (Section 5).

Before turning to the substance of the SCM Agreement, we note that the business community should bear in mind the Agreement’s sectoral coverage. The SCM Agreement is one of many WTO agreements that regulate trade in goods, and as it applies to subsidies affecting trade in goods, it applies to subsidies provided to industrial sectors. The SCM Agreement does not apply to subsidies affecting trade in services (e.g., financial services) (see Chapter Ten). Finally, subsidies provided to[Page120:]agricultural products hold a mixed position. The sector-specific Agreement on Agriculture moderates the ways in which the SCM Agreement applies to subsidies for agricultural products, and provides a number of allowances to subsidising Members. However, many of the current obligations in the SCM Agreement still apply to agricultural subsidies (something often overlooked) (see Chapter Seven).

To find out which rules apply to a subsidy provided to a given firm, two preliminary questions must be answered. First, in which sector is the firm operating: industrial products, agricultural products or services? The SCM Agreement is relevant to businesses in the industrial and agricultural sectors, but not to services. Second, which country has provided the subsidy? The SCM Agreement is relevant to subsidies provided by any WTO Member, but has more flexible rules for certain subsidies provided by developing countries.

It is also necessary to bear in mind that, as with all other aspects of WTO law, the location of production determines the course of action (where are the subsidised products produced?), and not the “nationality” of the affected firms (what is the home country of the subsidised producers?). Thus, the affected WTO Member wishing to enforce the WTO subsidy rules on behalf of a commercial stakeholder is the country from which the commercial stakeholder is operating, which may not be the same as its “home” country.

For instance, the EU could challenge subsidies given by the United States to its domestically located car manufacturers, which could include the US-based production facilities of European car manufacturers. In these circumstances, if the EU launched a WTO challenge, the interests of the EU car manufacturers located in the United States would be defended by the United States.

To decide whether to petition your government to take action against a foreign subsidy, make sure to determine whether your own business is benefiting from the same subsidy, e.g., via subsidiaries in the subsidising country, which could be negatively affected by the action sought.

2.0 When is a Foreign Firm Subsidised?

Only subsidies are regulated under the SCM Agreement. Therefore, an important threshold question arises: Does a given government measure qualify as a subsidy within the meaning of the SCM Agreement?

Undoubtedly, most readers will be able to give some examples of subsidies off the top of their head. The prototypical example is a sum of money given by the government to a company. However, upon further reflection, most readers will also realise that it is much harder to define the exact contours of what is, and what is not, a subsidy.

For instance, could a tax advantage be regarded as a subsidy? And, if so, what about tax advantages that put a country’s domestic firms on an equal footing with foreign competitors (in light of a foreign competitor’s tax obligations in its home market)? What about road or land improvements? Or what about the value of an effective police service or educational system, which clearly benefit domestic industry? Or, as a final example, what about government inaction; when a government fails to take certain actions (e.g., fails to impose meaningful environmental or labour standards), could such a failure be regarded as a subsidy to domestic industry? Defining the contours of a “subsidy” is complicated because, through a variety of different actions[Page121:]and inactions, a government could make its own firms better off. That alone, however, does not necessarily mean that each of these actions could and should be regarded as a subsidy.

This difficulty of defining the concept of a subsidy explains the absence of a definition of the term during the 50 years of the GATT era. Before 1995, the definition of a “bounty or grant” (the term used in Article VI of the GATT) was, as someone put it in the US Congress, like that of beauty, i.e., in the eye of the beholder.¹As with beauty, different beholders define the range of subsidies differently, depending on their views about the proper role of government in the market. Looking at the full spectrum of government action, an “open-minded” beholder could detect subsidies in all the examples mentioned above, as each of them makes domestic industry better off than it would be without government intervention.

Yet the SCM Agreement has narrowed the field of vision of the beholder – a WTO or CVD challenge based on the SCM Agreement can be considered only against foreign government measures that fall within the definition of a “subsidy” included in the SCM Agreement. This is something that firms need to understand when considering whether and in what ways to ask their governments to act on their behalf concerning support granted to foreign competitors.

The SCM Agreement contains a detailed definition of what constitutes a “subsidy”. Importantly, this definition is broad, going far beyond the prototypical lump sum of money transferred by a government to a company. At the same time, not just any type of government action that makes domestic industry better off can be challenged as a subsidy under the SCM Agreement. To constitute a subsidy, government action needs to: (a) involve a financial contribution, (b) by – or on behalf of – the government, that (c) confers a benefit on the receiving industry (Article 1 SCM). Moreover, such a subsidy is subject to either a multilateral challenge under the SCM Agreement or a unilateral CVD action (or both) only if it is (d) specific to the receiving industry (Article 2 SCM).

In two ways, the subsidy definition in the SCM Agreement serves a gatekeeping role. First, it defines which government measures are disciplined as “subsidies” under the SCM Agreement and are therefore subject to its substantive obligations. Second, it narrows the scope of government measures against which unilateral CVD action could be undertaken, namely only against imports that have benefited from specific “subsidies” as defined in the SCM Agreement.

2.1 Financial Contribution

Government intervention only constitutes a subsidy if it involves a “financial contribution” (Article 1.1(a)(1) SCM). The SCM Agreement includes a closed list of three forms of financial contribution, covering a broad range of government interventions.

2.1.1 Direct or Potential Direct Transfer of Funds

The first type of financial contribution refers to a government practice involving direct transfer of funds (e.g., grants, loans, and equity infusion), or potential direct transfer of funds or liabilities (e.g., loan guarantees). The case law has given a broad reading to this first type of financial contribution. Direct transfers of funds include, for instance, debt forgiveness, extensions of the maturity of a loan, interest rate reductions, debtto- equity swaps, and even participation in joint ventures. Potential direct transfers of funds include loan guarantees or insurance coverage.

[Page122:]

The broad reading also means that participation in a company’s ownership (through an equity infusion or debt-to-equity swap) can itself constitute a financial contribution. It is even possible for an owner to make a financial contribution to itself (e.g., for a government to make a cash grant to a government-owned company).²These examples already illustrate that subsidies may be present in situations that are not directly obvious to the business stakeholders involved.

2.1.2 Provision of Goods or Services or Purchase of Goods

The second type of financial contribution refers to the provision of goods or services by the government, or the purchase of goods by the government. Once again, the case law has endorsed an expansive reading of this second type of financial contribution, accepting that intangible properties are also covered. For instance, when Canadian provincial governments granted rights to harvest standing timber, this action was considered as provision of goods and thus a financial contribution, rather than an inchoate right.³

As an explicit exception, the government’s provision of “general infrastructure” (e.g., power stations, roads) does not amount to a subsidy to domestic industry. Such infrastructure is excluded only if it is “general” in nature, and thus accessible to all (or nearly all) entities. For example, road improvements that benefit a particular firm but also are accessible to and benefit others are “general infrastructure”, while an access road for a particular firm’s factory will not be “general infrastructure”, because it was designed to meet the firm’s needs, and only the firm and its visitors use it.

For unknown reasons, the purchase of services is not explicitly listed as a type of financial contribution, even though such a purchase could also affect trade in goods. It remains unclear whether purchases of services are therefore excluded from the SCM Agreement.

PURCHASE OF SERVICES

In US – Large Civil Aircraft, the Panel decided that the purchase of services is excluded from the SCM Agreement, even if these services are purchased from a goods provider (in this case Boeing) and could thus affect trade in goods. The Appellate Body reversed the Panel’s finding, but declined to shed light on whether the purchase of services is covered. Instead, the Appellate Body characterised the R&D work performed by Boeing for NASA and the US Department of Defense as part of “joint ventures” instead of purchases of services (further characterising joint ventures as direct transfers of funds, which are covered under the SCM Agreement).⁴

2.1.3 Revenue Forgone

While the first two types of financial contribution involve subsidisation by positive action, the third and final type of financial contribution recognises that a government can also subsidise by negative action. Specifically, a government grants a subsidy when it refrains from collecting revenue that is otherwise due. This category was added because tax regimes can be used to achieve outcomes similar to positive payments. Note that governments can forgo revenue in relation to all forms of taxation, such as internal taxes, direct (raised on income) and indirect (raised on products) taxes, as well as import duties (tariffs).

This last type of financial contribution, subsidisation by negative action, presents particular challenges. It is often difficult to determine the appropriate benchmark[Page123:]against which to assess whether a government has foregone revenue. As there are no internationally agreed rules on minimum taxation, the case law has correctly decided that, in a given instance, the benchmark has to be found in the tax regime of the WTO Member alleged to have granted the subsidy. In WTO parlance, this benchmark is the tax treatment afforded by the Member to “comparable income of comparably situated taxpayers”.⁵If the challenged tax treatment by the WTO Member in question is below this benchmark, the WTO Member is foregoing revenue otherwise due.

THE FOREIGN SALES CORPORATION CASE⁶

In 1997, the EU challenged the US income tax exemption for “Foreign Sales Corporations” (FSC). The US tax system is a worldwide tax system, because it taxes, in general, income of its citizens and residents earned anywhere in the world. However, foreign-source income of FSCs was exempted from such worldwide taxation. The EU claimed that this FSC exemption was a “financial contribution” under the SCM Agreement. The Panel and the Appellate Body agreed with the EU and found that the United States was foregoing revenue otherwise due, because FSC income was exempted from the generally applicable tax rules.

The fact that the benchmark for foregoing revenue has to be found in the tax regime of the WTO Member in question has important implications. The Panel in US – FSC illustrated these implications with the following example. When Country A imposes a corporate income tax of 75%, but gives a special tax rate of 25% for exporters, it provides a “financial contribution” to exporters. However, when Country B imposes a generally applicable corporate tax of only 25% (levied on all its producers, including exporters), it provides no “financial contribution”. This outcome may appear inequitable, because exporters from both countries pay the same tax rate (25%), but only exporters from Country A are considered to be subsidised; implying that only Country A will have to remove the prohibited export subsidy.⁷Nonetheless, the outcome is unavoidable in a situation where there are no internationally agreed minimum rules on taxation to serve as a benchmark.

WORLDWIDE VS. TERRITORIAL TAX SYSTEMS

The Panel in US – FSC used the example described above to refute a US argument that the WTO system should not penalise WTO members with a worldwide tax system (like the United States) for incorporating elements of a territorial tax system in order to obtain comparable tax treatment for their exports. According to the United States, the European territorial tax system, which exempts exports from value-added and other indirect taxes, had the same economic effect as its worldwide tax system combined with the FSC exemption, because both tax systems exempted foreign-source income of exporters. The United States argued that, whereas under a territorial tax system, all foreign-source income is not taxed, under a worldwide tax system (such as that of the United States), all sources of income are in principle taxed. Its worldwide tax system therefore needed an exemption to exclude foreign-source income of exporters. However, the European Union pointed out that the United States was responsible for having chosen a worldwide tax system that put its exporters at a disadvantage, and the panel and the Appellate Body essentially followed this view.

[Page124:]

2.1.4 Types of Government Support Not Considered Subsidies

To conclude this “financial contribution” discussion, it bears repeating that not every government action making domestic industry better off is a subsidy under the SCM Agreement. This is due to the closed list of forms of financial contribution. The list does not include, for instance, export restraints (e.g., export quotas),⁸even though, if they could be shown to depress the price of a product on the domestic market, they might very well benefit domestic downstream producers. Likewise, low regulatory standards (e.g., environmental or labour standards) do not fall within the definition of “financial contribution”.

To take a different example, could an undervalued exchange rate be seen as a subsidy under the SCM Agreement? This is a highly contested – and so far unresolved – question. For some years, some US interests have advocated unilateral CVD action against Chinese imports, on the assertion that they benefit from an undervalued Chinese currency, though so far the US Government has refused to take action. Such CVD action would be WTO-consistent only if an undervalued exchange rate regime qualified as a specific “subsidy”. If a country were to impose CVDs due to an undervalued exchange rate, the targeted WTO Member would likely challenge such an action before the WTO, in which case this issue would have to be resolved by a panel, and ultimately, by the Appellate Body.

2.2 By a Government

In addition, to qualify as a “subsidy”, a “financial contribution” must be given by – or on behalf of – a government. Government involvement is the core difference between subsidisation and dumping. While both actions could result in depressed prices in export markets, in the case of subsidisation the firm has been able to reduce export prices as a result of government involvement, whereas in the case of dumping, lower export prices are the result of the firm’s own price-setting strategy (see Chapter Six).

Government involvement can take three different forms under the SCM Agreement. First, the financial contribution could be made directly by the government, acting at the national, regional, or local level. In the supranational European context, a financial contribution obviously could also be made at the European level.

Second, a financial contribution could likewise be made by a “public body”. Importantly, the Appellate Body has decided that an entity may not be treated as a public body simply due to government ownership. In addition to being effectively controlled by the government (through, for instance, majority ownership), a public body needs to exercise governmental authority (see text box below on public bodies). If it does, its financial contributions (e.g., loans, sales of goods) could qualify as subsidies if they are provided on better than market terms (see the “benefit” element, Section 2.3 below).

[Page125:]

PUBLIC BODIES

In US – Anti-dumping and Countervailing Duties from China,⁹China challenged CVDs imposed by the United States. In imposing the CVDs, the United States had treated Chinese state-owned enterprises (SOEs) and state-owned commercial banks (SOCBs) as “public bodies” on the basis of government ownership of these bodies. The Appellate Body rejected the US finding of Chinese SOEs as “public bodies” purely on the basis of government ownership. For an SOE in the form of an SOCB to constitute a public body, proof of something more than mere government ownership was required, such as the exercise by the SOCB of government functions, including the pursuit of government policy.

Third, to prevent WTO Members from circumventing their obligations, the SCM Agreement foresees the presence of a subsidy when a government “directs” or “entrusts” a private body to provide a financial contribution. The aim is to discourage governments from effectively coercing banks or other private entities into providing low-interest loans or other forms of support that would be considered subsidies if provided by the government. In practice, it may be difficult to prove entrustment or direction by a government. Evidence of “entrustment” or “direction” may well not be public, and the case law demonstrates that, to satisfy the definition in the SCM Agreement, the government must do more than publically encourage the contested financial contribution.

THE DRAMS CASES

In three separate cases, South Korea challenged CVD action by, respectively, the United States, the EU, and Japan on the import of dynamic randomaccess memories (DRAMS).¹⁰A question common to each case was whether private creditors were “entrusted or directed” by the South Korean government to bail out a DRAMS producer. In each case, the Panel accepted some claims, but rejected others.

So what are the indicia of government entrustment or direction? One indication is when an entity acts against its own commercial interests when making the contested financial contribution (e.g., when a bank provides a loan on below-market terms). Other relevant indications of entrustment or direction include: (a) revealed intent or motivation of a government (e.g., the South Korean government’s expressed intent to assist a Korean manufacturer); (b) coercive behaviour of a government in related transactions; or (c), in a CVD investigation, the failure of an entity to co-operate with the investigating authority (e.g., the failure to co-operate by a bank was seen as an indication that it had acted on the direction of the South Korean government).

In conclusion, firms must keep in mind that a subsidy can come not only from the government itself, but also from private entities operating under the government’s direction. For instance, if a private bank extends a loan on better than market terms, the loan would qualify as a subsidy if it could be shown to have been extended on behalf of the government. At the same time, the mere fact that a bank itself has been subsidised by the government (e.g., via the large-scale bailout programmes after the financial crisis) is likely insufficient to qualify the bank’s loan transactions as subsidies. As long as the bank effectively operates independently from the government and pursues its own commercial interests, its loans cannot be challenged as subsidies, even if the bank would have been insolvent without government involvement.

[Page126:]

2.3 Benefit

2.3.1 The Private Market Test

A financial contribution by or on behalf of the government qualifies as a subsidy if it provides a “benefit” to the recipient. As one WTO panel explained, the rationale behind the “benefit” concept is that it “acts as a screen to filter out commercial conduct”.¹¹Indeed, governments participate in the marketplace every day (e.g., buying and selling goods, or providing loans), and when a government does so on the same terms as other, commercial, actors, its actions do not distort trade and should not be regulated under the SCM Agreement. Indeed, in such instances, the recipient is in the same position whether the financial contribution comes from the private market or from the government. The recipient is therefore not better off simply because the government was involved.

Thus, for a subsidy to exist, the recipient must be demonstrated to be better off as a result of the contested financial contribution. To assess such a claim, the normal benchmark is the private market prices that are effectively available to the recipient at the time of the financial contribution: could the firm have received similar terms for the financial contribution on the private market?

This private market test means that a subsidy may exist whether or not the financial contribution involves a cost to the government. For example, suppose that a government provides a loan to a private recipient above cost, i.e., at a higher interest rate than the government itself faces to borrow funds. Although the government incurs no financial cost in extending the loan, the government has conferred a “benefit” on the recipient if the interest charged is lower and the terms better than what the recipient could have received on a similar loan on the private market. This is contrary to what some WTO Members (such as the EU) advocated during the negotiations that led to the SCM Agreement, but is firmly reflected in the case law.¹²

Furthermore, when analysing whether a financial contribution provides a benefit, it is necessary to focus on the position of the recipient, and not on the position of the recipient’s foreign competitors. For instance, if the recipient of a government loan at 5% interest could only have received a loan on the private market at an interest rate of 8%, a “benefit” is conferred, even if the recipient’s foreign competitors had received loans on the private market at 5%. Thus, a subsidy is present even if it does nothing more than “level the playing field”, or in other words, equalise the position of the recipient relative to the terms and conditions available to foreign competitors.

MATCHING BENEFITS

A benefit is conferred and a subsidy exists even if the government merely matches subsidies provided to the foreign competitor by its own government – that is, even if the 5% interest rate secured by the foreign competitor was the result of subsidisation by its own government. Matching subsidies, which are given in response to foreign subsidisation, do not cancel out one other. Both subsidies could be challenged or countervailed if they cause harm.

2.3.2 Alternative Benchmarks

By using as a benchmark private market prices that are effectively available to the recipient of a government financial contribution, a “benefit” analysis under the SCM Agreement normally involves a determination of whether the recipient could have received the financial contribution on similar terms from the private market. However, even a market benchmark will not be acceptable in all situations. Two notable examples arise in the case law.

[Page127:]

First, where the private market is itself distorted by the very same contested financial contribution subject to the “benefit” analysis, the market has been rejected as a valid benchmark. For example, where the position of the government in the market for a financial instrument is so dominant as to effectively determine the market price for the instrument, or to prevent the emergence of a private market, the market cannot properly serve as a benchmark. In such instances, the government effectively acts as a “price setter”, and domestic private suppliers are only “price takers” (if they exist at all); the case law looks to alternative, constructed benchmarks, based, for example, on foreign prices or production costs (adjusted to reflect domestic market conditions).¹³The exercise is thus to estimate the market price for the instrument that would have existed without the government’s dominant role in the market.

Second, in Canada – Renewable Energy, the Appellate Body carved out another situation where an alternative benchmark should be used. Under Ontario’s feed-in tariff measure, to stimulate renewable energy, a higher price was paid for electricity derived from renewable energy sources (e.g., solar, wind), than was paid for fossil fuel-based electricity. Although this seems a textbook example of subsidisation, the Appellate Body considered that a “benefit” was not necessarily conferred. The Appellate Body found that, if a government uses financial contributions to create a market (e.g., creates a market for electricity generated by solar energy), the benchmark for the “benefit” analysis must be found within the contours of the newly created market (i.e., solar energy); specifically, the Appellate Body suggested that a “benefit” might not be conferred where the price paid by the government for electricity is not above the costs to produce electricity from each type of renewable energy (e.g., solar energy), plus a reasonable rate of return.¹⁴

THE CANADA – RENEWABLE ENERGY CASE15

Japan and the European Union successfully challenged local content requirements included in the feed-in tariff (FIT) programme implemented by the Canadian Province of Ontario. Under this scheme, renewable energy (RE) producers (wind, solar) were paid a higher price (so-called FIT) for their electricity than was paid to conventional energy producers, but only if they used certain domestic content. The Appellate Body considered that, despite the higher price, it was unable to determine whether this scheme provided a benefit – and therefore a subsidy – to RE producers. Although no violation of the SCM Agreement was therefore established, the FIT programme was still considered WTO-inconsistent because the local content requirement violated the national treatment obligation under Article III of the GATT. By incentivising RE producers to buy domestic inputs, the scheme discriminated between domestic and imported RE input producers.

Why did the Appellate Body take this approach in relation to markets created by a government? Arguably, it wanted to allow policy space under the SCM Agreement for government support pursuing legitimate non-trade objectives (i.e., renewable energy), even if not explicitly foreseen in the Agreement. The scope of this carve out has been the subject of much academic discussion, but it has not been tested further in the case law.

[Page128:]

If a WTO Member challenges government support measures as WTOinconsistent, producers of innovative environmentally friendly products, the market for which was created or is dominated by government incentives, should explore whether this support could be justified in light of the Appellate Body’s ruling in Canada – Renewable Energy. This case has potentially (re-)opened¹⁶the door (somewhat) for support programmes that pursue legitimate non-trade objectives.

2.3.3 Measuring the Benefit

In order to show that a “subsidy” is present when challenging foreign subsidies at the WTO (i.e., the multilateral track), it suffices for a complaining Member to show the presence of a benefit. There is no need to measure the exact amount of the benefit provided to the recipient. At the same time, an understanding of the amount of the subsidy – calculated in terms of the amount of the benefit – could be relevant to show that the challenged subsidies cause adverse effects (see Section 3.2.4 below). When pursuing unilateral CVD action, calculating the amount of benefit is certainly relevant because CVDs cannot exceed the level of subsidisation.

Article 14 of the SCM Agreement provides guidelines on how to measure the benefit provided by certain types of financial contribution:

• Equity infusion is only treated as a benefit if the investment is inconsistent with the usual practice of private investors in the Member. The issue is easy if private parties were investing in the company at the same time as the government; if the terms are the same, there is no benefit. If there was no private investment at the time, the investigating authority must examine the financial condition of the company at the time of the government investment to decide whether a private investor would have invested on the same terms.
• The benefit conferred by a loan is measured by the difference between the interest actually paid to the government and the interest that would have been paid on a comparable commercial loan.
• The benefit conferred by a loan guarantee is measured by the difference between the interest paid on the loan and the interest that would have been paid without the guarantee.
• Provision of goods and services by a government is treated as a benefit if the government receives “less than adequate remuneration”, and the purchase of goods by a government is a benefit if it pays more than adequate remuneration. “Adequate remuneration” essentially means a market-set price, and must be determined “in relation to prevailing market conditions … in the country of provision or purchase”.¹⁷

2.4 Specificity

Only subsidies “specific” to an industry, or group of industries, are disciplined by the SCM Agreement (Article 2 SCM). This means, for instance, that generally available services provided by the government (e.g., an effective police service, or educational system) cannot be challenged, even though the provision of such services may benefit the domestic business environment. The purpose of this limitation is to avoid challenges to widely available subsidies that are unlikely to distort investment decisions. Overall, the case law rather easily accepts that a subsidy is specific. For[Page129:]instance, subsidies to all industries producing wood products have been found to be specific, as well as subsidies available to most agricultural crops.¹⁸

Export and local content subsidies (see Section 3.1 below) are deemed to be specific. Domestic subsidies are treated as specific if they are explicitly limited to certain industries (de jure) or when they are focussed on a limited group of industries (de facto). A domestic subsidy is considered non-specific if the eligibility for the subsidy, and the amount of the subsidy, is based on objective criteria that do not favour certain industries over others, and that are economic in nature (based on, for instance, the number of employees or size of the firm).

An examination of whether a subsidy is de jure specific must be assessed at the level of the overall subsidy scheme (which could be stipulated in one or more regulatory acts). If the subsidy scheme compartmentalizes funding to certain industries, the subsidy is de jure specific.

For instance, in EC – Large Civil Aircraft, R&D support set aside to the aeronautics sector under a broader subsidy scheme (i.e., the EC Framework Programme) was found de jure specific, even though other industries equally had access to other pools of R&D support under that scheme; the rationale was essentially that the grantor had ear-marked pools of support for distinct and identifiable subsets of economic actors.¹⁹Likewise, in US – Large Civil Aircraft, business and occupation (B&O) tax reductions for commercial aircraft and component manufacturers were de jure specific, because tax reductions for other industries were not part of the same subsidy scheme (i.e., they were introduced at different times and for different purposes). Conversely, patents resulting from NASA or US Department of Defense R&D contracts were found not de jure specific, because the allocation of patents under these contracts was considered similar to the allocation of patent rights in all US government R&D contracts. Therefore, the subsidy scheme related to the allocation of patent rights was not confined to aerospace companies or, indeed, any particular, identifiable subsets of economic actors.²⁰

A subsidy that is not de jure specific, could still be found de facto specific if, for instance, the subsidy (or subsidy programme) is in reality used only or predominantly by certain industries; or if certain industries are granted a disproportionately large amount of the subsidy. For instance, in US – Large Civil Aircraft, the subsidy provided by the City of Wichita (i.e., Industrial Revenue Bonds) was not de jure specific because the bonds were potentially available to all enterprises that sought to invest in property. However, the subsidy was found de facto specific because the recipient, Boeing, had received a disproportionately large amount of the subsidy (almost 70% of all bonds, which was materially more than what was expected based on the eligibility criteria).²¹

Finally, regional subsidies available to all industries located in a particular region are treated as specific under the SCM Agreement, unless they are provided by the regional government itself rather than by the central government. Thus, to determine whether a regional subsidy is specific or not, the identification of the granting authority is decisive. For instance, in EC – Large Civil Aircraft, with regard to grants offered by the Andalusian government (sub-region) that were co-financed by an EU-level entity, the European Regional Development Fund (ERDF), the panel found that solely the part of the grant that was financed by the ERDF was specific.²²For that part of the subsidy, the ERDF had acted as granting authority and had limited the grant to a sub-region within its jurisdiction (i.e., Andalusia), making it specific to a subset of economic actors within its jurisdiction. The part granted by the Andalusian government itself was available to all industries within the entirety of its jurisdiction, and was thus found non-specific and, therefore, outside the scope of the SCM Agreement.

[Page130:]

3.0 When Is a Subsidy WTO Inconsistent?

The WTO subsidy rules do not ban every form of government support found to be a specific subsidy. Indeed, granting specific subsidies is, in principle, perfectly consistent with the SCM Agreement. WTO Members act inconsistently with the SCM Agreement only if the specific subsidy either (i) takes the form of an export subsidy or local content subsidy (prohibited subsidies, also called “red light” subsidies); or (ii) causes adverse trade effects on other WTO Members (actionable subsidies, also called “amber light” subsidies).

Prior to 2000, some types of subsidies were not subject to challenge at all (nonactionable subsidies, also called “green light” subsidies). This group included subsidies for certain research activities (R&D), subsidies for disadvantaged regions, and subsidies to cover the costs for industries to adapt to stricter environmental standards. However, since 2000, the “green light” status of these subsidies has expired, meaning that they have become actionable (“amber light” subsidies) if they cause adverse trade effects.

3.1 Prohibited Subsidies

Two types of subsidies are prohibited as such: export subsidies, and local content subsidies (Article 3 SCM). These types of subsidies are considered trade-distorting by their very nature. Accordingly, a complaining WTO Member need only demonstrate that such subsidies have been provided, without additionally having to demonstrate that the subsidies have caused adverse trade effects.

Governments are more likely to challenge foreign subsidy schemes if they include prohibited export subsidies or local content subsidies. The simple reason is that success is more predictable and easier to assess for claims against prohibited subsidies than for actionable subsidy claims. This certainly does not mean that actionable subsidy claims are never brought (and successfully so), but they are often added to complaints that also include prohibited subsidy claims (or claims of other WTO violations).

3.1.1 Export Subsidies

3.1.1.1 General Rule: Export Subsidies are Prohibited

Export subsidies are the first type of prohibited subsidy listed in the SCM Agreement (Article 3.1(a) SCM). To fall within this prohibition, a subsidy established through the legal standard in Article 1 of the SCM Agreement (financial contribution and benefit) must additionally be “contingent” on exportation. According to the Appellate Body, a subsidy is “contingent” on exportation if receipt of the subsidy is conditioned on the exportation of goods.

In some instances, the legal instrument granting the subsidy or setting out the programme from which the subsidy is granted will explicitly state that a condition of receiving the subsidy is exportation. In many if not most instances, however, the condition will not be stated expressly. In those instances, a complaining Member will need to address the constellation of facts surrounding the grant of the subsidy, in an attempt to demonstrate that the subsidy is in fact conditioned on export. To prove that a subsidy is de facto conditioned on export, the complaining Member must show that the subsidy is designed, or “geared”, to induce export performance by the recipient. To meet this standard, which resembles the definition of export subsidies in standard economic textbooks, a complaining WTO Member can attempt, for example, to show that the subsidy increased the recipient’s ratio of export sales to domestic sales.²³

[Page131:]

The standard for proving export subsidisation in law or in fact does not mean that every subsidy to an intrinsically export-oriented firm will be considered a prohibited export subsidy. The mere fact that a subsidy is granted to an export-oriented firm, or even increases the firm’s export sales, is insufficient to make it a prohibited export subsidy. If the geographical distribution of a subsidised firm’s sales simply reflects the fact that market demand for the product is disproportionately greater in export markets, the subsidy is not prohibited. In that case, the subsidy does not induce the subsidised firm to prefer export sales over domestic sales; instead, it is market demand that drives the geographical distribution of the firm’s sales.

Any attempt to prove that a subsidy is contingent on export on the basis of a change in the recipient’s ratio of export sales to domestic sales must reckon with this fact. Even if a firm with a pre-subsidy export-to-domestic sales ratio of 80:20 were to increase its ratio to 90:10 after a subsidy, that fact alone would not make the subsidy a prohibited export subsidy, if the post-subsidy ratio merely reflected a change in the geographical distribution of market demand for the subsidised product.

PROVING EXPORT SUBSIDISATION

One way to demonstrate export subsidisation on the basis of export-to-domestic sales ratios would be to compare the subsidised firm’s anticipated ratio of export-to-domestic sales before the subsidy, with the anticipated ratio of export-to-domestic sales after the subsidy. Were the firm to have changed the anticipated geographical distribution of its sales following the subsidy in ways not dictated by intervening changes in market demand, that change would likely be a significant fact, amongst the constellation of facts assessed by a WTO adjudicator.

The anticipated operation of the subsidy must be derived from the design and structure of the measure granting the subsidy. Is the measure designed in a way that drives the subsidised firm to prefer export sales over domestic sales? The answer to this question must be based on objective evidence (rather than on subjective intent), though the Appellate Body acknowledges that “objectively reviewable expressions of a government’s policy objective for granting a subsidy” may constitute relevant evidence.²⁴

Not just any subsidy to an export-oriented firm is prohibited outright. If the subsidy is designed to boost both export and domestic sales to a similar extent, the subsidy is in principle not prohibited, and could be challenged only as an “actionable” subsidy.

3.1.1.2 Exceptions

The SCM Agreement foresees a limited number of exceptions to this prohibition on export subsidies. All WTO Members have some – albeit limited – flexibility to provide export credit support on better than market terms, and all WTO Members are allowed to rebate exporters the taxes and import duties paid on inputs. In addition, certain small developing countries are exempt from the prohibition on export subsidies.

(a) Export Credit Support

Many WTO Members have Export Credit Agencies (ECAs) that provide foreign buyers with export credits to purchase goods or services from the ECA’s country. Export credit support takes two principal forms. First, “pure cover support” comprises insurance or guarantees for credit extended to a foreign buyer (or its bank) by a financial institution or an exporter. Under this form of export credit, the ECA commits to protect the[Page132:]financial institution or exporter against default by the foreign buyer; the foreign buyer (or its bank) essentially inherits the credit rating of the ECA, thus making the financial institution or exporter more willing to issue credits and/or credits at lower interest rates. Second, some ECAs also offer “direct credit” by directly extending loans to foreign buyers to purchase specific products or services originating from the ECA’s country.

In principle, under the SCM Agreement, WTO Members are prohibited from providing both types of export credit support if they do so on terms better than could be secured on the private market, without ECA involvement. This rule derives from the definition of the term “subsidy” provided in the SCM Agreement (see Section 2 above), and from the general prohibition against the provision of any subsidy that is contingent upon export performance (see previous section).

The SCM Agreement makes one limited exception for certain export credit support that conforms to the OECD (Organisation for Economic Co-operation and Development) Arrangement on Officially Supported Export Credits (the OECD Arrangement). However, it is critical for the business community to understand that export credit support is not necessarily WTO-compliant even if consistent with the terms of the OECD Arrangement. The SCM Agreement exempts some export credit support consistent with the OECD Arrangement from the prohibition on export subsidies, but the case law has given a narrow interpretation to this safe haven (inscribed in item (k) to the Export Subsidy List of the SCM Agreement (Annex 1)), and WTO adjudicators have not shied away from finding export credits to be inconsistent with the SCM Agreement.²⁵

THE OECD ARRANGEMENT

The OECD Arrangement is a gentlemen’s agreement between nine highincome member governments (including the EU, with its 28 member states), through which these OECD Participants have elaborated common disciplines on export credit support.²⁶The Arrangement is frequently modified. Under the terms of the Arrangement, enforcement is not achieved through a formal dispute settlement mechanism (as it is under the WTO), but rather based on a “notice and match” principle. Under this principle, an OECD Participant notifies fellow OECD Participants of the terms of support it intends to provide, and if those terms deviate from the disciplines of the OECD Arrangement, the other Participants are permitted to match that support, providing it on the same, OECD-inconsistent terms.

The safe haven (and the exception it provides) is available only for one type of export credit support, namely direct credits, and only insofar as those credits come with a repayment term of at least two years. This exception could also be invoked by non- OECD Participants if their export credit support is challenged before the WTO. However, the most significant form of export credit – pure cover in the form of guarantees or insurance – is not covered by the safe haven. WTO disciplines prohibit pure cover when provided to exporters on terms better than what could be secured on the market, even if such support conforms fully to the disciplines in the OECD Arrangement. Similarly, matching is no defence against export subsidy claims in a WTO dispute, even though it is an essential feature – and indeed constitutes the entire deterrent – of the OECD Arrangement.

Finally, even export credit support that does benefit from the safe haven remains, in theory, vulnerable to (i) WTO challenge, if it causes adverse effects to other WTO Members’ interests; and (ii) unilateral CVD action, if injury to another country’s domestic industry has been shown.

[Page133:]

THE REGIONAL AIRCRAFT CASES²⁷

In 1997/1998, Canada and Brazil brought WTO challenges against each other’s export credit support schemes, which they used to help support sales by their respective regional aircraft producers. The Panel and the Appellate Body found both countries’ export credit support to be inconsistent with the SCM Agreement, as it was provided on better than market terms and could not be justified under the safe haven provision. Notably, the Panel rejected Canada’s argument that its export credit support was justified under the safe haven because it had matched the terms provided by Brazil.

In the first compliance proceedings, both countries’ revised export credit support schemes for regional aircraft producers were found WTO-inconsistent. In the second compliance proceedings (2001), Brazil successfully argued that its revised export credit support was no longer WTO-inconsistent. In parallel proceedings against Canada (2002), Canada’s export credit support was for the third time found WTO-inconsistent.

In 2007, the OECD Participants, including Canada and Brazil, negotiated a new OECD sector agreement on export credit support for civil aircraft, which seems to have marked the end of this dispute. The original WTO rulings also prompted OECD Participants to revise the wording of the “matching” provisions in the OECD Arrangement, but it seems unlikely that this change will make “matching” WTO-consistent, as intended.

(b) Rebates of Indirect Taxes and Import Duties

Border tax adjustments (BTAs) encompass the imposition of a tax on imported products equal to a corresponding tax on domestic products (import side), and the rebate of such a tax on exported products (export side). Such tax adjustments put the destination principle into effect. According to this principle, products are taxed solely in the country of consumption. The idea behind BTAs is that they achieve trade neutrality: they level the playing field between products from different countries with regard to taxation. If applied by all trading countries, BTAs on both the import and export side ensure that products are not double-taxed, but also ensure that products cannot take advantage of low taxes in their country of origin.

It is critical for the business community to understand that WTO rules allow for BTAs only on indirect taxes (e.g., sales tax, VAT), which are imposed directly or indirectly on products, and for BTAs on import duties paid on inputs (which are called “duty drawbacks”). The SCM Agreement prohibits rebates on exportation with regard to direct taxes (e.g., on income) and social welfare charges, which are considered to be imposed on the producer. Such direct taxes and social welfare charges are imposed in the country of production and cannot be adjusted on either the import or export side. Thus, the destination principle is applied to indirect taxes, whereas the origin principle is applied to direct taxes.

This means, for instance, that governments may not, consistent with WTO rules, rebate direct taxes upon exportation, even if they are merely trying to equalise direct tax levels for their exporters with the level of direct taxes imposed on competing foreign firms in export markets. Differences in the level of direct taxation among WTO Members therefore cannot be neutralised by providing tax exemptions to exporting firms. If a government is concerned about the impact of direct taxes on exportoriented firms, it will have to reduce its overall level of direct taxation for both domestic-oriented and export-oriented firms. If so, the generally applicable new tax[Page134:]system will not be considered a subsidy under Article 1 of the SCM Agreement, because the government will not be foregoing revenue otherwise due (see Section 2.1.3 above).

As a result of countries’ WTO commitments, firms are better off if their governments rely more heavily on indirect taxes than on direct taxes. On the export side, indirect taxes paid on inputs do not hurt the competitive position of firms in export markets, as these taxes can be rebated upon exportation of the finished product. On the import side, indirect taxes imposed on products sold domestically do not hurt firms’ competitive position vis-à-vis foreign products either, because such taxes can also be imposed on imported products sold in the domestic market. Direct taxes do affect the competitive position of firms vis-à-vis foreign competitors, however, as these taxes cannot be adjusted either on the export side or on the import side.

This difference between direct and indirect taxes is one of the reasons that attention is now being given to changing US tax policy in a way that would allow border tax adjustments.

The prohibition on export subsidies does not apply to two groups of developing countries: (i) least-developed countries (LDCs) designated as such by the United Nations; and (ii) other low-income countries listed in Annex VII(b) of the SCM Agreement (e.g., Kenya and Pakistan) – but only as long as their gross national income (GNI) per capita has not reached US$1,000 in constant 1990 dollars for three consecutive years.²⁸Subject to these conditions, both groups of countries are thus allowed to use export subsidies as a development instrument. Often, these countries have established industrial export processing zones in which special incentives are given to exporters (e.g., fiscal incentives and investments in infrastructure).

Two caveats apply to both groups of countries. First, their right to offer export subsidies must be phased out for product categories for which they have attained export competitiveness, i.e., reached a share of 3.25% in world trade for two consecutive years. Second, even if these countries’ export subsidies are not prohibited, they could still be subject to a multilateral actionable subsidy claim, or to unilateral CVD action by other WTO Members.

3.1.2 Local Content Subsidies

Local content subsidies (also called import-substitution subsidies) are the second group of prohibited subsidies (Article 3.1(b) SCM). To fall within this prohibition, a subsidy established through the legal standard in Article 1 of the SCM Agreement must additionally be “contingent” on the use of domestic over imported goods.

All WTO Members, including developing countries, are subject to this prohibition. By treating domestic inputs more favourably than imported inputs, local content subsidies are inconsistent not only with the SCM Agreement, but also with the national treatment provision of the GATT (Article III).²⁹

Much as with export subsidies, two elements must be demonstrated before a measure falls within this prohibition. First, a subsidy must be identified within the meaning of Article 1 of the SCM Agreement, as described in Section 2 above.

Second, the subsidy must be “contingent upon the use of domestic over imported goods”, i.e., is provided to the recipient on the condition that it uses upstream inputs of domestic rather than foreign origin. As with export subsidies, the legal instrument[Page135:]granting the subsidy or setting out the programme from which the subsidy is granted might, in some instances, explicitly state that a condition of receiving the subsidy is the use of domestic instead of imported inputs. However, in many instances, the condition will not be stated expressly. In those instances, the facts surrounding the grant of the subsidy must be assessed to determine whether the subsidy is in fact conditioned on the use of domestic over imported goods. To prove that a subsidy is de facto conditioned on the use of domestic over imported goods, the complaining Member must show that the subsidy is designed, or “geared”, to induce the selection of domestic instead of imported inputs. If so, this subsidy is prohibited as such, without the need to show that it has effectively caused adverse trade effects.

3.2 Actionable Subsidies – Adverse Effects

3.2.1 Introduction

Following expiry of the “green light” category of subsidies discussed above (Section 3.0), every specific subsidy within the meaning of the SCM Agreement is now potentially “actionable” (Articles 5 and 6 SCM). This means that, even if they are not export or local content subsidies, specific subsidies can be challenged before the WTO if they are proven to cause “adverse effects” to other WTO Member governments’ interests, which is to say, to other WTO Members’ commercial stakeholders. The objective pursued by the government granting the subsidy is irrelevant. The focus is exclusively on the trade effects resulting from the subsidy. Examples of successful actionable subsidy claims include a challenge by Brazil against US cotton subsidies, and challenges by the EU and the United States against each other’s subsidies in the large civil aircraft sector.³⁰

3.2.2 Preliminary Observations: When Should a WTO Member Consider an Actionable Subsidy Claim?

When considering whether to petition a WTO Member to bring an actionable subsidy claim, industry must bear in mind at least three factors.

First, a WTO Member must show adverse effects to products originating in its own territory, which, depending on the facts, may have been exported afterwards. Indeed, the case law clarifies that a WTO Member may not sustain a claim that another Member and that Member’s industry have suffered adverse effects. This means that a Member cannot bring an actionable subsidy claim by showing that a subsidy has caused harm to foreign products, i.e., products originating in other countries.

INDONESIA – AUTOS³¹

In Indonesia – Autos, the Panel rejected the US claim that Indonesia’s subsidies caused adverse effects to its interests as a result of the impact of the subsidies on affiliates of US automakers established in the EU. To address harm caused to products made abroad, such as in the EU, the affected industry must request the host country (i.e., the EU) to challenge the subsidy. As explained above (Section 1.2), the location of production determines the course of action, rather than the “nationality” of the affected company.

Second, subsidies can be challenged as long as they cause “present” adverse effects, typically demonstrated on the basis of up-to-date historical data. Importantly, the subsidy need no longer “exist” at the time of the WTO proceedings for the adverse effects of the subsidies to be challenged; only the adverse effects of the subsidy must exist at the time of the proceedings. This means that historical subsidy measures can be challenged as long as they continue to cause adverse effects.

[Page136:]

Firms should be aware that “old” subsidies could be subject to challenge, if it can be demonstrated that they cause present adverse market effects. This means that even subsidies predating the establishment of the WTO (1995) or, for newly acceded Members, predating their WTO membership, could be vulnerable to WTO challenge.

Third, and finally, subsidies can only have adverse effects on foreign products that compete in the same product market as the subsidised products. If two products do not compete, subsidies for one of the products are unlikely to be the cause of economic harm suffered by the other product. Demand-side substitutability (i.e., when two products are considered substitutable by consumers) and supply side substitutability (i.e., when a supplier can easily switch its production from one product to another) would both be relevant to this question.

THE PRODUCT MARKET ANALYSIS

In EC – Large Civil Aircraft the Appellate Body criticised the Panel for assuming that all large civil aircraft (LCA) models compete in the same market. The Appellate Body found that the Panel should instead have analysed the EU’s assertion that the LCA models at issue competed in five distinct product markets. Where products compete in distinct product markets, a distinct adverse effects analysis must be conducted separately for each product market.

3.2.3 What Constitutes “Adverse Effects”

The definition of “adverse effects” in the Agreement is complex (Article 5 SCM). The Agreement lists three types of adverse effects: (a) “injury” to the complainant’s domestic industry; (b) “nullification or impairment” of tariff concessions undertaken by the subsidising country; and, finally, the broadest type, (c) “serious prejudice” to the interest of another Member.

For present purposes it is enough to observe that adverse effects in the form of “serious prejudice” can in principle occur in any part of the world, whether the domestic market of the complaining Member or an export market. These adverse effects could take the form of either adverse volume effects (loss of actual or anticipated market share or lost sales) and/or adverse price effects (price suppression, price depression or price underselling) (Article 6 SCM). For instance, a complaining Member may be able to show that subsidisation enabled foreign firms to win market share from its competitors, or to reduce the price at which a product is sold in a market where it is competing.

With regard to price effects and one type of volume effects (lost sales) the complaining Member must also show that these effects are “significant”, which the Appellate Body has understood to mean “important, notable or consequential”.³²The significance of an effect (or lack thereof) may vary from case to case, depending on the factual circumstances. For instance, in US – Upland Cotton, the Panel agreed that even a relatively small price effect could be significant in the upland cotton market, given the narrow profit margins and the price sensitivity of sales in this commodity market.³³

[Page137:]

If the complaining industry’s major concern is with the impact of the subsidised exports solely on its domestic market, it could consider a CVD complaint with the domestic authorities if that option is open to it under domestic law. But this will not of course help if the harm is in other markets. There is nothing to prevent a complainant from seeking both CVDs and the multilateral remedy at the same time, though the multilateral remedy will then have to be confined to adverse effects outside the domestic market.

3.2.4 Last But Not Least: How Does a Complaining WTO Member Demonstrate Causation?

Finally, the complainant must show that the above-mentioned volume or price effects are effectively caused by the subsidy. Demonstrating causation is often the most difficult hurdle in an actionable subsidy claim. As the Appellate Body has explained, subsidies must be shown to be a “genuine and substantial cause” of serious prejudice, and the demonstration is a “fact-intensive exercise, and one that inevitably involves extensive, case-specific evidence”.³⁴ In most cases, the evidence consists of a combination of qualitative and quantitative elements.

Several qualitative elements have been found particularly relevant in the case law.

The nature of the challenged subsidies is an important factor in assessing causation. For instance, subsidies tied to production are more likely to cause adverse effects than “untied” subsidies, which can be characterised in some circumstances as merely increasing cash flows.

The magnitude of subsidies plays a role in the determination of causation, although relatively small subsidies could generate significant effects, depending on the nature of the subsidies and the market.

The competitive dynamics in the market at issue are relevant. Serious prejudice is considered a more likely effect of subsidisation in markets where, for instance, market players exercise market power.

In most circumstances (and certainly when subsidies are provided in competitive markets), a successful causation showing will require that qualitative elements be supplemented with quantitative analyses. Quantitative analyses could be based on financial, economic and/or econometric tools suited to demonstrate a causal link between subsidies and adverse volume or price effects. For instance, in US – Upland Cotton,³⁵Brazil successfully presented a so-called “simulation model”. This model simulated the counterfactual situation of a world without US cotton subsidies, showing how much world prices, production, and imports or exports in the United States and the rest of the world would have changed absent the subsidies.

AGGREGATION

To establish causation, complainants can elect to “aggregate” all subsidies that are similar (in design, structure, and operation), such that they affect volume or prices through the same causal pathway. An aggregated analysis can be a powerful tool to establish the required causal nexus between the aggregated subsidies and the market phenomena (price or volume effect), in situations where there are a number of relatively small subsidies and no such link could have been established on the basis of an isolated analysis of each of the individual subsidies. Aggregation thus makes it easier to establish serious prejudice.

[Page138:]

Finally, the Appellate Body has accepted that “intervening events”, occurring after the subsidy has been granted, may attenuate, or even break, the causal link between the subsidy and adverse effects.³⁶An example of such an intervening event is the privatisation of a previously subsidised state-owned enterprise. The Appellate Body found that, if such privatisation is made at fair market value and at arm’s length, the prior subsidies are presumed to be extinguished.³⁷

3.2.5 More Flexibility Given to Developing Countries on Actionable Subsidies

Under the SCM Agreement, developing countries have greater flexibility to provide actionable subsidies. For at least two reasons, the scope of this special and differential (S&D) treatment is however unclear.

First, the group of countries benefiting from S&D treatment for actionable subsidies is not clearly defined. In principle, S&D treatment is available to all “developing country” Members of the WTO (except China, which committed on accession not to rely on this S&D treatment). “Developing country” status is in principle based on self-selection in the WTO regime, but could also be challenged by another WTO Member, including another developing country.

Second, the extent of S&D treatment is open to different interpretations. While the SCM Agreement clearly permits challenges to developing country subsidies that cause (i) injury to the complainant’s domestic industry or (ii) nullification or impairment of tariff concessions undertaken by the subsidising developing country, it is less clear whether developing country subsidies can be challenged for causing the third form of enumerated adverse effects – “serious prejudice”. This will remain an important grey area in WTO law until the case law clarifies the correct reading.

The SCM Agreement also makes it (slightly) more difficult to impose CVDs on subsidised imports from developing countries, by requiring negative findings in cases against developing countries where the subsidy rate is not more than 2%, whereas the cut-off is only 1% in the case of developed countries. However, despite this higher threshold, the majority of CVD action is still taken by developed countries (mainly by the United States and the European Union) against imports from developing countries (mainly against China and India).³⁸

Firms located in developing countries could benefit from the additional flexibility given to these countries to provide domestic subsidies. The flexibility offered by the SCM Agreement for developing countries to provide domestic subsidies to their industries provides some protection against a WTO challenge. At the same time, exports benefitting from these subsidies could still face CVDs in export markets.

4.0 What Can be Done to Remedy Subsidised Competition?

4.1 How Does a Company Know Whether Its Competitors Are Subsidised?

Firms may not know whether the success their rivals are enjoying in the marketplace is fuelled by subsidies. Fortunately, WTO rules and in some cases domestic law impose transparency obligations on Member governments that permit a fair degree of insight into the subsidies they provide to support their industry. While the information generated by virtue of these transparency disciplines will not be comprehensive and will not replace a thorough assessment of the consistency of the subsidies with the disciplines in the SCM Agreement, it does provide an important starting point to understand the nature and extent of benefits being provided to rival firms. We introduce below the SCM transparency obligations to assist in this exercise.

[Page139:]

First, all WTO Members are in principle obliged to notify the WTO of their specific subsidies on an annual basis. However, as Figure 1 illustrates, this obligation is not universally well respected. In 2015, two-thirds of WTO Members failed to notify the WTO of their specific subsidies. Moreover, even the completed notifications do not always list all of the specific subsidies provided. Nonetheless, the notifications that are made form an important source of information, and can be used by WTO Members as a basis to raise questions about other Members’ notified subsidies in meetings of the WTO’s Subsidies Committee. The notifications, arranged by individual country, together with questions and answers about them, can be found on the SCM page of the WTO website.³⁹

Figure 1: Status of compliance with subsidy notification requirements (1995-2015).⁴⁰

Second, the WTO Secretariat regularly conducts a Trade Policy Review (TPR) of each WTO Member (see Chapter One, Section 6). TPRs often provide a good overview of the general subsidy schemes in place in the WTO Member subject to review, and can form a good starting point for research on the subsidies available to a competitor in another WTO Member.

Third, subsidising governments often publish useful information on their subsidies. Many governments face domestic transparency obligations that require disclosure of detailed information on support granted to firms, often in granular detail. Some WTO Members have regulatory “checks and balances” in place to internally assess the effectiveness of their subsidy schemes. For instance, the US Congressional Research Service (CRS) conducts policy and legal analysis for the US Congress, including analysis on US subsidy programmes (e.g., export credit programmes and the farm bill), and both the US Congressional Budget Office (CBO) and the US Government Accountability Office (GAO) are frequently called upon to assess the efficacy of US subsidy programmes in achieving their stated objectives.⁴¹Additionally, some Members require notification of support programmes under domestic competition laws. For example, EU law requires EU member states to notify the European Commission of instances of “state aid”, with the resulting notifications potentially providing information on support provided to European industry.⁴²

Fourth, Article 22 of the SCM Agreement requires that CVD determinations be accompanied by a detailed report of findings of fact and law that will include detailed information about the subsidy programmes investigated. Reviewing determinations[Page140:]involving the country believed to be providing subsidies may provide useful information about programmes that may be benefitting the firm’s competitors.

4.2 What Choices Does an Industry have to React to Foreign Subsidisation?

When an industry knows that its foreign competitors are receiving subsidies, it may explore different ways to respond. In so doing, the industry must understand the upsides and downsides of these options in light of its country’s WTO commitments. It is often easier to convince a government to take action against foreign subsidisation when more than one firm supports action. In case of unilateral CVD action, it is even required, as a matter of law, that a sufficiently important part of the domestic industry (producing the same product) supports such action. (See Chapter Six, Section 2.4.1.)

4.2.1 Option 1: Ask for Subsidies in Return, to “Level the Playing Field”

The first way that an industry can respond to subsidies granted by a foreign government to a rival firm – indeed, probably the most obvious way – is to ask its own government to provide it with similar support. Critically, however, “matching” is not a defensible basis for providing subsidies under WTO law. This means that other WTO Members – even those who subsidise their own industries – could challenge such tit-for-tat subsidies before the WTO, claiming that the subsidies are prohibited (if they are export or local content subsidies) or actionable (if they cause adverse effects). The subsidies are not justified simply because they were given in order to match foreign subsidies. Other countries would be allowed to impose CVDs to offset the effect of such subsidies in their domestic markets.

In practice, the well-known “glass house” syndrome may make countries less likely to be the first to cast stones at another’s subsidies. This dynamic helps explain why WTO Members have not rushed to challenge the massive, cross-industry subsidisation undertaken by governments in the wake of the 2008 financial crisis. Nonetheless, several WTO cases show that glass houses are not an absolute impediment to litigation before the WTO. Recall, for instance, the decisions by Canada and the United States to cast the first stone in challenges against support granted by Brazil and Europe to their regional and large civil aircraft industries respectively, despite the predictable certainty that Brazil and the EU would rapidly respond with counterchallenges to support provided by Canada and the United States.

4.2.2 Option 2: Try to Secure Access to the Foreign Subsidies

On the principle that “if you can’t beat them, join them”, firms confronted with competition by rivals with access to foreign subsidies may consider whether they could themselves similarly secure access to those same foreign subsidies. Such access could be either direct or indirect, i.e., through a local subsidiary or branch. Some subsidies, such as fiscal incentives, are explicitly offered to foreign investors by governments to attract them into their markets. Again, however, doing so does not make the subsidies WTO-consistent or immune to challenge before the WTO. If a WTO Member feels that foreign subsidisation risks leading to off-shoring by some segment of its industry, it may become particularly motivated to challenge those subsidies before the WTO.

4.2.3 Option 3: Raise Concerns with the Subsidising Country about WTO-inconsistency

An industry could raise concerns about subsidisation with the foreign country in question, either directly or through its own government. Before opening these discussions, it is critical to prepare an assessment of the targeted subsidy under WTO rules, so that the specific WTO-inconsistencies at issue are clear and can be convincingly communicated to create maximum leverage. This may help convince the[Page141:]subsidising government to revoke or modify its subsidy schemes. If not, an industry can push its government to consider a unilateral CVD action or a multilateral WTO complaint. If the government of the complaining industry is involved, it could raise the matter with the subsidising government on a bilateral basis or it could bring it up in the WTO Committee on Subsidies and Countervailing Measures, in which case it might be able to get support from other countries.

4.2.4 Option 4: Seek Imposition of CVDs (Unilateral Remedy)

To address the adverse impact of subsidised imports in the domestic market, an industry could petition its government to launch a CVD investigation. If successful, this request would result in CVDs on subsidised imports, offsetting the impact of the subsidies on the domestic market (see Chapter Six). As noted above, however, CVDs are not effective for offsetting the impact of the subsidies in the market of the subsidising country or in third-country markets. Those effects can only be addressed through multilateral action (assuming Option 3 is unsuccessful). Such multilateral action against the effects of subsidies in foreign markets could be pursued at the WTO together with a CVD action designed to offset injury caused in the domestic market.

4.2.5 Option 5: Ask your Government to Launch a WTO Complaint against the Subsidising Country (Multilateral Remedy)

The industry could work with its government to bring a formal WTO complaint against the subsidising WTO Member. Although such a multilateral action may take longer than a unilateral CVD action, multilateral action could address the adverse impact of subsidies encountered in any and all geographic markets, beyond the domestic market of the injured Member.

In the following sections, we explore in greater detail how this multilateral track works.

4.3 Challenging Foreign Subsidisation before the WTO

The WTO dispute settlement system has been successfully used by many WTO Members (both developed and developing) to challenge subsidies for a variety of products in both the industrial and agricultural product sectors. The Appendix lists these cases, as well as cases challenging Members’ use of CVD laws.

The general rules governing WTO dispute settlement apply to disputes involving challenges to subsidies (see Chapter Twelve), supplemented by some “bells and whistles” specifically provided in the SCM Agreement. The supplemental rules vary depending on whether the challenged subsidies are prohibited or solely actionable. Because prohibited subsidies are prohibited per se, the SCM Agreement imposes more stringent procedural deadlines, implementation obligations and potential remedies than apply in cases involving actionable subsidies only.

4.3.1 Procedures

Accelerated, “fast track” procedures apply in the case of prohibited subsidies challenges, because there is no need to consider “adverse effects”. There are some, albeit more limited, accelerated deadlines also foreseen for actionable subsidies cases. In practice, the economic, econometric and financial complexity of subsidies disputes means that panels do not strictly adhere to the accelerated timelines foreseen by the SCM Agreement, although in some instances, the accelerated procedures have been effective.

Importantly, the SCM Agreement uniquely includes a procedure (the so-called Annex V procedure) akin in some respects to the “discovery” process available in some domestic jurisdictions. The Annex V procedure obliges respondents in disputes alleging serious prejudice to provide information requested by complainants on a broad range of questions concerning the nature and amount of subsidies, sales data[Page142:]for subsidised firms, and other information relevant to the assessment of the adverse effects of the challenged subsidies. Failure of a responding WTO Member to cooperate risks the adoption of adverse inferences, with key factual issues to be determined on the basis of the best evidence otherwise available. Annex V is therefore a powerful tool for use in actionable subsidy disputes.

4.3.2 Implementation

If the challenged measure is found by the WTO adjudicator to be a prohibited (export or local content) subsidy, the subsidising Member is required to “withdraw the subsidy”. While the preferred course of implementation in all WTO disputes is withdrawal of the offending measure, there is one important difference concerning prohibited subsidies findings. Specifically, the subsidising Member is not given a reasonable period of time to implement the ruling, as in cases of other WTO violations, but is required to withdraw the subsidy “without delay” – a period of time that the adjudicator will specify, and that is frequently set at 90 days.

The orthodox view of the requirement to withdraw the subsidy is that it applies on a prospective basis, such that the subsidising Member must halt subsidy benefits after the implementation deadline. Only one panel has found that, to withdraw the subsidy, the subsidising Member was required to secure retroactive repayment of the prohibited subsidy from the recipient company.⁴³ This ruling was fiercely criticised by many WTO Members, and was seen as a fundamental departure from the general principle that WTO law provides only for prospective remedies.

With respect to actionable subsidy findings, the implementation requirements are more flexible. The subsidising Member is given six months to implement the ruling (less than the implementation period usually given for other WTO violations). The Member is given the option of either withdrawing the subsidy, or removing the adverse effects of the subsidy. Thus, in contrast to prohibited subsidies, the subsidising Member is permitted to maintain the subsidy as long as the adverse effects are removed. The pending compliance proceedings in the US and EU disputes concerning support for their respective large civil aircraft industries will provide important guidance on what these obligations precisely mean.

4.3.3 Countermeasures

If the subsidising Member fails to implement the adverse ruling – a circumstance that is relatively rare in the WTO dispute settlement system – and does not offer acceptable compensation, the complainant can pursue authorisation from the WTO to impose countermeasures against the subsidising Member, in order to put pressure on it to give up or at least modify the subsidy programmes at issue (See Chapter 12, Section 2.1.2.5). When actionable subsidy findings are involved, the amount of countermeasures is based on the nature and degree of the adverse effects caused by the subsidy to volumes and values of trade by the complaining Member. In the case of prohibited subsidy findings, the practice has varied. In early disputes, countermeasures were calculated as the full amount of the prohibited subsidy – an amount that could, in many instances, be higher than the trade effects of the subsidy on the complaining Member. In more recent disputes, however, such as US – Upland Cotton, countermeasures for prohibited subsidy findings have been calculated in the same way as for actionable subsidy findings, i.e., in the amount of the adverse volume and value effects of the subsidy on trade by the complaining Member. As the US – Upland Cotton dispute demonstrates, the level of countermeasures can still be substantial, even when confined to trade effects.

[Page143:]

THE FOREIGN SALES CORPORATION CASE –

HOW IT CAME TO AN END⁴⁴

As explained above (Section 2.1.3), the EU successfully challenged the US income tax exemption for “Foreign Sales Corporations” (FSC) as – prohibited export subsidies, with the Appellate Body report circulated in 2000. In subsequent compliance proceedings (in 2002 and, again, in 2005), the EU showed that the United States had failed to withdraw the prohibited subsidies. Given the US failure to comply, an arbitration panel determined in 2002 that the EU could take countermeasures, with a maximum of US$4 billion annually (which the EU elected to operationalise in the form of a 100% ad valorem tax on certain US imports).⁴⁵ In 2006, the United States ultimately repealed the contested measures and the EU consequently lifted its countermeasures, bringing an end to this long-lasting trade dispute.

THE UPLAND COTTON CASE⁴⁶

Brazil successfully challenged actionable and prohibited subsidies for US upland cotton producers, along with prohibited export subsidies in the form of export credit guarantees for a wide range of agricultural products. In 2005, the WTO recommended that the United States withdraw the prohibited subsidies, and remove the adverse effects of the actionable cotton subsidies or withdraw such subsidies. As the United States failed to implement the ruling, Brazil sought authorisation to impose countermeasures, including under the TRIPS Agreement.

In 2009, the arbitration panel determined the amount of authorised countermeasures based on the adverse volume and value effects of the subsidies on Brazilian trade (with a fixed amount of approximately US$150 million associated with the actionable subsidy findings, and a variable amount associated with the prohibited subsidy findings, based on a formula to be applied to subsidy and trade data on an annual basis).⁴⁷Applying the arbitrators’ formula to data from 2010, Brazil was entitled to impose countermeasures in an amount of over US $800 million annually.

The threat of countermeasures led to negotiations between the Brazil and the United States, and ultimately resulted in settlement. To avoid countermeasures, the United States made a number of changes to its subsidy programmes, and paid Brazil approximately US$700 million to support Brazil’s cotton industry.

5.0 How to Design a WTO-Consistent Subsidy Programme

Having reached this concluding section, most readers will hopefully have some idea of the attributes of a subsidy that expose it to challenge under the SCM Agreement. Four guiding principles are distinguished below for governments seeking to design a WTO-consistent subsidy. These principles apply equally to one-time (so-called nonrecurring) subsidies and to subsidy programmes.

5.1 Principle 1: Shape or Form Does Not Matter (In Principle)

Subsidies are defined broadly under the SCM Agreement, covering subsidies resulting from positive government action (e.g., grants, loans, or the provision of goods or[Page144:]services), as well as from negative action (tax exemptions); and this regardless of whether these subsidies are given directly by the government (or any of its public bodies), or indirectly through entrustment or direction of private bodies.

This broad approach aims at preventing governments from circumventing the rules of the SCM Agreement. For this reason, panels and the Appellate Body have also been willing to give a broad interpretation to the definition of a subsidy, regardless of the specific form the subsidy takes in practice.

Although shape or form does not matter in principle, two nuances are important to keep in mind. First, even if the rules formally apply equally to all forms of subsidies, not all subsidies are as easily detectable and challengeable in WTO proceedings. For instance, it is often easier to show subsidisation by the government itself than to find sufficient evidence that a private body has been entrusted or directed by a government to provide such a subsidy. Second, despite the broad definition of subsidies, some types of government support for the domestic industry are not covered under the definition (e.g., export quotas and low regulatory standards) and are thus not regulated under the SCM Agreement. However, it bears noting that this does not mean that such government interventions are by definition WTO-consistent, as they may be regulated under other WTO agreements. For instance, although export quotas are not a subsidy (and are therefore not regulated under the SCM Agreement), they are nonetheless prohibited by virtue of Article XI of the GATT.

5.2 Principle 2: Do Not Tie the Subsidy to Increased Exports or the Use of Local Inputs

When designing a subsidy programme, governments must not tie receipt of the subsidy to exportation or on the use of local content. These are the two red lines in the SCM Agreement that must not be crossed. From a litigation perspective, export subsidies and local content subsidies are particularly attractive as a target, because a complaining Member need not demonstrate that these types of subsidies have caused any harm. These so-called red-light subsidies are prohibited as such, regardless whether trade effects can be demonstrated.

This means that governments should be careful not to include, in the measures or other documents describing the subsidy programme, any language suggesting that receipt of the subsidy is conditioned on exporting products, or using local inputs. Further, even if no such conditionality is expressly stated, governments should be careful that their subsidy programme is not in fact designed to encourage sales for export rather than to domestic markets, or the use of local as opposed to imported content. To prevent circumvention, such conditionality in fact is also prohibited under the SCM Agreement (although proving de facto conditionality in WTO proceedings is more challenging than when the condition is expressly stated).

If no such conditionality is present (either on exportation or on the use of local content), a subsidy programme is WTO-consistent, unless a complaining Member can prove that the subsidy programme causes adverse trade effects. This means that domestic subsidies always remain vulnerable to WTO challenge – if the subsidy turns out, immediately or sometime later, to cause economic harm to foreign producers. That said, the threshold to challenge actionable subsidies is higher than for prohibited subsidies, because adverse (volume or price) effects will have to be demonstrated, which is a fact-intensive exercise. Actionable subsidies (like prohibited subsidies) also remain vulnerable to CVD action. Therefore, to make sure that a subsidy programme is – and remains – WTO-consistent and outside the reach of CVD action, either Principle 3 or Principle 4 will have to be respected as well.

[Page145:]

5.3 Principle 3: Do Not Discriminate Among Domestic Producers: Make the Subsidy Generally Available Among Domestic Producers, Regardless of the Specific Industry

One way to design a WTO-consistent subsidy programme is to make it generally available among domestic producers, regardless of the industry or region in which they operate. If truly available across industries and regions, and not tied to exports or import substitution, such a subsidy is not specific, and is immune from WTO challenge and CVD action.

To design a non-specific subsidy, the government must clearly spell out objective criteria governing the eligibility for, and the amount of, a subsidy. These criteria must not favour certain industries over others, and should be economic in nature (based on, for instance, the number of employees or size of the firm).

Importantly, a government will also have to be careful that the subsidy will not in fact be predominantly used by a limited number of industries. As with export and local content contingency, the SCM Agreement aims to prevent circumvention of the specificity rule by covering subsidies that are specific in fact.

The provision of general infrastructure (e.g., roads, power stations) could be seen as a form of non-specific support that is also WTO-consistent. Such infrastructure must be accessible to all (or nearly all) entities, and not be designed or used by a limited group of industries.

5.4 Principle 4: Do Not Discriminate Against Foreign Producers: Subsidise Consumers, Regardless of the Origin of the Product

A final way to design a WTO-consistent subsidy scheme is to subsidise domestic consumers, instead of domestic producers. Consumption subsidies, provided to consumers regardless whether they buy domestic products or imported products, are less exposed to challenge. Such a consumption subsidy could, for instance, take the form of a tax credit for consumers.

Consumption subsidies are in principle consistent with the SCM Agreement because they do not undermine – and, indeed, bolster – competitive opportunities for all producers, including foreign producers, which may see an increase in their export sales to the country stimulating consumption of the product in question. Such a consumption subsidy is likewise GATT-consistent, as it is non-discriminatory.

Consider, for instance, a government wishing to simulate the sale of electric cars. One way to do so is by granting subsidies to domestic electric car producers, in the form of grants, loans at below market rates, or income tax reductions. If such producer subsidies are made conditional on the use of domestic inputs (e.g., engines), they would be prohibited outright by WTO rules. If not, the subsidies may still be vulnerable to WTO challenge or CVD action if they cause economic harm to foreign electric car producers.

Alternatively, the government may choose to provide consumer subsidies in the form of tax credits to buyers of electric cars, regardless of origin. Such non-discriminatory consumer subsidies are WTO-consistent and therefore in principle not vulnerable to WTO challenge or CVD action.

The WTO rules provide an incentive for governments to turn gradually away from producer subsidies, which inherently favour domestic producers, to nondiscriminatory consumer subsidies, which put domestic and foreign producers on an equal footing. Producer subsidies are vulnerable to WTO challenge if they cause adverse trade effects to foreign producers, whereas consumer subsidies are WTO-consistent, at least if implemented in a non-discriminatory fashion.

[Page146:]

[Page149:]

---

---