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Assignment on Type of Subsidies As Mentioned In

WTO Subsidies Agreement

SUBMITTED BY – KUNAL MEHTO

SUBMITTED TO -.

DR. DIGVIJAY SINGH KATOCH

ASSISTANT PROFESSOR OF LAW

R.N. -1020161753

BA LLB 7th Sem.

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RESEARCH METHODOLOGY

Method of Research
The researcher has adopted a purely doctrinal method of research. The researcher
has made extensive use of the library at the Himachal Pradesh National Law
University and also the internet sources.

Aims and Objectives

The aim of the project is to present an overview ‘Different type of Subsidies’ in the
International scenario.

Sources of Data:
The following secondary sources of data have been used in the project-
1. Cases
2. Books
3. Websites

Method of Writing:
The method of writing followed in the course of this research paper is primarily
descriptive.
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Type of Subsidies As Mentioned In WTO Subsidies Agreement

Introduction

The basic question of fair trade is derived from certain assumed values that touch the core
economic idea of free trade. Free trade under the WTO covers all kinds of goods, and is not
confined to trade in traditional goods such as raw materials and agricultural products; rather
nowadays it is also to promote trade in technological products, which needs to be competitive at
the global level. Attaining this level of competitiveness requires a specialisation in production
and this plays a key role in the creation of wealth. Creating wealth for welfare and, subsequently,
its proper distribution, needs fair regulation. In this context, the making of a distinction between
fair trade and unfair trade is a complex issue for both lawyers and economists.
Undoubtedly, the law relating to the development and administration of the use of subsidies
developing is one of the most difficult areas of international economic policy and rule making. It
is also one of the most pervasive problems in international trade. All the governments around the
world in some way or the other intervene in order to achieve the industrial or social policy goals.
Subsidy is one such method. In the simplest of terms, Subsidization occurs when a government
provides its producer(s) with financial contributions that give the producer(s) an advantage in the
market place1.
Subsidies acquire greater importance when it comes to developing countries and least developing
countries. It is crucial or the sustenance and maintenance of their economies at whatever stage of
development these economies are.
There are theories both for and against the use of subsidies in International Trade. Economists in
favor of subsidies argue that it would be unwise on the part of the importing country to take any
action any against subsidization. Subsidies do not distort as much as other classic trade and
commercial policy instruments, viz. quantitative restrictions and tariffs. In fact, they argue that
subsidies an instrument, whereby governments, at least in a perfect competition model, subsidize

1
Anwarul Hoda and Rajiv Ahuja, ‘Agreement on Subsidies and Countervailing Measures: Need for Clarification and
Improvement', 39(6) Journal of World Trade 1009 (2005)
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foreign consumers: a reduction in the marginal cost of foreign firms (which may be the
consequence of a subsidy) would, in general, reduce prices in domestic firms. On the other hand,
those against it argue that subsidies tend to distort international production and trading patterns,
and reduce efficiency and thus reduce world welfare.
The WTO- Agreement on Subsidies and Countervailing Measures aims to compromise these two
positions. The compromise between the possibility for governments to apply subsidies and
restrictions imposed by international trade law fits well into the general picture of the WTO legal
system's overall structure. WTO law primarily imposes restrictions on governments only insofar
as it is necessary to ensure the functioning of the principles of non-discrimination and open
markets in order to ensure optimal economic welfare. However, this does not imply that the
WTO members have unrestricted freedom with regard to their trade and economic policies.
Economic activity pursued within the ambit of their regulatory freedom is also subjected to the
restrictions by WTO law.

The WTO agreement on subsidies and countervailing measures (ASCM)

he ASCM, which came into force in 1995, established rules not only on how and when CVDs
could be applied, but also on what kinds of potentially trade-distorting subsidies would be
allowed, and what remedies were available to countries that felt they had been adversely affected
by another country's subsidies.
Only two kinds of subsidies are prohibited by the ASCM (Article 2): export subsidies, and
subsidies contingent upon the use of a domestically produced over imported goods. All other
"specific subsidies", which are subsidies that benefit only particular companies or industries, are
allowed, but actionable. "Actionable" means that if adverse effects can be demonstrated, the
affected country can take one of several actions 2.
If the main concern of the complaining Member (the WTO does not use the word "country") is
displacement of goods sold in its own market as a result of a non-prohibited subsidy, that
Member may apply a countervailing duty. If the complaining Member's main concern is

2
United Nations Conference on Trade and Development, ‘Subsidies and Countervailing Measures',
http://www.unctad.org/en/docs/edmmisc232add15_en.pdf (visited 20 November 2019)
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displacement of its exports in the subsidizing Member, or in a third country, by a prohibited or

actionable subsidy, it may seek remedies through the WTO.
A subsidy can generally be expressed as the opposite of a tax. Referring this practice from the
broader perspective of industrial trade production and free movement of goods, the term
“subsidy” in general can be construed as conforming to a meaning with a wider coverage, such
as “aid,” “bounty” and “grant” on a collinear basis. However, such a wide interpretation is not
used to determine fairness in international trade
The definition contains three basic elements:
a) a financial contribution
b) by a government or any public body within the territory of a Member
c) which confers a benefit.
All three of these elements must be satisfied in order for a subsidy to exist.3 Thereby, the
Agreement requires a financial contribution and contains a list of the types of measures that
represent a financial contribution (grants, loans, equity infusions, the purchase of goods, fiscal
incentives, the provision of goods or services, loan guarantees). 4
Also, financial contribution ought to be made by or at the direction of a government or any
public entity within the territory of a Member. Thus, it applies to measures of sub-national
governments and of such public bodies as state-owned companies. Although, government very
often give direct payments to enterprises subsidies are usually indirect. They may be in a form of
research-and-development
support, provision of raw materials at below-market prices, tax breaks, or law-interest loans or
low-interest export credits guaranteed by a government agency.

Categories of Subsidies

The SCM Agreement considering the WTO objectives classifies subsidies into three categories,
so as to distinguish between the types and their effects on the objectives of the WTO.
According to the WTO, a subsidy is classified as;

3
Article 1 of the WTO Agreement on Subsidies and Countervailing Measures L336 01/01/1995;
4
http://www.wto.org/english/tratop_e/scm_e/subs_e.html ( visited on 10:45 pm at 20 Nov 2019)
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1. Prohibited
2. Actionable
3. Non-actionable

Prohibited subsidies:
Prohibited subsidies are the kind of subsidies that directly induce export performance and also
include subsidies contingent upon the use of domestic inputs. Article 3 of the ASCM therefore;
prohibits two forms of subsidies, or any such measures adopted by any Member State to
encourage such subsidies. These are subsidies for the promotion of exports and, subsidies on the
use of domestic goods over imported goods.5 The inclusion of the MFN clause and the National
Treatment Principle is to strengthen the market liberalisation policies among the Member States.
State support in the form of prohibited categories of subsidies is contrary to trade liberalisation
policies and causes distortion in the promotion of free trade. It creates unfair competition in the
market, as the subsidy based products can be sold at a cheaper price. As a consequence of such
policies, market efficiency, based on fair competition is affected. The continued practice of
giving such support, affects the efficient use of resources, so the regulation through fair trade
measures attains primary relevance. Such policies, if adopted by the Developed countries,
depress market opportunities and disallow the growth of a comparative cost advantage for the
Developing and Less-Developed countries, thus hindering the main objectives of the WTO.

Export Promoting Subsidies

Article 3 mainly covers the subsidies for the export of industrial goods. Any forms of subsidies
for export performance are based on financial contribution and benefit to any specific industry.
Continuing the discussion on prohibited subsidies further, the provision Article 3.1(a), covers
subsidies that are meant for export performance contingent both in law or in fact. Thus, the issue
of contingency is based on two suppositions, de jure and de facto contingency. De jure
contingency can be explained directly by the words of the legislative provisions, whereas de
facto contingency needs to be ascertained by circumstances.

5
Hoda and Ahuja (2005), p. 1012.
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Subsidies Contingent upon the Use of Domestic over Imported Goods

This clause emphasises the need for regulatory fair trade values to check discriminatory
practices. This clause proposes a general prohibition without letting any explicit distinction
between questions related to law or any such condition related to facts. Any member affected by
such factors can bring claims under this provision and will be remedied. In the case of Canada-
Certain Measures Affecting the Automotive Industry,6 the main issue was the Canadian measure,
providing duty free treatment for the imports of automobiles, buses, and specified commercial
vehicles under Customs Tariff, Motor Vehicles Tariff Order, 1998 and the Special Remission
Orders.216 Claims were made by European Communities and Japan that the measures followed
by Canada were inconsistent with the prohibition of subsidies contingent upon the use of
domestic over imported goods, under Article 3.1(b) and in consistent with Article III:4217 of the
GATT Agreement. the Panel’s analysis in this case was incomplete as it failed to take into
account the object and purpose of the SCM Agreement.7 The A.B by drawing these implications
further stated that as there is nothing in the Article 3.1
Basically, Article 3 of the SCM Agreement is a proposed outline covering prohibited subsidies.
Prohibited subsidies are void-ab initio and are restricted at the initial stages. Thus, within the
provisions of Article 3, there is less room for flexibility as regards classifying subsidies as
justifiable and non-justifiable. The subject of subsidy is a matter of state support, so an important
question arises for study, that what types of subsidies are justifiable and which are non-
justifiable. The possibility to make such categorisations is in the case of actionable subsidies as
classified under SCM Agreement. Article 5 and Article 6 covers state support, that is actionable
and it demands further elaboration in the context of (1) development (2) basic infrastructure (3)
fair policy measures.

6
WT/DS139/AB/R
7
WT/DS139/AB/R, para 137 and para 138.
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Actionable subsidies:

Most subsidies, such as production subsidies, fall in the “actionable” category. Actionable
subsidies are not prohibited. However, they are subject to challenge, either through multilateral
dispute settlement or through countervailing action, in the event that they cause adverse effects
to the interests of another Member. Actionable subsidies can be defined as any form of subsidies
other than those mentioned in Article 3 of the SCM Agreement. Article 5 and Article 6 of the
SCM
Agreement covers substantive obligations for the Member States to follow while adopting such
policies. These subsidies are justifiable to the extent that they are not profit-making. Question
arises, when do they take the form of non-justifiable state support and therefore are liable as
actionable subsidies. Actionable subsidies can be objected to if they cause injury to the domestic
industry of another Member State country8.
There are three types of adverse effects. First, there is injury to a domestic industry caused by
subsidized imports in the territory unlike injury, it can serve as the basis for a complaint related
to harm to a Member's export interests. Finally, there is nullification or impairment of benefits
accruing under the GATT 1994. Nullification or impairment arises most typically where the
improved market access presumed to flow from a bound tariff reduction is undercut by
subsidization.
The creation of a system of multilateral remedies that allows Members to challenge subsidies
which give rise to adverse effects represents a major advance over the pre-WTO regime. The
difficulty, however, will remain the need in most cases for a complaining Member to
demonstrate the adverse trade effects arising from subsidization, a fact-intensive analysis that
panels may find difficult in some cases 9.
In the case of Canada-Measures Affecting the Export of Civilian Aircraft10, one can infer
that the purpose of including separate provision for an actionable subsidy is to create a legal
boundary between justifiable use and non-justifiable use of the subsidy. The justifiable use is for
such purposes as social welfare or the development of infrastructure, etc. The non-justifiable use,

8
Trebilock and Howse (2002), p. 196.
9
GURWINDER SINGH, SUBSIDIES IN THE CONTEXT OF THE WTO’S FREE TRADE SYSTEM A LEGAL AND ECONOMIC
ANALYSIS (2017),pg 94-99.
10
WT/DS70/R,
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is for such purposes as export promotion, encouraging the purchase of domestic goods in place
of exported goods of the same type.

Non-actionable Subsidies
Non-actionable subsidies are obsolete under the WTO Agreement, but for the purpose of
distinction between the types and to seek background information concerning various forms of
subsidies, and its use as justifiable and non-justifiable, a description of non-actionable subsidies
has relevance. Under the categorisation, when the present form of the SCM Agreement was
accepted, subsidies are treated as non–actionable if they are neither prohibited nor subjected to
any countervailing measures discussed under Article 10 to 23. Any form of state support for the
purpose of research and development, for higher education or for research-based connections
with firms is usually accepted and hence justifiable. Other general forms of state support that are
usually exempted from the regulatory provisions of the WTO are:
1. Assistance to a disadvantaged region within the territory of the Member Country for the
purpose of regional development.
2. Assistance in adopting new environmental requirements for sustainable development, imposed
by law or regulations with limitations.
Usually, non-actionable subsidies are also termed green light subsidies and are covered under
Article 8 of the SCM Agreement. Without outlining the basic features through legal provisions,
these subsidies are specified briefly in the study. Article 8 covers some specific kinds of
subsidies such as, [Article 8.2(a)] assistance for research activities conducted by firms or by
higher education or research establishments on a contract basis.

Subsidies for Development

The concept of subsidies for development is mainly associated with Developing countries and
much more with Less Developed countries. The two main supportive provisions that forward the
agenda of development for Developing and Less- Developed countries are: (1) concessions by
the industrialised economies through the GSP, (2) Special and Differential treatment under
Article 27 of the SCM agreement.
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Agricultural subsidies:

Article 13 of the Agreement on Agriculture establishes, during the implementation period

specified in that Agreement (until 1 January 2003), special rules regarding subsidies for
agricultural products. Export subsidies which are in full conformity with the Agriculture
Agreement are not prohibited by the SCM Agreement, although they remain countervailable.
Domestic supports which are in full conformity with the Agriculture Agreement are not
actionable multilaterally, although they also may be subject to countervailing duties. Finally,
domestic supports within the “green box” of the Agriculture Agreement are not
actionable multilaterally nor are they subject to countervailing measures. After the
implementation period, the SCM Agreement shall apply to subsidies for agricultural products
subject to the provisions of the Agreement on Agriculture, as set forth in its Article 21.

Conclusion
Following the debate on the trading systems, from the times preceding the creation of the WTO
to its formation and until today, it seems the categorical exclusion of subsidies in any form of
trading system is a remote possibility. It is also clear that subsidies and state-aid in the lack of
proper balance between fair trade and free trade objectives affects competition in international
trade. On the other hand, one needs to take into account the facts that there are occasions when
subsidies and state-aids may be necessary, such as for welfare and development. The regulatory
limitations in the present SCM Agreement can be drawn based on the restrictive provisions.
Probably, these provisions are the measures to create balance between free trade and the fair
trade regulatory mechanism. Justifiable subsidies and non-justifiable subsidies that are part of
actionable subsidies as classified in this chapter, have some common features, as both are
provided by the state. In the wake of common grounds and the policy supports, it highly possible
that justifiable subsidies, which later may take the form of non– justifiable subsidies, are used to
promote exports that are objectionable under the SCM Agreement. Ironically, through the SCM
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Agreement in its present form, it is difficult to overcome the obscurity between justifiable
subsidies and non-justifiable subsidies11.
The issue of subsidies arises at various levels and it becomes even-more intriguing in the cases
where provinces within a nation provide support to promote trade in one form or the other. This
form of state support can be seen in the Airbus case. The SCM Agreement classifies subsidies
mainly into prohibited and actionable subsidies. Within these regulating provisions, there are
flexibilities, so that every situation can be seen from its own perspective and the DSB can also
apply some discretion. In order to avoid Member States taking advantage of the gaps existing in
the provisions, some legal checks and balances are provided by the ASCM; for example, Annex
VI, provides procedures for on the spot investigation. It is also obligatory for the legislative
bodies of the Member States, to follow justifiable reasoning for the granting of flexibilities under
the enacted provisions. The primary and secondary rules framed by the Member States should be
in line with the of trade liberalisation policies.
The critics of the WTO raise their concern about the sovereign values of domestic policies, but
one cannot ignore the treaty obligations under the WTO which is part of international law.
However, considering the fundamental economic realities, it cannot be denied that there is a need
for subsidies, but they have to be allocated in a disciplinary manner and with the WTO as an
institution acting as a control mechanism. Those favouring the idea of free trade, have always
criticised subsidies as a means of government control that eventually affect fair competition.
Certainly, there is some truth in this argument but the economic logic behind the government
interference also cannot be ignored. When the market fails, policy instruments are deployed to
correct the distortions. Therefore, subsidies can be considered as a tool to correct
market distortions. Government intervention in the case of negative externalities is also justified,
such as in the case of pollution, over-production, etc. The main point of contention, i.e., export
subsidies, still remains a matter of continuing discussion. As already mentioned in the text,
subsidies improve the relative business position of the exporting nations. There is a need to
think constructively and objectively about the reasons behind these relaxations, both in the case
of Developing and Developed nations. A relevant point for this argument is that the WTO has

11
GURWINDER SINGH, SUBSIDIES IN THE CONTEXT OF THE WTO’S FREE TRADE SYSTEM A LEGAL AND ECONOMIC
ANALYSIS (2017),pg 105-108.
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not declared the criteria for determining the status of a nation as a Developing country. A
Member State declares the status of its own free choice 12.
Another reason for unequal market possibilities is that the market size of some of
the Developing countries is relatively large and some of them have attained significant industrial
capability too. The subsidy for exports and for building the infrastructure has a different meaning
in the Less-Developed countries than in the Developing countries such as China, India, Brazil,
and several other states that are in the same line13. The WTO lacks any strict criteria to keep
evaluating the economic conditions, therefore, the relaxation provided in the WTO Agreements
are manipulated for favourable terms of trade. Comparing the WTO objectives of welfare and
development with the free trade obligations, there is a possibility of strain between the two. In
the light of these circumstances, one suggestion is that the principles of free trade along with fair
trade should go together. With the gradual adoption of globalisation as a trend, people have
undoubtedly become outward-looking, but one cannot ignore the ethics and principles that have
laid the foundation for the socio-economic and political structure of the nations. Furthermore,
within the WTO, there is no such term determining “state-aid” or any provision that creates a
distinction between state-aid and a subsidy. Therefore, the issue of subsidies needs to be
analysed based on the relative economic situation. Assessing the SCM Agreement, in the context
of free trade and development objectives, one can say that it is an approach for prescribing trade
guidelines, in order to create coherence between market efficiency and fair opportunities to trade
to cover economic, political, social and several other types of objectives, for all types of Member
States in the international trading system.

12
ibid
13
ibid