Chapter 5: International disciplines on subsidies
Trade and subsidy regulation
Governments may differ in their readiness to use subsidies, but almost all agree that subsidies provided by trading partners are a bad thing if they artificially strengthen the competitiveness of the partner's industry.
Countries have been trying to control subsidy-driven competition affecting commerce within their borders for centuries. The U.S. Supreme Court, for example, has on numerous occasions invoked the Commerce Clause of the U.S. Constitution (Article I, Section 8) to strike down subsidies that favor local businesses over competitors from other states. The six countries that formed the European Coal and Steel Community - the precursor to the European Union - expressly abolished and prohibited all "subsidies or state assistance, or special charges" in the 1951 Treaty that created the ECSC. Exemptions from that rule later became routine, but that these countries even attempted such a mutual prohibition is significant.
To deal with subsidization beyond their borders, some countries also set up procedures for keeping out other countries' subsidized goods. This they did initially by either restricting imports or levying additional duties on top of the tariffs normally charged on all imports of the product. Nowadays these so-called "countervailing duties", or CVDs, are the only border measures allowed in response to subsidized imports, and are supposed to be set at a level equal to the estimated unit (i.e., per weight or volume) subsidy. CVDs are set unilaterally, however, and until the WTO Agreement on Subsidies and Countervailing Measures (ASCM) came into being, providing guidelines, there were few constraints on their use.
The WTO agreement on subsidies and countervailing measures (ASCM)
The 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 com-panies or industries, are allowed, but actionable. "Actionable" means that if adverse effects can be demonstrated, the affected country can take one of several actions.
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 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.
The Agreement on Agriculture: an overview
The WTO's Agreement on Agriculture (AoA) was negotiated in the 1986-94 Uruguay Round of multilateral trade negotiations and marked a significant first step towards bringing agricultural subsidies ("domestic support" in the language of the AoA) under international disciplines. Specific commitments set out in the AoA were implemented over a six-year period (10 years for developing countries), starting in 1995.
The AoA differs from the ASCM in several important respects. For one, it allows export subsidies for agricultural products, though these had to be reduced. (By contrast, the ASCM prohibits export subsidies.) Second, it requires Members to reduce other trade-distorting subsidies provided to agriculture.
Under the AoA, subsidies are grouped into "boxes": amber, blue and green. Amber-box support (see next page) is subject to limits expressed in terms of a "Total Aggregate Measurement of Support" (Total AMS) which combines all supports for specified products, together with supports that are not for specific products, into one single figure.
WTO Members agreed to initiate negotiations for continuing the agricultural reform process one year before the end of the implementation period, i.e. by the end of 1999. These talks were incorporated into the Doha Round of multilateral trade negotiations, which began in earnest in 2002.
Considerable progress was made over the next two years, leading to an agreement at the end of July 2004 on a framework for concluding the negotiations. The trade talks then turned to modalities - the specific targets, formulas and timetables for reducing trade-distorting domestic support and trade barriers, and eliminating export subsidies. However, a core group of WTO member countries - the United States, the European Union (EU), Brazil, India, Australia, and Japan - have not ironed out their differences over the modalities.
The Agreement on Agriculture: the boxes
Agricultural subsidies are grouped in one of three boxes (green, blue or amber) at the WTO, depending on the degree to which they distort trade. Green box subsidies are permitted because they are deemed to cause minimal distortion, and typically include those to research and development (R&D), environmental protection and animal welfare. Blue box subsidies are also permitted, but on the condition that they must not lead to increased production.
Meanwhile, all domestic support considered to distort production and trade (with some exceptions) falls into the amber box, which is defined in Article 6 of the AoA as all forms of domestic support except that placed in the blue and green boxes. Included in the amber box are measures to support prices, and subsidies directly related to production quantities. Amber-box support is subject to limits expressed in terms of a "Total Aggregate Measurement of Support" (Total AMS) which combines all supports for specified products, together with supports that are not for specific products, into one single figure.
Whether subsidies deserve to be placed in the green or blue box, rather than the amber box, is sometimes a matter of contention at the WTO. Within the current negotiations, many developing country members have expressed concern over "box-shifting": the movement of subsidies from the amber to the blue box without significant changes in the nature of the subsidy. The G-20, a group of 20 developing country WTO members, has pushed for rules that would help ensure that amber box subsidies are completely transformed before gaining access to the blue box.
The general agreement on trade in service (GATS)
Services encompass activities as diverse as air transport, banking, tourism, telecommunications, and the treatment of wastewater. Governments often provide subsidies to the providers of these services through grants (e.g., for the construction of hotels), subsidies in-kind (e.g., airports), concessional financing, and tax breaks.
When trade negotiators began drafting a General Agreement on Trade in Services (GATS), at the beginning of the Uruguay Round of multilateral trade negotiations, they were well aware that subsidies could distort trade in services, and some wanted to create new disciplines to avoid such trade-distorting effects. At the close of the Uruguay Round, however, the negotiators were unable to reach agreement on even the desirability, much less the substantive content, of any disciplines.
Subsidies to services therefore remained unfinished business at the WTO, part of the Council on Services' "built-in agenda" for follow-on negotiations. These commenced in 1996 and in 2001 were subsumed under the broader Doha Round of multilateral trade negotiations.
Progress on these negotiations has been slow. As of the beginning of 2007, negotiators had not even agreed on the definition of a subsidy. The WTO Secretariat itself has suggested using the ASCM definition of a subsidy as a starting point, but some WTO Members are nervous that it may contain unforeseen traps. Further complicating the discussions are the different "modes" in which trade in services takes place.
For the time being, therefore, WTO Members' subsidy practices affecting services remain subject only to the GATS' general obliga-tions, notably its most-favoured nation (non-discrimination) and national treatment obligations. The latter applies only in service sectors to which countries have scheduled (i.e., formally declared) liberalization commitments. Basically, national treatment requires that a subsidy provided to domestic service suppliers also be accessible to foreign service suppliers.
Dispute settlement at the WTO
All WTO Members are obligated to implement the subsidy provisions of the WTO Agreements. But they are also the initial judges of the best way to implement them. No multilateral mechanism exists to determine whether a particular subsidy is prohibited, actionable or not. For that, and other disputes, the WTO's Dispute Settlement Mechanism was created.
Disputes are expected to be the exception rather than the norm. Dispute settlement is cumbersome, requiring a domestic process to determine adverse effects, followed by a demanding WTO process that will typically include both a panel and an Appellate Body phase. Nonetheless, there have been a significant number of disputes concerning the SCM since 1995. The AoA included a "peace clause" that provided that most disputes would not be initiated during a six-year transition period, which expired at the end of 2003.
Dispute settlement at the WTO proceeds in stages, starting with a request for consultations between the disputing parties. If a mutually agreed solution is not reached within 60 days (30 days if it involves an alleged prohibited subsidy), any party may refer the matter to the WTO's Dispute Settlement Body (DSB).
The next step is the formation of a panel. If the panel accepts to review the matter it conducts formal hearings, culminating in the submission of a final report. The report is then accepted by all, or appealed by one of the parties. If the Appellate Body determines that the subsidy has resulted in adverse effects to the interests of another, the Member granting or main?taining the subsidy must "take appropriate steps to remove the adverse effects", or simply withdraw the subsidy. If the Member does conform within six months from the date when the DSB adopts the panel report or the Appellate Body report, and in the absence of agreement on compensation, the DSB shall grant authorization to the complaining Member to take countermeasures. These are to be "commensurate with the degree and nature of the adverse effects determined to exist, unless the DSB decides by consensus to reject the request."
The WTO and the IMF are not the only multilateral institutions that have attempted to influence how national governments use subsidies.
Several multilateral environmental agreements (MEAs), such as the Convention on Biological Diversity, have tried to draw more attention to the effects that subsidies have on the environmental assets that they are charged with protecting. The need for subsidy reform in respect of agriculture, fisheries and energy was also highlighted at the 2002 Johannesburg World Summit on Sustainable Development.
Yet none have dared so far to consider more than studying the problem or issuing exhortatory statements on the matter, or calling for more spending on "green" subsidies.
With the Kyoto Protocol having now come into force, the problem of subsidies to energy is likely to become more than just an idle debating point. The Kyotol Protocol, alone among MEAs, establishes a general obligation to take measures ("in accordance with national circumstances") to phase out market imperfections, like "subsidies in all greenhouse gas emitting sectors that run counter to the objective of the Convention" (Article 2.1(a)). While substantial margin for manoeuvre is granted to each signatory, it is likely that subsidies will increasingly come to the fore. And not only subsidies to fossil fuels: as the world market for biofuels and renewable-energy technologies expands, countries will start to look much closer at the kinds of infant-industry and domestic-supply promoting subsidies so favored by proponents of renewable energy.