III.

SUBSIDIES & COUNTERVAILING MEASURES

IN BRIEF

The SCM Agreement - addresses two separate but closely related matters: (i) the multilateral disciplines
on the use of subsidies; and, (ii) the conditions under which Members may apply countervailing
measures. The SCM Agreement contains a definition of "subsidy", which applies in both of these
areas.

The multilateral disciplines govern whether, and what kind of, a subsidy may be granted by a
Member. The SCM Agreement currently classifies subsidies into two categories: prohibited and
actionable.

Countervailing measures are unilateral tools, which may be applied by a Member after conducting a
domestic investigation in which it has been determined that subsidized imports are causing or
threatening to cause injury to the domestic industry producing the like products. As in the case of
anti-dumping, countervailing measures are normally applied in the form of customs duties in excess of
bound rates. An exporting Member affected by the measures may challenge a failure to comply with any of
the requirements for the imposition of countervailing measures by using the WTO dispute settlement
mechanism.

The SCM Agreement applies to all goods, that is both agricultural and industrial products. As you
learned in Module 4, the Agreement on Agriculture provides disciplines on trade-distorting subsidies relating
to agricultural products. As we will see, there are specific provisions regulating the interaction
between the SCM Agreement and the Agreement on Agriculture when referring to agricultural goods.

III.A. THE SUBSIDIES AND COUNTERVAILING MEASURES

The main object and purpose of the SCM Agreement is to increase and improve GATT disciplines relating to
the use of both subsidies and countervailing measures (US - Carbon Steel, Appellate Body Report,
para. 73). Therefore, the SCM Agreement can be seen as "two agreements in one".

III.A.1. MULTILATERAL DISCIPLINES ON SUBSIDIES

The SCM Agreement provides multilateral disciplines governing whether, and what kind of, a subsidy may
be provided by a Member. Certain subsidies are prohibited and all other specific subsidies may be challenged if
they cause adverse effects to the interests of other Members.

These rules are enforced through the WTO dispute settlement mechanism, in accordance with the
Dispute Settlement Understanding (DSU) – see Module 10. This is also called the "multilateral track". In

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this regard, the SCM Agreement contains special or additional rules and procedures that supplement or replace
the rules of the dispute settlement mechanism provided in the DSU. The invocation of the multilateral track
may end with the withdrawal of the subsidy or the removal of its adverse effects, depending on the
case.

III.A.2. COUNTERVAILING MEASURES

The SCM Agreement also allows Members to apply countervailing measures after conducting a domestic
investigation according to the criteria set forth in the SCM Agreement (also called "unilateral" or
"domestic" track). As we will see below, countervailing duties can only be applied when subsidized imports
are causing injury or threatening to cause injury to the domestic industry producing the like product. The
SCM Agreement also provides procedural requirements that regulate the conduct of countervailing
investigations. As in the case of anti-dumping, a failure to comply with any of the requirements for the
imposition of countervailing measures can be challenged by the exporting Member through the WTO
dispute settlement mechanism.

Figure 2: The SCM Agreement: Two tracks

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III.B. DISCIPLINES ON SUBSIDIES

III.B.1. DEFINITION OF "SUBSIDY"

For a measure to be covered by the SCM Agreement, it has to fall under the definition of subsidy provided in
Article 1 of the SCM Agreement and meet the "specificity" requirement provided in Article 2.

Definition of "Subsidy"

The definition of "subsidy" contains three elements which must be satisfied for a subsidy to be covered by
the SCM Agreement (Article 1). There must be:

ú A financial contribution;G

ú By a government or any public body within the territory of a Member; G

ú Which confers a benefit.G

All three elements must be satisfied in order for a subsidy to exist.

Specificity Requirement

The disciplines in the SCM Agreement only apply to "specific" subsidies (Article 2) — i.e. a subsidy
available only to an enterprise, industry, group of enterprises, or group of industries within the jurisdiction of
the granting authority.

a. FINANCIAL CONTRIBUTION
Under the SCM Agreement, a subsidy may only exist where a measure takes the form of a "financial
contribution", or where there is any form of income or price support in the sense of Article XVI of
GATT 1994. Article 1 contains a list of measures that are deemed to provide a financial contribution.
These include direct transfers of funds (e.g. grants, loans, and equity infusion) and potential direct transfers of
funds or liabilities (e.g. loan guarantees). A financial contribution also exists where government revenue that
is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits); where a government
provides goods or services other than general infrastructure, or purchases goods; or where a government
entrusts or directs a private body to carry out these functions.

If a measure confers regulatory - but not financial - advantages, it would not constitute a subsidy. For
instance, assume that a government temporarily exempts a manufacturing facility in financial difficulties from
the obligation to observe anti-pollution laws. To the extent that there is no element of financial contribution,
this would not constitute a subsidy.

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b. BY A GOVERNMENT OR ANY PUBLIC BODY
In order for a financial contribution to be a subsidy, it must be made by - or with the entrustment or direction
of - a government or any public body within the territory of a Member. The SCM Agreement applies not
only to measures of national governments, but also to measures of sub-national governments and of such
public bodies as state-owned companies.

A financial contribution made by a private body may still fall under the definition provided in Article 1.1 of the
SCM Agreement if a government or public body entrusts or directs a private body, that is, if the contribution is
made pursuant to the government's instructions. For example, if a private non-governmental organization
(NGO) gives technical and financial assistance to coffee growers in certain WTO Members in Africa, it would be
a case of private, not governmental, assistance, presumably unless the financial contribution was made at the
direction of a government or public body within the territory of the WTO Member.

c. CONFERS A BENEFIT
A financial contribution by a government is not a subsidy unless it confers a "benefit". The word ''benefit'', as
used in Article 1.1 of the SCM Agreement, is concerned with the ''benefit to the recipient'' and not with the
''cost to government'' (Canada – Aircraft, Appellate Body Report, paras. 154-155.

In many cases, as in the case of a cash grant, the existence of a benefit and its value may be clear. In some
cases, however, the issue of benefit is more complex. For example, when does a loan, an equity infusion or
the purchase by a government of a good confer a benefit?

Although the SCM Agreement does not provide comprehensive guidance on these issues, the Appellate Body
has stated in Canada – Aircraft that the existence of a benefit is to be determined by comparison with
the market-place (i.e., whether the recipient has received a financial contribution on terms more favourable
than those available to the recipient in the marketplace) (Canada – Aircraft, Appellate Body Report, para. 157).
Thus, for example, if a government makes a loan to a manufacturer on conditions equivalent to those that the
manufacturer could obtain from private banks, there is a financial contribution but no benefit; under these
conditions, the loan would not constitute a subsidy.

In the context of countervailing duties, Article 14 of the SCM Agreement provides some guidance with respect
to determining whether certain types of measures confer a benefit. While that provision furnishes contextual
guidance for the meaning of "benefit", as regards multilateral disciplines, the meaning of "benefit" is not fully
resolved.

d. SPECIFICITY
Even if a measure is a subsidy within the meaning of the SCM Agreement, it nevertheless is not subject to the
SCM Agreement unless it has been "specifically" provided to an enterprise or industry or group of
enterprises or industries. The basic principle is that only a subsidy that distorts the allocation of
resources within an economy should be subject to disciplines. Where a subsidy is widely available within an
economy, such a distortion in the allocation of resources is presumed not to occur.

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There are four types of "specificity" within the meaning of the SCM Agreement:

(i) Enterprise-specificity -a government targets a particular enterprise or enterprises for subsidization;

(ii) industry-specificity –a government targets a particular enterprise or enterprises for subsidization;

(iii) regional-specificity –a government targets producers in specified parts of its territory for
subsidization; and,

(iv) prohibited subsidies – i.e. export subsidies and domestic content subsidies are deemed to be specific.

The SCM Agreement covers not only subsidies which are de jure specific (their specific nature is derived from
an explicit limitation by the granting authority or the legislation pursuant to which the granting authority
operates), but also those that are de facto specific (the specific nature of the subsidy is derived from the
facts and circumstances surrounding its application; in other words, the subsidy is "in fact" specific). In this
regard, Article 2.1(c) of the SCM Agreement provides that if there are reasons to believe that the subsidy may,
in fact, be specific, other factors listed in the Agreement - such as the use of a subsidy programme by a limited
number of certain enterprises, predominant use by certain enterprises, and the manner in which discretion has
been exercised by the granting authority in the decision to grant a subsidy - may be considered. Information
on the frequency with which applications for a subsidy are refused or approved and the reasons for such
decisions are also to be considered. The extent of diversification of economic activities within the jurisdiction of
the granting authority, as well as the length of time during which the subsidy programme has been in
operation are to be taken into account.

III.B.2. CATEGORIES OF SUBSIDIES COVERED BY THE SUBSIDIES AND

Categories of Subsidies Covered by the SCM Agreement

*
The SCM Agreement defines two categories of subsidies :

1. Prohibited; and,

2. Actionable.

All specific subsidies fall into one of these categories.

*
The SCM Agreement originally contained a third category: non-actionable subsidies. This category existed

for five years, ending on 31 December 1999 (the possibility for its extension, originally envisaged in
Article 31 of the Agreement, did not occur).

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a. PROHIBITED SUBSIDIES
Article 3 of the SCM Agreement includes two categories of prohibited ("red-light") subsidies:

ú Export Subsidies: subsidies contingent, in law or in fact, whether solely or as one of several
other conditions, upon export performance (a detailed illustrative list of export subsidies is
contained in Annex 1 of the SCM Agreement). The mere fact that a subsidy is granted to
enterprises which export shall not, for that reason alone, be considered to be an export subsidy
within the meaning of this provision (see footnote 4 of the SCM Agreement).

ú Import Substitution Subsidies: subsidies contingent, whether solely or as one of several other
conditions, upon the use of domestic over imported goods.

Any subsidy falling under the provisions of Article 3 shall be deemed to be specific. These two categories are
prohibited because they are presumed to distort international trade, and are therefore most likely to have
adverse effects on the interest of other Members. They may be challenged through the WTO dispute
settlement mechanism (multilateral track) on the basis of special accelerated procedures and, if the
subsidy is found to be prohibited, it must be withdrawn without delay. Since these subsidies are most likely to
cause adverse effects, there is no need for the complaining Member to demonstrate the existence of any trade
effects. Rather, the main focus is on the nature of the subsidy itself. Prohibited subsidies may also be subject
to countervailing measures (unilateral or domestic track) if subsidized imports are causing injury to the
domestic industry.

b. ACTIONABLE SUBSIDIES
Most subsidies, such as many production subsidies, fall in the category of "actionable subsidies" (so-called
"yellow-light" subsidies). 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. Thus, in addition to the
existence of a specific subsidy, the complaining Member has to show that this specific subsidy causes adverse
effects. The SCM Agreement defines three types of adverse effects these subsidies can cause:

ú INJURY: subsidized imports cause injury to a domestic industry in the territory of the
complaining Member. This type of adverse effect can be challenged both at the unilateral level
through countervailing action or at the multilateral level through the WTO's dispute settlement
mechanism. However, only one form of relief (either countervailing duty or an authorized
countermeasure) is applicable.

ú SERIOUS PREJUDICE: usually arises where the effect of a subsidy is (i) displacement or
impedance of the complaining Member's exports, either in the market of the subsidizing
Member or in a third country market; or, (ii) significant price undercutting, price suppression or
depression or lost sales of the complaining Member's product in a given market; or, (iii) an
increase in the subsidizing Member's world market share in a subsidized primary product or
commodity.

ú Therefore, serious prejudice can serve as the basis for a complaint related to harm to a
Member's interests in its export markets. Accordingly, in the three instances of serious
prejudice, the subsidy can be challenged only through the multilateral track. The SCM
Agreement sets out situations where factors other than the subsidization appear to explain the
displacement or impeding of a complaining Member's exports and where serious prejudice
therefore should not be found to exist. Annex V sets out procedures for developing information

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 concerning serious prejudice in a dispute.

ú NULLIFICATION OR IMPAIRMENT OF BENEFITS (accruing under the GATT 1994): arises

Relationship between the SCM Agreement and the Agreement on Agriculture

Article 21 of the Agreement on Agriculture establishes that the provisions of GATT 1994 and of other
Multilateral Trade Agreements in Annex 1A to the WTO Agreement –including the SCM Agreement - shall
apply subject to the provisions of the Agreement on Agriculture.

Article 3.1 of the SCM Agreement prohibits export and import-substitution subsidies "except as provided in
the Agreement on Agriculture". In US - Upland Cotton, the Appellate Body stated that agricultural subsidies
are subject to the SCM Agreement "except to the extent that the Agreement on Agriculture contains specific
provisions dealing specifically with the same matter" (US - Upland Cotton, Appellate Body Report, paras.
530-533). Thus, for example, agricultural export subsidies that are fully consistent with the
provisions of the Agreement on Agriculture are not prohibited under Article 3 of the SCM
Agreement. They can be countervailed.

Article 13 of the Agreement on Agriculture, known as the "Peace Clause", provided that during the
implementation period specified in that Agreement (until 2004), special rules regarding subsidies for
agricultural products were to be applied. Since the implementation period has already expired, the Peace
Clause is not applicable anymore.

EXERCISES

10. Why is the SCM Agreement considered "two agreements in one"?

11. Explain briefly the elements that must be satisfied for a subsidy to be covered by the SCM Agreement.

12. Describe the categories of subsidies covered by the SCM Agreement, indicating the tracks available to
challenge each one.

13. What happens in case of conflict between a provision of the SCM Agreement and a provision of the
Agreement on Agriculture?

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