Minor changes which have been proposed to the subsidy disciplines of the WTO Subsidies and Countervailing Measures Agreement recognise that the existing Agreement is fundamentally sound, and reflect a widely held view that the interpretation and observance of the rules is a more important issue than what they say.

In the Draft Consolidated Chair Texts of the AD and SCM Agreements, issued by the Chairman of the Negotiating Group on Rules towards the end of last year, minor but useful changes to non-procedural aspects of the SCM Agreement have been proposed. In relation to the procedural aspects of countervailing investigations, it is expected that the changes made to the Anti-Dumping Agreement will also be made to the SCM Agreement (however the draft does not indicate how they will be replicated in the SCM Agreement). For a review of these procedural changes, please refer to our previous Trade Law Bulletin Zeroing and anti-circumvention emerge as key points in anti-dumping negotiations.

Primacy of the market determinant of benefit           

The importance of the market as a key determinant of fair pricing is underlined by some of the changes. The proposition that the conferral of a subsidy “benefit” can best be observed in the difference between the terms on which a recipient receives a financial contribution, and the terms otherwise available in the market, is proposed to be enshrined in a new footnote to key Article 1.1(b).

The proposed changes also grapple with the issue of regulated pricing, and of government influence on prices, which is an issue of particular importance to some new Members of the WTO whose economies can be said to be in transition from high levels of government control to market-based operations. In particular, changes have been proposed to deal with the situation of subsidies conferred by cheap regulated prices for input goods and services. If there is no market price, because of the regulation of the price, or because of distortion caused by the presence of the government of the country in the market for the goods or services concerned, then the benefit conferred may be measured by comparing the price with an export price from the country, or any market-determined price outside the country.

“Pass-through” is dead: Long live “pass through”

“Pass-through” involves the concept that a subsidy provided to the upstream producer of an input to a final product can be traced through to the final product. For example, a subsidy provided to an “upstream” grain grower might be reflected in the price of pork produced by the “downstream” pork processor. New Article 14.2 will abolish any unthinking use of the “pass-through” concept. In other words, no benefit to the final product is to be attributed solely by reason of the subsidy provided to the upstream producer.

Instead, the new text insists that the same questions should be asked in the case of a subsidy provided in respect of an input product as in the case of the provision of goods and services at less than adequate remuneration: namely, was the input obtained on terms more favourable than otherwise would have been commercially available on the market? However, if the price for the input in the country concerned is found to be so substantially distorted, such that there is no market price benchmark available to work out whether a benefit was conferred, then other sources, such as world market prices, can be used as the basis for the determination in question. In this way recognition of the “pass through” concept will be preserved, in appropriate cases.

How long should a subsidy last?         

New Article 14.3 sets out detailed guidelines for deciding whether a subsidy should be “expensed” or “allocated”. This is an important issue, because it will determine whether a subsidy has a lasting effect, and if so for how long. This directly impacts on the magnitude and duration of any duty imposed to counteract the subsidy.

A distinction is drawn in the new text between expensed subsidies, which will be deemed to benefit the recipient only in the year of receipt, and allocated subsidies, which will be deemed to benefit the recipient over the period of allocation.

Loan subsidies and subsidised debt instruments will be deemed to benefit the recipient over the period they remain outstanding. The draft text gives other examples of subsidies which usually should be allocated:

• equity infusions;
• grants;
• plant closure assistance;
• debt forgiveness;
• provision of non-general infrastructure.

It also gives examples of subsidies which usually should be expensed, including:

• direct tax exemptions and deductions;
• exemptions/rebates from indirect taxes or import duties;
• provision of goods and services at less than adequate remuneration;
• price support payments;
• discounts on utility services;
• freight subsidies.

Guidance is also provided to help decide into which category a subsidy should be placed. A large non-recurring subsidy might more readily be allocated, whereas recurring subsidies should be expensed. Subsidies directed towards the day-to-day production or sales activities of a company should normally be expensed, whereas subsidies tied to capital assets should normally be allocated. Small subsidies are more likely to be expensed; whereas big subsidies will be suggestive of allocation. The draft text also provides that allocation periods should correspond to the average useful life of the depreciable assets of the firm concerned.

Competing concerns juggled by new annex on fisheries subsidies                   

Lastly, and importantly, the proposed new SCM text incorporates a whole new Annex (Annex VIII) intended to impose disciplines on fisheries subsidies. The prohibition on such subsidies, and the different forms they can take, are relatively shortly stated. However, exceptions to the prohibitions are detailed and lengthy, mostly for the good reasons of environmental preservation, resource management, and special and differential treatment for developing country Members.

Comment        

Subsidy policy is the enfant terrible of the Doha Development Round: subsidy regulation under the SCM Agreement is his comparatively docile twin brother. Nonetheless the proposed changes to the SCM Agreement in relation to price regulation, determination of market price benchmarks, and subsidy calculation are important developments. In particular, the price regulation proposals could raise interesting questions in relation to energy supplies in developing countries.

The agriculture and non-agricultural market access (“NAMA”) negotiating groups circulated their latest draft “modalities”, as the basis for a consensus to be reached, on 8 February 2008. It is these negotiations that deal with subsidy policy, and with the primacy of the Agreement on Agriculture and its interaction with the SCM Agreement. What limits will be placed on farm subsidies by those negotiations? What types of subsidies outside those limits will be permissible, for environmental or other reasons? If consensus is reached, how will that consensus be incorporated into a legally binding document?

The degree to which the SCM Agreement might be used by WTO Members in the future, whether in the Dispute Settlement Body or in the imposition of countervailing measures against subsidising Members, will depend in large part on whether the compromises adopted in the agriculture and NAMA negotiations gain a good level of acceptance, and on the limits which emerge from new Agreements in those areas.

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.

© Moulis Legal 2008