Subsidies and countervailing measures

The WTO Agreement on Subsidies and Countervailing Measures regulates the use of subsidies,
and it regulates the actions countries can take to counter the effects of subsidies. Under the
agreement, a country can use the WTO’s dispute-settlement procedure to seek the withdrawal of
the subsidy or the removal of its adverse effects. Or the country can launch its own investigation
and ultimately charge extra duty (―countervailing duty‖) on subsidized imports that are found to
be hurting domestic producers.

Agreement on Subsidies and Countervailing Measures (“SCM Agreement”)

The Agreement on Subsidies and Countervailing Measures (―SCM Agreement‖) addresses two
separate but closely related topics: multilateral disciplines regulating the provision of subsidies,
and the use of countervailing measures to offset injury caused by subsidized imports.1
it regulates the actions countries can take to counter the effects of subsidies. It says a country can
use the WTO’s dispute settlement procedure to seek the withdrawal of the subsidy or the
removal of its adverse effects. Or the country can launch its own investigation and ultimately
charge ―countervailing duty‖ on subsidized imports that are found to be hurting domestic
producers.
Countervailing duty (the parallel of anti-dumping duty) can only be charged after the importing
country has conducted a detailed investigation similar to that required for anti-dumping action.
There are detailed rules for deciding whether a product is being subsidized, criteria for
determining whether imports of subsidized products are ―causing injury to‖ domestic industry,
procedures for initiating and conducting investigations, and rules on the implementation and
duration (normally five years) of countervailing measures. The subsidized exporter can also
agree to raise its export prices as an alternative to its exports being charged countervailing duty.

The agreement defines two categories of subsidies: prohibited and actionable. It originally
contained a third category: non-actionable subsidies. This category existed for five years, ending
on 31 December 1999, and was not extended. The agreement applies to agricultural goods as
well as industrial products, except when the subsidies are exempt under the Agriculture
Agreement’s ―peace clause‖, due to expire at the end of 2003.

Agreement
Part I provides that the SCM Agreement applies only to subsidies that are specifically provided
to an enterprise or industry or group of enterprises or industries, and defines both the term

1
Multilateral disciplines are the rules regarding whether or not a subsidy may be provided by a Member. They are
enforced through invocation of the WTO dispute settlement mechanism. Countervailing duties are a unilateral
instrument, which may be applied by a Member after an investigation by that Member and the criteria set forth in the
SCM Agreement are satisfied.
―subsidy‖ and the concept of ―specificity.‖ Parts II and III divide all specific subsidies into one
of two categories: prohibited and actionable2and establish certain rules and procedures with
respect to each category. Part V establishes the substantive and procedural requirements that
must be fulfilled before a Member may apply a countervailing measure against subsidized
imports. Parts VI and VII establish the institutional structure and notification/surveillance
modalities for implementation of the SCM Agreement. Part VIII contains special and differential
treatment rules for various categories of developing country Members. Part IX contains
transition rules for developed country and former centrally-planned economy Members. Parts X
and XI contain dispute settlement and final provisions.
Part I of the Agreement establishes a definition of the term ―subsidy‖ and an explanation of the
concept of ―specificity‖. Only a measure which is a ―specific subsidy‖ within the meaning of
Part I is subject to multilateral disciplines and can be subject to countervailing measures.

Definition of subsidy.
The definition contains three basic elements:
(i) a financial contribution
(ii) by a government or any public body within the territory of a Member
(iii) which confers a benefit.

financial contribution
All three of these elements must be satisfied in order for a subsidy to exist.
The Agreement requires a financial contribution and contains a list of the types of measures that
represent a financial contribution, e.g., grants, loans, equity infusions, loan guarantees, fiscal
incentives, the provision of goods or services, the purchase of goods.
by a government
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.
confers a benefit
A financial contribution by a government is not a subsidy unless it confers a ―benefit.‖ 3. Article
14 of the SCM Agreement provides some guidance with respect to determining whether certain
types of measures confer a benefit

2
.The Agreement as it originally entered into force contained a third category — non-actionable subsidies. This
category (along with a provision establishing a presumption of serious prejudice in respect of certain specified types
of actionable subsidies) applied provisionally for five years ending 31 December 1999, and pursuant to Article 31 of
the Agreement, could be extended by consensus of the SCM Committee. As of 31 December 1999, no such
consensus had been reached. Non-actionable subsidies, which could either be non-specific subsidies, or specific
subsidies involving assistance to industrial research and pre-competitive development activity, assistance to
disadvantaged regions, or certain type of assistance for adapting existing facilities to new environmental
requirements imposed by law and/or regulations.
3
In many cases, as in the case of a cash grant, the existence of a benefit and its valuation will be clear. In some
cases, however, the issue of benefit will be 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 complete
guidance on these issues, the Appellate Body has ruled (Canada – Aircraft) that the existence of a benefit is to be
Specificity.
Assuming that 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 a subsidy that distorts the allocation of resources within an economy
should be subject to discipline. Where a subsidy is widely available within an economy, such a
distortion in the allocation of resources is presumed not to occur. Thus, only ―specific‖ subsidies
are subject to the SCM Agreement disciplines.

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

 Enterprise-specificity. A government targets a particular company or companies for

subsidization;
 Industry-specificity. A government targets a particular sector or sectors for
subsidization
 Regional specificity. A government targets producers in specified parts of its territory
for subsidization.
 Prohibited subsidies. A government targets export goods or goods using domestic
inputs for subsidization.

Categories of Subsidies
The SCM Agreement creates two basic categories of subsidies. All specific subsidies fall into
one of these categories.
 those that are prohibited
 those that are actionable (i.e., subject to challenge in the WTO or to countervailing
measures).
Prohibited subsidies
Two categories of subsidies are prohibited by Article 3 of the SCM Agreement. The first
category consists of subsidies contingent, in law or in fact, on export performance (―export
subsidies‖).

The second category consists of subsidies contingent, upon the use of domestic over imported
goods (―local content subsidies‖).

These two categories of subsidies are prohibited because they are designed to directly affect
trade and thus are most likely to have adverse effects on the interests of other Members. They
can be challenged in the WTO dispute settlement procedure where they are handled under an

determined by comparison with the market-place (i.e., on the basis of what the recipient could have received in the
market). In the context of countervailing duties,
accelerated timetable. If the dispute settlement procedure confirms that the subsidy is prohibited,
it must be withdrawn immediately. Otherwise, the complaining country can take counter
measures. If domestic producers are hurt by imports of subsidized products, countervailing duty
can be imposed.

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. Otherwise the subsidy is permitted. In the event that it is determined that such adverse
effects exist, the subsidizing member must withdraw the subsidy or remove the adverse effects
There are three types of adverse effects.4
First, there is injury to a domestic industry caused by subsidized imports in the territory of the
complaining Member. This is the sole basis for countervailing action.
Second, there is serious prejudice. Serious prejudice usually arises as a result of adverse effects
(e.g., export displacement) in the market of the subsidizing Member or in a third country market.
Thus, unlike injury, it can serve as the basis for a complaint related to harm to a Member's export
interests.5
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.

SCM and Agriculture subsidies

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

4
The agreement defines three types of damage they can cause. One country’s subsidies can hurt a domestic
industry in an importing country. They can hurt rival exporters from another country when the two compete in
third markets. And domestic subsidies in one country can hurt exporters trying to compete in the subsidizing
country’s domestic market. If the Dispute Settlement Body rules that the subsidy does have an adverse effect,
the subsidy must be withdrawn or its adverse effect must be removed. Again, if domestic producers are hurt by
imports of subsidized products, countervailing duty can be imposed.

5
―Serious prejudice‖ shall be presumed to exist for certain subsidies including when the total ad
valorem subsidization of a product exceeds 5 per cent. In such a situation, the burden of proof is on the
subsidizing member to show that the subsidies in question do not cause serious prejudice to the complaining
member.
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.

Countervailing Measures
Part V of the SCM Agreement sets forth requirements that must be fulfilled in order to impose a
countervailing measure, procedural requirements for the conduct of a countervailing
investigation and the imposition and maintenance in place of countervailing measures. A failure
to respect either the substantive or procedural requirements of Part V can be taken to dispute
settlement. The agreement would require that all relevant economic factors be taken into account
in assessing the state of the industry and that a causal link be established between the subsidized
imports and the alleged injury. Countervailing investigations shall be terminated immediately in
cases where the amount of a subsidy is de minimis (the subsidy is less than 1 per
cent advalorem) or where the volume of subsidized imports, actual or potential, or the injury is
negligible. Except under exceptional circumstances, investigations shall be concluded within one
year after their initiation and in no case more than 18 months. All countervailing duties have to
be terminated within 5 years of their imposition unless the authorities determine on the basis of a
review that the expiry of the duty would be likely to lead to continuation or recurrence of
subsidization and injury.

Substantive rules
A Member may not impose a countervailing measure unless it determines that there
are subsidized imports, injury to a domestic industry, and a causal link between the subsidized
imports and the injury

the existence of a specific subsidy must be determined in accordance with the criteria in Part I of
the Agreement. However, the criteria regarding injury and causation are found in Part V. In
addition, Part V contains rules regarding the determination of the existence and amount of a
benefit.

Procedural rules
Part V of the SCM Agreement contains rules regarding the initiation and conduct of
countervailing investigations, the imposition of preliminary and final measures, the use of
undertakings, and the duration of measures.

A key objective of these rules is to ensure that investigations are conducted in a transparent
manner, that all interested parties have a full opportunity to defend their interests, and that
investigating authorities adequately explain the bases for their determinations.

A few of the more important innovations in the WTO SCM Agreement are identified below:
  Standing. The Agreement defines in numeric terms the circumstances under which
there is sufficient support from a domestic industry to justify initiation of an
investigation.
 Preliminary investigation. The Agreement ensures the conduct of a preliminary
investigation before a preliminary measure can be imposed.
 Undertakings. The Agreement places limitations on the use of undertakings to settle
CVD investigations, in order to avoid Voluntary Restraint Agreements or similar
measures masquerading as undertakings
 Sunset. The Agreement requires that a countervailing measure be terminated after five
years unless it is determined that continuation of the measure is necessary to avoid the
continuation or recurrence of subsidization and injury.
 Judicial review. The Agreement requires that Members create an independent tribunal
to review the consistency of determinations of the investigating authority with
domestic law.

Transition Rules and Special and Differential Treatment

Developed countries Members not otherwise eligible for special and differential treatment are
allowed three years from the date on which for them the SCM Agreement enters into force to
phase out prohibited subsidies.

Developing countries The SCM Agreement recognizes three categories of developing country
Members:

 least-developed Members (―LDCs‖),

 Members with a GNP per capita of less than $1000 per year

 other developing countries.

The lower a Member's level of development, the more favourable the treatment it receives with
respect to subsidies disciplines.

Thus, for example, LDCs and Members with a GNP per capita of less than $1000 per year are
exempted from the prohibition on export subsidies.

Other developing country Members have an eight-year period to phase out their export subsidies
(they cannot increase the level of their export subsidies during this period).

With respect to import-substitution subsidies, LDCs have eight years and other developing
country Members five years, to phase out such subsidies. There is also more favourable
treatment with respect to actionable subsidies. For example, certain subsidies related to
developing country Members' privatization programmes are not actionable multilaterally. With
respect to countervailing measures, developing country Members' exporters are entitled to more
favourable treatment with respect to the termination of investigations where the level of
subsidization or volume of imports is small.

Members in transformation to a market economy Members in transformation to a market

economy are given a seven-year period to phase out prohibited subsidies. Members in
transformation also receive preferential treatment with respect to actionable subsidies.

Notifications
Subsidies Article 25 of the SCM Agreement requires that Members notify all specific subsidies
(at all levels of government and covering all goods sectors, including agriculture) to the SCM
Committee. Countervailing legislation and measures All Members are required to notify their
countervailing duty laws and regulations to the SCM

Dispute Settlement
The SCM Agreement generally relies on the dispute settlement rules of the DSU. However the
Agreement contains extensive special or additional dispute settlement rules and procedures
providing for expedited procedures, particularly in the case of prohibited subsidy allegations
Round up
The Agreement on Subsidies and Countervailing Measures is intended to build on the Agreement
on Interpretation and Application of Articles VI, XVI and XXIII which was negotiated in the
Tokyo Round.
The agreement recognizes that subsidies may play an important role in economic development
programmes of developing countries, and in the transformation of centrally-planned economies
to market economies. Least-developed countries and developing countries with less than $1,000
per capita GNP are exempted from disciplines on prohibited export subsidies. Other developing
countries are given until 2003 to get rid of their export subsidies. Least-developed countries must
eliminate import-substitution subsidies (i.e. subsidies designed to help domestic production and
avoid importing) by 2003 — for other developing countries the deadline was 2000. Developing
countries also receive preferential treatment if their exports are subject to countervailing duty
investigations. Countervailing investigation of a product originating from a developing-country
member would be terminated if the overall level of subsidies does not exceed 2 per cent (and
from certain developing countries 3 per cent) of the value of the product, or if the volume of the
subsidized imports represents less than 4 per cent of the total imports for the like product in the
importing signatory. For transition economies, prohibited subsidies had to be phased out by
2002.

Subsidies play an important role in developing countries and in the transformation of centrally-
planned economies to market economies.
Anti dumping - countervailing duties
sometimes referred to the two together — ―AD-CVD‖ — but there are fundamental differences
Dumping and subsidies — together with anti-dumping (AD) measures and countervailing duties
(CVD) — share a number of similarities. Many countries handle the two under a single law,
apply a similar process to deal with them and give a single authority responsibility for
investigations. Occasionally, the two WTO committees responsible for these issues meet jointly.

The reaction to dumping and subsidies is often a special offsetting import tax (countervailing
duty in the case of a subsidy). This is charged on products from specific countries and therefore
it breaks the GATT principles of binding a tariff and treating trading partners equally (MFN).
The agreements provide an escape clause, but they both also say that before imposing a duty, the
importing country must conduct a detailed investigation that shows properly that domestic
industry is hurt.

But there are also fundamental differences, and these are reflected in the agreements.

Dumping is an action by a company. With subsidies, it is the government or a government

agency that acts, either by paying out subsidies directly or by requiring companies to subsidize
certain customers.

But the WTO is an organization of countries and their governments. The WTO does not deal
with companies and cannot regulate companies’ actions such as dumping. Therefore the Anti-
Dumping Agreement only concerns the actions governments may take against dumping. With
subsidies, governments act on both sides: they subsidize and they act against each others’
subsidies. Therefore the subsidies agreement disciplines both the subsidies and the reactions.

Focus Areas not exhaustive only suggestive

Salient features

Specific provisions for developing countries

AOA and SCM

AD-CVD

Subsidies categories every distinction