Subsidies and

countervailing
duties
 Introductory Remarks

• In addition to rules on dumping and anti-

dumping duties, WTO law also includes rules
on another so-called ‘unfair’ trade practice,
subsidisation.

• Subsidies are a very sensitive matter in

international trade relations.
The total subsidy
allocation for agriculture
and power is over Tk
1,12,000 crore in the
current fiscal year.

In the budget for

previous fiscal year, it was
Tk 1,00,174 crore.
• On the one hand, subsidies are evidently used
by governments to pursue and promote
important and fully legitimate objectives of
economic and social policy.
• On the other hand, however, subsidies may
have adverse effects on the interests of
trading partners whose industry may suffer, in
its domestic or export markets, from the
unfair competition from subsidised products.
It is useful to keep in mind three basic subsidy
scenarios:

1. Country A subsidizes exports of products to

Country B, allegedly causing material injury to
domestic producers of like products in Country B.
This is the classic countervailing duty scenario.
2. Country A subsidizes exports to Country C and as a
result squeezes out exports from Country B to
Country C’s market.
3. Country A subsidizes domestic production of
products for its own market, having the effect of
squeezing out imports from Country B into Country
A’s market.
The latter two scenarios do not implicate the
potential imposition of unilateral countervailing
duties given that the subsidized products are not
moving from Country A to Country B’s market,
but instead raise the potential for a formal
complaint under the Dispute Settlement
provisions of the WTO.
 WTO regime on Subsidies

The multilateral rules on subsidies and subsidised

trade are now set out in Articles VI and XVI of the GATT
1994 and, most importantly, in the SCM Agreement
(Agreement on Subsidies and Countervailing
Measures).

With respect to the object and purpose of this

Agreement, the Panel in Brazil – Aircraft clarified that:
The object and purpose of the SCM Agreement is to impose
multilateral disciplines on subsidies which distort
international trade.
 GATT 1994

Mirroring anti-dumping situations, Art. VI:3 GATT 1994

contains the opportunity for Members to apply so-
called “countervailing duties” in case of material injury
attributed to subsidies.

Under Article VI of the GATT, member countries may

impose countervailing duties on imports into their
domestic markets in an amount not in excess of the
estimated bounty or subsidy determined to have been
granted, directly or indirectly, on the manufacture,
production, or export of such product in the country of
origin or exportation.
Under Article XVI of the GATT, if any contracting
party grants or maintains any subsidy which
operates directly or indirectly to increase exports
of any product from, or to reduce imports of any
product into, its territory, it must notify the
contracting parties of the nature and extent of the
subsidization and of its likely effects on imports
and exports and upon request discuss with other
contracting parties concerned the possibility of
limiting subsidization.
 SCM Agreement

The SCM Agreement offers two tracks or avenues

for objection to other countries’ subsidies policies:
(i) the unilateral imposition of countervailing duties
on subsidized imports, and (ii) the filing of a formal
complaint with the WTO Dispute Settlement Body,
with the possibility of the imposition of retaliatory
sanctions in the event that the complaint is upheld.
 The concept of ‘subsidy’

Broadly speaking, Article 1.1 of the SCM Agreement

defines a subsidy as a financial contribution by a
government or public body, which confers a
benefit.
Furthermore, Article 2 of the SCM Agreement
provides that the WTO rules on subsidies and
subsidised trade only apply to ‘specific’ subsidies. A
specific subsidy is one that is only given to one
company, or to a special group of companies.
Government assistance in itself is common and permissible.
Only subsidies that are specific are actionable under the
SCM. What is the reason for this rule? A subsidy that is
widely available does not usually create the worrisome
economic distortion that a specific subsidy causes.

Article 2 sets out the principles for determining if a subsidy is

specific: (1) enterprise specificity, where a government
targets a particular company or companies; (2) industry
specificity, where a government targets a particular industrial
section; (3) geographical specificity, where a government
designates enterprises in a particular geographical area; and
(4) prohibited-subsidy specificity, where the government
targets goods destined for export, or requires the use of
domestic over foreign goods.
Agricultural Subsidies (excluded)

Articles 3 and 5 of the SCM contain exceptions for

agricultural subsidies that are the subject of the
WTO Agreement on Agriculture. The AoA is
deemed to be more specific than the SCM
Agreement so the AoA will govern in cases where
both agreements arguably apply.
 Three colours of subsidies

Since the beginning of the Uruguay Round of Trade

Negotiations, subsidies were categorized according
to the three colours of a traffic light (red, yellow,
and green).
 Prohibited subsidies: Red Light

Under Article 3 of the SCM Agreement, two types

of subsidies are prohibited outright (the red light
category of subsidies):

a) Subsidies contingent, in law or in fact, upon

export performance – export subsidies; and
b) Subsidies contingent upon the use of domestic
over imported goods – import substitution
subsidies.
 Green Light

Under Article 8 of the SCM Agreement, certain

subsidies are declared to be non-actionable,
including certain subsidies for research and
development, certain types of assistance to
disadvantaged regions, and certain subsidies for
compliance with environmental regulations. These
green light provisions expired in 2000.
 Actionable Subsidies: Yellow Light

The third class is an intermediate or yellow light class of subsidies,

deemed to be actionable subsidies under Part III of the SCM
Agreement.

Unlike export subsidies and import substitution subsidies, most

subsidies are not prohibited but are ‘actionable’, i.e. they are subject
to challenge in the event that they cause adverse effects on the
interests of another Member. In all cases, the assessment is
fact-specific.

To the extent that these subsidies do not cause adverse effects, or the
adverse effects are removed, they cannot, or can no longer, be
challenged successfully.
The chapeau of Article 5 of the ASCM Agreement provides:

No Member should cause, through the use of any subsidy referred to in

paragraphs 1 and 2 of Article 1, adverse effects to the interests of other
Members.

Paragraphs (a)–(c) of Article 5 distinguish between three types of

‘adverse effects’ on the interests of other Members: (1) injury to the
domestic industry of another Member (Article 5(a)); (2) nullification
or impairment of benefits accruing directly or indirectly to other
Members under the GATT 1994 (Article 5(b)); and (3) serious
prejudice, including a threat thereof, to the interests of another
Member (Article 5(c)).
5.1 Subsidies Causing Injury

Subsidies have adverse effects on the interests of other Members

within the meaning of Article 5(a) of the SCM Agreement – and are
therefore ‘actionable’ – when the subsidised imports cause injury to
the domestic industry producing the like product.
5.2 Subsidies Causing Nullification or Impairment

Subsidies have adverse effects on the interests of other Members

within the meaning of Article 5(b) of the SCM Agreement – and are
therefore ‘actionable’ – when the subsidised imports cause the
nullification or impairment of benefits accruing directly or indirectly
to other Members under the GATT 1994.

This may be the case, in particular, with respect to the benefits from
tariff concessions bound under Article II:1 of the GATT 1994.
Subsidisation may undercut improved market access resulting from a
tariff concession.
Suppose that Country A agrees in trade negotiations to reduce its
tariff on imported barley by 10 per cent. Country B, which is a rice
exporter, thus expects that its exports to Country A will increase
when the tariff cut takes effect. These expectations are not realized,
however.

Country A, simultaneously with implementing the tariff cut, begins

to subsidize its domestic purchasers of rice by an amount equal to
the tariff reduction, thus removing the incentive that purchasers
otherwise would have, due to the tariff reduction, to buy imported
rice. These purchasers thus continue to buy the domestic rice,
meaning that Country B’s benefits that should have accrued from
Country A's tariff reduction have been nullified or impaired by
Country A's subsidy.
5.3 Subsidies Causing Serious Prejudice

Subsidies have adverse effects on the interests of other Members

within the meaning of Article 5(c) of the SCM Agreement – and are
therefore ‘actionable’ – when the subsidised imports cause serious
prejudice to the interests of another Member.
Pursuant to Article 6.3 of the SCM Agreement, ‘serious prejudice’ may
arise where a subsidy has one or more of the following effects:

(1) the subsidy displaces or impedes imports of a like product of

another Member into the market of the subsidising Member
(Article 6.3(a));

(2) the subsidy displaces or impedes the export of a like product of

another Member from a third country market (Article 6.3(b));
(3) the subsidy results in a significant price undercutting by the
subsidized product in comparison to the like product of another
Member in the same market, or significant price suppression, price
depression or lost sales in the same market (Article 6.3(c)); or

(4) the subsidy leads to an increase in the world market share of the
subsidising Member in a particular primary product or commodity in
comparison to the average share it had during the previous period of
three years (Article 6.3(d)).

If a complaining Member can show that a subsidy has any of these

effects, then ‘serious prejudice’ may be found to exist.
In the US – Upland Cotton (2005), the panel arrived at the
conclusion that ‘significant price suppression’ under Article
6.3 amounted to ‘serious prejudice’ within the meaning of
Article 5(c) of the SCM Agreement.
 Countervailing Measures

Prohibited subsidies and actionable subsidies which cause

injury to the domestic industry can be challenged directly in
WTO dispute settlement, or, in the alternative, they can be
offset by the application of a countervailing measure.
A Member whose domestic industry is injured by subsidized
imports has the choice between:

(1) challenging the subsidy concerned multilaterally,

pursuant to Article 4 or Article 7 of the SCM Agreement; or

(2) unilaterally imposing countervailing duties on the

subsidised imports, following an investigation procedure
before a domestic investigating authority conducted
pursuant to the procedural requirements set out in Part V
of the SCM Agreement.
A countervailing duty is defined in Article VI of the
GATT 1994 and footnote 36 to the SCM
Agreement. Article VI of the GATT provides that:

[A] special duty levied for the purpose of offsetting …

any subsidy bestowed, directly, or indirectly, upon the
manufacture, production or export of any
merchandise.
The SCM Agreement provides for three types of countervailing
measures:
(1) provisional countervailing measures; (2) voluntary
undertakings; and (3) definitive countervailing duties.

1) Provisional countervailing measures may take the form of

provisional countervailing duties guaranteed by cash deposits or
bonds equal to the amount of the provisionally calculated
amount of subsidization (Art 17.2 of SCM Agreement).
However, such provisional countervailing measures cannot be
applied earlier than sixty days from the date of initiation of the
investigation. Furthermore, their application must be limited to
as short a period as possible, and in no case may they be applied
for more than four months (Articles 17.3 and 17.4 of the SCM
Agreement).

In US – Softwood Lumber III (2002), the panel found that the US

had violated Articles 17.3 and 17.4 of the SCM Agreement
because it had imposed provisional countervailing measures on
imports of softwood lumber prior to the lapse of the sixty-day
period after the date of initiation and had exceeded the four-
month maximum length by three months.
2) Voluntary Undertakings

Investigations may be suspended or terminated without the

imposition of provisional measures or countervailing duties
upon receipt of satisfactory voluntary undertakings under which:
(1) the government of the exporting Member agrees to
eliminate or limit the subsidy or to take other measures
concerning its effects; or
(2) the exporter agrees to revise its prices so that the
investigating authorities are satisfied that the injurious effect of
the subsidy is eliminated (Art 18.1).
3) Definitive Countervailing Duties

Members may impose definitive countervailing duties only after

making a final determination that: (1) a countervailable subsidy
exists; and (2) the subsidised imports cause, or threaten to
cause, injury to the domestic Industry (Art 19.1).

Note that Article 32.1 of the SCM Agreement states:

No specific action against a subsidy of another Member can be taken

except in accordance with the provisions of GATT 1994, as interpreted by
this Agreement.
The panel in Mexico – Anti-Dumping Measures on Rice (2005)
held that the provision in a Mexican regulation imposing fines
on importers importing products subject to countervailing duty
investigations was a form of ‘specific action’ against a subsidy,
that fines were not provided for in the GATT 1994 or the SCM
Agreement, and that the fines at issue were thus inconsistent
with Article 32.1 of the SCM Agreement.
Duration, Termination, and Review of Countervailing Duties

With respect to the period of imposition of countervailing

duties, Article 21.1 of the SCM Agreement states as a rule:

A countervailing duty shall remain in force only as long as and to the

extent necessary to counteract subsidization which is causing injury.

Upon a request from an interested party or upon their own initiative where
warranted, the investigating authorities shall review the need for the
continued application of the duty.
Interested parties may request such review once a reasonable period has
elapsed since the imposition of the definitive countervailing duty. The
interested parties requesting a review must submit positive information
substantiating the need for a review. (Art 21.2)
Article 21.3 of the SCM Agreement provides for a so-
called ‘sunset’ clause according to which all definitive
countervailing duties must be terminated, at the latest,
five years after their imposition or latest review.

However, where the investigating authorities

determine that the lapse of the countervailing duty
would be likely to lead to continuation or recurrence of
subsidisation and injury, the duty will not be
terminated. Investigating authorities make that
determination in the context of a review that is
commonly referred to as a ‘sunset review’.