Trade law disciplines on subsidies

Policy makers and trade negotiators have long been challenged in developing rules on subsidies, as they are common in most economic sectors, used by many economies for many reasons, take many forms, and are provided at different national and subnational levels, with great potential to alter trade and investment flows and undercut support for free trade flows if they appear to unfairly privilege exports from a subsidizing economy. (p. 8)
Whether and how to discipline subsidies has been a divisive issue since the GATT’s 1947 inception, which only required parties to notify each other of subsidies that could affect exports; the major modernization and expansion of subsidies rules came with the 1986-93 Uruguay Round creating the Subsidies and Countervailing Measures (SCM) agreement. (pp. 8-9)
Under WTO rules, companies receive a subsidy only if a “financial contribution” that confers a benefit comes from a government or “public body”; the subsidy must be specific to an enterprise or industry in order to be actionable; the SCM agreement allows for two remedies: countervailing duties (CVDs) for injury in a domestic market or a WTO challenge that subsidies are causing serious prejudice in a third-market or in the home market of the subsidy provider. (pp. 9-10)
Concerns persist that WTO rules and the dispute settlement system cannot discipline subsidies due to the narrow definition of “government” and “public body”, the high evidentiary burden in proving the existence of a subsidy; the notification process’s failure to provide sufficient transparency; the ineffectiveness of remedies in disciplining subsidies, and the inability of current rules to distinguish between “bad” and “good” (pp. 10-11, Figure 1)
The need to police the behavior of state-owned enterprises (SOEs) by applying subsidy disciplines is acute in China given the size and reach of its SOEs; the WTO’s dispute settlement system rejected the contention that China’s SOEs qualify as “public bodies” even though they are owned and controlled by the Chinese government; this decision made it more difficult to impose CVDs or apply subsidy disciplines to SOEs or products containing SOE inputs. (pp. 10-12)
Aspects of the SCM agreement make it difficult for complaining members to prove that prohibited or actionable subsidies were provided, including 1) demonstrating government control over an entity and 2) showing that a private entity acted at the direction of the government, as obtaining such evidence can be extraordinarily difficult and getting firms to help is challenging if they fear retaliation; 3) proving a benchmark against which to judge whether a financial contribution confers a benefit, which is challenging in countries whose government dominates the economy; and 4) proving that subsidies were the cause of adverse effects, which is the hardest, as many factors can potentially cause such effects. (pp. 12-13)
WTO members are required to provide annual notifications of all specific subsidies granted or maintained but this rule is undermined by tardy reporting by a large and growing number of countries; in addition, members only notify what they believe to be a subsidy, leaving many programs unidentified; the lack of notifications impairs the ability to assess member compliance and limits the breadth of discussions. (pp. 13-14, Figure 2)
Remedies available under WTO rules are an impediment to the SCM agreement’s ability to police subsidies; the three remedies include for prohibited subsidies withdrawal of the subsidy without delay, and for all other subsidies CVDs or bringing a serious prejudice case to the WTO; CVDs are only available in countries importing the product and with a domestic industry making comparable products; investigations take a long time and require data that is difficult to obtain and CVDs can push subsidized goods into other markets, suppressing prices; in serious prejudice cases remedies are prospective and the elements of proof have temporal aspects; a long time passes before a challenge can be brought and compliance realized. (pp. 14-15)
WTO rules no longer distinguish between subsidies deserving of discipline and encouraged subsidies as the provision listing non-actionable subsidies has expired; while in some contexts members have discussed listing prohibited subsidies, no progress has been made in adopting a list; defining desirable subsidies and agreeing on whether and how to carve the out of the subsidy disciplines is a tall order. (pp. 15-16)