The Agreement on Subsidy and Countervailing Measures provides that certain subsidies are to be regarded as legitimate depending on their purpose. In other words, subsidy is not ex officio illegitimate under the international trade law.
Where a subsidy is explicitly limited to certain enterprises, industries or regions, either by the granting authority, or by legislation, it is de jure specific. On the other hand, where the authority, or legislation, establish objective criteria or conditions governing the eligibility for, and amount of, a subsidy, specificity shall not exist, provided that the eligibility is automatic and the criteria and conditions are strictly adhered to. Footnote 2 of the Agreement on Subsidy and Countervailing Measures clarifies that objective criteria or conditions are criteria or conditions which are neutral, which do not favour certain enterprises over others, and which are economic in nature and horizontal in application. It is relatively easy to establish such de jure specificity or nonspecificity.
It is quite possible that a subsidy at face value is non-specific, but in fact is operated in a specific manner. If there are reasons to believe that this is the case, other factors may be considered, including (1) the use of a subsidy programme by a limited number of certain enterprises, (2) the predominant use of a subsidy programme by certain enterprises, (3) the granting of disproportionately large subsidies to certain enterprises, and (4) the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy, including the frequency with which applications for a subsidy are refused or approved and the reasons for such decisions are of a particular relevance in this context. In performing this assessment, account shall be taken of the extent of diversification of economic activities within the jurisdiction of the granting authority as well as of the length of time during which the subsidy programme has been in operation.
Article 3 of the Agreement on Subsidy and Countervailing Measuressingles out two types of prohibited subsidies, which are export subsidies and import substitution subsidies. The Export subsidies are subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, including the programmes enumerated in the Illustrative List of export subsidies in Annex I of the Agreement on Subsidy and Countervailing Measures. The second category of prohibited subsidies which is defined as subsidies contingent whether solely or as one of several other conditions, upon the use of domestic over imported goods. Often, these take the form of local content requirements. In the US-Upland Cotton (2005), the Panel as well as the Appellate Body concluded that the subsidies at issue in that case, namely, payments to domestic users of US upland cotton, were subsidies contingent upon the use of domestic over imported goods and were, therefore, inconsistent with Article 3.1(b) of the Agreement on Subsidy and Countervailing Measures
The imposition of countervailing measures on imports to UAE, for example, will seek to offset the subsidy and increase the price of the imported product accordingly. These duties, if applied in line with the WTO Members obligations under the Agreement on Subsidy and Countervailing Measuresdo not constitute a barrier to trade but instead of that seek to restore the fair competition conditions between the domestically produced product and the imported product.In fact, subsidies are evidently used by governments to pursue and promote important and fully legitimate objectives of economic and social policy, but it may more probably have adverse effects on the interests of trading partners.