The definition of subsidy was for the first time introduced in the WTO Agreement on Subsidy and Countervailing Measures. Indeed, the definition turns around three main components: (i) a financial contribution (ii) by a government or any public body within the territory of a Member (iii) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist.
However, unlike the common understanding, not every subsidy is subject to multilateral disciplines and can be subject to countervailing measures. Only a subsidy, which is found “specific” within the meaning of Part I of the SCM Agreement is subject to multilateral, disciplines and can be subject to countervailing measures. In other words, a subsidy within the meaning of the SCM Agreement is not subject to the Agreement unless it has been specifically provided to an enterprise, industry, or group of enterprises or industries.
The basic principle is that a subsidy, which is specific to an enterprise, an industry or a region, distorts the allocation of resources, therefore makes goods artificially competitive against non-subsidized goods, and thus negatively affect competitors not due to the merit of the firm, but only because of the subsidy. For the same reason, where a subsidy is widely available to all firms operating within the country, such a distortion in the allocation of resources is presumed not to occur and therefore the subsidy is not specific.
Specificity according to the Agreement on Subsidy and Countervailing Measures
While the term subsidy is broadly defined, covering a wide scale of governmental support, not all subsidies are countervailable. Rather, a subsidy must be specific in order to be countervailable.
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.
The SCM Agreement makes a clear distinction between the De jure specificity and De Facto specificity. In fact, where a subsidy is explicitly limited sectorally or regionally, either by the granting authority, or by legislation, it is de jure specific. However, it is quite possible that a subsidy at face value is non-specific, but in fact is operated in a specific manner. There are certain factors that may be considered in this respect, including the use of a subsidy programme by a limited number of certain enterprises, predominant use of certain enterprises, the granting of disproportionately large amounts of subsidy to certain enterprises, and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy. The examination may lead to a finding of de facto specificity.
An example of subsidy calculations and countervailing measures
For example, if the law of a country B provides for an exemption on income tax for companies working specifically in the wood sector. Therefore, company A receives an income tax exemption. It produced and exported 200,000 tonnes of product Y. Assuming that it makes 10 million $ profit on product Y and the normal tax rate is 30%, the value of the exemption in total would be 3 million $ (10 Million * 30%), which equates to a per tonne value of 15 $ (3 Million / 200,000 tonnes).
The company A also receives a government loan of 10 Million $ at 10% interest for the same project, and the normal commercial interest rate is 30%. Since the loan is repayable, the amount of subsidy would be the difference between the interest paid (10Million $ * 10% =1 Million $) and the normal amount payable at commercial rates (10 Million $ * 30% = 3 Million $) which equates to 2 Million $ (3 Million $ – 1 Million $). The subsidy per tonne would therefore be 10$ (2 Million $ / 200,000 tonnes of production).
The above examples clearly show how exporters receiving a specific subsidy can reduce their prices to the importing markets due to the effects of the subsidy and not to the merit of the firm and therefore help those exporters to unfairly compete with domestic producers in the importing market and cause injury to the domestic producers.
Remedial measures to be applied against Subsidies.
The SCM Agreement uses the three terms ‘adverse effects’, ‘serious prejudice’ and ‘material injury’ to indicate certain conditions that must be met for remedies to be applied. The first two terms relate to the multilateral track where actionable subsidies are concerned, while the last term relates to the unilateral – countervailing duty – track. In this respect, we shed light on the unilateral path relevant to the determination of material injury to the domestic industry so that countervailing measures can be imposed on subsidized imports.
The WTO SCM Agreement allows countervailing measures to be imposed once the investigating authority of the importing country determined that subsidized imports caused or threatened to cause material injury to the domestic industry producing the like product. In making this determination, the investigation Authority will examine the volume of subsidized imports and the effect of the subsidized imports on prices in the domestic market for like products and the consequent impact of these imports on domestic producers of such products.
With reference to the effect of subsidized imports on the domestic industry, the SCM Agreement provides that the investigating authority shall evaluate all relevant economic factors bearing upon the state of the domestic industry, including actual or potential declines in sales, profits, output, market share, productivity, return on investments, utilization of capacity, actual or potential effects on cash flow, inventories, employment, wages, growth and ability to raise capital or investments.
A countervailing measure – usually in the form of a duty – is applied to counteract the injurious effects of subsidized imports on the importing market and restore fair competition. It can be a percentage of the price of the goods, a fixed amount per unit or a minimum import price as the goods enter the importing.