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Training Module on SubSidieS and CounTervailing MeaSureS

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Training Module on Subsidies and Countervailing Measures

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This Training Module is published under the auspices of TradeMark Southern Africa and is designed to contribute to the negotiating capacity of relevant stakeholders involved in the shaping of the Tripartite Free Trade Area (TFTA).

The training material provided is therefore tailored to the negotiating tasks of the TFTA role players, which include government officials, the private sector and civil society representatives.

The Module is intended for educational and divulgation purposes only. As such, it does not reflect or state the official positions of TFTA Members. Having no legal value, no claim can be made to the publisher regarding legal contents, which in no instance replace or substitute the official texts being reviewed.

PreFaCe

This Module concerns the discipline of subsidies and countervailing measures as these are dealt with in the legal provisions of the Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC) and the Southern African Development Community (SADC), as well as in the Draft TFTA Text.

The legal provisions on trade remedies (i.e.: anti-dumping, safeguards, subsidies and countervailing measures) of the three Regional Economic Communities (RECs) and the Draft Text of the TFTA mirror and refer to the World Trade Organization (WTO) rules on trade remedies.

In this scenario, the legal texts of COMESA, EAC and SADC, along with the Draft TFTA Text, are examined in the light of the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM), as the latter remains the reference source to administer, interpret and understand the functioning of the trade remedy under review.

Throughout the Module, selected excerpts from the jurisprudence of the WTO’s Panel and Appellate Body (AB) are provided as well as, wherever relevant, other leading cases from the TFTA region and its trading partners. The WTO’s Panel and Appellate Body reports and judgments are instrumental to the interpretation of the ASCM, thus contributing to the better understanding of the operational modalities of subsidies and countervailing measures.

This Module was drafted by Edwin Vermulst, Founding Partner of VVGB Advocaten under the supervision of Stefano Inama, Trade Lawyer at the United Nations Conference on Trade and Development (UNCTAD), and draws from a training module in the UNCTAD Dispute Settlements Series. It was adapted and updated to fit the particular needs of TFTA Member States.

Special thanks to Mwansa Musonda of the COMESA Secretariat, Geoffrey Osoro of the EAC Secretariat and Paul Kalenga of the SADC Secretariat for providing the relevant legal texts and advice during the drafting.

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TradeMark Southern Africa

What you will learn

You will learn the following from this Training Module:

> The international discipline of subsidies and countervailing duties under the WTO as mirrored in the COMESA, EAC and SADC legal provisions, as well as in the current formulation of the Draft TFTA Text;

> Master the terminology related to subsidies and countervailing measures, as well as the legal requirements pertaining to this trade remedy;

> Understand how to manage the legal process of subsidies and countervailing measures, in compliance with existing legislation at multilateral, regional and national levels; and

> Become acquainted with the basic calculations and references to legal sources that will enable you to better understand these trade remedies and their administration in the light of their evolution in jurisprudence and negotiations.

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Table oF ConTenTS

Overview ............................................................................................................................................................................................. 4

1. Subsidies and Countervailing Legislation in the TFTA Member States ...................................................... 5

1.1 Comesa ............................................................................................................................................................................ 5

1.2 EAC .................................................................................................................................................................................... 7

1.3 SADC ................................................................................................................................................................................. 8

1.4 Draft TFTA Text .............................................................................................................................................................. 8

1.5 The Status of Countervailing Duty Legislation in TFTA Member States .................................................10

2. The Agreement on Subsidies and Countervailing Measures of the WTO .................................................11

3. The Determination of Subsidisation ..........................................................................................................................13

3.1 Definition of Subsidy ................................................................................................................................................13

3.2 Specificity .....................................................................................................................................................................16

4. The Determination of Material Injury/Adverse Effects/Serious Prejudice .............................................25

5. Procedural Rules/Remedies ............................................................................................................................................30

5.1 CVD Track ......................................................................................................................................................................30

5.2 Multilateral Track ........................................................................................................................................................34

6. Developing Country Members ......................................................................................................................................36

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Overview1

Setting the stage for the trade remedies available to WTO Members confronted with injurious subsidisation, the WTO Agreement on Subsidies and Countervailing Measures (hereinafter referred to as the ASCM) contains many procedural provisions that TFTA Member States willing to embark on countervailing duty action (the unilateral track) must comply with. It also provides provisions for attacking certain subsidies (the multilateral track) under the WTO regime.

This Module starts by examining the treatment of subsidies in the context of the COMESA, EAC and SADC agreements, as well as the current formulation of the Draft TFTA Text in its version dated December 2010.

As shown by the review of their respective legal disciplines, COMESA, EAC and SADC provisions on trade remedies mirror and refer to the WTO’s rules on subsidies and countervailing duties. The Module, therefore, presents both substantive and procedural rules contained in the ASCM, and provides detailed information on the concepts of subsidisation, actionable subsidies and material injury/serious prejudice.

Throughout the Module, selected WTO Panel and Appellate Body jurisprudence sheds light on the interpretation of the Agreement. Since coming into force in 1995, a series of WTO Panel and Appellate Body reports and sentences have been issued that offer crucial findings on the application and operational modalities of the ASCM. In addition, the Module provides case law from the EU to further explain how certain articles and procedures have been implemented.

Under the title Determination of subsidisation, the Module explains important subsidy concepts, such as the definition and quantification of subsidies, the cost to government versus benefit to the recipient approaches, actionable subsidies, specificity, and green, orange and red subsidies.

In the Determination of injury/serious prejudice section, the Module discusses unilateral track requirements such as the material injury requirement, as well as related concepts such as the definitions of ‘like product’ and ‘domestic industry’, and the causal link between dumped imports and the injury suffered by the domestic industry. It further discusses the multilateral track requirement of serious prejudice.

The Procedural rules section highlights the various procedural stages of the unilateral and multilateral tracks.

With respect to special and differential treatment, the position of developing countries (DCs) should be determined according to the classification contained in Annex VII of the ASCM, which distinguishes between two categories of DCs.

1 This Module was prepared to address the interests and needs of TFTA Member States and builds on and updates the UNCTAD training modules.

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1. Subsidies and Countervailing Legislation in the TFTA Member States

The discipline of subsidies and countervailing measures is discussed below as per the provisions contained in the COMESA, EAC and SADC legal provisions, as well as the Draft TFTA Text.

1.1 Comesa

The COMESA Treaty regulates subsidies in Articles 52 and 53 and in the Trade Remedy Regulation.2

There are four paragraphs in Article 52. The first two paragraphs regulate subsidies in the common market that are incompatible “in so far it affects trade between Member States”. This provision seems to mirror European Community (EC) practices on subsidies in the EU internal market. Paragraphs 3 and 4 regulate subsidies granted by third countries that are incompatible in so far as it “distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods”.

Paragraphs 2 and 4 of Article 52 provide for remedies in the form of countervailing duties.

Article 53 of the Treaty provides for an ‘exception’ to the remedies contained in Article 52, establishing that countervailing duties with respect to products of other Member States can only be imposed if they “cause or threaten material injury to an established domestic industry or is such as to materially retard the establishment of a domestic industry”. This exception seems to mirror the multilateral track of the WTO where subsidies are countervailable if there is a determination of ‘adverse effects’.

Article 52Subsidies Granted by Member States

“1. Except as otherwise provided in this Treaty, any subsidy granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between the Member States, be incompatible with the common market.

2. A Member State may, for the purposes of offsetting the effects of subsidies and subject to regulations made by the Council, levy countervailing duty on any product of any Member State imported into another Member State equal to the amount of the estimated 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.

3. Except as otherwise provided in this Treaty, any subsidy granted by a third country or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between the Member States and the third country, be incompatible with the common market.

4. A Member State may, for the purposes of offsetting the effects of subsidies and subject to regulations made by the Council, levy a countervailing duty on any product of any third country imported into another Member State equal to the amount of the estimated 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.”

Article 53Exceptions to Levying of Countervailing Duty

“No Member State shall levy a countervailing duty on the importation of any product of the territory of another Member State unless it determines that the effect of the subsidisation is such as to cause or threaten material injury to an established domestic industry, or is such as to materially retard the establishment of a domestic industry.”

2 See COMESA Regulation on Trade Remedies, 2001.

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Besides the provisions contained in the COMESA Free Trade Area (FTA) Treaty, the COMESA Council of Ministers adopted the Regulation on Trade Remedy Measures (hereinafter the Main Regulation) in November 2001 under Article 10(1) of the COMESA Treaty3.

The purpose of having a set of trade remedy regulations, including subsidies and countervailing duties, is explicitly stated in Regulation 2 of the Main Regulation.

“1. These regulations are a binding instrument on COMESA Member States in their conduct of trade remedy investigations. Its purpose is to ensure that there is uniformity among COMESA Member States in the conducting of trade remedy investigations and to ensure, to the extent possible, that such investigations are undertaken in harmony and within the framework of the WTO Safeguard Agreement.

2. These regulations establish rules for the conduct of trade remedy investigations and the application of trade remedy measures.”

Regulation 3 of the Main Regulation provides for the scope of application and the relationship with national legislation adopted to implement the WTO agreements as follows:

“1. These regulations shall apply to investigations or reviews initiated under the national legislation of COMESA Member States on or after the day of entry into force of this regulation.

2. These regulations are to be applied in conjunction with the existing national legislation for conducting trade remedy investigations and reviews in the individual COMESA Member States. The Member States of COMESA recognise that most of them are also signatories in the WTO and may have national legislation, which is consistent with the WTO Agreement. All COMESA Member States recognise that these Member States have the right to apply their national legislation, without amendment, in conducting all trade remedy investigations from the date that this regulation comes into force, as their national legislation complies with both the WTO Agreement and this regulation.

3. If an investigation, initiated by a COMESA Member State, finds that the industry under investigation includes imported products only from COMESA countries, the provisions to be applied are the COMESA trade remedy regulations.

4. If an investigation, initiated by a COMESA Member State, finds that the industry under investigation includes imported products only from non-COMESA WTO Member countries, the provision to be applied is the WTO Agreement on Safeguards.

5. If an investigation, initiated by a COMESA Member State, finds that the industry under investigation includes imported products from both COMESA and non-COMESA WTO Member countries, the provisions to be applied are the WTO Agreement, and where not otherwise provided for by WTO, the provisions of the COMESA trade remedy regulations.

6. In the case of Part III on anti-dumping only if an investigation is initiated by a COMESA Member State against fellow COMESA Members, the provisions of Part III of this Regulation shall apply. If an investigation is initiated by a COMESA Member State against non-COMESA WTO Member countries, the provisions of the WTO Agreement shall apply. In cases where an investigation under Part III has been initiated by a COMESA Member State against fellow COMESA Members and non-COMESA WTO Member States, both this regulation and the WTO Agreement will be applied in this investigation.”

When reading Regulation 3, as mentioned above, the complementary nature of the COMESA Main Regulation on Trade Remedies and the WTO agreements emerges.

National laws adopted to implement the WTO Trade Remedies Agreement will prevail in investigations concerning non-COMESA countries and where non-COMESA countries and COMESA countries are concerned.

The COMESA trade remedies regulations under the Main Regulation will only apply when an investigation is initiated against another COMESA country. However, even in this case the second paragraph of Regulation 3

3 Article 10 of the COMESA Treaty provides as follows:

“Regulations, directives, decisions, recommendations and opinions of Council:

1. The Council may, in accordance with the provisions of this Treaty, make regulations, issue directives, take decisions, make recommendations or deliver opinions

2. A regulation shall be binding on all Member States in its entirety

3. A directive shall be binding upon each Member State to which it is addressed as to the result to be achieved but not as to the means of achieving it

4. A decision shall be binding upon those to whom it is addressed

5. A recommendation and an opinion shall have no binding force.”

Available at http://www.iss.co.za/AF/RegOrg/unity_to_union/pdfs/comesa/2COMESA_Treaty.pdf

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provides a warning stating that COMESA–WTO Member States that have adopted trade remedy legislation have the right to apply it without amendments.

The Member States of COMESA recognise that most of them are also WTO signatories and may have national legislation which is consistent with the WTO Agreement. They recognise that such Member States have the right to apply national legislation, without amendment, in conducting all trade remedy investigations from the date that this Regulation comes into force, as their national legislation complies with both the WTO Agreement and this Regulation.

The trade remedies regulations of the COMESA Main Regulation are drawn from the existing WTO agreements, in certain cases, verbatim. Hence the risk of potential conflict among national legislation of COMESA–WTO Members and the COMESA Main Regulation appears minor.

Reportedly, the main purpose for the adoption of the Main Regulation is to have a common regional platform that could also be used by non-WTO Members and WTO Members of COMESA alike. It also aims at providing a forum for consultation and amicable solution seeking through COMESA organs in case of intraregional investigations on trade remedies as contained in Part V of the Main Regulation.

Part IV of the COMESA Regulation on Trade Remedy Measures mirrors, to a large extent, the provisions of the ASCM and does not need to be further commented on at this stage. No incidents or jurisprudence have been reported.

1.2 EAC

The Protocol on the Establishment of the East African Community4, in Articles 17 and 18, regulates subsidies within the EAC market and subsidies and countervailing duty actions against subsidised imports from foreign countries. It thus establishes a two tier approach.

Article 17 on its own does not prohibit or provide for any sort of trade remedy for subsidies granted by EAC Member States, but obliges them to notify other EAC partners.

Conversely, Article 18 of the Protocol explicitly provides that subsidised imports of foreign countries may be countervailed.

Paragraph 2 of Article 18 provides that the implementation of both articles is subject to the East African Community Customs Union (Subsidies and Countervailing Measures) Regulations, specified in Annex V to this Protocol.

Article 17Subsidies

“1. If a partner state grants or maintains any subsidy, including any form of income or price support which operates directly or indirectly to distort competition by favouring certain undertakings or the production of certain goods in the partner state, it shall notify the other partner states in writing.

2. The notification in paragraph 1 of this Article shall contain the extent and nature of the subsidisation, the estimated effect of the subsidisation, the quantity of the affected product or products exported to the partner states and the circumstances making the subsidisation necessary. “

Article 18Countervailing Measures

“1.(a) The community may, for the purposes of offsetting the effects of subsidies and subject to regulations made under this Article, levy a countervailing duty on any product of any foreign country imported into the customs union.

(b) The countervailing duty shall be equal to the amount of the estimated subsidy determined to have been granted, directly or indirectly, on the manufacture, production or export of that product in the country of origin or exportation.

2. The implementation of Articles 17 and 18 of this Protocol shall be in accordance with the East African Community Customs Union (Subsidies and Countervailing Measures) Regulations, specified in Annex V to this Protocol.”

4 The Protocol on the Establishment of the East African Community. (2004). Available at:

http://www.customs.eac.int/index.php?option=com_docman&task=doc_view&gid=1&tmpl=component&format=raw&Itemid=164 (2 March 2004)

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1.3 SADC

The Regulation on Subsidies and Countervailing in the SADC Trade Protocol5 makes an explicit reference to the ASCM, with an exception referred to in Article 3 of the SADC Trade Protocol. However, this Article deals with the elimination of barriers to intra-SADC trade6 and not with subsidy issues. One possible interpretation is to link the Protocol with paragraph (c) of Article 3, which states that Member States may ask for a grace period for maintaining non-tariff barriers (NTBs).

Article 19Subsidies and Countervailing Measures

“1. Member States shall not grant subsidies which distort or threaten to distort competition in the region.

2. Notwithstanding paragraph 1 of this Article, a Member State may continue to apply a subsidy in accordance with Article 3.

3. A Member State may, for the purposes of offsetting the effects of subsidies and subject to WTO provisions, levy countervailing duties on a product of another Member State.

4. Notwithstanding the provisions of paragraph 1 of this Article, a Member State may introduce a new subsidy only in accordance with WTO provisions.”

1.4 Draft TFTA Text

Article 18 of the Draft TFTA Text makes explicit reference to the adoption of countervailing measures in accordance with the WTO Agreement as follows:

Article 18Anti-dumping and Countervailing Measures

“1. Subject to the provisions of this Agreement, nothing in this Agreement shall prevent Tripartite Member States from adopting anti-dumping and countervailing measures in accordance with the relevant WTO Agreements and Annex 2 to this Agreement.

2. In applying this Article, Tripartite Member States shall be guided by provisions of the WTO Agreement on the Interpretation of Article VI of the General Agreement on Tariffs and Trade and the WTO Agreement on Subsidies and Countervailing Measures.”

Article 2 of Annex 2 on Trade Remedies establishes some principles in applying trade remedies, such as an investigation to be conducted before imposition, and entrusts the Sub-committee on Trade Remedies with the responsibility to conduct such investigation and recommend the adoption of trade remedies as follows:

“1. Trade remedies relating to the trade of the Tripartite Member States with third countries and within the Free Trade Area may only be adopted after an investigation in accordance with the rules of natural justice and this Annex.

2. The Sub-committee on Trade Remedies shall have the authority to initiate and conduct the investigations and recommend the adoption of trade remedies, which shall be applied in accordance with the mechanisms on border measures relating to imports.

3. Notwithstanding paragraph 1 of this Article and paragraph 2 of Article 4, where a Tripartite Member State has entered other trade arrangements, the Sub-committee on Trade Remedies may recommend the trade remedies provided for in the instruments regulating those arrangements.”

The relationship between the Sub-committee on Trade Remedies and the national investigation authorities of those TFTA Member States that have established such authorities is dealt with in Article 8 of Annex 2.

“With respect to Tripartite Member States that are Members of the World Trade Organisation, the notification of the Sub-committee on Trade Remedies as the investigating authority or competent authority to the WTO is hereby authorised, as well as any other notifications that may be made as and when may be necessary or required.”

5 Consolidated version of the SADC Trade Protocol.

6 Eventually the drafters of the Protocol referred to paragraph (c) of Article 3: “That Member States, which consider they may be or have been adversely affected, by removal of tariffs and non-tariff barriers (NTBs) to trade, may, upon application to the Committee of Ministers of Trade (CMT), be granted a grace period to afford them additional time for the elimination of tariffs and NTBs. CMT shall elaborate appropriate criteria for the consideration of such applications”. In other words, if a Member State wish to consider a subsidy that is applying a kind of NTBs it may ask to the CMT additional time for its elimination.

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This Article seems to suggest that TFTA countries that are Members of the WTO, which have adopted anti-dumping legislation and which have established a national investigating authority, must indicate to the WTO that the Sub-committee on Trade Remedies will take up the duties and tasks previously exercised by the national investigating authority. It remains to be seen whether TFTA Member States that have invested substantially in developing a national investigating authority are willing to accept such a move.

Article 3 of Annex 2 provides for the initiation of investigations as follows:

“1. Applications seeking trade remedies shall be made to the Sub-committee on Trade Remedies.

2. Applications under this Article may be made by:

a) An industry, national, or regional business association;

b) A Tripartite Member State on behalf of a domestic or regional industry; or

c) A consumer organisation registered in a Tripartite Member State.

3. When the Sub-committee on Trade Remedies is satisfied that investigations are necessary for the application of trade remedies, it may direct the initiation of the investigations and adopt the modalities, including the constitution of a Panel from among its Members to undertake the designated tasks.”

As examined later in this Module, Article 3 is the only provision in Annex 2 that hints at the composition of an organ, in this case a Panel, which will actually carry out the investigation. However no further details are provided on the composition of the Panel.

Article 4 of Annex 2 provides for the kind of trade remedy measures that the Sub-committee may recommend:

“1. When it is established after an investigation that domestic or regional industries, producing like, or directly competitive products, have suffered injury, or are threatened with injury, or establishment of a domestic industry has been curtailed within the meaning of this Annex, the Sub-committee on Trade Remedies may recommend a measure in accordance with sub-paragraph (2) of this Article.

2. Provided that the measures shall be necessary and appropriate to deal with the injury to the domestic or regional industries, the measures may include:

a) Safeguard action in the form of higher than otherwise applicable customs duties, or imposition of quotas allocated out among suppliers, or exporters to the Tripartite Member States on the basis of performance for a representative period;

b) Anti-dumping duties not exceeding the margin of dumping;

c) Countervailing duties to offset the subsidies;

d) Price undertakings to appropriately raise the price of imported products, undertaken by the exporters and suppliers to the Tripartite Member States if accepted by the Sub-committee on Trade Remedies;

e) Orders to enterprises doing business or having a presence in, or directly affecting the trade and industries in the Tripartite region, to ensure and maintain conditions for fair competition and for sustainable human development; or

f) Any other measures in the public interest, consistent with the appropriate protection of a domestic or regional industry.”

As can be seen from the above-mentioned Article, ample discretion on trade remedies lies with the Sub-committee. It is, however, not clear to whom the Sub-committee should recommend the adoption of a trade remedy measure, nor is it specified elsewhere in Annex 2 or in the Draft TFTA Text.

Article 387 of the Draft TFTA Text provides for the establishment of tripartite committees on trade and customs, but does not expressly make any reference to the Sub-committee on Trade Remedies. The composition of the Sub-committee on Trade Remedies is neither contained in Annex 2, nor in the Draft TFTA Text.

7 Paragraph 2 of Article 38 of the Draft TFTA Text so provides:

‘’The functions of the Ministerial Committee on Trade and Customs shall be to: (a) regularly review the status of the Tripartite Free Trade Area and make appropriate recommendations; (b) initiate policy analysis on key issues affecting the Tripartite Free Trade Area; (c) receive and consider reports on trade, trade related and customs issues under this Agreement; (d) resolve through consultation trade, trade related and customs matters referred to it by Tripartite Member States; (e) implement and monitor closely measures taken to promote trade within the Tripartite FTA; (f ) decide on new annexes and regulations that may be required to facilitate the implementation of this Agreement; (g) amend existing annexes and regulations required to facilitate the implementation of this Agreement; and (h) discharge any other functions as may be required by the Tripartite Council or Tripartite Summit as established by the Tripartite’’.

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The establishment of such a sub-committee, with extensive powers on the initiation of investigations and recommendations, does not have a precedent in FTAs. Normally matters relating to trade remedies are left to national authorities. Many FTAs contain provisions for previous consultations and notification of a trade remedies investigation through the joint organs and consultations mechanisms established by the FTA.

1.5 The Status of Countervailing Duty Legislation in TFTA Member States8

There is no obligation for WTO Members to adopt national subsidies and countervailing measures legislation. However, the WTO Committee on Subsidies and Countervailing Measures should be notified regarding national legislation, or the absence thereof. The table below provides, at a glance, the current situation in relation to such legislation for TFTA Member States that have complied with the WTO notification requirement.

Member/observer Notification provided9

Angola NoneBotswana NoneBurundi G/SCM/N/1/BUR/1Democratic Republic of the Congo NoneDjibouti NoneKenya G/SCM/N/1/KEN/2Lesotho NoneMadagascar NoneMalawi G/SCM/N/1/MWI/1Mauritius G/SCM/N/1/MUS/2Mozambique NoneNamibia G/SCM/N/1/NAM/1Rwanda NoneSouth Africa G/SCM/N/1/ZAF/2 and Addendum 1Tanzania NoneUganda G/SCM/N/1/UGA/2Zambia G/SCM/N/1/ZMB/1Zimbabwe G/SCM/N/1/ZWE/2 and Supplement 1

8 Excerpted and adapted from Report (2011) of the Committee on Subsidies and Countervailing Measures G/L/970 of 27 October 2011.

9 ‘None’ means that no notification was submitted.

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2. The Agreement on Subsidies and Countervailing Measures of the WTO10

Notably, because of policy differences between the United States and the EC, the General Agreement on Tariffs and Trade (GATT) treatment of subsidies (Articles VI and XVI) has historically been controversial and the disciplines weak. A Subsidies Code was agreed on in the Tokyo Round, but it skirted around important issues. The Uruguay Round Agreement on Subsidies and Countervailing Measures (ASCM) has generally been hailed as a major improvement on previous regimes, because for the first time it provides a definition of ‘subsidy’, lays down detailed standards for the conduct of countervailing duty investigations and provides a workable, multilateral discipline over subsidies.11

“The term ‘subsidy’ is first defined in the GATT/WTO context in Article 1 of the ASCM. The inclusion of this detailed and comprehensive definition of the term ‘subsidy’ is generally considered to represent one of the most important achievements of the Uruguay Round in the area of subsidy disciplines. Under these circumstances, it would in our view be inappropriate to place any weight in interpreting the definition of subsidy found in Article 1 of the ASCM on an understanding regarding Article XVI: 4 of GATT 1947, which was adopted more than a decade before that definition was formulated.” 12

United States Foreign Sales Corporation (FSC) Panel

“[T]he negotiating history confirms that the introduction of the two-part definition of subsidy, consisting of ‘financial contribution’ and ‘benefit’, was intended specifically to prevent the countervailing of benefits from any sort of (formal, enforceable) government measures, by restricting to a finite list the kinds of government measures that would, if they conferred benefits, constitute subsidies.”

United States Export Restraints Panel

In terms of its structure, the ASCM is divided into 11 parts:

• Part I – General: Includes the definition of subsidies in Article 1, as well as the concept of specificity in Article 2;

• Part II – Prohibited subsidies:

- Article 3 provides that export subsidies and import substitution subsidies are prohibited;

- Article 4 provides multilateral remedies against such prohibited subsidies;

• Part III – Actionable subsidies:

- Article 5 covers the concept of adverse effects, while Article 6 discusses serious prejudice;

- Article 7 is the mirror provision of Article 4, discussing the multilateral remedies against actionable subsidies;

• Part IV – Non-actionable subsidies: Article 8 provides that subsidies which are not specific are non-actionable. It furthermore exempts certain environmental, research and development (R&D) and regional subsidies, even though they are specific. Multilateral remedies, however, remain open;

• Part V – Countervailing duties:

- Articles 10–23 largely mirror the procedural and material injury provisions of the Anti-Dumping Agreement;

- Article 14 contains important rules on the calculation of the amount of certain subsidies;

• Part VI – Institutions: Establishes the Committee on Subsidies and Countervailing Measures and authorises the establishment of a permanent group of experts;

10 It should be noted that the WTO’s Agriculture Agreement contains its own discipline with respect to the subsidisation of agricultural products, covered by the dedicated provisions of that Agreement. However, Article 13 provides that, under certain circumstances, and provided that ‘due restraint’ is shown before initiation, agricultural subsidies may be countervailed under the ASCM. This Module will not cover cases brought under the Agriculture Agreement.

11 Horlick, G.N. and Clarke, P.A. 1994. The 1994 Subsidies Agreement, World Competition, p. 41.

12 FSC Panel, para. 7.80.

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• Part VII – Notification and surveillance: Contains important notification and surveillance procedures;

• Part VIII – Developing countries: Grants significant special and differential treatment to developing Member Countries;

• Part IX – Transitional arrangements: Deals with accessions and transition economies;

• Part X – Dispute settlement: Article 30 provides that the Dispute Settlement Understanding (DSU) provisions apply, except as otherwise specified in the ASCM; and

• Part XI – Final provisions: Includes the provision that Article 6.1 (serious prejudice definition) and Articles 8 and 9 (non-actionable subsidies) applied for five years only. Because of the failure of the Seattle Ministerial Conference, these provisions expired on 31 December 1999.

Furthermore, the ASCM contains the following important annexes:

• Annex I: The illustrative list of export subsidies;

• Annex II: Guidelines on consumption of inputs in the production process;

• Annex III: Guidelines in the determination of substitution drawback systems as export subsidies;

• Annex IV: Calculation of the total ad valorem subsidisation for purposes of Article 6.1(a);

• Annex V: Procedures for developing information concerning serious prejudice;

• Annex VI: Procedures for on the spot investigations ex Article 12.6; and

• Annex VII: Coverage of developing and least developed Member Countries.

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3. The Determination of Subsidisation

3.1 Definition of Subsidy

Article 1 of the ASCM defines the term ‘subsidy’ very broadly:

“1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:

(a)(1) There is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as ‘government’), i.e. where:

i. A government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), or potential direct transfers of funds or liabilities (e.g. loan guarantees);

ii. Government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits);13

iii. A government provides goods or services other than general infrastructure, or purchases goods;

iv. A government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above, which would normally be vested in government and the practice, in no real sense, differs from practices normally followed by governments; or

(a)(2) There is any form of income or price support in the sense of Article XVI of GATT 1994; and

(b) A benefit is thereby conferred.”

Article 1, ASCM

Thus, in order for a subsidy to exist, a government must make a financial contribution and a benefit must be conferred thereby.

“In short, the negotiating history confirms that the introduction of the two-part definition of subsidy, consisting of ‘financial contribution’ and ‘benefit’, was intended specifically to prevent the countervailing of benefits from any sort of (formal, enforceable) government measures, by restricting to a finite list the kinds of government measures that would, if they conferred benefits, constitute subsidies. The negotiating history confirms that items (i)–(iii) of that list limit these kinds of measures to the transfer of economic resources from a government to a private entity. Under subparagraphs (i)–(iii), the government acting on its own behalf is effecting that transfer by directly providing something of value – either money, goods, or services – to a private entity. Sub-paragraph (iv) ensures that the same kinds of government transfers of economic resources, when undertaken through explicit delegation of those functions to a private entity, do not thereby escape disciplines.” 14

United States Lumber Panel

The definition of public body and the analysis that has to be carried to consider a public body as part of government, as contained in Article 1.1.(a)(1), has been recently clarified in the US – Appellate Body (AB) Report on Anti-dumping and Countervailing Duties on certain products from China.

13 In accordance with the provisions of Article XVI of GATT 1994 (Note to Article XVI) and the provisions of Annexes I through III of this Agreement, the exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued, shall not be deemed to be a subsidy.

14 Lumber Panel, para. 8.73.

14


“… We see the concept of ‘public body’ as sharing certain attributes with the concept of ‘government’. A public body within the meaning of Article 1.1.(a)(1) of the Subsidies and Countervailing Measures (SCM) Agreement must be an entity that possesses, exercises or is vested with governmental authority. Yet, just as no two governments are exactly alike, the precise contours and characteristics of a public body are bound to differ from entity to entity, state to state, and case to case. Panels or investigating authorities confronted with the question of whether conduct falling within the scope of Article 1.1.(a)(1) is that of a public body will be in a position to answer that question only by conducting a proper evaluation of the core features of the entity concerned, and its relationship with government in the narrow sense15.

… In all instances, Panels and investigating authorities are called upon to engage in a careful evaluation of the entity in question, and to identify its common features and relationship with government in the narrow sense, having regard, in particular, to whether the entity exercises authority on behalf of government. An investigating authority must, in making its determination, evaluate and give due consideration to all relevant characteristics of the entity and, in reaching its ultimate determination as to how that entity should be characterised, avoid focusing exclusively or unduly on any single characteristic without affording due consideration to others that may be relevant. In all instances, Panels and investigating authorities are called upon to engage in a careful evaluation of the entity in question and to identify its common features and relationship with government in the narrow sense, having regard, in particular, to whether the entity exercises authority on behalf of government. An investigating authority must, in making its determination, evaluate and give due consideration to all relevant characteristics of the entity and, in reaching its ultimate determination as to how that entity should be characterised, avoid focusing exclusively or unduly on any single characteristic, without affording due consideration to others that may be relevant.”16

US – Anti-dumping and Countervailing Duties (China) AB

The Appellate Body unambiguously stated that the term ‘benefit’ means benefit to the recipient, as opposed to the cost to government, thereby definitively putting to rest the old conflict between the US and the EC.

“A ‘benefit’ does not exist in the abstract, but must be received and enjoyed by a beneficiary or a recipient. Logically, a ‘benefit’ can be said to arise only if a person, natural or legal, or a group of persons, has in fact received something. The term ‘benefit’, therefore, implies that there must be a recipient… Accordingly, we believe that Canada’s argument that ‘cost to government’ is one way of conceiving of ‘benefit’ is at odds with the ordinary meaning of Article 1.1(b), which focuses on the recipient and not on the government providing the ‘financial contribution’.17

The structure of Article 1.1 as a whole confirms our view that Article 1.1(b) is concerned with the ‘benefit’ to the recipient, and not with the ‘cost to government’. The definition of ‘subsidy’ in Article 1.1 has two discrete elements: “a financial contribution by a government or any public body” and “a benefit is thereby conferred”. The first element of this definition is concerned with whether the government made a ‘financial contribution’, as that term is defined in Article 1.1(a). The focus of the first element is on the action of the government in making the ‘financial contribution’. That being so, it seems to us logical that the second element in Article 1.1 is concerned with the “benefit … conferred” on the recipient by that governmental action.18

We also believe that the word ‘benefit’, as used in Article 1.1(b), implies some kind of comparison. This must be so, for there can be no ‘benefit’ to the recipient unless the ‘financial contribution’ makes the recipient ‘better off’ than it would otherwise have been, absent that contribution. In our view, the marketplace provides an appropriate basis for comparison in determining whether a ‘benefit’ has been ‘conferred’, because the trade-distorting potential of a ‘financial contribution’ can be identified by determining whether the recipient has received a ‘financial contribution’ on terms more favourable than those available to the recipient in the market.”19

Canada – Aircraft, AB

The term provision of goods in Article 1(a)(1)(iii) was clarified in US – Appellate Body Report on Softwood Lumber IV20. In this dispute, Canada argued that that standing timber was not ‘provided’ to harvesters merely by virtue of the conferral through stumpage arrangements of an intangible right to harvest, nor was it to be considered a good since the term ‘goods’ is limited to tradable items with an actual or potential tariff classification. The AB rejected this argument and stated that:

15 US – Anti-dumping and Countervailing Duties (China), para. 317.

16 US – Anti-dumping and Countervailing Duties (China), para. 319.

17 Canada – Aircraft, AB, para. 154.

18 Canada – Aircraft AB, para. 156.


20 US – Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada, WT/DS257/AB/R.

15


“… In Article 1.1(a)(1)(iii), the only explicit exception to the general principle that the provision of ‘goods’ by a government will result in a financial contribution is when those goods are provided in the form of ‘general infrastructure’. In the context of Article 1.1(a)(1)(iii), all goods that might be used by an enterprise to its benefit even including goods that might be considered infrastructure are to be considered ‘goods’ within the meaning of the provision, unless they are infrastructure of a general nature21.

In sum, nothing in the text of Article 1.1(a)(1)(iii), its context, or the object and purpose of the SCM Agreement, leads us to the view that tangible items such as standing, unfelled trees that are not both tradable as such and subject to tariff classification, should be excluded, as Canada suggests, from the coverage of the term ‘goods’ as it appears in that Article. It follows that we agree with the Panel that standing timber trees are ‘goods’ within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.”22

US – Softwood Lumber IV AB

The terms ‘entrust’ and ‘direct’ in Article 1(a)(1)(iv) were clarified in the US – Countervailing Duty Investigation on Dynamic Random Access Memory Semiconductors (DRAMs).

Paragraph (iv) covers situations where a private body is used as a proxy by government to carry out one of the functions listed in paragraphs (i) through (iii). Thus, in this context, the terms ‘entrusts’ and ‘direct’ in paragraph (iv) identify the instances where seemingly private conduct may be attributable to a government for purposes of determining whether there has been a financial contribution within the meaning of the ASCM. In other words, Article 1.1(a)(1)(iv) is, in essence, an anti-circumvention provision.23

“… we are of the view that, pursuant to paragraph (iv), ‘entrustment’ occurs where a government gives responsibility to a private body, and ‘direction’ refers to situations where the government exercises its authority over a private body. In both instances, the government uses a private body as proxy to effectuate one of the types of financial contributions listed in paragraphs (i) through (iii). It may be difficult to identify precisely, in the abstract, the types of government actions that constitute entrustment or direction and those that do not. The particular label used to describe the governmental action is not necessarily dispositive. Indeed, as Korea acknowledges, in some circumstances, ‘guidance’ by a government can constitute direction.24 In most cases, one would expect entrustment or direction of a private body to involve some form of threat or inducement, which could, in turn, serve as evidence of entrustment or direction. The determination of entrustment or direction will hinge on the particular facts of the case.”25

US – Countervailing Duty Investigation on DRAMs AB

After having noted that the determination of the facts of the case will determine entrustment and direction, the AB further clarified modalities for assessing the factual evidence:

“…We note, first, that the Panel’s discussion of the totality of the evidence appears to be primarily a summation of errors that the Panel found in the course of its review of the individual pieces of evidence. Such errors undoubtedly would affect an examination of the totality of the evidence, as these pieces would constitute the evidence the Panel would consider as a whole in assessing the evidentiary support of the USDOC’s finding of entrustment or direction. Nevertheless, what is absent from the Panel’s “global” assessment, in our view, is a consideration of the inferences that might reasonably have been drawn by the USDOC on the basis of the totality of the evidence.26 As we have already observed27, individual pieces of circumstantial evidence are unlikely to establish entrustment or direction; the significance of individual pieces of evidence may become clear only when viewed together with other evidence. In other words, a piece of evidence that may initially appear to be of little or no probative value, when viewed in isolation, could, when placed beside another piece of evidence of the same nature, form part of an overall picture that gives rise to a reasonable inference of entrustment or direction.” 28

US – Countervailing Duty Investigation on DRAMs AB

21 US – Softwood Lumber IV, para. 60.



24 Korea’s response to questioning at the oral hearing.

25 US – Countervailing Duty Investigation on DRAMs, para. 116.

26 As a result of its approach to the individual pieces of evidence, (see Supra, para. 144–152), several pieces of evidence erroneously deemed irrelevant by the Panel were not part of the Panel’s ‘global review’.

27 Supra, para. 150.

28 US – Countervailing Duty Investigation on DRAMs, para. 154.

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While the term subsidy is broadly defined and covers a wide range of governmental support, not all subsidies are countervailable. Rather, a subsidy must be specific in order to be countervailable.

3.2 Specificity

There are four types of ‘specificity’ within the meaning of the ASCM:

• Enterprise specificity: A government targets a particular company or companies for subsidisation;

• Industry specificity: A government targets a particular sector or sectors for subsidisation;

• Regional specificity: A government targets producers in specified parts of its territory for subsidisation; and

• Prohibited subsidies: A government targets export goods or goods using domestic inputs for subsidisation.29

De jure specificity

Where a subsidy is explicitly limited according to sector or region, 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.30 Footnote 2 of the ASCM clarifies that objective criteria or conditions are neutral, do not favour certain enterprises over others and are economic in nature and horizontal in application. It is relatively easy to establish such de jure specificity or non-specificity.

De facto specificity

It is quite possible that a subsidy is non-specific at face value, but is operated in a specific manner. If there are reasons to believe that this is the case, other factors may be considered, including:

• The use of a subsidy programme by a limited number of enterprises;

• Predominant use of certain enterprises;

• The granting of disproportionately large amounts of subsidy to certain enterprises; and

• The manner in which discretion exercised by the granting authority in the decision to grant a subsidy (notably, information on the frequency with which applications for a subsidy are refused or approved and the reasons therefore).

In the analysis, account must be taken of the extent of diversification of economic activities within the jurisdiction, as well as of the length of time during which the subsidy programme has been in operation. The analysis may lead to a finding of de facto specificity.

Prohibited subsidies

Prohibited (red light) subsidies, as defined in Article 3, are by definition specific and therefore countervailable. Article 3 singles out two types of subsidies: export subsidies and import substitution subsidies.

The Panel on Indonesia – Autos, was called upon to decide whether the Indonesian subsidies, contingent upon the use of domestic over imported goods, were specific.

29 WTO: ASCM Overview, http://www.wto.org/english/tratop_e/scm_e/subs_e.htm

30 ASCM, Art. 2.1 (b)

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“As with any analysis under the SCM Agreement, the first issue to be resolved is whether the measures in question are subsidies within the meaning of Article 1 that are specific to an enterprise, or industry or group of enterprises or industries within the meaning of Article 2 … In this case, the European Community, the United States and Indonesia agree that these measures are specific subsidies within the meaning of those articles … Further, the European Community, the United States and Indonesia agree that these subsidies are contingent upon the use of domestic over imported goods within the meaning of Article 3.1(b), and that they are therefore deemed to be specific pursuant to Article 2.3 of the Agreement. In light of the views of the parties, and given that nothing in the record would compel a different conclusion, we find that the measures in question are specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement.”

Panel Report on Indonesia – Autos

Export subsidies

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 included in the explanatory list of export subsidies in Annex I. Incentives given to firms based in export processing zones (EPZs) are subsidies continent on export performance and therefore countervailable. Some authors argue that if existing incentive schemes are to be kept in place, the contingency on exports could be lifted if firms were allowed to operate in EPZs without being required to export only, but could also supply the domestic market. Another solution that keeps incentives WTO-compatible would be to extend benefits enjoyed by exporters within the zone to outside firms.31

The Canada – Auto Pact Panel holds that, while all practices identified in the explanatory list are subsidies contingent upon export performance, there may be other practices not identified in the explanatory list that are also subsidies contingent upon export performance.32 The concept of de jure export subsidies is relatively straightforward.

“In our opinion, export credits granted “for the purpose of supporting and developing, directly or indirectly, Canada’s export trade” are expressly contingent in law on export performance. We therefore find that the Canada account debt financing in issue is “contingent in law … upon export performance” within the meaning of Article 3.1(a) of the ASCM.” 33

Canada – Aircraft Panel

“In our view, a subsidy is contingent ‘in law’ upon export performance when the existence of that condition can be demonstrated on the basis of the very words of the relevant legislation, regulation or other legal instrument constituting the measure. The simplest, and hence, perhaps, the uncommon, case is one in which the condition of exportation is set out expressly, in so many words, on the face of the law, regulation or other legal instrument. We believe, however, that a subsidy is also properly held to be de jure export contingent where the condition to export is clearly, though implicitly, in the instrument comprising the measure. Thus, for a subsidy to be de jure export contingent, the underlying legal instrument does not always have to provide expressis verbis that the subsidy is available only upon fulfilment of the condition of export performance. Such conditionality can also be derived by necessary implication from the words actually used in the measure.” 34

Canada – Auto Pact AB

Footnote 4 provides that de facto export subsidies exist when the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings. On the other hand, a subsidy granted to enterprises which export shall not for that reason alone be considered to be an export subsidy.

31 See WTO Staff Working Paper ERSD-2004-03, May 2004.

32 Auto Pact Panel, para. 10.196.

33 Canada – Aircraft Panel, para. 9.230.

34 Auto Pact AB, para. 100.

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“Article 3.1(a) prohibits any subsidy that is contingent upon export performance, whether that subsidy is contingent ‘in law or in fact’. The Uruguay Round negotiators have, through the prohibition against export subsidies that are contingent in fact upon export performance, sought to prevent circumvention of the prohibition against subsidies contingent in law upon export performance. In our view, the legal standard expressed by the word ‘contingent’ is the same for both de jure and de facto contingency. There is a difference, however, in what evidence may be employed to prove that a subsidy is export contingent. De jure export contingency is demonstrated on the basis of the words of the relevant legislation, regulation or other legal instrument. Proving de facto export contingency is a much more difficult task. There is no single legal document which will demonstrate, on its face, that a subsidy is “contingent … in fact … upon export performance”. Instead, the existence of this relationship of contingency, between the subsidy and export performance, must be inferred from the total configuration of the facts constituting and surrounding the granting of the subsidy, none of which on its own is likely to be decisive in any given case.” 35

Canada – Aircraft AB

“An inquiry into the meaning of the term “contingent … in fact” in Article 3.1(a) of the SCM Agreement must, therefore, begin with an examination of the ordinary meaning of the word ‘contingent’. The ordinary meaning of ‘contingent’ is “dependent for its existence on something else”, “conditional, dependent on, upon”. The text of Article 3.1(a) also includes footnote 4, which states that the standard of ‘in fact’ contingency is met if the facts demonstrate that the subsidy is “in fact tied to actual or anticipated exportation or export earnings”. The ordinary meaning of ‘tied to’ is “restrain or constrain to or from an action; limit or restricted as to behaviour, location, conditions, etc.” Both of the terms – ‘contingent … in fact’ and ‘in fact tied to’ suggest an interpretation that requires a close connection between the grant or maintenance of a subsidy and export performance.”

Australia – Automotive Leather II

The explanatory list in Annex I lists 11 types of export subsidies, ranging from direct export subsidies to currency retention schemes, exemptions, remissions or deferrals of direct taxes on exports (United States FSC), excessive duty drawback, provision of export credit guarantee, insurance programmes at premium rates or export credits below commercial rates (Brazil – Aircraft; Canada – Aircraft). Some developing countries have argued that the extent to which they provide export subsidies to offset certain disadvantages they face ought not to be countervailable. However, Panels have rejected this line of reasoning.

“In items (e), (f ), (g), (h) and (i) of the explanatory list, all of which relate to exemptions, remissions or deferrals of taxes or import charges, there is no hint that a tax advantage would not constitute an export subsidy simply because it reduced the exporter’s tax burden to a level comparable to that of foreign competitors.” 36

Brazil – Aircraft Panel

Duty drawback and export processing zones

Almost every TFTA Member State has a duty drawback scheme and export processing zones in place. Hence this part of the Module pays special attention to these issues. Given the relative absence of WTO jurisprudence on these issues, some jurisprudence has been excerpted from leading cases of EC national application of the ASCM to better illustrate the treatment of duty drawback provision and EPZs.

The basic concept underlying drawback and exemptions is that import duties on imports of raw materials are either not payable or refundable on the condition that such raw materials are used in the manufacture of products, which are consequently exported. Duty drawback schemes assume special importance in cases where import duties are still high, as is often the case in developing countries. Footnote 1 and Annexes I–III of the ASCM are all relevant in determining the legality of duty drawback schemes. Duty drawback systems, particularly those used by developing countries, have proven very problematic in the context of countervailing duty proceedings.

Firstly, many developing countries have simplified systems in use for small and medium-sized enterprises to facilitate their paperwork. Typically, such systems work with standard input-output ratios to quantify the amount of drawback. However, importing Member countries may determine that such systems are not sufficiently precise and violate Annex II.


36 Brazil – Aircraft Panel, para. 7.25.

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Secondly, the ASCM requires that imported raw materials be used in the exported finished product. However, in the production of bulk items and where both domestically purchased and imported raw materials are used, producers may not always be able to prove conclusively that particular export shipments incorporated exclusively imported raw materials. Again, this may be grounds to consider the duty drawback scheme to be countervailable. Lastly, duty drawback schemes have been considered illegal on the grounds that developing country Members did not have adequate verification procedures in place.

Examples of cases under EC national legislation on ASCM drawbacks37

“In certain broad spectrum antibiotics (BSA) from India, the Indian Passbook Scheme was examined. Under this scheme, upon export of finished goods, the exporter builds up credit, which can be used to pay customs duties on subsequent imports. However, the imported products did not need to have any relation to the actual production of the exporter of the finished product and could be sold on the Indian market38. The EC considered that the Passbook Scheme was not a permitted scheme within the meaning of Annex II, since the passbook credit is not calculated in relation to inputs actually consumed in the production process and the exporter is under no obligation to consume imported goods, free of duty, in the production process of the finished product39.

In stainless steel wire (SSW)40, the EC examined the Korean duty drawback schemes and found that two systems existed, the individual duty drawback scheme (available to all operators) and the fixed amount refund, available only to small and medium enterprises having received less than 100 million Won duty drawback during the last year. The EC found no fault with the individual duty drawback scheme since the government of Korea was found to have a system in place to confirm which inputs are consumed in the production of the exported product and in what amounts. However, the EC considered the fixed amount refund system countervailable, because the refunded amount of import charges was not calculated in relation to inputs actually consumed in the production process by the manufacturer–exporter concerned, but rather as a lump sum based on overall data.

In the polyester staple fibre (PSF)41 case, the commission considered the Indonesian BAPEKSTA Scheme countervailable because it found that there was not sufficient evidence for the existence of an effective verification scheme in accordance with point (i) of Annex I.”

Examples of case under EC national legislation on ASCM exemptions

Exemption on Imported Capital Goods

“In BSA42, the EC investigated the Indian Export Promotion Capital Goods Scheme. Under this scheme, a company must provide details of the type and value of capital goods to be imported and, depending on the level of export commitment which the company undertakes, the imports could be made at reduced or zero rates. To meet the export obligation, goods exported must have been produced using the imported capital goods. The EC held that this is a subsidy, because there is a financial contribution in the customs duties foregone and it is specific because it is contingent upon export performance.” 43

37 Examples drawn from an unpublished manuscript by Edwin Vermulst, 2001.

38 Commission Regulation (EC) No. 1204/98 imposing a provisional countervailing duty on imports of certain BSA originating in India, OJ L166/17, 1998. See also Council Regulation (EC) No. 2164/98 imposing definitive duties, OJ L273/1, 1998.

39 The EC further reasoned that even if it were assumed that the scheme constituted a remission, drawback or substitution scheme, there was no system or procedure in place to confirm which inputs are consumed in the production process of the exported product within the meaning of item (i) of Annex I, II and III to the basic Regulation. It was noted that Annex II(ii)(5) and Annex III(ii)(3) provide that where it is determined that the government of the exporting country does not have such a system in place, a further examination by the exporting country, based on actual inputs involved, or actual transactions, will normally need to be carried out in the context of determining whether an excess payment was made. Since the Indian government did not carry out such an examination, the EC did not examine whether there was in fact an excess drawback.

40 See OJ C199/3 (initiation), 1998; OJ L79/60 (provisional), 1999; OJ L189/26 (definitive India; termination Korea de minimis), 1999; OJ C261/4 (initiation accelerated review), 1999; OJ C199/5 (initiation), 1998; OJ L79/25 (provisional), 1999, and OJ L189/1 (definitive India; termination Korea), 1999.

41 Polyester staple fibres from Australia, Indonesia, Korea, Taiwan and Thailand, OJ L16/3 (provisional Australia, Taiwan; termination Korea, Thailand), 2000.

42 See above, footnote 26.

43 Compare polyester staple fibres from Australia, Indonesia, Korea, Taiwan, Thailand, OJ L16/3 (provisional Australia, Taiwan; termination Korea, Thailand), 2000, where a similar Thai scheme was considered countervailable.

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Import substitution subsidies

This category of prohibited subsidies is defined as subsidies contingent, whether solely or as one of several other conditions, on the use of domestic over imported goods. These often take the form of local content requirements, however, Article 3.1(b) mentions ‘goods’, but since local content requirements often comprise not only goods but also other costs items, the requirements themselves will need to be scrutinised in detail.

“In our view, the Panel’s examination of the Customs Valuation Agreement (CVA) requirements for specific manufacturers was insufficient for a reasoned determination of whether contingency ‘in law’ on the use of domestic over imported goods exists. For the MVTO 1998 manufacturers and most SRO manufacturers, the Panel did not make findings as to what the actual CVA requirements are and how they operate for individual manufacturers. Without this vital information, we do not believe the Panel knew enough about the measure to determine whether the CVA requirements were contingent ‘in law’ upon the use of domestic over imported goods. We recall that the Panel did make a finding as to the level of the CVA requirements for one company, CAMI. The Panel stated that the CVA requirements for CAMI are 60 per cent of the cost of sales of vehicles sold in Canada. At this level, it may well be that the CVA requirements operate as a condition for using domestic over imported goods. However, the Panel did not examine how the CVA requirements would actually operate at a level of 60 percent.” 44


The Appellate Body overruling the Panel holds that this provision also covers both de jure and de facto variants.

“… We believe that a finding that Article 3.1(b) extends only to contingency ‘in law’ upon the use of domestic over imported goods would be contrary to the object and purpose of the ASCM, because it would make circumvention of obligations by Members too easy.” 45


Non-actionable subsidies

First, non-specific subsidies are not actionable. Second, certain narrowly defined R&D, environmental and regional subsidies are non-actionable (these expired on 31 December 1999) on the condition that the Subsidies Committee is notified in advance. Non-actionable subsidies are often referred to as green light subsidies.

Calculation of benefit to recipient for countervailing duty purposes

Article 14 of ASCM provides guidelines for calculating the benefit to the recipient of four types of subsidies:

• Specific government provision of equity on terms inconsistent with the usual investment practices of private investors in the country;

• Specific government loans for less than the beneficiary would pay on a comparable commercial loan that the firm could actually obtain on the market;

• Specific government loan guarantees for less than the firm would pay on a comparable commercial loan in the absence of a government guarantee; and

• Specific government provision of goods or services for less than adequate remuneration, or specific government purchase of goods for more than adequate remuneration. The adequacy of remuneration must be determined in relation to prevailing market conditions for the goods or service in the country concerned, including price, quality, availability, marketability, transportation and other conditions of purchase or sale.

In all four cases the benchmark is the price in the market. Article 14 further provides that laws or regulation must provide national calculation methods.



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The US – Softwood Lumber IV AB provided further details on the notion of price in the market:

“... We find, instead, that an investigating authority may use a benchmark, other than private prices of the goods in question in the country of provision, when it has been established that those private prices are distorted, because of the predominant role of the government in the market as a provider of the same or similar goods. When an investigating authority resorts, in such a situation, to a benchmark other than private prices in the country of provision, the benchmark chosen must, nevertheless, relate or refer to, or be connected with, the prevailing market conditions in that country, and must reflect price, quality, availability, marketability, transportation and other conditions of purchase or sale as required by Article 14(d) 46.

… We emphasise, however, that when an investigating authority proceeds in this manner, it is obliged, pursuant to Article 14(d), to ensure that the alternative benchmark it uses relates or refers to, or is connected with, prevailing market conditions in the country of provision (including price, quality, availability, marketability, transportation and other conditions of purchase or sale) with a view to determining, ultimately, whether the goods at issue were provided by the government for less than adequate remuneration.” 47

Some examples of calculation benefit under EC practice:

1. Grants

• Any lump sum of revenue transferred or foregone is equivalent to a grant (no repayment).

• The value of the subsidy is the amount of the grant corrected for any differences between the point in time of its receipt and the investigation period (IP), i.e. the period in which production or sales are allocated.

• If the grant is entirely expensed during the IP, the interest that would have accrued during that period will normally be added.

• Tax exemption: The amount of subsidy is the amount of tax that would have been payable by the recipient at the standard tax rate applicable during the IP.

• Tax reduction: The amount of subsidy is the difference between the amount of tax actually paid by the recipient during the IP and the amount that would have been paid at the normal tax rate.

2. Government loans

• Repayment takes place.

• The subsidy is the difference between the amount of interest paid on the government loan and the interest normally payable on a comparable (similar amount plus similar repayment period) commercial loan (i.e. from a private bank operating in the domestic market) during the IP.

• If all or part of a loan is forgiven, the amount not repaid will be treated as a grant, depending on whether there was a guarantee. Tax referrals and reimbursable grants are also treated as interest free loans.

3. Government guarantee

• Normally enables a firm to borrow more cheaply (lower interest rate) than would otherwise be the case.

• If the scheme is viable during the IP and the recipient has paid the fees enabling the programme to operate on a commercial basis, there is no financial contribution by government, and therefore no subsidy involved.

• If no fees are paid by the recipient, the subsidy would be the difference between the amount the firm pays on the guaranteed loan and the amount it would have to pay for a comparable commercial loan in the absence of the government guarantee.

4. Provision of goods and services by government

• The calculation must reflect only that part of the purchases of goods or services which are used directly in the production/sale of a like product during the IP.

• The amount of subsidy is the difference between price paid by firms for goods or services, and the adequate remuneration for these products or services in prevailing market conditions.

5. Government provision of equity capital

• Does not in itself confer a benefit (case-by-case basis).

• If there is a market in freely-traded shares, the amount of subsidy is the difference between what the government has paid and the normal market price for the shares involved.

• If there is no market, the government’s realistic expectation of a return on the price paid for equity should be considered.

• In cases where the government has not acted according to the usual investment practice of the private investors, all or part of the equity must be considered a grant.



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6. Forgiveness of government held debt

• Forgiveness of debt relieves a company of its repayment obligations, and therefore should be treated as a grant.

• If the subsidy has to be allocated, the allocation period should be considered to begin at the time of the forgiveness of the debt. The subsidy amount is the outstanding amount of the debt forgiveness (including any interest accrued).

Examples of calculations methods:

To facilitate the reader’s understanding of the operation of these complicated rules, a few simple calculation examples are provided below.

Allocation period and allocation

The subsidy amount has to be established during the IP (which is normally the most recent financial year), but as many subsidies are effective for a number of years, subsidies granted before the IP should also be investigated:

• Per unit subsidy: Weighted average value over the IP (e.g. duty drawback); and

• Global sum subsidy: Allocation of the global sum to each unit of the product as appropriate (e.g. machinery).

Allocation involves two exercises:

1. Attribution to the IP of subsidies granted before the IP; and

2. Allocation of the subsidy amount per unit of the like product.

Allocation to the IP of portion of subsidies granted before the IP

• Recurring subsidies (e.g. tax incentives), which effects are felt immediately after granting: the expensed amount in the IP should be increased by the annual commercial interest rate.

• Non-recurring subsidies linked to the acquisition of fixed assets (e.g. machinery): total value of subsidy has to be spread over the normal depreciation period of the assets.

Appropriate denominator for allocation of subsidy amount

1. Once the subsidy amount for the IP has been established, the per unit amount is derived by allocating it over the appropriate denominator consisting of the volume of sales or exports of the product concerned.

2. Appropriate denominator:

• Export subsidies: Export volume during the IP;

• Non-export subsidies: Total sales (domestic plus export); and

• If the benefit of a subsidy is limited to a particular product, the denominator should reflect only sales of that product.

Deduction from amount of subsidy

• Allowed deductions from the amount of subsidy: Any application fee or cost necessarily incurred to qualify for, or to obtain the subsidy, directly paid to the government in the IP.

• Export taxes, duties or other charges levied on the export of a product, specifically intended to offset the subsidy.

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Example 1: Subsidies granted per unit of product

Government rebate per tonne of product X exported, according to season:

First half of 2011: 200,000 tonnes exportedRebate: €5 per tonne = €1,000,000

Second half of 2011: 100,000 tonnes exportedRebate: €20 per tonne = €2,000,000

Total rebate = €3,000,000Weighted average: 3,000,000/300,000 = €10/tonneAmount of subsidy: + 25% interest = €12.5/tonne

Example 2.1: Subsidies expensed in the IP

Company A receives further benefits if it exports all the product X it produces (export subsidy) and, among others, it receives an income tax exemption.

IP: 100,000 tonnes produced and exported = €4 million = profit on product XNormal tax rate: 25%Tax exemption: €1 million = €10/tonne

Amount of subsidy: +25% interest = € 12.5/tonne

Example 2.2: Subsidies expensed in the IP

Company A also receives a loan of €5,000,000 at 5% interest for the same project, and the normal commercial interest rate is 25%.

Amount of subsidy: €5,000,000 at 25% = (25% - 5%) = 20% = €1 million for IP = € 10/tonne.

If the repayment period for the loan is more than one year, the subsidy will recur in future periods (and its amount will depend upon how much of the capital amount of the loan has been repaid).

Example 3: Subsidies allocated over time

Company A receives a grant of €5,000,000 to purchase machinery used to produce the product for export.

Normal depreciation period: five yearsExports: 100,000 tonnes/yearSubsidy amount for one year (IP): €1,000,000 = €10/tonne

This subsidy amount has to be increased by the average annual amount of interest that the firm could earn from the non-depreciated amount of the grant over the five years’ allocation:

Year 1= €5,000,000 x 25% = 1,250,000 Year 2= €4,000,000 x 25% = 1,000,000 Year 3= €3,000,000 x 25% = 750,000 Year 4= €2,000,000 x 25% = 500,000 Year 5= €1,000,000 x 25% = 250,000 = €7.5/tonne

Subsidy amount/year = € (10 + 7.5) €/tonne = €17.5/tonne

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Example 4: Import duty exemption on machinery (fixed assets)

Company A receives import duty exemption on machinery since 2000.

IP: 2012Normal depreciation period: five yearsImports: €5,000,000Import duty rate: 50%Amount allocated to the IP: €500,000 = €5/tonne

Subsidy amount (including 25% interest) = €6.25/tonne

Calculation of benefit to recipient for serious prejudice purposes

In contrast, Annex IV to the ASCM provides that any calculation of the amount of subsidy for the purpose of paragraph 1(a) of Article 6 (ad valorem subsidisation exceeding 5%) shall be done in terms of the cost to granting governments.

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4. The Determination of Material Injury/Adverse Effects/Serious Prejudice

The ASCM 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.

Adverse effects

Article 5 provides that no Member should cause, through the use of actionable subsidies, adverse effects to the interests of other Members, i.e.:

• Material injury in the sense of the countervailing duty (CVD) track;

• Nullification or impairment of benefits accruing directly or indirectly to other Members under the GATT 1994; and

• Serious prejudice, including threat thereof, to the interests of another Member.

Serious prejudice

According to Article 6, serious prejudice shall be deemed to exist in the case of:

• The total ad valorem subsidisation of a product exceeding 5%;

• Subsidies to cover operating losses sustained by an industry;

• Subsidies to cover operating losses sustained by enterprise, other than one-time measures which are non-recurrent and cannot be repeated for that enterprise and which are given merely to provide time for the development of long-term solutions and to avoid acute social problems; and

• Direct forgiveness of debt, i.e. forgiveness of government-held debt and grants to cover debt repayment.

However, where the subsidising Member can demonstrate that the subsidy did not have any of the below effects, serious prejudice shall not be found. Serious prejudice may arise where an actionable subsidy has one or more of the following effects:

• It displaces or impedes imports of a like product of another Member into the market of the subsidising Member;

• It displaces or impedes the exports of a like product of another Member from a third country market;

• It results in significant price undercutting by the subsidised product as compared with the price of a like product of another Member in the same market, or significant price suppression, price depression or lost sales in the same market; and

• It leads to an increase in the world market share of the subsidising Member, in a particular the primary product or commodity as compared to the average share it had during the previous period of three years. This increase follows a consistent trend over the period when subsidies have been granted.

In the Indonesia – Automobile Industry Panel, the EC and the US argued that as the result of Indonesian subsidies to Timor, their exports to Indonesia had been displaced or impeded. However, the Panel determined that these assertions were not supported by sufficient evidence.

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“We do not mean to suggest that in WTO dispute settlement there are any rigid evidentiary rules regarding the admissibility of newspaper reports or the need to demonstrate factual assertions through contemporaneous source information. However, we are concerned that the complainants are asking us to resolve core issues relating to adverse trade effects on the basis of little more than general assertions. This situation is particularly disturbing, given that the affected companies certainly had at their disposal copious evidence in support of the claims of the complainants, such as the actual business plans relating to the new models, government documentation indicating approval for such plans … and corporate minutes or internal decision memoranda relating both to the initial approval, and the subsequent abandonment of the plans in question.

We note the United States’ stated concern for the confidentiality of company business plans. However, an invitation by the Panel for proposals to ensure adequate protection of such information was not taken up. While complainants cannot be required to submit confidential business information to WTO dispute settlement Panels, neither may they invoke confidentiality as a basis for their failure to submit the positive evidence required, in the present case, to demonstrate serious prejudice under the ASCM.” 48

Indonesia – Automobile Industry Panel

Material injury – key elements

The determination of material injury consists of a determination that the subsidised imports have caused material injury to the domestic industry producing a like product, the four elements of which will be discussed below. In addition, the possible calculation of injury margins for WTO Members applying the lesser duty rule will be discussed.

The like product

The term like product is defined in footnote 46 of the ASCM as a product which is identical, i.e. alike in all respects, to the product under consideration, or in the absence of such a product, another product that, although not alike in all respects, has characteristics closely resembling those of the product under consideration. This definition is strict and may be contrasted, for example, with the broader term ‘like or directly competitive’ as used in the Safeguards Agreement. As the definition applies throughout the ASCM, it is also relevant, for example, for the serious prejudice analysis of Article 6. The Indonesia – Automobile Industry Panel had to determine which European and American cars were like the Indonesian-produced Timor. The Panel rejected the EC argument that all passenger cars were like products, and rather took a more nuanced view, based on data from the automotive industry itself.

“One reasonable way for this Panel to approach the ‘like product’ issue is to look at the manner in which the automotive industry itself has analysed market segmentation. The United States and the European Community have submitted information regarding the market segmentation approach taken by DRI’s Global Automotive Group, a company whose clients include all major auto manufacturers, including KIA, PT TPN’s national car partner.

DRI has in its analysis considered the physical characteristics of the cars in question when designing its segmentation. It has used as an initial filter the size of the vehicle, but it has then divided cars of a given size into upper and lower end categories, and has moved luxury cars, regardless of size, from lower segments to the E segment. We consider such an approach, which segments the market based on a combination of size and price/market position, to be a sensible one which is consistent with the criteria relevant to ‘like product’ analysis under the ASCM.” 49

Indonesia – Automobile Industry Panel

The Panel concluded that finished Timors and comparable CKD car imports were alike in the circumstances of the case.

48 Indonesia – Automobile Industry Panel, para. 14.234–14.235.

49 Automobile Industry Panel, para. 14.177–14.178.

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The domestic industry

Article 16.1 of the ASCM defines the domestic industry as the domestic producers as a whole of like products, or those of them whose collective output of the products constitutes a major proportion of the total domestic production of those products. There are two exceptions to this principle. First, and most importantly, where domestic producers are associated with exporters or importers, or import the dumped products themselves, they may be excluded from the definition of the domestic industry. Second, under restrictive circumstances, a regional industry comprising only producers in a certain area of a Member’s territory may be found to exist. Last, it is noted that the definition of the domestic industry is closely linked to the standing determination that importing country authorities must make prior to initiation. This procedural issue is discussed in the next section.

Material injury

According to introductory Article 15.1 of the ASCM, the determination of material injury must be based on positive evidence and involve an objective examination of the volume of dumped imports, their effect on domestic prices in the importing country market and their consequent impact on the domestic industry. However, the AB went on to emphasise the due process rights of interest parties, emanating from Articles 6 and 12 of the Anti-dumping Agreement (ADA), against which the determination will be scrutinised.

Volume and prices

Article 15.2 provides more details on the volume and price analysis, emphasising the relevance of a significant increase in subsidised imports (either absolute or relative to production or consumption in the importing Member country) and price undercutting, depressing or suppressing50 effects of the dumped imports.

Subsidised imports

The notion of ‘subsidised imports’ is used throughout Article 15. However, it often happens in CVD cases that some producers were subsidised, while others did not benefit from subsidies. A conceptual issue then is whether such non-subsidised imports may be treated as subsidised in the injury analysis. By analogy to the EC – Bed Linen Panel anti-dumping case, this would appear not to be the case. In an important obiter dictum in that case, the Panel pronounced that imports from producers found not to have been dumped, should not be included in the injury analysis.51

Cumulation

Article 15.3 legalises the concept of cumulation. This principle means that where imports from several countries are simultaneously subject to anti-subsidy investigations, their effects may be assessed cumulatively for injury purposes, as long as they do not qualify for the de minimis or negligibility thresholds (see the next section). A cumulative assessment is appropriate in light of the conditions of competition among and between imports and the like domestic product. Many WTO Members apply cumulation almost as a matter of course, as long as the thresholds are not met.

The injury factors

Article 15.4 requires that the examination of the impact of the dumped imports on the domestic industry shall include an evaluation of all relevant economic factors and indices having a bearing on the state of the industry and then mentions 15 specific factors. Article 15.4 concludes that this list is not exhaustive and that no single or several of these factors can necessarily give decisive guidance.

50 Prevention of price increases that would have otherwise occurred.

51 Bed Linen Panel, para. 6.138.

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The 15 Injury Factor Provided by Article 15.4

“Actual and potential decline in output, sales, market share, profits, productivity, return on investments, or utilisation of capacity; factors affecting domestic prices; actual and potential negative effects on cash flow, inventories, employment, wages, growth, ability to raise capital or investments and, in the case of agriculture, whether there has been an increased burden on government support programmes.”

By analogy to WTO Panel and Appellate Body reports interpreting similar provisions in the ADA and Safeguards Agreement, it seems beyond doubt that the evaluation of the 15 factors is mandatory in each case and must be clear from the published documents.

Causation/other known factors

The evaluation of import volumes and prices and their impact on the domestic industry is not only relevant for the determination of whether the domestic industry has in fact suffered material injury, but will often be indicative of whether the injury has been caused by the dumped imports or by other factors. Footnote 47 of the ASCM refers back to Articles 15.2 and 15.4 of the ASCM, stating that the demonstration of the causal link must be based on an examination of all relevant evidence before the authorities. The authorities must also examine any known factors, other than the subsidised imports injuring the domestic industry, at the same time. The resulting injury caused by these factors must not be attributable to the dumped imports. Article 3.5 provides a non-exhaustive list of factors which may be relevant, depending on the facts of the case.

Other Factors Listed in Article 3.5

“The volumes and prices of non-subsidised imports of the like product, contraction in demand or changes in the patterns of consumption, trade-restrictive practices of and competition between the foreign and domestic producers, developments in technology and the export performance and productivity of the domestic industry.”

The WTO ADA Panel has held that, contrary to the Article 3.4 factors, the Article 3.5 factors need not be examined as a matter of course in each administrative determination. Such examination will instead depend on the arguments made by interested parties in the course of the administrative investigation.52

Threat of injury

It may happen that a domestic industry alleges that it is not yet suffering material injury, but is threatened with material injury which will develop into material injury unless anti-dumping measures are taken. Article 15.7 offers special provisions for a threat case, because such statements are easy to make and any investigation based on threat of material injury will necessarily be speculative since it involves analysis of events that have not yet happened. Thus, a determination of threat must be based on facts and not merely on allegation, conjecture or remote possibility.

The change in circumstances in which the dumping would cause injury must be clearly foreseen and imminent. In making a threat determination, the importing country authorities should consider, inter alia:

• Nature of the subsidy or subsidies in question and the trade effects likely to arise therefrom;

• A significant increase rate of subsidised imports into the domestic market indicating the likelihood of substantially increased importation;

• Sufficient, freely disposable, or an imminent substantial increase in capacity of the exporter indicating the likelihood of substantially increased subsidised exports to the importing Member’s market, taking into account the availability of other export markets to absorb any additional exports;

• Whether imports are entering at prices that will have a significant depressing or suppressing effect on domestic prices, and would likely increase demand for further imports; and

• Inventories of the product being investigated.

52 H-beams Panel, para. 7.273.

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No single factor will necessarily be decisive, but the totality of the factors considered must lead to the conclusion that further subsidised exports are imminent and that, unless protective action is taken, material injury would occur. The identical sentence in the ADA was an important reason for the High Fructose Corn Syrup (HFCS) Panel to conclude that a threat analysis must also include the evaluation of the injury factors.

Injury margins

The determination of whether dumping has caused material injury to the domestic industry producing the like product is generally made with respect to the country or countries under investigation. By nature, this is either an affirmative or negative determination. If the determination is affirmative, WTO Members that apply a lesser duty rule in accordance with Articles 8.1 and 9.1 will calculate injury margins. The ADA does not give any guidance on such calculation and arguably leaves its Members substantial discretion. Suffice to say that injury margins are normally producer-specific, and will compare imported and domestically produced like products prices, focusing on whether the former is undercutting or underselling the latter.

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5. Procedural Rules/Remedies

As mentioned before, the ASCM establishes two tracks to deal with subsidies: the unilateral CVD track and the multilateral remedy track. The purpose of the CVD track is to re-establish a level playing field for domestic producers who face competition from subsidised imports. Thus, the imposition of a countervailing duty will supposedly offset the unfair advantage that foreign exporters gain as a result of the subsidisation. As the relevant procedure is a domestic one, the ASCM contains various procedural obligations that authorities wishing to investigate injurious subsidisation must comply with.

However, a Member injured by another Member’s subsidisation may prefer the abolition of the subsidy programme itself. It is also possible that the Member in a third market feels the effects of the subsidy. In such cases, the ASCM provides for multilateral, accelerated track dispute settlement procedures.

5.1 CVD Track

The following ASCM articles contain important procedural provisions as far as CVD action is concerned:

• Article 11: Initiation and subsequent investigation, including the standing determination;

• Article 12: Evidence, including due process rights of interested parties;

• Article 13: Pre-initiation consultations;

• Article 17: Provisional measures;

• Article 18: Undertakings;

• Article 19: Imposition and collection of countervailing duties;

• Article 20: Retroactivity;

• Article 21: Duration and review of countervailing duties and undertakings;

• Article 22: Public notice and explanation of determinations pertaining to initiation and imposition of preliminary and final measures; and

• Article 23: Judicial review.

It falls outside the scope of this Module to discuss these procedural provisions in detail. However, the general tendency of Panels has been to interpret these provisions strictly, and little deference is given to national implementation shortcuts that do not do justice to their plain meaning.

Contents application

A countervailing duty case normally starts with the official submission of a written complaint by the domestic industry to the importing country authorities that injurious subsidisation is taking place. This complaint is called the application in the ASCM. Article 11.2 contains requirements for the contents of this application.

Pre-initiation examination

Article 11.3 imposes the obligation on the importing country authorities to review, before initiation, the accuracy and the adequacy of the evidence in the application. However, as Article 11.3 does not provide any details on the nature of this review, it is difficult for Panels to judge whether importing country authorities have complied with Article 11.3.

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Standing determination

Under Article 11.4 of the ASCM, importing country authorities must determine, before initiation and on the basis of an examination of the degree of support for, or opposition to, the application expressed by domestic producers of the like product, that the application has been made by or on behalf of the domestic industry. Since GATT Panels often holds that the failure to properly determine standing before initiation is a fatal error which cannot be repaired retroactively in the course of the proceeding, this is a potentially outcome-decisive claim.

Pre-initiation consultations

Article 13 of the ASCM requires an importing Member to engage in consultations with the exporting Member prior to initiation, with the aim of clarifying the situation and arriving at a mutually agreed solution. Practice in jurisdictions such as the US and the EC has shown that such consultations may be an important tool to limit the harassment aspect of a CVD investigation. Domestic industries tend to allege laundry lists of subsidy programmes in their applications and pre-initiation consultations may weed out programmes that are at face value non-countervailable (for example, because they are not specific, or because they are not used by the exporters concerned).

De minimis/negligibility rules

Article 11.9 contains the important de minimis rule that the investigation shall be promptly terminated if the subsidisation margin is less than 1% ad valorem. Similarly, prompt termination is required where the volume of subsidised imports, actual or potential, from a particular country is negligible. However, as will be seen in the next section, higher thresholds are provided for developing countries.

Investigation deadline

Article 11.11 provides that investigations shall normally be concluded within one year and in no case more than 18 months after their initiation. The 18 month deadline appears to be absolute.

Due process rights introduction

Articles 12 and 22 of the ASCM contain important due process rights of interested parties.

Public notice and motivation

Article 22 obliges importing country authorities to publish public notices of initiation and of preliminary and final determinations, with increasing degrees of specificity, as the investigation progresses. In addition, they must publish detailed explanations of their determinations. Conceptually, Article 12 violations will often be linked to substantive violations. Panel practice is, however, not entirely clear whether one or two violations exist in such cases.

Confidentiality

Countervailing duty investigations, particularly at company level, involve confidential and sensitive information because they require companies to submit detailed, company-specific information on customers, pricing and, sometimes, costing information to the importing country’s authorities. In order to mount an optimal legal defence, interested parties ideally need access to the confidential information submitted by the opposing side (foreign producers and their importers versus domestic producers and vice versa). On the other hand, they will be extremely reluctant to provide their own confidential information to their competitors. Thus, to ensure fair play and equality of arms, a balance must be struck between these competing interests and

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a legal system must give opposing parties equal levels of access to information. Article 12.4 of the ASCM chooses the principle53 that information which is by nature confidential or which is provided on a confidential basis shall, upon good cause shown, be treated as confidential by the authorities and shall not be disclosed without specific information of the party submitting it. However, the authorities shall require interested parties providing confidential information to provide meaningful non-confidential summaries thereof.

Other rights

Other important due process rights in Article 12 include ample opportunity to present evidence in writing (Article 12.1), right of access to the file (Article 12.1.2–12.3), the right to a hearing (Article 12.2) and the right to be timely informed of the essential facts under consideration, which form the basis for the decision whether to apply definitive measures (disclosure; Article 12.8).

Facts available

Article 12.7 provides that, in cases where an interested Member or party refuses access to, does not provide necessary information within a reasonable period, or significantly impedes the investigation, preliminary and final determinations, whether affirmative or negative, may be made on the basis of the facts available.

Provisional measures

Provisional measures should preferably take the form of a security (cash deposit or bond), and may not be applied sooner than 60 days from the date of initiation and may not last longer than four months.

Price undertakings

Article 18.1 envisages two types of undertakings: (a) an undertaking by the exporting country’s government to eliminate or limit the subsidy or to take other measures concerning its effects, or (b) an undertaking by an exporter to revise its prices to eliminate the injurious effect of the subsidy or the amount of the subsidy itself, whichever is lower. Under the Agreement, the imposition of anti-subsidy measures is discretionary and it is preferable that the measures are set at levels less than the subsidy margin, if such levels are adequate to remove the injury to the domestic industry.

Countervailing duties

The imposition of countervailing duties where injurious subsidisation has been found is discretionary and the use of a lesser duty rule is encouraged. Many WTO Members include a public interest clause in their national legislation to enable them to refrain from imposing duties, even where injurious subsidisation is found. If a countervailing duty is imposed, it must be levied on a non-discriminatory basis.

Retroactivity

Article 20 of the ASCM provides for two types of retroactivity. First, where a final determination of injury (but not of a threat thereof or of a material retardation of the establishment of an industry) is made, or in the case of a final determination of a threat of injury where the effect of the subsidised imports would, in the absence of the provisional measures, have led to a determination of injury, countervailing duties may be levied retroactively for the period for which provisional measures, if any, have been applied.

53 However, in footnote 17, Members recognise that in the territory of certain Members’ disclosures, a narrowly drawn protective order may be required. This is the case in the US and Canada.

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Second, definitive countervailing duties may be assessed retroactively, in critical circumstances, on imports for consumption less than 90 days prior to the date of application of provisional measures where the authorities for the subsidised product find that injury, which is difficult to repair, is caused by massive imports in a relatively short time of a product benefiting from subsidies paid or bestowed in contrast with the provisions of GATT 1994 and the ASCM, where deemed necessary, in order to preclude the recurrence of such injury.

Reviews

The ASCM recognises three types of anti-dumping measures reviews. Article 19.3 requires importing country authorities to promptly carry out reviews requested by newcomers, i.e. exporters subject to a definitive countervailing duty, but which were not actually investigated (other than for refusal to cooperate).

Article 21 provides for what can be called interim and expiry reviews. To start with the latter, definitive countervailing duties shall normally expire after five years from their imposition, unless the domestic industry asks for a review within a reasonable period preceding the expiry, arguing that the expiry of the duty would be likely to lead to continuation or recurrence of subsidisation and injury. During the five year period (hence the term interim review), interested parties may request the authorities to examine whether the continued imposition of the duty is necessary to offset subsidisation, whether the injury would be likely to continue or recur if the duty was removed or varied, or both. In both cases, the measures stay in force pending the outcome of the review. The United States Bismuth Steel AB, for example, had the opportunity to expand on the nature of interim review investigations.

“… We agree with the Panel that while an investigating authority may presume, in the context of an administrative review under Article 21.2, that a ‘benefit’ continues to flow from an untied, non-recurring ‘financial contribution’, this presumption can never be ‘irrebuttable’. In this case, given the changes in ownership leading to the creation of UES and BS plc/BSES, the USDOC was required under Article 21.2 to examine, on the basis of the information before it relating to these changes, whether a ‘benefit’ accrued to UES and BS plc/BSES.29

We do not agree with the Panel’s implied view that, in the context of an administrative review under Article 21.2, an investigating authority must always establish the existence of a ‘benefit’ during the period of review in the same way as an investigating authority must establish a ‘benefit’ in an original investigation. We believe that it is important to distinguish between the original investigation leading to the imposition of countervailing duties and the administrative review. In an original investigation, the investigating authority must establish that all conditions set out in the ASCM for the imposition of countervailing duties are fulfilled. In an administrative review, however, the investigating authority must address those issues which have been raised before it by the interested parties or, in the case of an investigation conducted on its own initiative, those issues which warranted the examination.”30

United States Bismuth Steel AB

Judicial review

Article 23 provides that Members that adopt countervailing duty legislation must also maintain independent judicial, arbitral or administrative tribunals or procedures for the purpose of prompt review of final and review administrative determinations.

54 Bismuth Steel AB, para. 62.

55 Bismuth Steel AB, para. 63.

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5.2 Multilateral Track

Article 4 provides the remedies in case of prohibited subsidies, while Article 7 provides the remedies in case of actionable subsidies. In both cases, the procedures have ‘teeth’, with short deadlines and workable remedies. As may be obvious, the procedure for dealing with prohibited subsidies is the strongest.

Prohibited subsidies Actionable subsidies1 Request for consultation, including statement

of available evidence in existence and subsidy nature

Request for consultation, including statement of (a)available evidence in existence and (b) subsidy nature of injury caused to domestic industry, nullification, impairment or serious prejudice

2 Consultations as quickly as possible Consultations as quickly as possible3 If no solution within 30 days referral to WTO

Dispute Settlement Body (DSB) for immediate establishment of a Panel

If no solution within 60 days referral to DSB for establishment and composition of a Panel and terms of reference within 15 days

4 Panel may request assistance Permanent Group of Experts (PGE) for binding advice on whether it is a prohibited subsidy (this has not happened thus far)

5 Circulate Panel report within 90 days of date of Panel composition/establishment terms of reference

Circulate Panel report within 120 days of date of Panel composition/establishment terms of reference

6 If it is a prohibited subsidy, the Panel will recommend that the Member withdraws the subsidy without delay, and will specify the time period for withdrawal. Thus far, Panels have generally given 90 days31

7 Within 30 days of circulation, the DSB shall adopt the report, unless it is appealed

Within 30 days of circulation, the DSB shall adopt the report, unless it is appealed

8 An AB must normally issue a decision within 30 days from notice of intention to appeal; in no event more than 60 days

An AB must normally issue decision within 60 days from notice of intention to appeal; in no event more than 90 days

9 After adoption of a Panel/AB report that found adverse effects, the subsidising Member must take appropriate steps to remove the adverse effects or withdraw the subsidy

10 If the DSB recommendation is not followed within the period specified by the Panel (which commences from data adoption of the Panel/AB report), the DSB grants the complaining Member the authority to take appropriate (proportionate) countermeasures

If the Member does not do so within six months from the date of the DSB’s adoption of the Panel/AB report, the DSB grants the complaining member the authority to take appropriate countermeasures, commensurate with the degree and nature of the adverse effects

11 Applicable DSU time periods shall be half

Failure to cooperate

Information concerning subsidisation is in the hands of the Member providing the subsidies and often will not be publicly available. In the case of actionable subsidies, Annex V contains detailed provisions for unearthing all relevant evidence, including an admonition to the Panel to “draw adverse inferences from instances of non-cooperation”. While similar procedures are lacking in the context of prohibited subsidies, the AB has filled this lacuna.

56 With the exception of the FSC Panel.

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“There is no logical reason why the Members of the WTO would, in conceiving and concluding the ASCM, have granted Panels the authority to draw inferences in cases involving actionable subsidies that may be illegal if they have certain trade effects, but not in cases that involve prohibited export subsidies for which the adverse effects are presumed. To the contrary, the appropriate inference is that the authority to draw adverse inferences from a Member’s refusal to provide information also belongs a fortiori to Panels examining claims of prohibited exports subsidies. Indeed, that authority seems to us an ordinary aspect of the task of all Panels to determine the relevant facts of any dispute involving any covered agreement: a view supported by the general practice and usage of international tribunals.” 57

Canada – Aircraft AB

Retroactivity

Article 4.7 provides that prohibited subsidies must be withdrawn without delay. The Australia – Automotive Leather Panel, in an Article 21.5 proceeding, determined that the term ‘withdraw’ encompasses repayment of the prohibited subsidy, thereby effectively adopting a retroactive remedy.

“We believe it is incumbent upon us to interpret ‘withdraw the subsidy’ so as to give it effective meaning. A finding that the term ‘withdraw the subsidy’ may not encompass repayment would give rise to serious questions regarding the efficacy of the remedy in prohibited subsidy cases involving one-time subsidies paid in the past whose retention is not contingent upon future export performance…” 58

Australia – Automotive Leather 21.5 Panel

This decision was heavily criticised in the DSB and elsewhere. It went beyond what any of the parties to the dispute had argued, opened the door for retroactive remedies in violation of general WTO practice and might have far-reaching repercussions for future cases, if followed by other Panels. The Panel made much of the distinction between recurring and non-recurring (one-time) subsidies, but the US position, advocating repayment only of the prospective portion, would have taken care of this. In fact, the Panel’s ruling arguably would create enormous liabilities for Members that granted prohibited recurring subsidies, for example illegal duty drawback schemes. Interestingly, the US and Australia ignored the Panel decision in the aftermath of the report, and bilaterally settled the case by agreeing on repayment of the prospective portion only. Two subsequent Panels also declined to follow the road taken by the Australia – Automotive Leather Panel.

“Brazil has explicitly expressed the ‘hope’ that the Panel does not consider itself bound to follow Australia – Leather Article 21.5. Indeed, Brazil “believes that the Panel in Australia – Leather [Article 21.5] reached a result that is not required by the language of the [SCM] Agreement”, and “does not believe that this or any other Panel should follow Australia – Leather [Article 21.5]”.

In light of these comments by Brazil, we consider that Brazil does not in fact want us to make any finding along the lines of Australia – Leather Article 21.5. The same is more obviously true of Canada. As noted above, we consider that a Panel’s findings under Article 21.5 of the DSU should be restricted to the scope of the ‘disagreement’ between the parties. In the present case, therefore, we do not consider it necessary to make any finding as to whether Article 4.7 of the ASCM may encompass repayment of subsidies found to be prohibited.” 59

Canada – Aircraft 21.5 Panel

“In this dispute, Canada has not claimed that the non-repayment, in whole or in part, of subsidies granted by Brazil represents a failure to ‘withdraw’ the prohibited export subsidies in question. We recall that, under Article 3.7 of the DSU, the aim of the dispute settlement mechanism is to secure a positive resolution to a dispute, and that our role under Article 21.5 is to render a decision “where there is disagreement” as to the existence or consistency with a covered agreement of measures taken to comply with the recommendations or rulings of the DSB. Accordingly, we shall address only claims that are put before us. Our silence on issues that are not before us should not be taken as expressing any view, express or implied, as to whether or not a recommendation to ‘withdraw’ a prohibited subsidy may encompass repayment of that subsidy.” 60

Brazil – Aircraft 21.5 Panel


58 Automotive Leather 21.5 Panel, para. 6.35.

59 Canada – Aircraft 21.5 Panel, para. 5.47–5.48.

60 Brazil – Aircraft 21.5 Panel, footnote 17.

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6. Developing Country Members

Article 27 of the ASCM provides special and differential treatment to developing countries in a number of ways. To properly understand the operation of this Article, it must be borne in mind that the ASCM distinguishes between two types of developing countries: Annex VII developing countries and other developing countries.

Annex VII Developing Countries

“(a) Least-developed countries, designated as such by the United Nations, which are Members of the WTO.

(b) Each of the following developing countries, which are Members of the WTO, shall be subject to the provisions applicable to other developing country Members according to paragraph 2(b) of Article 27 when GNP per capita has reached $1,000 per annum 61: Bolivia, Cameroon, Democratic Republic of the Congo, Côte d’Ivoire, Dominican Republic, Egypt, Ghana, Guatemala, Guyana, India, Indonesia, Kenya, Morocco, Nicaragua, Nigeria, Pakistan, Philippines, Senegal, Sri Lanka and Zimbabwe.”

Export subsidies’ prohibition

The Article 3.1(a) prohibition on export subsidies does not apply to Annex VII countries, while other developing countries had until 31 December 2002 to comply. These countries had to phase out their export subsidies within the eight year period, preferably progressively. No developing country Member was allowed to increase its export subsidy levels and had to eliminate these within a shorter period when the use of such export subsidies was inconsistent with its development needs.

“The exemption for developing country Members other than those referred to in Annex VII from the application of the Article 3.1(a) prohibition on export subsidies is clearly conditional on compliance with the provisions in paragraph 4 of Article 27. Thus, we consider that, where the provisions in Article 27.4 have not been complied with, the Article 3.1(a) prohibition applies to such developing country Members.62

… We consider that, in order to assert and prove a claim of violation of Article 3.1(a) with respect to a Member that is a developing country within the meaning of Article 27.2(b), the Member asserting the claim must demonstrate that the substantive obligations contained in Article 3.1(a) of the ASCM apply to the Member in question. In order to do this, the Member asserting the claim must demonstrate that the developing country Member concerned has not complied with the conditions stipulated in Article 27.4.” 63

Brazil – Aircraft Panel

If a developing country wished to apply export subsidies beyond the eight year period, it had to consult with the Subsidies Committee not later than 31 December 2001. The Committee had to determine whether an extension was justified on the basis of an examination of all the relevant economic, financial and development needs of the country in question. If the Committee agreed that an extension was justified, annual consultations had to be held. If no determination was made, the developing country had to phase out the remaining export subsidies within two years. The ASCM also introduced the notion of export competitiveness, defined as at least 3.25% in world trade of a given product (a section heading in the Harmonised System) for two consecutive years. Where a developing country had reached such export competitiveness, it had to phase out its export subsidies for that product within two years, while Annex VII countries had eight years. Export competitiveness could be self-declared or determined on the basis of a computation by the WTO Secretariat at the request of a Member.

Import substitution subsidies

The Article 3.1(b) prohibition on import substitution subsidies did not apply to developing countries until 31 December 1999, while least-developed countries had until 31 December 2002 to comply.

61 Footnote 68 in the ASCM: The inclusion of developing country Members in the list in paragraph (b) is based on the most recent data from the World Bank on GNP per capita.



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No presumption of serious prejudice

The Article 6.1 presumption of serious prejudice does not apply to developing countries. Any finding of serious prejudice must instead be based on positive evidence. Regarding other actionable subsidies by developing countries, multilateral remedies may be authorised only where the subsidies result in nullification or impairment, in such a way as to displace or impede imports of a like product of another Member into the market of the developing country, or unless injury to the domestic industry in the importing country market occurs.

Part III actionable subsidies

The Part III provisions do not apply to direct forgiveness of debt or subsidies to cover social costs, in whatever form, including relinquishment of government revenue and other transfer of liabilities when such subsidies are granted within and directly linked to a privatisation programme of a developing country, provided that both the programme and the subsidies involved are granted for a limited period, are notified to the Subsidies Committee and that the programme actually results in eventual privatisation of the company concerned.

De minimis/negligibility

For developing countries, the de minimis subsidy level is 2%, while negligibility is defined as 4% of total imports of the like product, unless imports from developing countries together account for more than 9%. For Annex VII countries the de minimis level is 3%. It is emphasised that, as far as CVD action is concerned, this is the only special and differential treatment foreseen under the ASCM. The other exceptions discussed above only apply to the multilateral track. In other words, it is, for example, perfectly possible for Members to impose countervailing duties against export or import substitution subsidies.

Transition economies

Transition economies had until 31 December 2001 to phase out export and import substitution subsidies. Until that date, direct forgiveness of debt and grants to cover debt repayment within the meaning of Article 6.1(d) were not actionable. Regarding other actionable subsidies, multilateral remedies could be authorised only where the subsidies resulted in nullification or impairment, in such a way as to displace or impede imports of a like product of another Member into the market of the developing country, or unless injury to the domestic industry in the importing country market occurred.

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liST oF abbreviaTionS

AB Appellate BodyADA Anti-dumping AgreementASCM Agreement on Subsidies and Countervailing MeasuresBSA Broad spectrum antibioticsCMT Committee of Ministers of TradeCOMESA Common Market for Eastern and Southern AfricaCVA Customs Valuation AgreementCVD Countervailing dutyDCs Developing countriesDRAMs Dynamic Random Access Memory Semiconductors DSB Dispute Settlement BodyDSU Dispute Settlement UnderstandingEAC East African CommunityEC European CommunitiesEPZs Export processing zonesFSC Foreign Sales CorporationFTA Free Trade AreaGATT General Agreement on Tariffs and TradeHFCS High Fructose Corn SyrupIP Investigation periodNTBs Non-tariff barriersPGE Permanent Group of ExpertsPSF Polyester staple fibreR&D Research and developmentRECs Regional Economic CommunitiesSADC Southern African Development CommunitySCM Subsidies and Countervailing MeasuresSSW Stainless steel wireTFTA Tripartite Free Trade AreaUNCTAD United Nations Conference on Trade and DevelopmentUS United StatesWTO World Trade Organization

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Notes

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Notes

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