Subsidies & Countervailing Measures
The General Agreement on Tariffs and Trade (GATT) was a treaty created following the conclusion of World War II. The General Agreement on Tariffs and Trade (GATT) was implemented to further regulate world trade to aide in the economic recovery following the war. GATT's main objective was to reduce the barriers of international trade through the reduction of tariffs, quotas and subsidies.
Formed in 1947 and signed into international law on January 1, 1948, GATT remained one of the focal features of international trade agreements until it was replaced by the creation of the World Trade Organization in 1995. The foundation for GATT was laid by the proposal of the International Trade Organization in 1945; however the ITO was never completed.
GATT was signed by 23 nations in Geneva on October 30, 1947 and took effect on January 1, 1948. It lasted until the signature by 123 nations in Marrakesh on April 14, 1994 of the Uruguay Round Agreements, which established the World Trade Organization (WTO) on January 1, 1995.
Nowhere in Article XVI of GATT 1947 was there any definition whatsoever of the term “subsidy”. Rather, that term was first defined in the WTO context only in Article 1 of the SCM Agreement, and the inclusion of that 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. Before the ASCM, subsidies were regulated by the 1947 GATT.
As per the Black’s Law Dictionary, subsidy means a grant, usually made by the government, to any enterprise whose promotion is considered to be in the public interest. Although governments sometimes make direct payments (such as cash grants), subsidies are usually indirect or disguised. In theory as well as practicality, subsidies are not bad. However, if a subsidy can distort trade or are acting as a barrier to free and fair trade are actionable under the Agreement on Subsidies & Countervailing Measures (“ASCM”).
The WTO Agreement on Subsidies and Countervailing Measures (ASCM) disciplines the use of subsidies, and it regulates the actions countries can take to counter the effects of subsidies. Under the agreement, a country can use the WTO’s dispute-settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Or the country can launch its own investigation and ultimately charge extra duty (“countervailing duty”/ “anti- subsidy duty”) on subsidized imports that are found to be hurting domestic producers.
Agreement on Subsidies and Countervailing Measures (ASCM) under WTO, which is a legal framework, provides provision for a member country to frame its own rules for the purpose of invoking anti- subsidy investigation, conducting anti- subsidy investigation and recommending anti- subsidy duty.
The members of the World Trade Organisation (“WTO”) have formulated their local laws for anti subsidy measures in accordance with the directions issued by WTO. Subsidy is a financial contribution and benefit provided by a government or a public body. Subsidies are defined under General Agreements on Trade and Tariff (“GATT”), Tokyo Round and WTO. As per WTO, subsidies are broadly classified in to prohibited, actionable, or non‐actionable.
Following the concept of “welfare nation”, every country provides subsidies to help and support the economic growth; however, if the trade of subsidised product, is injuring the domestic industry of the importing country, the importing country gets a right to impose countervailing measures against such exports. If a subsidy provided by the government promotes unfair trade, it is prohibited /actionable under WTO.
ASCM under WTO defines a subsidy in respect to the prohibited, actionable and non actionable subsidies. There are three basic elements of an actionable subsidy, namely,
(i) a benefit,
(ii) given by a government or public body &,
(iii) which is specific in nature.
2. “A ‘financial contribution’ and a ‘benefit’ arising out of that contribution are two separate legal elements in Article 1.1 of ACM, which determine whether a countervaliable subsidy exists”
3. The term ‘benefit’ is an important element in identifying the existence of a subsidy.
For both domestic economic development and international trade relations, subsidy is an important issue. It may have negative impact on the importing country causing injury to the industry and leading to unfair competition.
Until the 1990s, the United States, followed, to a lesser extent, by Canada, were the main users of countervailing duty actions. However, since that time, the EU/ EC and some developing countries have also started to apply countervailing measures. According to WTO statistics, the current main users include the EU/ EC and Brazil in addition to the two traditional users. With growing concerns with regard to limited relief offered by anti- dumping, especially after China attains Market Economy status, some of the main users of anti- dumping like India are resorting to countervailing/ anti- subsidy investigations.
India’s involvement in anti- subsidy investigations has so far been very limited (but picking up), and the history is also not so long. In India “Directorate General of Anti- Dumping & Allied Duties” is the authority which investigates anti- subsidy investigation matters.
Two anti- subsidy investigations have been initiated so far by India. First case was initiated on 14th Jan 2009 concerning imports of Sodium Nitrite from China. The initiation was terminated on 12th Jan 2010 upon withdrawal of petition by the petitioner.
The second case initiated on 29th May 2014 concerning imports of Castings for Wind Operated Electricity Generator from China. The second case investigations were concluded on 27th November 2015, thereby, India successfully imposed anti- subsidy duty on imports of Castings for Wind Operated Electricity Generator from China. Out of 45 schemes considered by the authority, 23 schemes were determined to be countervaliable. Based on quantification of those 23 schemes, anti- subsidy duty recommended by the authority was 8.78 - 13.44%.
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