Article XVI of GATT provides that if a state party to the agreement grants any subsidy, which operates directly or indirectly to increase exports of any product from or to reduce imports of products into a territory, it must notify the state parties to the Agreement of the nature and effect of the subsidisation and its likely effect on imports and exports. It must, upon request, discuss with the other state parties , the possibility of limiting subsidies.
State parties must not grant directly or indirectly any subsidy on exports, other than on primary products where such subsidiary results in the sale of the product at a price lower than the comparable price charged for the like products to domestic purchasers.
In the case of primary products, the state parties have agreed that subsidies must not be applied in such a way as to cause the subsidising party to have more than an equitable share of world exports trade in a particular product, taking account of the share of other state parties in the trade in the product concerned in the most recent period.
The above consultation provisions have been of limited effect. The additional provisions mentioned above, on export subsidies, have not been adopted by many state members, in particular, developing states.
Subsidies and Countervailing Measures Agreement
The Subsidies and Countervailing Measures (SCM) Agreement was entered as part of the series of agreements following the Uruguay Round in 1994. It provides further more detailed measures in relation to subsidies and countervailing measures.
A subsidy is defined as a contribution by the government, including a direct funds transfer, a potential funds transfer, revenue foregone or governmental provision of goods and services other than general infrastructure and the general governmental purchase of goods. There must be a benefit by reason of the subsidy.
Subsidies contingent on the use of domestic over imported goods and those which either in law or in effect, are contingent on export performance are completely prohibited. All other subsidies are potentially actionable if they cause specific injury or prejudice to another state. See below in relation to the requirements for a valid complaint.
Certain subsidies were specifically permitted, including those for research and development, certain disadvantaged areas assistance and those required for compliance with environmental regulations. However, these exceptions expired in 2000 and have not been renewed.
There are exemptions and limitations of application for the least developed countries.
The application of the Agreement may involve significant issues of interpretation. Subsidies may arise through taxation and de facto measures. Issues of revenue foregone by states may arise. There may be an effective financial contribution by state and governmental action.
There may be a benefit where there is a financial contribution in terms that are more advantageous than might otherwise be available on the market. The subsidy must be specific in order to be actionable. Prohibited subsidies are deemed specific. Questions may arise as to how small groups of industries or firms who benefit are for the purpose of specificity.
The subsidies contingent on export performance or the use of domestic as opposed to imported goods may be in place by law or in effect. There must be a tie to exports. It does not suffice that exports are anticipated. Annex 1 sets out a list of export subsidies. They may include export guarantees.
If a measure is determined to be prohibited subsidy, the panel is to recommend that the subsidy be withdrawn immediately. If it is not withdrawn, countermeasures may be taken by the complainant state in the equivalent amount in order to offset the adverse effect of the actionable subsidy.
Complaint re Subsidy
In order to be the subject of a complaint, the subsidy must be specific. The authority granting it must impliedly or expressly limit access to a subsidy to certain businesses or enterprises. Specifically prohibited subsidies are deemed specific for this purpose.
The complainant must show adverse effects from the subsidies. States must not cause, through the use of a subsidy, any adverse effect on the interests of another member party, either
- by way of injury to the domestic industry of that other party,
- nullification or impairment of benefits accruing directly or indirectly to other member parties including benefits of tariff concessions; or
- serious prejudice to the interest of the other member.
Serious prejudice is where
- the effect of the subsidy such as to displace or impede the imports of a like product of another state party into the market of the subsidising member;
- the effect is to displace or impede exports of the like products of another state party from a third country;
- the effect is a significant price undercutting of the subsidised product relative to the price of a like product of another state or a significant price suppression, depression or lost sales;
- the effect of the subsidy is an increase in the world market share of the subsidising member in the subsidised primary product or commodity relative to the average share during the previous three years, such increase to follow the consistent trend over a period during which subsidies were granted.
There are dispensations for developing countries and countries in transition to market economies. The provisions of the agreement do not apply to subsidies maintained on agricultural products.
There are detailed reporting obligations in relation to actionable subsidies.
The Tokyo Round extended the non-discriminatory provisions to the procurement of goods by central government entities. There are approximately 20 state signatories. There were transparency requirements and provisions in relation to dispute resolution.
The Uruguay Round Governmental Procurement Agreement extends the above provisions to include service and construction contracts. It also covers sub-national government entities and lower level governmental entities.
The Agreement contemplates open, selective and limited procedures. There is provision for providers to challenge breaches of the agreement. There must be an impartial review body to adjudicate on procurement disputes. Compensation is relatively limited. The provisions are complex.
The commitments made by each party differ and may be conditional. The Doha Development Round Agreement extends the agreement to lower-level government entities including local governments.