The article 'Subsidies, Kinds, and Remedies under SCM Agreement' systematically studies the Agreement on Subsidies and Countervailing Measures.

The article 'Subsidies, Kinds, and Remedies under SCM Agreement' systematically studies the Agreement on Subsidies and Countervailing Measures. The SCM Agreement is also one such agreement contained in Annex 1A to the WTO Agreement and has continuously evolved since its inception. Post World War II, most countries had strived to join the General Agreement on Tariff and Trade (GATT) to encourage global commerce and benefit from it as all of the superpowers were not keen to cooperate at...

The article 'Subsidies, Kinds, and Remedies under SCM Agreement' systematically studies the Agreement on Subsidies and Countervailing Measures.  The SCM Agreement is also one such agreement contained in Annex 1A to the WTO Agreement and has continuously evolved since its inception.  

Post World War II, most countries had strived to join the General Agreement on Tariff and Trade (GATT) to encourage global commerce and benefit from it as all of the superpowers were not keen to cooperate at once. The Marrakesh Agreement effectively led to the formation of the World Trade Organization (WTO), which was created on January 1, 1995. The most significant distinction between GATT and WTO is that they both focused on international trade, with WTO having a larger network of contacts.

While it is true that the GATT and WTO agreements contain all the principles relating to international commerce, it is less widely known that the WTO agreement has very few principles overall. Prior to the rise in demand and the importance of WTO principles, the WTO was only concerned with expanding global trade in goods. As a result, the WTO has since offered numerous other separate agreements, including those on TRIPS, reshipment inspection, safeguards, agriculture etc. 

What is SCM Agreement?

The Agreement on Subsidies and Countervailing Measures, also called the "SCM Agreement," covers two distinct concepts. Yet, it is crucial to include both concepts in the same agreement because they are closely related, one of which is the application of other principles. The SCM Agreement of the WTO regulates international disciplines such as subsidies, whereas countervailing measures remedy issues brought on by subsidies.

In contrast to all other contracts, agreements, acts, etc., the SCM Agreement also includes a very simple agreement structure that splits the agreements into the following parts:

  • Part I of the SCM agreements precisely defines subsidies, defines specificity, and discusses how far subsidies can be applied to a particular firm, industry, or set of industries, as well as other similar enterprises.
  • Part II & III of the SCM agreement splits all specific subsidies into two groups: prohibited subsidies and actionable subsidies. The implications of these subsidies, remedies and a DSB's authority to provide a remedy for breach of this portion of the agreement are all covered by both of these Parts. Conclusively we may assume that this part of the agreement has rules and regulations for different aspects. We can conclude that these parts of the agreement contain rules and regulations for multiple aspects.
  • Part IV of the SCM agreements talks about those subsidies which are non-actionable in nature.
  • Part V of the SCM agreements covers the requirements, guidelines, etc. for applying or carrying out countervailing measures. It also covers a variety of issues, including the implementation of GATT 1994 Article VI, how to investigate an incident and gather evidence, how to confer with DSBs, and more.
  • Part VI & VII consists of institutions like the Committee on Subsidies and Countervailing Measures, subsidiary bodies, notification, and surveillance by those regulatory bodies for the implementation of the SCM agreement.
  • Part VIII includes norms and regulations relating to special treatment for various types of nations, such as developed, underdeveloped, developing, LDCs, etc.
  • Parts X and XI only cover the DSB's guiding principles and final provisions.

It can be understood from the above, that the Subsidies are the multilateral disciplines which are regulated by the SCM Agreement of WTO. However, there are remedies such as countervailing measures for damage caused by subsidies. However, it is pertinent to know the conceptual background of subsidies before discussing the remedies.

What are Subsidies?

Subsidies as basically financial assistance or support given to a member country typically with the goal of advancing the economic and social policy of such member country. The SCM Agreement lists three conditions and states that only when all three are met will the action be classified as a subsidy. The conditions are as follows:

  • Governments or other public entities must make a financial contribution inside the borders of a member country.
  • If the action is consistent with Article XVI of GATT 1994, which means if there is any form of income or price support.
  • A benefit must follow such financial donations.

The application of this agreement calls for monetary contributions like loans, financial incentives, special grants, etc., and specifies that any monetary contributions, even from sub-governments, shall be regarded as a subsidy if it results in a benefit for the receiver.

Kinds of Subsidies

The Subsidies can be further subdivided into three categories, i.e., Prohibited Subsidies, Actionable Subsidies and Non-Actionable Subsidies, which are discussed as follows:

1) Prohibited Subsidies

The SCM Agreement forbids any government from offering any subsidies that are dependent on export performance in terms of law or fact. These subsidies are frequently referred to as export subsidies. It also prohibits the subsidies that depend on the law or the circumstances before granting any protectionism of domestic goods over foreign ones. They are frequently referred to as local content subsidies.

Although all developed countries have already implemented this, it is crucial to keep in mind that the scope of such subsidies is very small. However, this poses challenges for developing or LDC countries. The SCM Agreement includes not only dos and don'ts but also sanctions for breaking the SCM Agreement's norms, which are handled by the DSB of the WTO.

2) Actionable Subsidies

The SCM Agreement does not forbid any countries from taking action on actionable subsidies; rather, it restricts their ability to do so and only makes them vulnerable to it when a country brings a DSB or countervailing duty action. The member countries suffer three negative effects from the actionable subsidy, which are:

  • The member countries' domestic markets suffer because of them.
  • Substantial prejudice to the interests of other members- when the government directly absolves an industry or sector of any government debts in order to assist and provide subsidies totalling more than 5% of the operating loss of that business or sector. The impacts of offering such subsidies cause displacement of other net exporter countries to the importing country of Similar Goods.
  •  Nullification or impairment- The process of undermining an importing country's rights to benefits and expectations from other WTO members through a change in another country's or a third country's trade regime that does not comply with the obligations of the GATT/WTO Agreements.

3) Non-Actionable Subsidies

It is a type of subsidy that neither the GATT nor the WTO forbids nor regulates, and no member country may levy countervailing duties against it. The majority of subsidies are observed to be either limited or outlawed by the GATT/WTO, and any member countries that violate these rules will be subject to countervailing actions from other members, particularly the impacted nations. However, non-actionable subsidies, such as those for the environment, agriculture, science, etc., are not subject to these tariffs (countervailing duties).

Countervailing Duties: A Remedy available against Subsidies

As we have already discussed the subsidies and their relevant aspects which are provided in the initial parts of the SCM Agreement, Part V of the SCM Agreement introduces remedies for all of the prohibited acts which are associated with the Subsidies. Countervailing measures have been defined at length within Part V, along with their purpose and methodology. Countervailing measures are considered by the WTO to be a protection against those members who are using subsidies that are either restricted or forbidden under the SCM Agreement. According to the WTO, it is a type of tax placed on imported goods to balance out the subsidies received by producers in the exporting country from either their government or any other public body.

Countervailing Duties (CVDs) are the counterbalance tariff to maintain a balance between domestic producers and other foreign producers of the same product because not all producers receive the same or even similar types of subsidies from their government or other public body. This is the only reason why GATT/WTO has reflected the concept of CVDs in the agreement and mentioned that these export subsidies are unfair trade practices and must be restricted or prohibited. If these are left unchecked, then there is a great possibility that these subsidized imports may severely affect any importer country, such as deflation/inflation, loss of employment, etc.

The SCM Agreement's Part V also outlines the guidelines for conducting an investigation with the intention of imposing CVDs. Apart from this, it is very important to understand the concept of ‘Sunset’ and ‘Judicial Review’. Where "Sunset" refers to the automatic collapse of CVDs after every five years and their continuation only under the condition that the importer country judges that the exporter country is still not abiding by the major SCM Agreement regulations. While "Judicial Review" is the authority granted under Article 23 that GATT/WTO members can establish a separate tribunal to challenge the findings of the investigation authority or investigation panel of GATT/WTO with regard to the domestic law of the country only if the country has its own legal framework with regard to CVDs.

Conclusion

The evolution of SCM agreements has been in parlance with the evolving and dynamic needs of the changing international scenario. While it is true, that there has been a significant transformation in international trade, there lies a huge scope ahead for relevant necessary changes to be introduced.

References

[1] Agreement on Subsidies and Countervailing Measures (“SCM Agreement”), Available Here

[2] José Guilherme and Moreno Caiado, Defining Uncertainty in the SCM Agreement, Available Here

[3] Sparsh Mali, Subsidies and Countervailing Measures, Available Here

[4] Abhijit Das and Shailja Singh, WTO Subsidies Agreement: Jurisprudence on Key Concepts, Available Here

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Snehil Sharma

Snehil Sharma

Snehil Sharma is an advocate with an LL.M specializing in Business Law. He is a legal research aficionado and is actively indulged in legal content creation. His forte is researching on contemporary legal issues.

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