Do the World Trade Organization Disciplines on Domestic Subsidies Make Sense? The Case for Legalizing Some Subsidies
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Description
Prior to the Uruguay Round, the multilateral trading system did not contain any enforceable legal disciplines on domestic subsidies. The treatment of such subsidies in the General Agreement on Tariffs and Trade (GATT) was ambiguous: On the one hand, their legitimacy as tools of public policy was affirmed while their capacity to distort trade was also acknowledged. On the other hand, self-help against such subsidies was permitted in the form of countervailing duties (CVDs), provided that the subsidies caused “material injury” to domestic industry in the importing country. The Uruguay Round Agreement on Subsidies and Countervailing Measures (SCM Agreement) introduced a category of domestic subsidies called “actionable,” which can be challenged in World Trade Organization (WTO) dispute settlements, thus for the first time providing a multilateral legal remedy against subsidization. For a subsidy to be challenged in a WTO dispute settlement as actionable, it has to fall within the definition of subsidy in Article 1 of the SCM Agreement, which means it must entail a “financial contribution” governmental financial assistance to firms (from cash payments to equity infusions to provision of goods and services below market prices), and also confer a “benefit” on an enterprise; the subsidy must also be “specific,” either de jure (legally targeted at a particular industry or enterprise or group of industries or enterprises) or de facto (in fact used only or disproportionately by a particular industry or enterprise or group of industries or enterprises). If these criteria are met, then the subsidy in question will be actionable, which means that if the importing country can further show the existence of certain “adverse effects” on the interests of other WTO Members, then it can either request in WTO dispute settlement the legal remedy of removal of the offending measure or it may countervail the subsidy (provided the CVD action complies with the various procedural and substantive requirements in the SCM Agreement that apply to countervail). If any of these criteria are not met, not only will a dispute settlement action fail, but the imposition of CVDs will be illegal. The SCM Agreement (Article 8) originally entailed a defined list of subsidies to be deemed “nonactionable”; in other words, subsidies immunized from challenge in WTO dispute settlement as well as CVD action, even if they were to be found to meet the criteria discussed above. This list included certain subsidies for research and development, for environmental protection, and to disadvantaged regions. However, this provision for deemed non-actionability applied provisionally, for only the first five years that the SCM Agreement was in force. Since its effective expiration, WTO Members have been unable to agree either to continue with the list as it now stands or to create a different list. Therefore, today there are no subsidy programs that are explicitly protected as nonactionable. During the current Doha Round negotiations, proposals from developing countries (most notably Venezuela and Cuba) emerged for the reinstatement of a category of non-actionable subsidies. These proposals need to be seen in a context of renewed and more sympathetic attention by economists to the question of industrial policy and the role of various instruments of government policy, including subsidies, in achieving economic development goals through industrial policy. At the same time, an important and provocative article by Bagwell and Staiger has raised fundamental issues about the economic rationality of the SCM Agreement disciplines on domestic subsidies, suggesting that these rules may do more harm than good to the world trading system. The 2006 World Trade Report of the WTO Secretariat focuses extensively on the issue of subsidies and entertains the possibility that the SCM rules may, in some respects, end up disciplining efficient domestic policy interventions. In light of recent debates about subsidies and trade in the economics and trade policy literature, this chapter aims to revive the case for creating a “safe haven” of nonactionable subsidies in the SCM Agreement. It begins by looking at different rationales for, or ways of, conceptualizing the discipline of subsidies in WTO law. It then examines against this framework some important recent work in economics and trade policy on the question of subsidies and WTO law. In light of this analysis, this chapter continues by examining the extent to which the existing rules on domestic subsidies in the SCM Agreement are desirable and optimal in light of the justificatory framework developed in the first part of the chapter. Finally, the chapter considers proposals for reintroducing non-actionability and asks whether and how creating a safe haven for defined subsidies would improve outcomes under the SCM Agreement.
Source Publication
Law and Economics of Contingent Protection in International Trade
Source Editors/Authors
Kyle W. Bagwell, George A. Bermann, Petros C. Mavroidis
Publication Date
2010
Recommended Citation
Howse, Robert L., "Do the World Trade Organization Disciplines on Domestic Subsidies Make Sense? The Case for Legalizing Some Subsidies" (2010). Faculty Chapters. 857.
https://gretchen.law.nyu.edu/fac-chapt/857
