Subsidies and countervailing measures - negotiation of subsidies in the GATT negotiations

U.S. Objectives

* Strengthen multilateral subsidy disciplines through expansion of subsidy prohibitions, coverage of domestic subsidies, clarification of terms, and operationalization of dispute settlement rules.

* Increase level of subsidy disciplines applicable to developing countries.

* Extend rules/disciplines to "new" areas, such as industrial targeting and distortive government practices within the natural resource sector.

* Preserve effectiveness of U.S. countervailing duty (CVD) law and practice.

Results of the Agreement

* Categorizes subsidies into three classes of treatment: (1) prohibited subsidies; (2) permissible subsidies which are actionable multilaterally and countervailable unilaterally if they cause adverse trade effects; and (3) permissible subsidies which are non-actionable and non-countervailable if provided according to criteria intended to limit their potential for distortion.

* Defines (for the first time in the GATT) the term "subsidy" (based on a "financial contribution" provided directly or indirectly by a government and which confers a benefit) and the conditions necessary for a subsidy to be actionable (i.e., reflecting U.S. countervailing duty (CVD) rules on "specificity").

* Codifies U.S. CVD practice with respect to the specificity of sub-national subsidies, e.g., generally available state subsidies provided by a state government are not specific, but central government subsidies to a region are specific even if generally available throughout the region (except where exempted by non-actionable provisions).

* Extends and clarifies the 1979 GATT Subsidies Code's list of prohibited practices from export subsidies to include de facto export subsidies and subsidies contingent upon the use of local content. Countries have three years from the entry into force of the agreement to bring inconsistent practices into conformity with the agreement.

* Clarifies the means and basis for demonstrating when the use of subsidies by a country has adversely affected another country's trade interests through price or volume/market share effects (i.e., "serious prejudice"), and creates an obligation to withdraw the subsidy or remove the adverse effects when such effects are identified.

* Establishes a presumption of serious prejudice in situations where the total ad valorem subsidization of a product exceeds 5 percent (calculated on the basis of the cost to the subsidizing government of granting the subsidies), or when subsidies are provided (1) for debt forgiveness, (2) to cover the operating losses of a specific industry, or (3) to cover the operating losses of a single firm if provided on more than one occasion. In circumstances where serious prejudice is presumed, the burden is upon the subsidizing government to demonstrate that serious prejudice did not result from the subsidization in question.

* Articulates (for the first time in the GATT) conditions under which certain subsidies may be virtually exempted from trade remedies (i.e., the "green light" category). This provision makes non-actionable (1) certain government assistance for industrial research, (2) certain government assistance for regional development, and (3) certain government assistance to adapt existing plant and equipment to meet new environmental standards.

* Government assistance for industrial research is non-actionable if the assistance for "industrial research" is limited to 75 percent of eligible research costs and the assistance for "pre-competitive development activity" is limited to 50 percent of eligible costs.

* Government assistance for regional development is non-actionable to the extent that the assistance is provided within regions that are determined to be disadvantaged on the basis of neutral and objective criteria and the assistance is not targeted to a specific firm, industry or group of recipients within eligible regions.

* Government assistance to meet environmental requirements is non-actionable to the extent that it is limited to a one-time measure equivalent to 20 percent of the costs of adapting existing facilities to new standards and does not cover any manufacturing cost savings which may be achieved as a result of the adaptation.

* The non-actionable status of a subsidy may be demonstrated either through prior notification of a program or in the context of a CVD investigation or multilateral dispute settlement proceeding. If a program is notified in advance, the notification must provide sufficient detail to permit other countries to judge whether the non-actionability criteria have been satisfied. Disagreements over this question may be settled through binding arbitration.

* Subsidy programs which meet the non-actionability criteria may not be overturned in GATT nor offset through the imposition of countervailing duties. However, if a program results in serious adverse effects such as to cause damage which may be difficult to repair, the Subsidies Committee may recommend that the program be modified so as to remove the adverse effects.

* Both the non-actionable subsidy provisions and the provisions establishing a rebuttable presumption of serious prejudice expire automatically five years after the entry into force of the agreement, unless the Subsidies Committee decides to continue them in current or modified form.

* CVD rules have been made more precise, but in some cases the changes may make it more difficult to bring, win and/or keep CVD actions. For example, countervailable subsidies will need to embody some form of financial contribution by the government and a sunset provision will necessitate an injury or injury/subsidy review after five years in order for a measure to remain in force. However, for the first time, GATT rules will explicitly recognize U.S. "benefit-to-the-recipient" calculation methodologies in order to determine the benefit conferred by subsidies in CVD cases (and, arguably, for other purposes).

* Multilateral subsidy disciplines will begin to be introduced for developing countries (LDCs), although subject to certain derogations. LDCs with annual GNP per capita at or above $1000 must progressively phase-out all export subsidies over eight years (unless extended by the Subsidies Committee), and export subsidies used in a given product sector must be phased-out over eight years (for least developed LDCs) or two years (for other LDCs) whenever the LDC's share of world trade in that sector reaches 3.25 percent during two consecutive years. With respect to prohibited local content subsidies, LDCs are provided a five-year phase-out period, with the least developed LDCs permitted eight years.

* LDCs are exempt from presumptions of serious prejudice, but are subject to "normal" serious prejudice rules for those situations where presumptions would otherwise exist for developed countries. The other context in which multilateral subsidy remedies may be available for use against LDC subsidies is if the subsidies cause nullification or impairment of tariff concessions or other GATT obligations such as to displace or impede exports into that LDC's market. (Note: LDCs are, however, exempted from multilateral (not CVD) subsidy remedies for notified, time-limited subsidies linked to programs to privatize state-owned firms.)

* In the CVD context, LDCs receive a de minimis subsidy level of 2 percent (developed countries receive 1 percent) but, during the export subsidy phase-out period, both LDCs which eliminate export subsidies ahead of schedule and the least developed LDCs receive a de minimis subsidy level of 3 percent. LDCs also enjoy a special provision for determining "negligible" imports which would warrant the termination of a CVD investigation--if the country accounts for less than 4 percent of total imports of the like product unless all LDCs with less than 4 percent import share collectively account for more than 9 percent of total imports of that product.

* Countries in transition from centrally-planned economies also enjoy certain derogations from normal rules for the first seven years of the agreement. During this period, they are exempted from the prohibitions on local content and export subsidies, any subsidies provided for debt forgiveness will not be subject to multilateral subsidy remedies, and all other subsidies are subject only to possible nullification or impairment complaints. However, these countries receive no special treatment or exemptions in CVD cases. Benefits for U.S. Interests

* Strengthening of multilateral disciplines and clarification of terms, combined with speedier and more binding dispute settlement, will make GATT subsidy remedies significantly more "user-friendly" than in the past. This should work to the advantage of U.S. industries which rely on export markets but which face subsidized competition in those markets. These industries would include such obvious candidates as aircraft, but might also encompass small businesses or producers of light manufactures that have turned increasingly to export markets in recent years.

* Much of the benefit embodied in the subsidies agreement may be realized in its ability to discourage the most distortive forms of subsidization, rather than its remedial value. First, beyond the simple expansion of subsidy prohibitions, it is qualitatively significant that the prohibitions include de facto export subsidies and that the remedy for prohibited subsidy violations implies the endorsement of punitive measures if the prohibited practice is not quickly withdrawn. Second, the manner in which the rules are structured for both presumptive and non-presumptive serious prejudice combine to establish a high psychological risk for any government contemplating the provision of a significant subsidy.

* The increased scope and flexibility of the rules providing for non-actionable treatment of government assistance for industrial R&D will enhance the extent to which U.S. R&D program administrators can make use of the protection from possible trade cases which these provisions offer. U.S. R&D programs can now be insulated from foreign trade challenges without having to disclose the direction of strategic research.

* The limited non-actionability provision to encourage compliance with new environmental requirements responds to the need to converge industrial, commercial and environmental policy objectives, and should benefit U.S. manufacturers and exporters of "clean technology" equipment and processes.

* Even though our flexibility and discretion in the CVD area will be subject to some additional restrictions, we have gained multilateral acceptance of basic U.S. methodological approaches in determining whether a subsidy is "specific" (and, therefore, countervailable) and in determining a subsidy's value according to the benefit-to-the-recipient principle. Moreover, the addition of various transparency and due process requirements will help to bring foreign CVD systems up to U.S. standards, which will benefit U.S. exporters as more countries begin to employ CVD remedies.

* Finally, the value of the subsidy rules and disciplines applicable to LDCs should not be discounted. Given that the Uruguay Round package will be accepted as a "single undertaking," now all but the very least developed LDCs accepting the results of the Round will be subject to a framework for the elimination of their export subsidies, and all LDCs will be required to phase out any local content subsidies. The new agreement will also increase the degree to which multilateral subsidy remedies are applicable to LDC domestic subsidies. Finally, in those sectors where LDCs achieve a significant degree of export competitiveness, they will be compelled to eliminate their export subsidies on a more accelerated basis. This requirement could prove to be of modest to significant benefit to such industries as textiles and steel.

COPYRIGHT 1994 U.S. Government Printing Office
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