Subsidies, whether national or transnational, have the potential of distorting the international market if allowed in contravention of WTO rules. Therefore, the law on international trade ought not to subject crucial issues to ambiguity and vagueness.
Subsidies are prohibited by the WTO since it negatively affects international trade. Subsidies were not subjected to harsh disciplines under GATT, 1947. It was only after the formation of WTO in 1994, that the rules governing and prohibiting subsidies were framed under a special agreement named Agreement on Subsidies and Countervailing Measures (hereinafter “ASCM”). Subsidies are very sensitive and at times become controversial when bought at the international level for first, it involves the question of sovereignty of a state and second, the question of the autonomy of the state to accomplish their economic policies by assisting their domestic markets. Moreover, not every subsidy provided by the state is prohibited under WTO regulations. Public subsidy aimed at subsidization of education sectors, healthcare sectors are not prohibited under WTO. Hence, it becomes imperative for international law to deal with subsides very cautiously.
Subsidies under ASCM
A subsidy is not said to be prohibited under WTO rules merely because it has the potential to distort the international market. A subsidy may be allowed even if it is capable of distorting the international market if it is maintained for policy reasons. For the first time, the definition of subsidies has been provided under the SCM Agreement. According to the SCM Agreement, the notion of subsidies under WTO consists of certain essential requirements. They are as follows:
- A financial contribution by a government or any public body within the territory of a Member
- A benefit should be conferred.
- It should be specific in nature.
Article 1.1 (a) 1 provides an exhaustive list for governmental practice which can be said to be the financial contribution. They are as follows: 1) a direct or potential direct transfer of funds 2) government revenue that is otherwise due is foregone or not collected 3) a government provides goods or services other than general infrastructure, or purchases goods 4) a government making payment to a funding mechanism or directing a private body to make financial contribution of the types listed above. Furthermore, there is no definition of the term benefit under ASCM. However, the Appellate Body in the case of Canada-Aircraft has stated that a financial contribution will confer benefit only when it was provided on terms that were more advantageous than available in the market. The last requirement of specificity generally means subsidies that are either de facto or de jure limited to certain enterprises or industries. Therefore, the cumulative effect of these three elements constitutes subsidies as per the meaning of the SCM Agreement.
Transnational Subsidies And Its Distorting Effects
A transnational subsidy is not defined under the WTO. Transnational subsidy exists when a government of one country provides a financial contribution to the recipient in another country. Unlike domestic subsidies, it is not limited to the territorial limits of a country. In the case of domestic subsidies, the government of a country provides some financial contribution in the form of grants, etc to the recipient located within the territorial limits of that country. This form of subsidization makes the products cheaper and therefore when they are exported into other countries and sold at a low price; it distorts the domestic markets of the country where it is sold. However, in the case of transnational subsidies, the government of one country provides financial assistance to the recipient located in another country. For example, if China provides a financial contribution to one of its home firm located in India, with the aim of making those cheaper in the Indian domestic markets would be a transnational subsidy. This form of subsidization also distorts the domestic markets and hampers fair trade. The effects of transnational subsidies are as adverse as that of domestic subsidies and directly contravene the principle of non-discrimination and MFN treatment rules of WTO rules. They also impede or displace the imports of like products into the market of the subsidizing country and thereby distorting the efficient trading patterns among the trading partners.
This type of subsidization is used by the government of one country to assist their home firms located in another country to penetrate the foreign markets to become dominant. The government usually targets their rival firms in another country and tries to swallow their market by subsidizing their home firms. They aim at getting a monopoly over the market and complete control over the competition. They, therefore, induce allocative inefficiency and worse off the terms of the trade.
The question of applicability of WTO rules to transnational subsidies
The boiling issue in the world of subsidies and countervailing duties is whether transnational subsidies can be subjected to the rules of WTO? There has been a dearth of any judicial interpretation to this very question and as a result, the question is still shrouded in ambiguity and dust. This ambiguity is with respect to Article 1.1 (a) (1) of SCMA which states that the financial contribution should be within the territory of a member. The phrase “within the territory of a member” does not clarify as to which member is being talked about. The term ‘member’ means member to the WTO. Hence, this could land us with two possible interpretation of the term member. According to the first line of reasoning, member, as contemplated in Article 1, would mean member country which is the recipient of the financial contribution. The second line of reasoning would contemplate that the term ‘member’ would mean member country which is the recipient of the benefit. Moreover, in the case of US-Anti Dumping, the Appellate Body has held that it is not necessary that the recipient of financial contribution and recipient of benefit have to be the same person, and there is nothing indicating that the benefit cannot be received or enjoyed by two or more distinct bodies. Following the ratio laid down in the case, this would possibly lead us to the conclusion that the subsidies can be both territorial as well as transnational.
With regard to the contrasting opinions, reference can also be made to Article 2 and 3 of the SCMA. Article 2 which deals with the element of specificity particularly points out that subsidies, as defined under Article 1, should be specific within the jurisdiction of granting authority. This makes clear that it is talking about the territoriality requirement. Whereas Article 3, which deals with the Prohibited Subsidies, does not talk about the territoriality requirement and hence can be concluded that Prohibited subsidies can be transnational subsidies.
Difficulty in the Regulation of Transnational Subsidies
In the case of US-FSC, the appellate body has acknowledged the presence of transnational subsidies in international trade relations. However, it is still not subject to the WTO regulatory measures like countervailing measures and declaring them prohibited under SCMA. The difficulty arises concerning the imposition of the countervailing duties because a countervailing duty, as per WTO regulations, can only be imposed on the country exporting the goods and not against the country in which the primary beneficiary is situated. In the case of domestic subsidies, the countervailing duties imposed on the goods exported would neutralize the benefits enjoyed by the imported goods, which otherwise would have caused disadvantages for the competing domestic goods. For example, the export subsidies provided by the Chinese government to the Chinese products will make their products low priced in India and destroy domestic markets of India. Therefore, the imposition of countervailing duties on the imported Chinese goods would offset the benefits enjoyed by the Chinese goods in India and make the market fair.
However, in the case of transnational subsides, subsidies in the form of financial contribution are given by one country to the recipient located in the other country and therefore the imposition of countervailing duties on exported goods would not solve the problem. There is a need to countervail the goods produced by the recipient country to offset the distorting effects it can have over the domestic products of that country. Additionally, this exemption of transnational subsidies can also be attributed to the US countervailing legislations which treat transnational subsidies as non-countervailable.
Need to regulate the transnational subsidies
In the case of US-FSC, the European Communities have argued that it is inappropriate to exempt transnational subsidies from countervailing duties. The reasoning placed was that Part V of the SCM Agreement does not limit the countervailing duties with regard to the territorial aspects. It shall extend to all the interested parties regardless of their territory. The reasoning holds true in the era of globalization of trade relations, where providing subsidies by the government of one country to the recipient in another country is not a far-fetched concept and takes its legal basis from Article 1 of the SCM which does not limit the scope of subsidies on the territorial grounds.
Given the potential threat to fairness and transparency in the international market some of which are mentioned above, it becomes imperative that the transnational subsidies are also met with the same WTO regulations like the imposition of the countervailing measures and declaring them prohibited under SCMA for avoiding trade distortions and ensuring fairness and transparency in the international market.
Conclusion & Suggestions
In the era of free trade facilitation, the question regarding the legality of transnational subsidy as per the WTO rules remains a crucial, yet an unanswered question. The question has neither been addressed by the DSU nor has there been much academic discussion on the topic. Given the seriousness of this issue which can distort international trade relations, it becomes imperative that sufficient light is thrown over the issue to bring some clarity to this ambiguity. Although the text of WTO in the ASCM does not deal with the question of transnational subsidies, the issue of transnational subsidy is widely in controversy due to the tremendous changes in the international trade dimensions. The ongoing debate on the applicability of cross-ownership regulations to regulate and countervail transnational subsidies and US reluctance to make subsidies across borders countervailable has made this issue more contemporary and controversial. Therefore, there is a dire need to resolve this ambiguity on the question of the status of transnational subsidies under WTO rules and the applicability of WTO regulations like the imposition of countervailing measures on the transnational subsidies.
The first way to regulate market transparency in the governance of subsidy is through transparency in defining them. As stated above, the ambiguity in Article 1 of the SCMA with respect to the element of territory in defining subsidy has created a lot of confusion and uncertainty in the application of WTO rules to transnational subsidies. Hence, there is need for clarity and transparent definition of the term subsidy. Another method could be the engagement of NGO’s and other international forums as informational agents to supplement the information regarding transnational subsidies. Therefore, with better information and robust surveillance, the governments providing subsidies would have to explain to the international forums if it distorts the market of any another country. Therefore, good governance on subsidies, whether domestic or transnational, could be achieved.
Suvam is a III Year student at NLU Jodhpur.
Image Source: Flickr