Dec 2, 1989


GENEVA, DECEMBER 1 (BY CHAKRAVARTHI RAGHAVAN) – The U.S. and the EEC on the issue of subsidies, as well as between industrial and third would nations on the entire issue of subsidies have been voiced at this week’s meeting of the Uruguay Round negotiating group on subsidies.

The group has before it five new papers on the elements of the framework for negotiations: from the U.S., EEC, Australia, Nordics and India.

But it is discussing not individual papers but "issues", with the proposals in the papers being considered under each issue.

On Thursday it discussed the issue of prohibited subsidies and remedies, and is now expected to address the two remaining ones – non-actionable subsidies and actionable subsidies.

But the five papers provide some sharp differences on these two.

Basically, the United States wants to expand the whole range of prohibited and actionable subsidies, and extend the prohibitions from the traditional GATT one of encompassing export subsidies affecting trade and causing injury to other parties, to prohibit a broad range of domestic production and other subsidies for industry.

The EEC is insisting on a narrower focus, underscoring its legitimate use as instruments of social and economic policy, and for a narrow definition of the subsidy itself.

Some of the third world viewpoints support this argument of the EEC, but also extend it to cover the specific problems of third world countries trying to use a variety of subsidies to correct or neutralise market distortions because of imperfections, and also to overcome infrastructural and other handicaps of their exporters.

From this view, the third world countries want to make sure that the special treatment and exemptions in their favour in article 14 of the present Tokyo Round subsidies code are safeguarded, clarified and even extended.

The U.S. and EEC and others want to tightening of the article 14 provisions, in making the code a general discipline, and some transition period for third world countries, but subject to a continuous multilateral review and determination, rather than the autonomous determination by the third world country in the subsidies code.

All of them support special treatment only for the least developed countries (LDCs), most of whom in any event have no industrial production and exports with which industrial countries have to contend, and thus a blanket exemption is almost costlees.

The U.S. wants the disciplines tightened and made applicable to all, with merely a transition period for new rules given to individual countries on a demonstrated basis of need, and some special considerations for the LDCs.

The EEC envisages changes in article 14 of the subsidies code to take due account of development needs of LDCs on one hand and on the other for third world countries assuming obligations according to their ability to compete in international markets.

Most third world countries are not even members of the Tokyo Round codes, which were in fact negotiated between the U.S. and EEC, and forced on others.

The limited third world participation in the code is partly because the disciplines envisaged are difficult for most of them. On top of it the U.S. was extracting bilateral concessions and agreements to phase-out even the limited exemptions as a price for allowing third world countries to join.

India, a member of the Tokyo Round codes on subsides and countervailing measures, has underlined the provisions of article 14 of the code and the right there for third world countries to adopt policies and measures to assist their industries including in their export sector.

"These provisions", the Indian paper argues, "have a sound economic basis. Developing countries have to be allowed to use subsidies including export subsidies in order to neutralise the distortions faced by them".

Subsidies on production, consumption or factor use, it points out, have been acknowledged as best policy for correcting market distortions, but in third world countries, with widespread incidence of market distortions, governments lacked budgetary resources to correct distortions through domestic subsidies and were compelled to follow the "second best" policy of taxes of imports and subsidies for exports.

Third world export incentives tried to replicate a free trade and monetary regime for exporters only, in view of the constraints faced by these countries on adopting measures across the board for the entire economy.

In view of the economic justification for the provisions of article 14 of the Tokyo round subsidies code, its provisions should remain unchanged.

India has also rebutted the view that the article provides a carte blanche for the third world, an argument used to secure its deletion or substantial change.

The Indian paper notes that from the viewpoint of trading partners of the third world countries using the article 14 provisions, there are three important safeguards:

* Third world countries are not to use export subsidies in a manner causing "serious prejudice" to trade or production of other countries.

* Third world countries should "endeavour" to enter into a commitment to reduce or eliminate export subsidies when their use is inconsistent with the country’s competitive and development needs.

* Any interested signatory may request the subsidies committee to undertake a review of a specific export subsidy practice of a third world country to examine the extent to which the practice is in conformity with the objectives of the subsidies code.

India has also opposed some of the suggestions that disputes and dispute settlement for subsidy issues should have different procedures and provisions than for normal GATT dispute settlement procedures.

On the issue of prohibited subsidies and the suggestion that existing prohibition on export subsidies on non-primary productions should be extended to agricultural products, India has argued that this is an important issue to be considered in all aspects and should be reviewed in the subsidies group after its consideration in the agriculture negotiations where a whole gamut of agriculture trade liberalisation is being considered.

The concept of prohibition (of export subsidies) could not be extended to any category of domestic subsidies nor could any quantitative criteria be laid down for prohibiting domestic subsidies.

The illustrative list of export subsidies in the subsidies code, in the Indian view, also need changes.

The present concept of "physical incorporation" in respect of taxes or charges, results in rebates on taxes of auxiliary materials, capital goods and services employed in production for the export sector coming under prohibited subsidies.

This is bad from viewpoint of equity and economic efficiency on those countries who have not adopted the value added system of taxation, but use a multistage cumulative tax system. Exporters in those countries with a vat system are able to get full rebates on tax paid, but not those following different systems.

The physical incorporation test is also not consistent with article XI: 4 of the GATT.

India has also complained that the provision in the Tokyo Round code illustrative list on prohibition of subsidised export credits was being misused by the OECD countries to subsidise their exports of capital goods.

The provision is so worded that signatories to the OECD code on export credits, insofar as they observe that, are able to get around the prohibition.

(In the OECD while the fight often is over their mutual subsidised competition, there is a common position against the third world).

Criticising the anomaly of a general GATT code being bound by decisions of a limited number of signatories in an outside forum, India said the code should be self-contained, with provisions on minimum rates of export credits, amortisation periods, etc.

As for remedies in third country markets and home market of the subsidising country, India has underscored the need for recourse only to multilateral dispute settlement procedures.

As for remedies in the importing country, it could use the countervailing (CV) rights after showing material injury or use dispute settlement procedures.

The test for inclusion or exclusion of a practice in the category of non-countervailing and non-actionable subsidies should be its neutral or compensatory nature.

Generally available subsidies are non-distortive and thus non-actionable. Similar are regional development assistance for basic infrastructure, adjustment assistance to workers and for R and D.

Also, designated geographical areas of industrialised countries are viewed as having disadvantages, which could be offset by regional development assistance.

Third world countries whose entire territory and economies suffer from such disadvantages, but because of paucity of resources are unable to provide assistance to correct the distortions and imperfections throughout the economy, and are compelled to limit to their export sectors only.

While their practices might not meet the test of general availability, a few of their subsidies for export sector should be non-actionable.

These include:

* A subsidy for providing exporters access to raw materials, components, intermediate inputs and capital goods at international prices.

* Subsidies directed at reducing international transport freight costs to level generally available in international markets.

(UNCTAD studies and published data show that the incidence of freight on exports of third world is far higher than competing products form the industrial world).

* Provision of export credits at rates below those applicable to other users, provided the rates are not below the cost of funds to the institutions providing credit.

Non-prohibited but actionable subsidies should apply in cases where there is a financial contribution from government, the measure is not generally available, and is one which merely corrects and existing distortion.

As for remedies, these should be through dispute settlement procedures.

There could be nullification or impairment of rights in markets of the subsidising country only if there is a subsisting tariff concession and the domestic subsidy has not been in existence at the time the tariff concession or has increased substantially since then.

In every case, the affected country must demonstrate adverse effects.

In third country markets, to demonstrate nullification or impairment of GATT rights, the adverse effects could be through subsidised exports displacing exports of like product of another signatory.

Even here, the subsidy code has clarified that this should be interpreted taking account of development and trade needs of the third world and not "to fix traditional market shares".

Third world suppliers should not be deemed to be causing displacement until they become a "substantial supplier" in a third country market.

India favoured the narrower definition of the injured "domestic industry", namely one which produces "like products" as interpreted by two panels reports in the subsidies code. Industries producing raw materials or components are different from those producing the final product.

To minimise countervailing duty actions becoming a non-tariff measure, there should be a presumption of absence of material injury if the share of the subsidised imports in an importing country is below a particular market penetration threshold.

The Indian proposal is also critical of the dilution of the market injury test by some countries (like the U.S.) through use of concepts of cumulation of imports, making position of small exporters vulnerable.

Suppliers with an import share of less than five percent of the import share should be exempt from the cumulation principle.

The calculation of the subsidy to be countervails should be based on the financial contribution of the government rather than benefit to the recipient.

Before investigations are started, the complaints should represent at least 50 percent of the domestic industry affected.

There should also be a "sunset clause" for CV duty orders, with suo moto review of orders every two years or at nay time if an affected party claims material change.

The levy of CV duties should not also be compulsory. There should be final decision by the importing country taking into account public interest like the welfare of the consumer.