Feb 11, 1988


GENEVA FEBRUARY 8 (IFDA/CHAKRAVARTHI RAGHAVAN)— The fundamental objectives and concepts behind the GATT provisions on subsidies and countervailing measures, and some contradictory proposals - for tightening them and restricting their scope for trade-harassment - are to be considered at the next meeting of the Uruguay round negotiating group in this area.

The negotiators have been mandated to improve GATT disciplines relating to all subsidies and countervailing (CV) measures affecting international trade, and base their work on a review of GATT articles VI and XVI, and the Tokyo round codes on subsidies and CV measures.

Article VI of GATT empowers the levy of anti-dumping and countervailing duties, and the conditions and procedures for this. Article XVI prohibits grants of subsidies on non-primary exports and of subsidies on primary exports that result in a country gaining "more than an equitable share of world export trade" in that product.

The GATT provisions in respect of "subsidies" enable a Contract Party to take action against a subsidised export entering its own domestic market, provided such a subsidised export results in or threatens "material injury" to its established domestic industry or retards the establishment of a domestic industry.

The entire scheme is on the basis that subsidised exports should not adversely affect the interests of other signatories, and countervailing (CV) measures are not indiscriminately used to impede international trade.

The negotiating group, chaired by Hong Kong’s Michael Cartland, held its first meeting this year in the first week of February, and is to meet again in the week of June 3.

At that meeting it is to continue discussion of objectives and concepts behind article VI and XVI and the relationships between these two provisions. It is also to review the issues proposed for negotiations by various participants, and begin consideration of specific drafting proposals and explanatory texts, without committing any participant to any particular text.

The negotiators have to agree on a common negotiating basis before they can proceed to negotiations on the basis of specific proposals.

At its meeting last week, the group reportedly received proposals from India and Switzerland. At earlier meetings, it has received proposals, suggestions and comments from Brazil, Canada, the EEC, New Zealand, Singapore and the U.S.

The Indian proposal on subsidies calls for clearer understanding on the concept of "material injury" that could trigger actions, and prescribe a threshold of market penetration (by the subsidised exports) which alone could warrant actions by the imparting country.

In respect of CV measures and duties, the Indian proposals seek a clearer understanding on the type of export incentives and support (by governments of exporting countries) that would be countervailable, and for exclusion of assistance or supports by countries to offset a handicap of the exporter vis-a-vis competitors in international markets.

The Swiss proposals seeks redrafting of the articles to introduce three different classes of subsidies - prohibited subsidies permitting unilateral CV measures without proof of material injury, actionable subsidies requiring such proof, and non-actionable subsidies that have to be tolerated even if there are negative effects to trading partners.

The Indian proposal argues that the Tokyo round agreement on interpretation and application of articles VI, XVI, and XXIII (dealing with nullification and impairment of rights) had been designed to ensure that use of subsidies did not adversely affect or prejudice interests of a signatory, and application of CV measures did not unjustifiably impede international trade.

However, ambiguities and deficiencies in the provisions, have resulted in a number of unresolved problems, which have became the starting point for non-observance of the letter and spirit of rules and use of CV measures for trade harassment.

The Uruguay round negotiations should hence tackle these problems.

In respect of "injury" or "material injury", the Tokyo round code has not provided much guidance on when the "injury" is to be regarded as "material" and thus enabling actions.

One of the parties to the code (the U.S.) had so diluted the concept of "material injury" as to enable it to take action if the injury is some thing more than "inconsequential, immaterial or unimportant".

As a result, positive findings of material injury have been made even in cases where the share of the market (by the offending subsidised export) is a fraction of one percent.

Also, the U.S. practice of "cumulation of imports" (from a number of sources) for determining "material injury" has resulted in subjecting exports of third world countries to vexatious investigations.

There is hence need to reach an understanding on the minimum market share or threshold of market penetration below which there should be a presumption of absence of material injury.

There is also no consensus under the Tokyo round codes on the circumstances in which export incentives and other programmes of government assistance to enterprises constitute countervailable subsidies.

Every financial contribution by a government should not per se constitute a countervailable subsidy.

Compensatory payments - such as reimbursement of difference between international and domestic price of products and services used in production of exported goods - that merely offset a handicap should not be countervailabe.

Similarly, government contributions to financial institutions to extend export credit at rates different from those available for other purposes should not be countervailable, so long as the credits are given at rates equal to or above rates prevalent in international capital markets.

Similarly, rebates of prior stage cumulative indirect taxes should not be countervailable, whether or not such taxes have been levied on goods and services physically incorporated in the exported product.

GATT article VI provides there should be no CV duty by reason of exemption of a product from taxes or duties borne by like products destined for consumption in the country of origin.

This clearly suggests that rebate of taxes on auxiliary material (energy, fuel, lubricants, packing stationary, etc.) or durable capital goods (machinery, buildings, vehicles) and services (transport, advertising) can't be treated as countervailable subsidies.

Again, incentives to enterprises to enable them to overcome locational disadvantages should not also be countervailable.

In suggesting new classifications, the Swiss argue that the present complex system, based on motivations and objectives of the exporter, classifications on primary and non-primary exports, and the rest of material injury, has became difficult to manage and should be reviewed.

The GATT law should be based, not on motivations and objectives, but on legal effects, both procedural and substantive.

There should be a class of "prohibited subsidies" in respect of which unilateral measures could be taken.

The types of national subsidies falling under this category should be the subjects of negotiations. But many export subsidies already prohibited now could be brought under this heading.

A second class of subsidies should follow traditional GATT approach - not prohibited at the outset, but actionable on the basis of their negative effects on international trade, and subject to complaint and countermeasures.

As now, in such cases, there should be the mandatory requirement of "material injury or threat thereof" to the imparting country before actions could be taken.

The type of national subsidies falling under this category, should again be the subject of negotiations.

A third class of "non-actionable subsidies" should not be subject to CV duties or other forms of actions, whether or not an importing country is negatively affected.

Subsidies that from the outset are unlikely to cause harm to third parties - such as subsidisation of local public transport or measures taken for structural adjustment - should be tolerated and not subject to countervailing duties, even if they cause injury.

Prohibited subsidies and non-actionable subsidies should be strictly defined, removing scope for uncertainties of interpretation and actions.

But actionable subsidies could have more flexible definitions.

The negotiations should provide for efficient instruments of dispute prevention and settlement of disputes.

Also, parties violating the GATT obligations should first be required to remedy the situation before any actions are taken through countervailing measures.

And imparting countries should also be obliged to accept "equivalent concessions" from the subsidising exporting country in lieu of countervailing measures.