Subsidies and countervailing measures

1. Why subsidies are regulated

Governments subsidise industries for many reasons: development, employment, regional balance, research. But a subsidy can distort trade by letting a firm sell below its real cost, displacing competitors in the subsidising country's market, in the importing country, or in third markets. GATT 1947 dealt with subsidies only in Article XVI (a notification duty and a weak restraint on export subsidies) and Article VI (countervailing duties). The Tokyo Round Subsidies Code (1979) bound only signatories. The Uruguay Round produced the Agreement on Subsidies and Countervailing Measures (SCM Agreement), with the first legal definition of a subsidy.

2. Definition: Article 1

A subsidy exists if there is

• (a) a financial contribution by a government or any public body within the territory of a member, that is, where the government (i) makes a direct transfer of funds (grants, loans, equity infusion) or potential direct transfer (loan guarantees); (ii) forgoes or does not collect revenue otherwise due (tax credits, exemptions); (iii) provides goods or services other than general infrastructure, or purchases goods; or (iv) makes payments to a funding mechanism or entrusts or directs a private body to do any of these; or there is any form of income or price support in the sense of GATT Article XVI; and
• (b) a benefit is thereby conferred.

“Benefit” is measured against the market: the recipient is better off than it would have been on terms available in the market (Canada – Aircraft, Appellate Body, 1999). Article 14 applies this to equity, loans, guarantees and the provision of goods.

3. Specificity: Article 2

Only specific subsidies are disciplined. A subsidy is specific if access is limited to certain enterprises, an industry or group of industries (enterprise or industry specificity), or to enterprises in a designated geographical region (regional specificity). A subsidy available generally on objective criteria, such as a uniform tax rate, is not specific. Prohibited subsidies are deemed specific (Article 2.3).

4. The categories

(a) Prohibited subsidies: Part II, Article 3 (the red light)

• Export subsidies: subsidies contingent, in law or in fact, upon export performance, including those in the Illustrative List in Annex I (direct subsidies on export, export-related tax exemptions, preferential export credit, currency retention schemes).
• Import-substitution (local content) subsidies: subsidies contingent on the use of domestic over imported goods.

A member shall neither grant nor maintain them (Article 3.2). Remedies are expedited (Article 4): if the measure is found prohibited, the panel recommends that it be withdrawn without delay. In US – FSC (Appellate Body, 2000), US tax exemptions for “foreign sales corporations” were held prohibited export subsidies; in Brazil – Aircraft and Canada – Aircraft (1999), export financing for regional jets.

(b) Actionable subsidies: Part III, Articles 5 to 7 (the amber light)

Permitted, but challengeable if they cause adverse effects to another member's interests: (a) injury to its domestic industry; (b) nullification or impairment of benefits under GATT, especially tariff concessions; or (c) serious prejudice (Article 6), shown by displacement or impedance of imports or exports, significant price undercutting, price suppression or lost sales, or an increase in world market share. The remedy is to withdraw the subsidy or remove the adverse effects (Article 7.8). The long Airbus–Boeing disputes, EC – Large Civil Aircraft (2011) and US – Large Civil Aircraft (2012), were serious-prejudice cases.

(c) Non-actionable subsidies: Part IV, Article 8 (the green light)

Non-specific subsidies, and certain specific subsidies for industrial research, assistance to disadvantaged regions, and adaptation to new environmental requirements, were protected from challenge. Under Article 31 this category applied for five years and lapsed on 31 December 1999 because members did not agree to extend it. Today a specific research or regional subsidy is simply actionable.

5. Agricultural subsidies

The Agreement on Agriculture governs farm subsidies, and the SCM Agreement applies subject to it (Article 21 of the AoA). Domestic support is classified in “boxes”: the amber box (trade-distorting support, measured as the Aggregate Measurement of Support and subject to reduction, with a de minimis of 10 per cent of the value of production for developing countries); the blue box (payments under production-limiting programmes); and the green box (minimally distorting support, Annex 2: research, extension, public stockholding under conditions, decoupled income support). Article 6.2 exempts certain investment and input subsidies to low-income farmers in developing countries. Export subsidies on farm products were to be eliminated under the Nairobi Ministerial Decision of 2015. India's minimum support price procurement raises amber-box questions; the Bali “peace clause” (2013) protects public stockholding for food security from challenge, and India – Sugar and Sugarcane (panel, 2021) found Indian sugar support above permitted levels (appealed by India).

6. Countervailing measures: Part V and Indian law

A member injured by subsidised imports has two routes: a multilateral challenge (Parts II and III) or a unilateral countervailing duty after its own investigation, but not both remedies for the same effect (footnote 35). Part V (Articles 10 to 23) mirrors the Anti-Dumping Agreement: initiation on application of the domestic industry (Article 11), evidence (Article 12), consultations with the subsidising member (Article 13), calculation of the benefit (Article 14), injury and causation (Article 15), provisional measures (Article 17), undertakings (Article 18), a duty not exceeding the subsidy (Article 19), and a five-year sunset (Article 21.3). De minimis is 1 per cent ad valorem (Article 11.9), higher for developing countries (Article 27.10).

In India, section 9 of the Customs Tariff Act, 1975 empowers the Central Government, where a country pays or bestows directly or indirectly any subsidy on the manufacture, production or export of an article, to impose by notification a countervailing duty not exceeding the amount of the subsidy. The Explanation defines a subsidy in the terms of Article 1; section 9(6) limits the duty to five years unless extended; section 9C provides an appeal to CESTAT. Investigations are conducted by the DGTR.

7. Developing countries: Article 27

Least-developed members and those listed in Annex VII (with GNP per capita below US$1,000) were exempt from the export-subsidy prohibition. India was in Annex VII but crossed the threshold, and in India – Export Related Measures (panel, 2019), brought by the United States, the Merchandise Exports from India Scheme, Export Oriented Units, Special Economic Zones and other schemes were held to be prohibited export subsidies. India appealed into the non-functioning Appellate Body and replaced the Merchandise Exports scheme with the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme from 1 January 2021, designed as a refund of embedded taxes, which footnote 1 of the SCM Agreement treats as not a subsidy.

How this is examined

For the essay: why subsidies matter, the definition in Article 1 with all its limbs, specificity, the three categories with the lapse of the third, agricultural boxes in a paragraph, and remedies (multilateral and countervailing). Indian examples — export schemes and the 2019 panel — lift the answer. For the countervailing short note: definition, Part V conditions, the one-remedy rule, and section 9.