1. The World Trade Organization (WTO) plays a crucial role in regulating international trade, including the use of subsidies by governments. The Agreement on Subsidies and Countervailing Measures (SCM Agreement) sets the legal framework for how subsidies can be used and challenged to ensure fair competition in global markets.
2. In this post, we will explore the key aspects of the SCM Agreement, including prohibited and actionable subsidies, countervailing measures, and special rules for agricultural subsidies.
TWO MAIN CATEGORIES OF SUBSIDIES
1. The SCM Agreement classifies subsidies into two broad categories:
• Prohibited Subsidies – These are strictly not allowed under WTO rules.
• Actionable Subsidies – These are permitted but can be challenged if they harm other WTO members.
PROHIBITED SUBSIDIES
1. Under Article 3 of the SCM Agreement, two types of subsidies are outright prohibited because they distort trade and negatively impact global markets:
• Export Subsidies: These are subsidies given to companies contingent on their export performance. The SCM Agreement includes a detailed annex listing such subsidies.
• Local Content Subsidies: These require businesses to use domestic products instead of imported goods as a condition for receiving financial support.
ACTIONABLE SUBSIDIES
1. Unlike prohibited subsidies, actionable subsidies are not automatically banned but can be challenged if they cause "adverse effects" to other WTO members. The three main types of adverse effects are:
• Injury to Domestic Industry – When a country’s industry is harmed by subsidized imports.
• Serious Prejudice – When subsidies disrupt competition, such as by displacing exports from another country.
• Nullification or Impairment of Benefits – When subsidies undermine market access benefits granted under WTO agreements.
2. Countries affected by actionable subsidies can either:
• Challenge them through WTO dispute settlement mechanisms.
• Impose countervailing duties to neutralize the impact of the subsidies.
COUNTERVAILING MEASURES
1. The SCM Agreement allows countries to take countervailing measures against subsidized imports that harm their domestic industries. Before imposing these measures, a country must conduct an investigation to prove that:
• A subsidy exists.
• The subsidy causes harm to domestic industries.
• There is a clear link between the subsidy and the injury.
2. Once these conditions are met, countervailing duties (special tariffs) can be imposed to offset the negative effects of the subsidy.
SPECIAL RULES FOR AGRICULTURAL SUBSIDIES
1. Subsidies in the agricultural sector are subject to special rules under Article 13 of the WTO’s Agreement on Agriculture. These rules, which were in effect until January 1, 2003, allowed certain agricultural subsidies to be exempt from SCM Agreement disciplines if they:
• Complied fully with the Agriculture Agreement (e.g., export subsidies that met specified criteria).
• Were classified as "green box" subsidies, meaning they were non-trade-distorting and focused on public goods like environmental protection.
2. After 2003, the SCM Agreement applies to agricultural subsidies, subject to the provisions of the Agreement on Agriculture.
KEY TAKEAWAY
1. The WTO’s SCM Agreement plays a critical role in maintaining fair trade by regulating the use of subsidies. While some subsidies are prohibited outright, others are only subject to challenge if they harm other WTO members.
2. Additionally, the agreement provides mechanisms for affected countries to take countervailing actions. Understanding these rules is essential for governments and businesses operating in the global market to ensure compliance and avoid trade disputes.
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