[Opinion] Determination of Adverse Effects under the Subsidies and Countervailing Measures Agreement

[2024] 166 taxmann.com 649 (Article)

Introduction

The agreement on Subsidies and Countervailing Measures (hereinafter referred to as the SCM Agreement) addresses two separate but closely related topics: multilateral disciplines regulating the provisions of subsidies and the use of countervailing measures to remove the injury caused by subsidized imports. The SCM agreement was drafted and approved at the eighth round of multilateral trade negotiations conducted within the framework of the General Agreement on Tariffs and Trade (GATT), which is known as the Uruguay round.

As per the SCM agreement, subsidies are classified into the following types:

(a) Prohibited Subsidy: Part II of the agreement deals with the prohibited subsidy. These classes of subsidies also known as ‘Red Light Subsidy’ are strictly prohibited under the SCM agreement. As stated under Article 3 of the SCM agreement these are further classified into Subsidy on Local Content and Subsidy on Export Performance.

(b) Actionable Subsidy: Part III of the agreement deals with the actionable subsidy. These subsidies are allowed and not outrightly prohibited under the SCM agreement. The extent of application of these subsidies is subject to certain adverse effects which may hamper the economic interests of other member countries. They are also called ‘Yellow Light Subsidy’

The purpose of this paper is to study the relevance of adverse effects in the SCM agreement and the ways through which adverse effects can be observed in transactions between two member countries. Article 5 of the SCM agreement deals with the types of adverse effects that can arise when an actionable subsidy is granted by the member country. In addition to this, Article 6 of the SCM agreement also plays a crucial role in determining the adverse effect of serious prejudice caused to the complaining country.

Statement of Problem

This paper analyzes the different aspects of the application of Articles 5 and 6 in light of the most important precedents of the World Trade Organization. It is often stated that nothing in this world is ideal and every statute on its application may show certain discrepancies. Hence, with the application of this agreement, various issues were illustrated before the WTO Dispute Settlement Body in major cases like the US Upland Cotton Case, India’s import of Steel from China, Case Concerning US Civil Aircraft, The Korea Commercial Vessels Case, and others. Thus these issues are analyzed in light of the findings of the Panel of WTO and the Appellate Body to make a comprehensive analysis of the provisions concerning adverse effects under the SCM Agreement. A brief background of the SCM Agreement in light of subsidies and their utility is stated below.

Actionable subsidy under Article 3 of the SCM agreement is subject to certain adverse effects which may hamper the interests of the member country. The paper aims to study the adverse effects along with their statutory interpretation and application. For the statutory analysis, each factor causing adverse effects must be read in light of the SCM agreement. As per Article 5 of the SCM Agreement, adverse effects can be caused when any of the three situations arise:

(a) Injury to the domestic industry of another member country

(b) Impairment or nullification of benefits accruing directly or indirectly to other Members under the GATT 1994

(c) Serious prejudice to the interests of another member

The exception to the above factors is subsidies maintained on agricultural products as provided under Article 13 of the Agreements on Agriculture. Secondly, the matters about serious prejudice in the sense of Article 5(c) have been dealt with under Article 6 of the SCM agreement which includes the following factors:

“6.3 Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where one or several of the following apply:

(a) the effect of the subsidy is to displace or impede the imports of a like product of another Member into the market of the subsidizing Member;

(b) the effect of the subsidy is to displace or impede the exports of a like product of another Member from a third country market;

(c) the effect of the subsidy is a significant price undercutting by the subsidized product as compared with the price of a like product of another Member in the same market or significant price suppression, price depression, or lost sales in the same market;

(d) the effect of the subsidy is an increase in the world market share of the subsidizing Member in a particular subsidized primary product or commodity as compared to the average share it had during the previous period of three years and this increase follows a consistent trend over a period when subsidies have been granted.”

In addition to this, the paper also aims to study various case laws and other statutory provisions that have promoted the application and development of the above-mentioned concepts. Some of them are Article VI of the GATT, 1994; The US Byrd Amendment of 1971: US Cotton Case (DS267): Subsidies on Upland Cotton; European Communities Case (DS316): Measures affecting trade in large civil aircraft, etc.

Click Here To Read The Full Article