Subsidies and countervailing duties
WTO guidelines on subsidies and countervailing duties
Subsidies
Enterprise Industry Region Export To goods using
specific specific specific good domestic contents
(export (import competing
subsidies) subsidies)
Actionable / Non actionable Prohibited
As they cause adverse effect on
Actionable subsidies become prohibited / trading patterns
are subject to countervailing duties when
they cause adverse effects
Non actionable subsidies are not subject
to countervailing duties
[Link]
negs_bkgrnd07_domestic_e.htm
Adverse effects
for subsidies to be actionable
Injury to domestic industry Serious prejudice to the export Nullification /
of another member caused intention of another member impairment of benefits
by subsidised imports accruing under GATT (in
3rd country markets)
Transition time allowed
To phase out prohibited subsidies
Import
Export subsidies substitution
subsidies
Developed countries 3 yrs 2 years if export 5yrs
share is >3.25%
of the world for
Developing 8yrs, 2 consecutive 8yrs
countries
years.
Least developed NA NA
countries
Non actionable subsidies (till 1999*)
1. Subsidies on basic research
2. Precompetitive domestic subsidies
3. Assistance to disadvantaged regions
4. Assistance to adopt existing facilities to new environmental
requirements (one time, < 20% of the cost)
Refer to Green Box Subsidies in Agricultural Subsidies.
WTO Agreement on Subsidies and Countervailing Duties and EPZs
Governments provide benefits to Export Processing Zones in various forms
including exemption from excise taxes or import duties. The effect of such
benefits are identical to that of providing subsidies for exports.
When such a tax break is restricted to EPZs, it tends to violate the most
favoured nation principle of the GATT 1994 and is inconsistent with the
purposes of the WTO rules on subsidies.
“…(B)ecause they are hosted by a large number of countries, either
developed or developing, there has not yet been a case alleging that
infringement. It is very likely that the dispute settlement mechanism has not
yet been made manifest because of a “gentleman’s agreement”, whose
objective is the maintenance of an industrial policy that seems to be
advantageous to every country.” *
Export Subsidies
• Promotional policy for exports
• Often countered with a countervailing duty from the country that imports
• Say the HOME country provides a per unit subsidy for supplying in the export market.
• Does export subsidy raise welfare in the exporting country?
• Does the small country benefit from giving an export subsidy?
• Or is it the large country that gains, as in tariff or quota or VER?
•
Export subsidy – effect on the exporting country
When the home is a small exporter
P P P
D(H)
D(W+H)
D(W)
q q q
Home Demand World demand Total demand
Export subsidy – effect on the exporting country
When the home is a large exporter market
P P P
D(H) D(W+H)
A B
A+B
D(W)
q q q
Home Demand World demand Total demand
Export subsidy – effect on the exporting country
When the home is a small exporter
P P P
D(H)
D(W+H)
D(W)
q q q
Home Demand World demand Total demand
Effect of the export subsidy on small exporting country
S(H)
D(H) S’(H) Pw = free trade world price
Pw +S Post subsidy:
Supply curve shifts down by subsidy
amount
D(W)
Pw Price in export market remains at
Pw unaffected
Price received by exporter
= Pw + S
PH Pw +S = price charged in the
domestic market of the exporting
country
q3 q1 q2 q4 Export grows from q1q2 to q3q4
Welfare effects: small exporting country market: closed
P= PH
D(H) S(H)
consumers’
surplus =
Pw+S
Producers’
D(W) surplus =
Pw
PH
q3 q1 q2 q4
Welfare effects: small exporting country market: free trade
P= Pw
Domestic consumption = q1
S(H) Export = q2-q1
D(H)
consumers’ surplus =
Pw+S
Producers’ surplus =
D(W)
Pw
PH
q3 q1 q2 q4
Welfare effects: small exporting country market: with export subsidy
Foreign market
Price = Pw
S(H) Subsidy for export = s per unit
D(H)
Effectively gets Pw+s per unit
Export = q4-q3
Pw +S
Domestic market
a b c d D(W) Price charged in the domestic
Pw market = Pw+s
consumers’ surplus =
Producers’ surplus =
PH
Subsidy bill =
q3 q1 q2 q4
Home country market: dead weight loss with export subsidy
S1
Ps +S
S2
b
d
Ps = Pw
PH
q3 q1 q2 q4
Should the large country gain from export subsidy?
Effect of the export subsidy on LARGE exporting country: Free trade
S(H) Pw = free trade world price
D(W)
D(H)
Pw
PH
q1 q2
Effect of the export subsidy on LARGE exporting country: Post subsidy
S(H)
Post subsidy:
D(W) Price received by exporter
= Ps (from the consumer)
D(H) + S (subsidy from the government)
Ps + S S(H) with = Ps+S
subsidy
Pw Ps = price charge in the export market
Ps Ps < Pw
Ps+S = price charged in the domestic
market
PH
q3 q1 q2 q4
Welfare Effect of the export subsidy on LARGE exporting country:
free trade
S(H)
D(W)
D(H)
Ps + S S(H) with
subsidy
Pw
Ps
PH
q3 q1 q2 q4
Welfare Effect of the export subsidy on LARGE exporting country:
With subsidy
Reduction in CS = a + b
S(H)
Increase in PS = a+b+c
D(W) Subsidy Bill = b+c+i+e+f+g+h
D(H) Welfare loss = b+i+e+f+g+h
Ps + S S(H) with
c subsidy
Pw a b i
Ps ef g h
PH
consumers’ surplus =
Producers’ surplus =
Subsidy bill =
q3 q1 q2 q4
Welfare Effect of the export subsidy on LARGE exporting country:
With subsidy
Reduction in CS = a + b
S(H)
Increase in PS = a+b+c
D(W) Subsidy Bill = b+c+i+e+f+g+h
D(H) Welfare loss = b+i+e+f+g+h
Ps + S S(H) with
subsidy
Pw
Ps
PH
consumers’ surplus =
Producers’ surplus =
Subsidy bill =
q3 q1 q2 q4
• Export subsidy reduces welfare for small as well as large exporters.
why then are export subsidies provided ?
When all other exporters are subsidised: • When all other competitors in
the export market provides
subsidy, the world price drops
to ‘Pws’ from ‘Pw’.
S1
• The exporter who is not
subsidised
S2 - either charges a price Pw >
Pws, and hence loses the export
market.
- Or charges Pws and can export
Pw only q4-q3.
With the subsidy export market
Pws (q5-q3) could be regained.
q1 q3 q4 q2 q5
Effect of export subsidy from the importing country perspective:
S
P Due to the export subsidy given by the
exporting country, price in the
importing country falls from Pw to Ps.
Consumers benefit.
Domestic production falls.
PH Import rises.
To compensate for this loss, a
countervailing duty is imposed.
Pw
With this duty the price is raised back
PS again.
Welfare effects: identical as tariff.
Only the tariff revenue is effectively
Dpaid by the exporting country
government.
QH Q
Subsidy for a 2nd mover: Airbus and Boeing
• US’s monopoly in large aircrafts - Boeing 747 Jumbo jet- till 2000
• First mover’s advantage in an industry with large economies of scale. Cost
advantages to Boeing.
• Airbus (a consortium of French, German, British and Spanish aircraft
producers) wanted to enter the large-aircraft market.
• 1992: Boeing enters into a talk with Airbus to launch a ‘super jumbo’ of 800
capacity. After 4 yrs, talks fail. Successful delaying by Boeing.
• EU governments subsidized Airbus to launch A380 – a 600 capacity jumbo.
• Boing’s monopoly ended in 2000.
WTO’s response to the subsidy:
2004 – US filed a dispute with the WTO against EU for export subsidy
2009 –
• It was found that the low cost loans granted to Airbus by EU governments
was illegal. Those loans had to be refinanced on commercial rates and
terms.
• Counter claim submitted by EU to the WTO dispute settlement body
mentioning US government’s assistance to Boeing. The US assistances
came in the form of tax grants and generous military contracts and space
programs of US being forwarded to Boeing.
2018-19: -
WTO decided EU’s subsidy was far more ($18 bn) compared to US subsidy
($3-4 bn) to Boeing. Both are illegal. Both are to be withdrawn.
Conclusion
EU’s subsidy made the market for aircrafts competitive. But withdrawing
both EU and US subsidies brought both parties to a level playing field.
The issue of making a level playing field seems more important to the WTO
than increasing competitiveness in the market.
In 2018 the US has challenged practically almost all of India’s export programmes. It has filed a
complaint at the WTO about India’s export subsidy programmes claiming them to harm American
workers.
These programmes are the Merchandise Exports from India Scheme; Export Oriented Units Scheme
and sector specific schemes, including
• Electronics Hardware Technology Parks Scheme;
• Special Economic Zones;
• Export Promotion Capital Goods Scheme;
• and a duty free imports for exporters programme.
agricultural
subsidies
Export subsidies (agriculture) phase out as per Hong Kong Round of ministerial
conference 2005
1. Export subsidies to reduce substantially from the 1986-90 level.
Rate of Volume Transition time
subsidy to Reduction by allowed
reduce by
Developed countries 36% 21% 6 yrs
Developing countries 24% 14% 10yrs
Least developed 0% NA
countries
2. No laid down rules for subsidies given after export shipment.
Agricultural export / production subsidies in developed world
Europe’s Common Agricultural Policy –Sugar beet subsidy
A production subsidy for a largely exported item
• Gives market access to European farmers.
• Poorer countries that are net importers benefit from low prices due to the
subsidy.
• Countries with temperate and tropical climate do not get access to the
world market despite having comparative advantage due to this subsidy.
USA’s – Cotton subsidy
• Benefits US cotton exporters and countries that are net importers of cotton.
• Reduces market for Brazil, India, China, Egypt etc.*
Domestic support subsidies
The Green Box subsidies
Subsidies that have no, or at most minimal, trade-distorting effects or effects
on production. These subsidies can stay.
Examples –
• general services provided by governments,
• public stockholding programmes for food security purposes
• Research programmes, (general / environmental ),
• pest and disease control programmes,
• agricultural training services /advisory services/ inspection services,
• marketing and promotion services;
• infrastructural services, including electricity, reticulation, roads and other
means of transport, market and port facilities, water supply facilities, etc;
• domestic food aid to sections of the population in need.
• direct payments to producers which are not linked to production
decisions.
Subsidies should not be product specific to be included in the green box.
Other exempt measures
• agricultural input subsidies generally available to low-income or resource-
poor producers in developing country Members
• domestic support to producers in developing country Members to
encourage diversification from growing illicit narcotic crops.
Blue box subsidies
Only production limiting subsidies (that still distort trade) are allowed.
• It covers payments directly linked to acreage or animal numbers, but under
schemes which also limit production by imposing production quotas or
requiring farmers to set aside part of their land.
• Blue box opponents want it eliminated because they say the payments are
only partly decoupled from production, or they want an agreement in place
to reduce the use of these subsidies. Defenders say the blue box is an
important tool for supporting and reforming agriculture, and for achieving
certain non-trade objectives and argue that it should not be restricted as it
distorts trade less than other types of support.
Problem : There is no limit on the volume of subsidy. Currently only few
countries like Norway , Iceland , Slovenia etc use this kind of subsidies.
Amber box subsidies
most directly linked to production levels
AMS (Aggregate measure of support) is subject to reduction commitments.
They have to be brought to the de minimis level. These subsidies can be
• Product specific (MSP or minimum support price)
• Non-product specific (subsidies on input, fertilizer, power, irrigation)
WTO limit -
For developed country - 5% of value of agriculture production in 1986-88
For developing country - 10% of value of agriculture production in 1986-88
Price support to agriculture
• Raise the price obtained by farmers
• Price support measures are in the non-exempt category.
• Wherever a price support measure is present the Aggregate Measure of
Support is to be calculated and brought to the de minimis level.
de minimis
• Minimal amounts of domestic support that are allowed even though they
distort trade — up to 5% of the value of production for developed
countries, 10% for developing.
Prices promised by a food security policy cannot be too low, and have to be
consistent with the WTO rules on domestic support.
• Example: Calculation of the current total AMS
Member X (developed country), year Y
• Price support in Wheat :
> Intervention price for wheat = $255 per tonne
> Fixed external reference price (world market price) = $110 per tonne
> Domestic production of wheat = 2,000,000 tonnes
> Value of wheat production = $510,000,000
> Wheat AMS (AMS 1)
($255–$110) x 2,000,000 tonnes = $290,000,000
(de minimis level=$25,500,000)
• Deficiency payments in Barley
> Deficiency payments (to cover a financial deficit) for barley = $3,000,000
> Value of barley production = $100,000,000
> Barley AMS (AMS 2) = $3,000,000
(de minimis level=$5,000,000)
• Combined support in Oilseeds:
> Deficiency payments for oilseeds = $13,000,000
> Fertilizer subsidy = $1,000,000
> Value of oilseeds production = $250,000,000
> Oilseeds AMS (AMS 3) = $14,000,000
(de minimis level=$12,500,000)
• Support not specific to products: interest subsidy
> Generally available interest rate subsidy = $ 4,000,000
Value of total agricultural production = $860,000,000
> Non-product-specific AMS (AMS 4) = $4,000,000
de minimis level=$43,000,000
• Current total AMS (AMS 1 + AMS 3) = $304,000,000
• This has to match the de-minimis level
India’s issues:
• Decoupling subsidies from products:
To be in the green box, subsidies should not be product specific.
In India, domestic support regime (Minimum support price system) does not only
provide livelihood guarantee to farmers, it also ensures food security and
sufficiency. It is directly encouraging growth of production of subsidised products.
Thus decoupling support from products is difficult and complicated.
But in US the decoupling has been done in large extent. As a result most subsidies
fall in the category of green box.
• R&D related subsidy
Agriculture in EU or US are capitalistic and hence big farmers spend substantially
on technology up-gradation and R&D. They enjoy R&D subsidy.
In India, farming is mostly subsistence and hence very little R&D. Thus India
cannot take advantage of this opportunity.
India’s issues:
• Amber box subsidies
Subsidies have to be reduced in reference to the 1986-88 level. In 1986 EU and
USA had historically high levels of Amber box subsidies. Even after reduction to 5%,
they have a high level of subsidy.
In India such productions were not as high in 1986. Hence India can provide small
amount of such subsidies after reduction to 10%. Also amber box subsidies have
grown in India due to
- Efforts to control inflation
- Wide difference between market price and MSP.
But if the rule of reference to 1986 level of subsidies is altered, we will be able to
maintain higher level of subsidies.
• Peace Clause at Bali convention 2014
Countries may keep their Amber box subsidies till 2017. No dispute case will be
launched provided full information on the subsidies are given.
Reading
1. From the reading material on module 2 – Topic 2(a) – “Export Subsidies and quotas” – page
188- 195
2. Slides
3. For detailed information on Agricultural subsidies
[Link]
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