Agreement on Subsidies and Countervailing Measures (SCM Agreement)

The Agreement on Subsidies and Countervailing Measures (SCM Agreement) is one of the core agreements under the World Trade Organization (WTO) framework. It addresses issues related to subsidies and the use of countervailing measures (CVM) to counteract the harmful effects of subsidies that distort international trade. Here"s an overview of its key components and provisions:

1. Purpose of the SCM Agreement:

The primary purpose of the SCM Agreement is to ensure that subsidies provided by governments or public authorities do not distort international trade or create unfair competition. The agreement establishes rules for the use of subsidies and sets out procedures for imposing countervailing measures (tariffs or other duties) to offset the effects of these subsidies.

2. Definition of Subsidies:

Under the SCM Agreement, a subsidy is defined as a financial contribution by a government or public body that:

• Confers a benefit to the recipient, and
• Is specific to an industry or a group of industries.

A financial contribution can take several forms, such as:

• Grants or direct financial support,
• Loans or loan guarantees on favorable terms,
• Tax credits or exemptions,
• Provision of goods or services at below-market prices, and
• The assumption of liabilities by a government (e.g., bailouts).

3. Types of Subsidies under the SCM Agreement:

The SCM Agreement distinguishes between three main types of subsidies:

a) Prohibited Subsidies (Article 3)

These are subsidies that are deemed to be most harmful to international trade because they encourage unfair trade practices. Two key categories of prohibited subsidies:

• Export Subsidies: These subsidies are contingent upon the export of goods. In other words, a government gives subsidies to encourage companies to export their products (e.g., export credits or export rebates).
• Import Substitution Subsidies: These subsidies are contingent on the use of domestic goods over imported goods.

Both of these types of subsidies are prohibited under the SCM Agreement, as they directly distort international trade.

b) Actionable Subsidies (Article 5)

These are subsidies that may have negative effects on trade but are not automatically prohibited. A subsidy is actionable if it causes:

• Adverse effects on the interests of other WTO Members, which can manifest as:
  • Trade distortion (e.g., injury to the domestic industry of another member),
  • Impediments to market access (e.g., reducing the market share of a foreign competitor),
  • Unfair competition (e.g., by receiving more favorable financial terms).

Members can challenge these subsidies through dispute resolution mechanisms at the WTO.

c) Non-Actionable Subsidies (Article 8) (Note: This provision is no longer applicable as of 2001, but it was originally created to promote subsidies that were seen as beneficial for economic development and trade.)

Historically, non-actionable subsidies were those that were seen as not distorting trade or that promoted a public good:

• Research and development subsidies,
• Subsidies for disadvantaged regions,
• Environmental subsidies.

4. Countervailing Measures (CVM):

When a country believes that a subsidy from another country is causing material injury to its domestic industry or is significantly distorting trade, it can apply countervailing measures (CVM). These are tariffs or other duties placed on imported subsidized goods to counter the subsidy’s effect.

• Investigation: Before imposing CVM, the importing country must conduct a thorough investigation, including evidence of injury to domestic industry and the specific subsidy in question.
• Proportionality: The countervailing measure should only be imposed in an amount sufficient to offset the subsidy, and it must not exceed the degree of the distortion caused by the subsidy.

5. Transparency and Notification:

Countries are required to notify the WTO of subsidies they provide and to provide details on the nature of these subsidies, as well as the amounts involved. Transparency helps ensure that other members can evaluate and challenge subsidies if needed.

6. Dispute Resolution Mechanism:

If a country believes that a subsidy is being used in a manner that violates the SCM Agreement, it can bring a case to the WTO’s Dispute Settlement Body (DSB). The WTO panel will review the matter, and if the subsidy is found to be inconsistent with the agreement, it can be ruled as prohibited or actionable, and appropriate remedies (like withdrawal of the subsidy or countervailing duties) will be suggested.

7. Special Provisions for Developing Countries:

The SCM Agreement has special provisions for developing countries to allow them more flexibility in implementing subsidy-related policies. Some of these provisions include:

• Longer transition periods for eliminating prohibited subsidies.
• Special treatment for certain types of subsidies, including those aimed at promoting economic development and infrastructure.

8. Key Articles of the SCM Agreement:

• Article 1: Defines what constitutes a subsidy.
• Article 2: Discusses how subsidies are to be assessed for their benefit.
• Article 3: Specifies prohibited subsidies (export subsidies and import substitution subsidies).
• Article 5: Outlines actionable subsidies and how they can be challenged.
• Article 7: Covers the countervailing duties and measures against subsidized goods.
• Article 9: Addresses the WTO"s dispute settlement procedure regarding subsidies.
• Article 10: Covers the transparency provisions, such as notification and reporting.

9. Real-World Implications:

• Trade Disputes: Many trade disputes between countries involve accusations of subsidies, such as in sectors like agriculture, steel, aerospace, and energy. For example, the US has brought cases against the European Union (EU) regarding subsidies for aircraft manufacturers like Airbus, and similarly, the EU has challenged subsidies for Boeing in the United States.
• Developing Countries: Developing countries, particularly those seeking to industrialize or enhance economic growth, may use subsidies to promote specific industries. However, this can lead to disputes with developed nations that see these subsidies as unfair competition.

Conclusion:

The SCM Agreement is a critical tool in regulating subsidies and ensuring fair competition in international trade. By balancing the rights of countries to provide subsidies for economic growth with the need to prevent unfair trade practices, it plays a significant role in the global trade system. Countries that feel their industries are harmed by unfair subsidies can use countervailing measures, but they must comply with detailed investigation and WTO dispute resolution procedures.

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