By Bhargav Mansatta
Article 3 of the WTO SCM Agreement provides for two types of subsidies which are considered as prohibited subsidies, namely (i) export contingent and (ii) import substitution. A member-country is not allowed to grant or maintain these types of subsidies. Article 3 provides as below:
3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited:
(a) subsidies contingent, in law or in fact (see end note 1), whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I (see end note 2);
(b) subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.
3.2 A Member shall neither grant nor maintain subsidies referred to in paragraph 1.
However, under Article 27 of the SCM Agreement which provides for ‘special and differential treatment’ towards developing countries, prohibition on export contingent subsidies shall not apply to developing country members referred to in Annex VII [Article 27.2(a)] and other developing country members for a period of eight years from the date of entry into force of the WTO Agreement [Article 27.2(b)]. Article 27.2 provides as below:
27.2 The prohibition of paragraph 1(a) of Article 3 shall not apply to:
(a) developing country Members referred to in Annex VII.
(b) other developing country Members for a period of eight years from the date of entry into force of the WTO Agreement, subject to compliance with the provisions in paragraph 4.
Annex VII exempts India from the prohibition under Article 3.1(a) of the Agreement. However, it conditions the exemption with the clause that when GNP per capita reaches $1000 per annum, then the country will be subject to provisions of paragraph 27.2(b). Annex VII in relevant part provides as below:
(b) Each of the following developing countries which are members of the WTO shall be subject to the provisions which are applicable to other developing country members which are applicable to paragraph 2(b) of Article 27 when GNP per capita has reached $1000 per annum …(see end note 3) Guyana, India, Indonesia…
At the time of Uruguay round of negotiations which resulted in the WTO Covered Agreement in the year 1995, GNP per capita income of India was much below $1000. India was allowed to maintain and grant export contingent subsidies. However, it has to be noted that there was no exemption from imposition of countervailing duty on the exported product which benefits from such export contingent subsidies (see end note 4). India is second only to China in facing the highest number of countervailing duty investigations in the world as of date (see end note 5).
It should be noted that many of the export contingent programmes can be argued as not amounting to financial contribution under Article 1 of the SCM as they squarely fall under footnote 1 to Article 1.1(a)(1)(ii) of the SCM Agreement. Under footnote 1 a mere exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued are not considered as subsidy (see end note 6).
Be that as it may, this article intends to convey the issue regarding expiry of the exemption clause under Article 27.2(a). India’s GNI (see end note 7) per capita crossed $1000 mark in the year 2008 (see end note 8). However, this would not invite any immediate consequences and is only an alarm bell given the fact that the Doha Ministerial Conference decided to put a condition that not only the GNI per capita income should cross $1000 mark in current dollars, it should also reach $1,000 in constant 1990 dollars for three consecutive years (see end note 9). As per the latest assessment by the committee on subsidies and countervailing measures, as of 2010, India’s GNI per capita income in constant 1990 dollars was at 926 (see end note 10), whereas India’s GNI per capita income at current dollars was measured at 1399 as of 2010 (see end note 11). Whether India has crossed the $1000 mark in the subsequent year will more certainly be known once the Committee on Subsidies and Countervailing Measures will update the list in its meeting in June 2013 which will state the GNI per capita income of India as of 2011.
Another issue which will stem out of this is that under paragraph 27.2(b), prohibition on export contingent subsidy is not applicable to other developing countries (i.e. countries except for the ones covered under Annex VII) members for a period of eight years from the date of entry into force of WTO Agreement. In a recent proposal, a number of Annex VII(b) countries including India sought to ‘clarify’ that this flexibility under Article 27.2(b) would indeed still be available (see end note 12). They have submitted that developing countries graduating out of Annex VII when their GNP per capita has reached US$1,000 per annum, shall have a period of 8 years from the year of graduating out of Annex VII to phase out their export subsidies covered under Article 3.1(a) (see end note 13). The stricto senso interpretation or the plain textual interpretation of Annex VII of SCM Agreement readwith paragraph 2(b) of Article 27 goes against the above proposal. However, if one is to adopt a harmonious interpretation, the eight year period can be counted from the date of graduation. India as well as other Annex VII(b) countries who are approaching gradually towards the required benchmark have apprehended the situation.
Be that as it may, India maintains a large number of export contingent benefit programs which are viewed and treated as prohibited subsidy by the investigating authorities in other countries. India’s local content requirement in certain sectors has already come under the WTO scanner (see end note 14). Once India’s GNI per capita income touches the $1000 mark for three consecutive years in terms of 1990 dollars, it may face the ire of WTO law.
1. This standard is met when the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings. The mere fact that a subsidy is granted to enterprises which export shall not for that reason alone be considered to be an export subsidy within the meaning of this provision.
2. Measures referred to in Annex I as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement.
3. The inclusion of developing country members in the list in paragraph (b) is based on the most recent data from the world bank on GNP per capita.
4. Export contingent subsidies have been subjected to countervailing duty once it is established that the subsidy is ‘specific’ in nature in accordance with Article 2 of the SCM Agreement and it causes material injury or threat of material injury or material retardation to the establishment of domestic industry in the country of import. As per Article 2.3 of the SCM Agreement, subsidies which are not otherwise specific in terms of it being available only to a specified sector, industry or region are considered as deemed to be specific if they are contingent on export performance. Export contingent schemes like Advance Authorisation, Export Promotion of Capital Goods (EPCG), Duty drawback, etc. are considered as deemed to be specific by investigating authorities in European Union (EU) and United States (US). Exemption from Article 3 will not affect reliance on its provision for definitional purport to ascertain specificity of a particular subsidy.
5. Countervailing duty initiations by Exporting Country, available at http://wto.org/english/tratop_e/scm_e/CV_InitiationsByExpCty.pdf
6. Investigating authorities in EU, United States etc. are not convinced that there is ‘no excess’ remission or exemption of duties taxes or charges and hence export contingent programs are considered as subsidies.
7. The World Bank data series
8. GNI Per Capita Income. World Bank Data, available at http://data.worldbank.org/indicator/NY.GNP.PCAP.CD
9. Countries will be re-included when their GNI per capita falls again below $1,000. See WT/MIN(01)/17, 14 November 2001, paras. 10.1 and 10.4. Precise methodology for arriving at the GNI per capita income in 1990 dollars is contained in the proposal by the Chairman of the Committee set forth in G/SCM/38. The secretariat calculated the GNI per capita income as per the prescribed methodology and the same in contained the Committee Decision.
10. See G/SCM/110/Add.9, dated 20 June 2012. Precise methodology for arriving at the GNI per capita income in 1990 dollars is contained in the proposal by the Chairman of the Committee set forth in G/SCM/38. The secretariat calculated the GNI per capita income as per the prescribed methodology and the same is reflected in this document.
12. TN/RL/GEN/177/Rev.2, 18 March 2011.
13. Ibid., para. 4
14. US files dispute against India on solar panel products, available at http://wto.org/english/news_e/news13_e/ds456rfc_06feb13_e.htm, 6 February, 2013; See India — Certain Measures Relating to Solar Cells and Solar Modules,
[The author is a Senior Associate, International Trade Practice, Lakshmikumaran & Sridharan, New Delhi]