Subsidies and Countervailing Measures
Information Paper

Issue

The World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures (the SCM Agreement) deals with government subsidization.

Subsidization occurs when a government provides its producer(s) with financial contributions that give the producer(s) an advantage in the market place. This support may, in turn, negatively affect other countries’ industries and trade. The objective of the Agreement is to curb the use of such government assistance.

The SCM Agreement does two things:

• It defines those types of subsidies that distort trade: generally, the most ‘trade-distorting’ subsidies are those aimed at promoting exports or displacing imports, or those given to specific industries; and

• It sets out rules for trade actions that countries may take to counter such subsidization by other countries. Trade actions may be pursued multilaterally through the WTO Dispute Settlement Body, or unilaterally through countervail action.

Description of the SCM Agreement:

The SCM Agreement’s approach to establishing disciplines on the use of subsidies is described as a ‘traffic light’ approach:

• Subsidies that are prohibited by the Agreement (‘red light’ subsidies) are those that are considered the most trade-distorting. There are two types of prohibited subsidies: subsidies that are contingent on export performance and those that are contingent on the use of domestic over imported goods.

• There are other subsidies, i.e. specific subsidies, that, while not prohibited, are subject to trade action under the Agreement (actionable or ‘amber light’ subsidies).

• Non-specific (i.e. generally available) subsidies fall in the non-actionable category (‘green light’ subsidies) under the Agreement. They are considered the least trade-distorting type of subsidies, and are not subject to trade action.

Countries may take action against the adverse effects of subsidy practices through the dispute settlement procedures set out under the WTO or by means of unilateral countervailing duty action. A challenge in the WTO of a prohibited subsidy, for example, seeks the elimination of the subsidy programme that is inconsistent with the rules of the SCM Agreement. In contrast, in a unilateral countervail action, countervailing duties are imposed on subsidized imports to offset the injurious effect of the subsidy on the relevant industry in the importing country. WTO rules governing the use of countervailing duties are similar to the WTO rules on the use of anti-dumping measures. The main difference is that anti-dumping involves an investigation of the pricing practices of private companies whereas a countervailing duty investigation examines subsidy practices of governments.

The SCM Agreement applies to industrial products and to agricultural goods, except where special provisions of the Agreement on Agriculture apply.

Government Assistance

Since the conclusion of the Uruguay Round in 1994, both federal and provincial governments in Canada have altered the nature of government assistance to the private sector. Driven by fiscal imperatives as well as an effort to reform economic programs to adjust to new economic realities, governments have generally moved away from assistance aimed at the development of production capacity to more broad-based strategic practices such as assistance for research and development. Other OECD countries have followed a similar trend with respect to reductions in government assistance to non-agricultural sectors. In developing countries, financial and economic crises facing many countries in Asia, Eastern Europe and Latin America in recent years have resulted in the implementation of economic reforms. Where International Monetary Fund (IMF) assistance has been provided, the IMF has in some cases demanded the reduction or elimination of subsidies as one measure to restore their economies.

Given that the key objective of the SCM Agreement is to discipline the use of subsidies, this widespread change in the magnitude and nature of government assistance offers new opportunities to make progress on global disciplines in the context of multilateral trade negotiations.

Countervail Action

Canada currently has nine countervail measures in place, primarily against certain agricultural products from the EU and certain steel products from India, Thailand, Indonesia and Brazil.

The most frequent user of countervail action is the U.S. (see chart).

U.S. actions against Canada have been a major source of trade tension between the two countries. Given the large size of the U.S. economy relative to the Canadian economy, U.S. countervailing duty actions have a much more significant impact on Canadian exports than do Canadian countervailing duty action on U.S. exports.

U.S. countervail investigations related to imports from Canada over the last fifteen years covered the following products: steel rails, pork, hogs, limousines, plastic tubing, magnesium, softwood lumber, portable seismographs, laminated hardwood, steel wire rod, and live cattle. Currently there are two measures in place affecting Canada, covering steel rails and magnesium, and an investigation is underway concerning softwood lumber.

Canadian Position

Canada has an overall interest in strengthening and clarifying subsidy rules to ensure that its trade and investment interests are not disadvantaged by the subsidy capacity of its larger trading partners, such as the U.S., Japan and the EU. Subsidies provided by developing countries can also have a direct impact on the ability of Canadian firms to compete in international markets.

This key objective of strengthening disciplines, however, must be balanced with an interest in ensuring that subsidy rules do not impair the ability of Canadian governments, at all levels, to pursue legitimate public policy objectives.

The Government of Canada consulted with domestic stakeholders on the SCM Agreement prior to and following the Seattle WTO Ministerial meeting. Reflecting these discussions, as well developments since since the Uruguay Round, the following list of issues has been developed to serve as a basis for further consultations in advance of a possible new round of multilateral trade negotiations:

• Reinstating Key Provisions of the SCM Agreement: Certain provisions of the SCM Agreement were included on a provisional basis. They expired at the end of 1999 because WTO Members could not reach an agreement to extend them. These provisions included:

• Article 6.1: Article 6.1 contained provisions for dealing with the adverse effects of foreign subsidies in export markets through so-called serious prejudice provisions (e.g., subsidies that displace Canadian exports to foreign markets). While the remaining serious prejudice provisions continue to provide recourse for such subsidies, one of the elements that expired at the end of 1999 deemed that subsidies above a certain threshold or certain types of subsidies (e.g. those to cover operating losses) created adverse effects. Article 6.1 offered a streamlined process for dealing with the adverse effects of subsidies in foreign markets. As an economy that is highly dependent on exports, Canada supports the reinstatement of this or a similar provision.
• Article 8: Article 8 contained provisions that rendered certain R&D, regional development, and environmental adaptation subsidies immune from WTO remedies and from the imposition of countervailing duties, because they were seen to be only minimally trade distorting. Canada continues to be supportive of Article 8 provisions to reinforce the ability of governments to provide financial assistance in support of certain legitimate economic and social goals.
• Sectoral Concerns
• Canada’s preference is that specific sectoral concerns in the subsidies area be taken up in the context of broad-based negotiations under the SCM Agreement, i.e. not in sector-specific negotiations.
• Fisheries subsidies are of concern to a range of Members: A number of countries, including Canada, have indicated an interest in further disciplines on subsidies that contribute to over-capacity in the fisheries sector, for both trade policy and environment reasons.
• The need to ensure the application of appropriate subsidy disciplines to the aircraft sector: It was anticipated after the Uruguay Round that multilateral negotiations on aircraft subsidy rules would be undertaken. As these negotiations have not materialized, Canada will want to ensure that there are clear subsidy rules governing this sector.
• Growing concern regarding foreign subsidy practices in the steel and shipbuilding sectors: The Canadian steel and shipbuilding sectors have raised concerns about certain foreign subsidy practices, including subsidies provided by developing countries.

• Issues Related to the Prohibited Subsidies Category:

• Clarifying the WTO rules concerning export subsidies: Under WTO dispute settlement, certain decisions concerning prohibited export subsidies have taken into consideration a country’s propensity to export. This could place exporting economies with relatively small domestic markets, such as Canada, at a disadvantage.
• The scope of the prohibited subsidies category*: Further progress on expanding the definition of prohibited subsidies could also be examined by further identifying subsidy practices that clearly distort trade. An expanded prohibited subsidy category could possibly include certain subsidies that exceed a given threshold, or subsidies used to cover operating losses sustained by an industry.
• Export financing: The SCM Agreement provides some guidance on which export financing practices are permitted. The OECD rules on export credits form the basis of the SCM Agreement rules. Export financing has been the subject of WTO aircraft cases. Given the implications of these cases and the evolution of the OECD rules, we expect that the treatment of export financing will be a major issue in any future negotiation of the SCM Agreement.
• The relevance of the SCM Agreement to the new economy: Ensuring that the SCM Agreement retains its relevance in the new economy is critical. In knowledge-based industries, government assistance is often provided differently than in the old economy. For example, there is more focus on government-private sector partnerships in R&D, and assistance comes in forms that are difficult to quantify, such as transfers of intellectual property. This is true in Canada as well as elsewhere. Given this shift, it would be useful to examine whether new rules are necessary or desirable to address such assistance.
• Treatment of developing countries: The SCM Agreement currently provides for special and differential treatment of developing economies, including exemptions and transition periods related to prohibited subsidies, and differential treatment in the conduct of countervailing duty investigations. Any new multilateral trade negotiation will likely need to address whether the current provisions are adequate in addressing development needs, particularly for the least developed countries. With respect to the more advanced developing countries, greater integration into the disciplines of the Agreement, commensurate with their level of development, remains an important objective.
• Countervailing duty action and linkages with other agreements: Changes to the SCM Agreement will not be negotiated in a vacuum. We will have to consider developments on other fronts. In particular, Canada’s negotiating position with respect to subsidies may reflect developments in the ongoing agriculture and services negotiations, as well as the outcome of WTO disputes, such as ongoing WTO cases that deal with countervailing duty rules.

* Note: The issue of defining the export subsidy element of certain forms of export assistance that are not specifically defined in the current Agreement on Agriculture is the subject of discussion in the agricultural negotiations currently underway in the WTO.  [Return]