For prohibited and actionable subsidies, two types of remedy are possible, i.e., remedy through the dispute settlement mechanism at a multilateral level and remedy by imposing countervailing duty at a unilateral level. The route of countervailing duty can be taken only if material injury or a threat of material injury exists.
Countervailing Measures are usually duties imposed by the importing country to offset the effect of the subsidy on the product in question. They are a unilateral remedy, but may only be applied by a Member after an investigation by that Member and a determination that the criteria set forth in the SCM Agreement are satisfied.
Criteria: subsidized imports or the existence of a prohibited or actionable subsidy, injury to a domestic industry, a causal link between the subsidized imports and the injury
Application by domestic industry: If an application is supported by more than half of the total domestic producers of the like product, or if those supporting an application account for a higher level of production of the product than those opposing it, the application will be considered to be made by or on behalf of the domestic industry. For this purpose, those supporting an application should not account for less than 25% of the total domestic production of the product.
Preliminary examination by designated authorities of a Member: to determine whether the evidence given in the application is sufficient to justify the initiation of an investigation.
The application must be rejected and investigation terminated if the amount of subsidy is de minimis, or the volume of the subsidized import or the injury is negligible, i.e., less than 1% in general cases, or less than 3% for developing countries in Annex VI, or less than 2% for other developing countries, or less than 4% of the total import of the like product in the importing country in the case of a developing country under investigation ( but no more than 9% collectively for all developing countries).
Consultation: to be held between governments of importing and exporting countries after an application is accepted and before initiating the investigation so as to clarify facts in the application and arrive at a mutually agreed solution.
Investigation: If no agreement is reached in the consultation, the investigation may start. The time will normally be one year, but in no case should it exceed 18 months, and then a final determination will be made by the investigating authorities.
Interested Members and parties, i.e., foreign producers, exporters, importers and domestic producers whose products are the subject of investigation, as well as industrial users and consumers, will be informed of the investigation in order to provide relevant information and arguments.
The investigation is to determine whether the measure in question is a subsidy, the extent of the subsidy, whether material injury to the domestic industry has been caused and whether there is a causal link between the subsidy and the injury, i.e., whether the injury or the threat of it has been caused by the subsidy.
Provisional measures may be taken by the Member after the expiry of 60 days from the initiation of the investigation to prevent injury being caused during the investigation, but the period of application must not exceed 4 months.
Satisfactory Undertakings from the subsidizing Member or from the exporters in the course of the investigation to remove or limit the subsidy or to raise the price of the product may suspend or terminate the investigation.
Imposition of countervailing duty: If there has been a positive finding in relation to the subsidy, injury or linkage, countervailing duty may be imposed. But before the imposition, domestic consumers and industrial users should be given an opportunity to demonstrate the possible adverse effects of such duty on them.
The countervailing duty cannot be higher than or in excess of the subsidy found to exist. The Agreement provides a guideline that the duty should be less if such a smaller duty will be adequate to remove the injury to the domestic industry, i.e., the duty should be just enough to compensate for the injury margin.
The countervailing duty has to be applied on a non-discriminatory basis to the products of all countries satisfying the conditions of subsidy, injury and causal linkage.
Review and duration: A review may be undertaken by the authorities either on their own initiative or at the request of an interested party as to whether the continuance of the duty is necessary to offset subsidization or it is likely that injury will continue or recur if the duty is removed. A countervailing duty can be continued as long as is necessary to counteract injury-causing subsidization, i.e., less or more than the 5-year period.
Least developed country (LCD) Members and other developing country Members having gross national product (GNP) per capita less than US$1,000 per annum are permitted to provide export subsidies.
Country list: Bolivia, Cameroon, Congo, Egypt, Ghana, Guatemala, India, Indonesia, Kenya, Morocco, Nicaragua, Nigeria, Pakistan, Philippines, Senegal, Sri Lanka, Zimbabwe.
Other developing country Members are exempted from the prohibition of export subsidies for a period of eight years from 1 January 1995.
If a developing country Member has attained export competitiveness in a product, i.e., a share of at least 3.25% of world trade in that product and such share continues for two consecutive years, this Member will have to phase out export subsidies on this product over a period of eight years if it is included in the above list (Annex VII to Article 3.1 a), or two years otherwise.
LDC Members will be exempted from the prohibition of import substitution subsidies for 8 years from 1 January 1995. For other developing country Members, the prohibition will not apply for five years from 1 January 1995.
Absence of presumption of serious prejudice
For developed country Members, there is a presumption of the existence of serious prejudice if any of the following four situations exists:
- the subsidy on a product exceeds 5% of the value of production;
- the subsidy is given to cover the operating losses of an industry
- repeating subsidy is given to cover the operating losses of an enterprise;
- direct forgiveness of debt, including grants to cover debt repayment.
The burden of proof lies on the subsidizing Member to demonstrate that in spite of the existence of these situations, the elements of serious prejudice do not exist. In the case of developing country Members, however, there is no presumption of serious prejudice in these circumstances. Thus, there is a shift of the burden of proof, i.e., the burden of proof is on the complaining Member to demonstrate that serious prejudice exists. Furthermore, adverse effect in a third country market caused by the subsidized exports from developing countries will be exempted from any countermeasures.
Besides, subsidies linked to and granted within a privatization program of a developing country Member will be free from any remedial action.
For Member countries in transition from a centrally planned economy to a market, free-enterprise economy, the following flexibilities have been laid down in the Agreement:
- such Members have seven years to phase out the prohibited subsidies, i.e., export subsidies and import-substitution subsidies;
- remedies through the dispute settlement process cannot be taken against direct forgiveness of debt for seven years;
- regarding remedies through the dispute settlement process against other actionable subsidies, such Members have the same seven-year flexibility as the developing country Members in general.
Definition: Dumping is a situation of international price discrimination, where the price of a product, when sold in the importing country, i.e., the export price, is less than the price of that product in the market of the exporting country, i.e., the normal value.
Dumping is adopted by firms and enterprises, whereas subsidy by Member governments;
The remedial action in respect of subsidies is targeted at the subsidizing Member, i.e., is taken against the subsidized product exported by the various enterprises of the subsidizing country, whereas the action in respect of dumping is taken only against the enterprises that resort to the practice. Those enterprises which do not dump the product are not covered by the anti-dumping action.
The low prices of the imported products may harm the domestic industry which is producing like products;
The consumers and industrial users of the product in the importing country may benefit from such low prices.
Impact on trade.
Generally, the very initiation of an investigation on dumping gives rise to uncertainty in the exports from the country under investigation to the investigating importing country. Importers may start shifting their sources of supply. Usually, the investigation takes a long time, and even if finally there is a negative determination of injury of dumping, some damage would already have been done, with some loss of market for the exporting country.
Developing countries are exposed to a considerable degree of uncertainty about their export prospects as they have been facing a large number of anti-dumping investigations.
Persistent dumping or international price discrimination, is the continuous tendency of a domestic monopolist to maximize total profits by selling the commodity at a higher price in the domestic market than internationally.
Predatory dumping is the temporary sale of a commodity at below cost or at a lower price abroad in order to drive foreign producers out of business, after which prices are raised to take advantage of the newly acquired monopoly power abroad.
Sporadic dumping is the occasional sale of a commodity at below cost or at a lower price abroad than domestically in order to unload an unforeseen and temporary surplus of the commodity without having to reduce domestic prices.
Cases in history
In the late twentieth century, Japan was accused of dumping steel and television sets in the US, and European nations of dumping cars, steel, and agricultural products. With the development of international trade, however, more and more developing countries are exposed to charges of dumping by developed countries.
- Existence of material injury or threat of material injury to domestic industry producing like products
- Causal link between dumping and injury
- Margin of dumping
If an enterprise is found to be dumping its products and if such dumping is causing injury to the domestic industry in the importing country, the importing Members can impose a countervailing duty on the imports up to the maximum extent of the margin of dumping, i.e., the quantum of dumping.
Three steps in determining the existence of dumping
1. determination of the export price
2. determination of the normal value
3. comparison of the export price and the normal value
The major importing countries have enacted very complex procedures to adjust the available data for the export price and the normal value so as to make them reasonably comparable.
Export Price
Generally, the export price will be based on the transaction price at which the foreign producers sells the product to an importer in the importing country. In some cases, however, this price may not be available or reliable:
- the export transaction is an internal transfer
- the product is exchanged in a barter transaction
- the exporter and the importer may be associated
- the exporter and the importer may have some mutual compensatory arrangement between them or a third party.
In such cases, an alternative method of determining an appropriate export price or calculating a constructed export price for comparison is needed.
Constructed export price: The basis for calculating the constructed export price is the price at which the imported product is first sold to an independent buyer. If the product is not resold to an independent buyer or is not resold in its original imported condition, the authorities in the importing country may determine the constructed export price on some reasonable alternative basis.
Normal Value.
General rule for the determination of normal value:
The normal value is generally the price of the product at issue or the price of the like product, in the ordinary course of trade, when destined for consumption in the exporting country market.
Sometimes, it may not be possible to consider the sale price in the exporting country because:
- there is no sale of the like product in the exporting country
- the sale is made in a particular market situation
- sales volume in the domestic market of the exporting country is less than 5% of the sale of the product to the importing country
- sales in the domestic market of the exporter are made below cost
Ordinary course of trade
This concept has been clarified by citing negative situations:
- the exporters and importers are related
- the sale price is consistently below the cost price
- the product is made for a single and specific purpose according to exclusive specifications
Particular market situation:
- there may be strict government control on prices and prices may not be determined based on market conditions, but on several other social and political considerations
- there may be different patterns of demand for the product in the exporting and importing countries
Prices consist of fixed costs, variable costs, plus the amounts for administrative, selling and general costs/expenses and amounts for profits. This issue has particular significance as it has a bearing on the calculation of the dumping margin. If prices below cost in the exporting countries are left out while calculating the normal value, there will be a bias towards arriving at a higher normal value and therefore a higher dumping margin. Generally, prices below cost will be included in calculating the normal value. When there is evidence of persistent sales at lower prices and when large quantities are involved, sales below cost will be excluded from the calculation of normal value.
Conditions for exclusion of sales below cost from calculation
- such sales are made within one year, and in no case less than six months
- the volume of such sales is 20% or more of the volume under consideration in determining normal value
- the weighted average selling price of the transaction under consideration is below the weighted average per unit cost, and therefore cannot provide for the recovery of all costs within a reasonable period of time
Normally, the cost will be calculated based on the records kept by the exporter or producers under investigation if:
- such records have been kept in accordance with the generally accepted accounting principles of the exporting country, and
- the records reflect reasonably the costs associated with the production and sale of the product.
Some adjustments in the cost will be required as there may be some items of cost which are spread over products beyond those which have been exported, such as R&D costs, costs relating to start-up operations.
If the recorded sale price for the product in the exporting country cannot be taken for the purpose o of calculating the normal value, the normal value will be determined as:
a comparable price of the like product when exported to an appropriate third country
a constructed normal value based on the cost of production in the country of origin plus administrative, selling and general costs/expenses and profits
Which of the two alternatives should be adopted will depend on the discretion of the importing country.
According to GATT 1994 and the Agreement, importing countries have exercised significant discretion in the calculation of normal value of products exported from non-market economies where the governments have a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by states.
The comparison must be made at the same level of trade, normally the ex-factory level, and the comparison must be of sales made at as nearly as possible the same time. Due adjustments should be made for differences which affect price comparability, such as differences in conditions and terms of sale, taxation, levels of trade, quantities, physical characteristics, etc.
In cases where the export price is constructed on the basis of sale to the first independent buyer, adjustments should be made for costs incurred between importation and resale, such as duties and taxes, and also for profits. In most cases, the comparison of the export price and the normal value will involve conversion of currencies. The rate of exchange on the date of sale (i.e., the date of the instrument which establishes the material terms of sale) will be considered.