Objectives: To promote the expansion and progressive liberalization of world trade and to facilitate investment across international frontiers so as to increase the economic growth of all trading partners, particularly developing country Members.
Coverage: The Agreement applies to investment measures related to trade in goods only. Moreover, the Agreement is not concerned with the regulation of foreign investment. The disciplines of the TRIMs Agreement focus on discriminatory treatment of imported and exported products and do not govern the issue of entry and treatment of foreign investment. For example, a local content requirement imposed in a non-discriminatory manner on domestic and foreign enterprises is inconsistent with the TRIMs Agreement because it involves discriminatory treatment of imported products in favor of domestic products. But the fact that there is no discrimination between domestic and foreign investors in the imposition of the requirement is irrelevant under the TRIMs Agreement.
Measures inconsistent with Article III.4 of GATT 1994
· specifying that particular products of domestic origin must be purchased or used by an enterprise,
· specifying that a particular volume or value of some products of domestic origin must be purchased or used by an enterprise,
· specifying that an enterprise must purchase or use domestic products at least up to a particular proportion of the volume or value of the local production of the enterprise,
· restricting the purchase or use of an imported product by and enterprise to an amount related to the export of its (the enterprise’s) local production.
The first three are local-content requirements and the fourth is an indirect requirement of partial balancing of foreign exchange outflows and inflows.
Measures inconsistent with Article XI.1 of GATT 1994
· imposing a general restriction on the import of inputs by an enterprise or restricting the import of inputs to an amount related to the export of its local production,
· restricting the foreign exchange for the import of inputs by an enterprise to an amount related to the foreign exchange inflow attributable to the enterprise,
· restricting export by an enterprise by specifying the products so restricted, the volume or value of products so restricted, or the proportion of its local production so restricted.
The first two are requirements of a partial balancing of foreign exchange, and the third is an export-restraint requirement for ensuring the domestic availability of the product.
Exception: A developing country Member is allowed temporary deviation from this obligation in so far as it is covered by the flexibility provided under the provision of Balance-of-Payment.
Notification and transparency: Members have to notify all TRIMs not in conformity with the Agreement to the Council for Trade in Goods within 90 days of 1 January 1995.
Elimination of existing measures: 2 years of 1 January 1995 by a developed country Member, 5 years of 1 January 1995 by a developing country Member, 7 years of 1 January 1995 by a least developed country Member, and the time for developing and least developed country Members can be extended if necessary.
1. What are VERs and OMAs? What economic interests of participating and third countries are involved in connection to VERs? Why were they seldom challenged in the GATT dispute settlement system?
2. What are safeguards and escape clauses?
3. Describe balance of payment provisions of WTO system.
4. Discuss the problem of technical standards in International Trade.
5. Explain the aims and procedure of imposing sanitary and phytosanitary measures.
References
1. John H. Jackson, The World Trading System: Law and Policy of International Economic Relations (2nd ed., Cambridge, MA: MIT Press, 1997). p.139-228.
2. Ustor, Most-Favored-Nation Clause, III EPIL (1997), 468-473.
3. Jackson/Davey/Sykes, 559-595, 990-1061.
4. Trading into the Future – WTO, 3rd edition, Revised August 2003. p. 50-55.
Lecture 5. Measures against Unfair Trade
WTO establishes rules of competition for countries, which can be described as rules on ‘fair trade’. Mainly, WTO targets two types of measures affecting competitiveness of companies – subsidies and dumping. In cases of dumping and subsidies WTO allows countries to restrict their trade under strict set of rules.
Subsidies are benefits provided by governments to producers and exporters of products which improve their competitiveness in international trade and thereby distort competition. Hence, a subsidy is generally considered to be an unfair practice.
For example, all major industrial nations give foreign buyers of the nation’s exports low-interest loans to finance the purchase through agencies such as the US export-import bank. These low-interest credits finance about 5% of US exports but as much as 30 to 40% of the exports of Japan and France. The amount of the subsidy can be measured by the difference between the interest that would have been paid on a commercial loan and what is in fact paid at the subsidized rate.
A subsidy is a financial contribution or income or price support by the government or any public body or a funding mechanism or a private party directed or trusted by the government within the territory of a Member, which confers a benefit to production/producers or export/exporters.
Financial contribution
- Direct transfer of funds, e.g., direct payments, granting of tax relief, subsidized loans, and equity infusion, low-interest loans to foreign buyers
- Potential direct transfer of funds or liabilities, e.g., loan guarantees
- Revenue foregone or not collected, e.g., tax credits
- Provision of goods and services other than general infrastructure, or purchase of goods
- Subsidies for exports: an outright cash payment based on the volume or value of the export of a product, payment of a part of the freight charges
- Subsidies for domestic production: provision of raw materials at subsidized prices for the production of a particular product, exemption from the payment of some tax, provision of cheap loans
Examples of non-subsidy
- A government temporarily exempts a paper mill in financial difficulties from the obligation to observe anti-pollution laws. (Regulatory but not financial privileges)
- A private NGO - non-governmental organization - gives technical and financial assistance to coffee growers in Africa. (Private aid)
- A government makes a loan to an automobile manufacturer on conditions equivalent to those that the manufacturer could obtain from private banks. (Financial contribution with no benefit)
- Differing effects of subsidies in importing countries
- Domestic producer industry: harm - more competitive foreign products
- Consumers and user industries: benefit - possibility of buying the product at lower prices and a wider choice of sources from which to buy
Prohibited subsidies (red): subsidies for export performance or for the use of domestic over imported goods, namely export subsidies and import substitution subsidies.
Export subsidies: direct payment of subsidy to a firm or an industry based on export performance, a bonus on exports through currency retention schemes, favorable internal transport and freight charges on export shipments, favorable provision of goods or services for the production of exported goods, export-related exemption, remission or deferral of indirect taxes or import duties, favorable export credits at rates lower than those in international capital markets, export credit guarantee or insurance programs at premium rates inadequate to cover the operating costs and losses of the programs, full or partial payment of the costs incurred by exporters
Prohibited subsidies are designed to affect trade and are most likely to cause adverse effects to the interests of other Members, thus are subject to dispute settlement procedures which include an expedited timetable for action by the Dispute Settlement Body. If it is found that the subsidy is indeed prohibited, it must be immediately withdrawn. If this is not done within the specified time period, the complaining member is authorized to take counter-measures.
Actionable subsidies (yellow): specific subsidies allowed under some conditions up to certain limits, but subject to challenge, either through multilateral dispute settlement or through countervailing action, in the event that they cause adverse effects to the interests of other Members
There are three possible types of adverse effects that can be challenged multilaterally:
- one country’s subsidies can hurt a domestic industry in an importing country;
- one country’s subsidies can harm a Member’s exporting interests because of serious prejudice;
- there is nullification or impairment of benefits accruing under GATT 1994 because the improved access to a market that is presumed to flow from a bound tariff reduction is undercut by subsidization in that market.
Non-actionable (permissible) subsidies (green): Four types of subsidy are permitted in the sense that no counteraction against them is normally allowed.
1. general subsidies: subsidies not specific to particular enterprises or industries
2. subsidies for research activities conducted by firms or by higher education or research establishments on a contract basis with firms
3. The subsidy should not exceed 75% of the cost of industrial research or 50% of the cost of pre-competitive development activity like the preparation of blueprints and designs for new or improved products.
4. subsidies for development of disadvantaged regions within the territory of a Member.
Criteria for these regions are: a) per capita income, per capita household income or per capita GDP must not be above 85% of the average for the Member territory, b) the unemployment rate must be at least 110% of the average of the Member territory, c) subsidies for environmental purposes by promoting adaptation of existing facilities to new environmental requirements by law or regulations which result in greater constraints and financial burden on firms, provided that the assistance is a one-time non-recurring measure and is limited to 20% of the cost of adaptation, directly linked to the firm’s own planned reduction of pollution and available to all firms which have to adapt to the new environmental requirements.
Non-actionable subsidies are challenged if the implementation of these measures has resulted in “serious adverse effects” to the domestic industry of another Member, such as to cause damage that is difficult to repair. Members initiating action for countermeasures will first have consultations with the subsidizing Member, and if a mutually acceptable solution is not found in 60 days, the matter will be referred to the Committee on Subsidies. If the Committee determines that serious adverse effects do exist and that these cause damage which is difficult to repair, it will recommend the subsidizing Member to modify its program to remove these effects. If the recommendation is not implemented within six months, the Committee will authorize the complaining Member to take appropriate countermeasures normally in the form of the withdrawal of some concessions to the Member or the reduction of obligations benefiting the Member.
Assuming that a measure is a subsidy within the meaning of the SCM Agreement, it nevertheless is not subject to SCM Agreement disciplines unless it has been specifically provided to an enterprise or industry or group of enterprises or industries within the jurisdiction of the authority granting the subsidy. In other words, only subsidy distorting the allocation of resources within an economy should be subject to SCM disciplines.
Enterprise-specificity: for a particular enterprise
Industry-specificity: for a particular sector or sectors
Regional-specificity: for producers in specified parts of a territory
Elements for adverse effect:
- material injury or threat of material injury (clearly foreseeable and imminent injury)
- nullification or impairment of benefits under GATT 1994 when the improved access to a market is undercut by subsidization in that market (see relevant sections concerning DSM)
- serious prejudice to the interests of another Member, or the threat of serious prejudice
Any one of the above three elements will be enough to get the action initiated.
Factors relevant to injury:
- volume of the subsidized imports: whether there has been a significant increase either in absolute terms or relative to production or consumption in the importing country
- the effect of the subsidized imports on the prices of like products in the domestic market: whether there has been significant price undercutting, depression or suppression, i.e., prevention of price increase which would have occurred in the absence of the subsidized imports
- the consequent impact of the imports on the domestic producers of these products, such as decline in output, sales or market share, profits, productivity, return on investments, cash flow, inventories, employment, wages, etc..
Serious prejudice is considered to exist if at least one of the following conditions is fulfilled.
The subsidy displaces or impedes the import of a like product of another Member into the market of the subsidizing Member. In this case, the subsidy is given by an importing Member, and the adverse effect is on an exporting Member.
The subsidy displaces or impedes the export of a like product of another exporting Member in a third country market. In this case, the subsidy is given by an exporting Member, and the adverse effect is on another exporting Member sharing a common export market.
The subsidy results in significant price undercutting, significant price suppression (a situation in which prices are prevented from rising though normally they would have risen) or price depression (lowering of prices), or lost sales in a market. In this case, the subsidy is given by an exporting Member, and the adverse effect is on the importing Member in its market; or the subsidy is given by an importing Member, and the adverse effect is on an exporting Member in the market of the importing Member; or the subsidy is given by an exporting Member, and the adverse effect is on another exporting Member in a third country market.
The subsidy on a particular primary product or commodity results in an increase in the world market share of the subsidizing Member in that product or commodity as compared to the average share it had during the previous three years, and the increase follows a consistent trend over the period in which the subsidy has been granted.
The Panel on European Community-Refunds on Exports of Sugar-Complaint by Brazil (Nov. 1980) considered the quantity of European Community sugar made available for export with maximum refunds and also the fact that the funds for export refunds did not have a limit. It concluded that the manner of application of the system of granting export refunds contributed to depress sugar prices in the world market, and this constituted a serious prejudice to Brazil.
Domestic industry: the whole of the domestic producers of the like products, or at least those of them whose collective output of the products constitutes a major proportion (normally more than half) of the total domestic production of those products, excluding related producers
If there are isolated markets for products in question in a country, the examination of injury can be conducted in relation to only the industry located in a specific isolated region, i.e., regional industry, not to the total or majority of the domestic producers.
Industry in a unified market of a customs union must be taken to be the domestic industry.
Like products: products identical, i.e., alike in all respects, to the product under consideration, or in the absence of such products, products which have characteristics closely resembling those of the product under consideration, even though they are not totally alike in all respects
The decision regarding the like product is important because it is the basis of determining which companies constitute the domestic industry, and that determination in turn governs the scope of the investigation and determination of injury and causal link.
For example: The Panel on US-Definition of Industry Concerning Wine and Grape Products (April 1992), examined whether wines and grapes were like products. It concluded that they were not because these two products had different physical characteristics and the production of grapes and the production of wine were two separate groups of industries in the US.