Export subsidies are a form of subsidies which are given by governments to increase the exports of goods from their country. Export subsidies, by their very nature, are prohibited under the Agreement on Subsidies and Countervailing Measures (“SCM Agreement”). This is because export of subsidized products injures the domestic market of the importing country producing the same product. These subsidized exports also compete with non-subsidized products in third country markets and often gain an unfair advantage over the latter. Thus, export subsidies tend to distort competitive relationships that develop naturally in a free trading system and are strongly discouraged in the WTO regime.
The issue of ambiguity
Recognizing the economic constraints faced by developing countries, the SCM Agreement provides special and differential treatment to them. This means that developing countries are not subject to the prohibition on export subsidies and can continue subsidizing their exports, provided certain conditions are met. Presently, developing countries are classified into two categories in the SCM Agreement – non-Annex VII(b) countries and Annex VII(b) countries.
Non-annex VII(b) countries are those whose GNP is above 1000 dollars, hence they are considered economically stable and no exemption is provided to them from the rules of the SCM Agreement. On the other hand, Annex VII(b) lists countries whose GNP is below 1000 dollars and thus are completely exempt from the prohibition on export subsidies. These countries will graduate out of Annex VII(b) only after their GNP increases above 1000 dollars for three consecutive years and will then be subject to the disciplines of the SCM Agreement.
Furthermore, Annex VII(b) directs countries listed in it to be governed by Article 27.2(b) of the SCM Agreement once their GNP increases above 1000 dollars and they graduate out of Annex VII(b). Article 27.2(b) states that the prohibition of export subsidies shall not apply to developing country members for a period of eight years from the date of entry into force of the WTO Agreement. This means that the eight-year phase out period given to developing countries for phasing out their export subsidies was to last from 1995 (date of commencement of WTO Agreement) to the beginning of 2003.
However, the ambiguity which now arises is: what will happen to developing countries which graduate out of Annex VII (b) at a later point of time, that is, after 2003? Will the eight-year period for these countries start from the moment they graduate out of Annex VII(b) or has such a period already lapsed in 2003 and such countries will get no phase out period at all?
The said issue gained prominence this year when USA requested dispute settlement consultations with the Government of India at the World Trade Organization challenging India’s many export subsidy programs. India graduated out of Annex VII(b) in 2017, however has continued granting export subsidies to various sectors like textiles et al. Naturally, the question of whether an eight-year phase out period is still available to India is something which will form the very crux of the issue between India and USA. This is because the availability of the eight-year period to India will be a decisive factor in determining whether the rules of the SCM Agreement have been violated or not.
To give or not to give the eight-year period
In 2011, developing countries like Bolivia, Egypt, Honduras, India, Nicaragua and Sri Lanka had submitted a proposal to the WTO that a transitional eight-year period should be given to countries which graduate at a later point of time from Annex VII(b). On the other hand, developed countries like the United States had opposed this and argued that such an interpretation would be an amendment of the SCM Agreement and would be creating new rights in the Agreement.
There are possible arguments for both types of interpretation. For the eight-year period to have been considered as lapsed, a textual interpretation of Article 27.2(b) read with Article 27.4 is required. Article 31 of the Vienna Convention of the Law of Treaties incorporates the concept of a literal interpretation and is something which the United States could rely upon to argue that the text of Article 27.2(b) is clear in stating that the eight-year period was to begin from the commencement of the WTO. Since the text of the SCM Agreement is clear, there is no need to give a contrary interpretation to the same.
Furthermore, it can also be argued that this special and differential treatment granted to developing countries is not meant to continue indefinitely. This is evident from the 2001 Export Subsidy extension by the SCM Committee and 2007 Export Subsidy extension by the General Council which have special provisions for countries in Annex VII(b) to reserve their rights to use these extensions when they graduate out of Annex VII(b). This indicates that the SCM Committee and the General Council understood that countries graduating out of Annex VII(b) were not entitled to an eight-year period automatically but had to specifically reserve their rights to even get a one year extension.
It should also be noted that countries acceding to the WTO after 2001 with a GNP below or above thousand dollars have neither been added to Annex VII(b) nor have been given any eight-year period to phase out their export subsidies. Some examples of these countries are Albania (acceded to the WTO in 2000), Georgia (acceded to the WTO in 2000), Tonga (acceded to the WTO in 2007), Vietnam (acceded to the WTO in 2007) et al. In fact, the Working Party Report on Vietnam’s accession to the WTO specifically states that Vietnam would be acceding to the WTO after the expiry of the phase out period for export subsidies by developing countries, and hence it was not allowed any such period.
This goes on to show that the special and differential treatment in the SCM Agreement was restricted for a few countries and only for a specific point of time.
On the other hand, India can rely upon supplementary means of interpretation – basically the intention of the negotiators – to argue that the eight-year period is to begin from the moment of its graduation from Annex VII(b). After establishing that the text of the SCM Agreement is ambiguous as it lacks clarity as to what would happen to countries which graduate from Annex VII(b) at a later point of time, resort to Article 32 of the Vienna Convention of the Law of Treaties can be made. There are sufficient discussions in the Uruguay Round Negotiations of the SCM Agreement which reveal that parties always intended to differentiate between countries on the basis of their economic development. Not granting an eight-year period to countries like India would amount to differentiating between countries on the basis of the time they graduate out of Annex VII(b) – something which was never intended by the negotiators.
Moreover, the object of the Marrakesh Agreement and the spirit of the WTO as a whole is to assimilate developing countries into the multilateral trading system according to their economic development. Developing countries which have just acquired a stable GNP should not be expected to abolish their export subsidies overnight, considering the role which subsidies play in the growth of a developing nation.
As prior stated, a case for both types of interpretation can be made. However, for the argument advanced by the Government of India to succeed, a highly judicially active Panel or Appellate Body would be required. This is because Article 3.2 and 19.2 of the Dispute Settlement Understanding mandates that the rulings of the Dispute Settlement Body cannot add to the rights or obligations in the covered agreements. Since the text of the SCM Agreement is very clear in stating that the eight-year period would begin from the commencement of the WTO, it is unlikely that the novel interpretation being suggested by India would succeed.
On the other hand, the interpretation being suggested by USA is one which is economically harsh and inequitable for countries which graduate at a later point of time from Annex VII(b). This is because the developing countries which were given this eight-year period earlier, that is, prior to 2003, had similar or better economic conditions than countries which are graduating from Annex VII(b) during the present times. Not granting the same eight-year period to countries like India which similarly or better placed countries than it had received earlier can be criticized from an equity point of view.
USA and India have completed their consultations in April this year, which have not been successful. A dispute settlement Panel is being set up, which will eventually decide this interpretative issue and hopefully clear the prevailing ambiguity.