During the period of an economic slowdown, India is faced with yet another setback. On 31st September 2019, the World Trade Organisation (WTO) ruled the export subsidies of India to be violative of the provisions of the trade body’s norms. Trade experts and economists have also suggested that any change in the subsidies, if India decides to do so, will impact the trade and commerce. However, because India has appealed the WTO decision on 22nd November 2019, and the Appellate Body of WTO is not in function currently, the decision cannot be implemented.
In this article, I argue that to ensure internal trade takes place in a harmonious way, alternative mechanisms to settle such an unsolved dispute needs to be considered. Arbitration can be one such tool which can assist in resolving such trade disputes until the WTO attends to the concern regarding the appellate body.
II. The India – USA dispute
India had provided certain export subsidies under five sets of measures to boost the foreign trade. These are: the Export Oriented Units, Electronics Hardware Technology Park and Bio-Technology Park (EOU/EHTP/BTP) Schemes; the Export Promotion Capital Goods (EPCG) Scheme; the Special Economic Zones (SEZ) Scheme; a collection of duty stipulations described in these proceedings as the Duty-Free Imports for Exporters Scheme (DFIS); and the Merchandise Exports from India Scheme (MEIS).
The United states of America (USA) initiated the dispute on 17th May, 2018, by requesting the WTO to establish a Panel which is a quasi-judicial body, to adjudicate the dispute. Before the constituted Panel, USA challenged the five subsidies on the grounds of violation of Article 3 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement). USA submitted that these export subsidies consist of exemptions and deductions from customs duties and other taxes. Regarding export subsidies provided under MEIS, USA submitted that they consist of notes issued by the government that can be used to pay for certain liabilities with regards to the Government and they are freely transferable. Further, the subsidies allow Indian producers to avail exemptions from IGST and deduction of export earnings from corporate income taxes in case of SEZ.
III. Issues addressed by the Panel
Initially, India relied upon the provision of Article 27 of the SCM Agreement and argued that the special and differential treatment applies to India, and India is excluded from the application of the prohibition on export subsidies.
However, the Panel concluded in its ruling that India had graduated from the special and differential treatment provision that it originally fell under (in particular Article 27.2[a] and Annex VII[b]), and the Panel found that no transition period is further required under Article 27.2(b) to India after it graduated. India therefore, is not anymore excluded by means of Article 27 from the application of prohibitions on export subsidies. Consequently, Articles 3 and 4, which lay down the dispute settlement procedures, are also applicable.
India argued that out of the five subsidies, except the SEZ scheme, the remaining four schemes fell within the purview of footnote 1 of the SCM Agreement, which is derived from the definition of a subsidy, under some conditions, i.e. the exemption from or revocation of duties or taxes on an exported item. The Panel welcomed this argument, but only with respect to certain custom duty exemptions under DFIS and regarding exemption from excise duties under the EOU/EHTP/BTP schemes.
But the Panel found that all the other remaining measures under the four schemes were not in consonance with the conditions of footnote 1, read together with annexure 1 of the SCM Agreement, because of the nature of goods for which the custom duty exemptions were available, and in the case of MEIS, due to the entire design, structure and operation of the measure.
For these measures and for the exemptions and abstractions under the SEZ Scheme, for which footnote 1 was not invoked, the Panel observed that the United States was successful in demonstrating the existence of a financial contribution by the government in the form of revenue foregone, (in the case of the exemptions and deductions from duties and other taxes) and in the form of a direct transfer of funds (for the provision of govt. issued notes under MEIS) through which a benefit was conferred on the recipient, i.e. the exporters.
Further, the Panel also held that the United States had established that each of those measures of the Indian Government was contingent in law upon the export performance. The Panel therefore concluded that the United States had demonstrated the existence of prohibited export subsidies being provided which was inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.
Based on this conclusion, the Panel suggested India to withdraw the prohibited subsidies under (a) DFIS within 90 days, (b) EOU/EHTP/BTP schemes, EPCH scheme, and MEIS, within 120 days, and (c) SEZ scheme within 180 days, from date of adoption of the report.
IV. Conundrum regarding the Appellate Body
India, which has appealed to the report, is under no obligation to abide by the decision of the Panel till the Appellate Body disposes the appeal. The Appellate Body of the WTO allows the members to appeal the rulings. Generally, the body consists of seven members. Since the Appellate Body is dysfunctional, as the minimum number of judges required are not present in the body, an outcome cannot be reached.
The US has stopped judges from being appointed for the next two years, crippling WTO’s dispute settlement mechanism. The US has criticized the body for its “flawed” interpretation in various cases, failure to issue reports within the 90-day mandatory period, the way it is composed and the determination of compensation. The problem here is, as per the rules of WTO, a report cannot be adopted before an appeal is addressed. With such powers of the international organisation being paralyzed, countries might abandon the multilateral system, leading to unilateral measures being taken.
V. Alternative means of redressal
Considering the crisis and the likelihood that a solution probably cannot be reached, alternative redressal system seems to an ideal solution to settle such trade disputes. One such option is to make use of Article 25 of the Dispute Settlement Understanding (DSU). Due to the vague language of Article 25, arbitration under DSU can be initiated at any stage of a dispute, even during an appeal from a panel decision.
Legal Practitioners, and a former member of the Appellate Body have suggested that Article 25 provides for a parallel dispute settlement structure within the WTO Framework. It produces decisions that are binding on the parties and are enforceable in the same way as the decision of a Panel and Appellate Body.
The only drawback of resorting to arbitration is that, just like the Panel decision or the Appellate Body’s decision, the arbitral decision is also not binding. But choosing arbitration as an alternative means would have a greater success if the members sign a General Arbitration Agreement, where the procedure, scope of the arbitration process and binding nature of the arbitral decision would be enumerated.
If the current situation is not mitigated, the dispute would not be solved for at least the next few years, which would lead to an uneven playing field to the USA and an adverse trade relation for India. Hence, arbitration seems to be the most feasible option to be chosen by both the parties. This, however, has certain barriers. If USA decides to not agree for arbitration, which one can expect to happen since the process of arbitration is also similar to an appeal, trade conflicts where world’s largest economy is involved would not be settled. Whereas India which has lost the dispute at WTO would be eager to choose the process of arbitration. This would stir uncertainty in future trade disputes, leading to unpredictability in the global economy.
Given the dysfunctional Appellate mechanism, it is imperative for member states to promote alternative practices. Replacing the functions of the Appellate Body with arbitration appears to be the most viable solution to resolve trade conflicts within the WTO framework.