Countervailing Measures in Merchandise Trade

Countervailing Measures in Merchandise Trade20

Industrial subsidies are nothing new but have become an increasing threat to fair competition on global markets in recent years. Similar to the number of anti-dumping investigations, the number of anti-subsidy investigations is also steadily increasing. According to the WTO, new countervailing investigations among members have increased in recent years, with 36 new investigations initiated in 2019 compared to just nine in 2010.21 Since the founding of the WTO in 1995, WTO members have introduced 604 countervailing investigations against one another. In 337 cases (56 %), measures were imposed and countervailing duties collected (as of June 2020).

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Total Countervailing Investigations initiated among WTO Members (1995-2020)

Diagrammtitel

700

600

500

400

300

200

100

0 10 17 33 58 *Data as of end of June 2020

99 117 144 153 168 176 182 190 201 217 245 254 279 302 335 380 411 445 486 541 577 604

Quelle: World Trade Organization, Countervailing Initiations: By Reporting Member 01/01/1995 - 30/06/2020, <https://www.wto.org/english/tratop_e/scm_e/CV_InitiationsByRepMem.pdf> (accessed 8 Februar 2021).

Status quo

While the rulebook of the WTO contains disciplines on subsidies, there is a lack of coherent and comprehensive rules to effectively address market distortive practices particularly in the area of subsidies (beyond export subsidies) – in particular regarding industrial subsidies – the role of state-owned enterprises (SOEs), and forced technology transfers. The WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) only vaguely defines subsidies. It also covers only export subsidies and subsidies intended to increase domestic supply or replace imports.

20 BDI has published a more detailed position on the reform of the WTO Agreement on Subsidies and Countervailing Measures. The paper is available via the following link: https://english.bdi.eu/publication/news/reform-of-the-wto-agreement-on-subsidiesand-countervailing-measures/. 21 The WTO data is only available until the end of June 2020; in order to compare full years, we have used the data here for 2019. 22 World Trade Organization, Countervailing Measures: Reporting Member vs. Exporting Country 01/01/1995 – 30/06/2020, <https://www.wto.org/english/tratop_e/scm_e/CV_InitiationsByRepMem.pdf> und Countervailing Measures: By Reporting Member 01/01/1995 - 30/06/2020, <https://www.wto.org/english/tratop_e/scm_e/CV_MeasuresByRepMem.pdf> (accessed 8 February 2021).

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Moreover, the hurdles to obtain the authorization for countervailing duties are high: The complainant bears the burden of proof to show the injury that has been suffered and must demonstrate a causal link between the injury and the subsidized imports. Opaque government funding in some countries makes this very difficult. In addition, the notification disciplines under the WTO for subsidies are weak. The WTO has little leeway to sanction those countries which do not fulfill their notification obligations.

To address this regulatory gap, the Trilateral Initiative of the European Union, the United States, and Japan issued a joint statement on 14 January 202023 after a meeting in Washington, DC. Among other proposals, the statement dealt with a comprehensive reform of the SCM Agreement to more precisely regulate government subsidization of industrial goods and their exports.

The SCM Agreement provides multilateral disciplines regulating the provision of subsidies. It also regulates the use of countervailing measures to offset injury caused by subsidized imports. The Trilateral partners agreed that the SCM Agreement in its current form is “insufficient to tackle market and tradedistorting subsidization” of industrial goods in “certain jurisdictions.”

They identified insufficiencies in several areas for which they provide policy recommendations: the definition and types of subsidies, benchmarking, notification, and conditions for countervailing measures.

The parties lastly reassert their commitment to continue work on:

▪ Identifying the scope of prohibited subsidies as well as additional categories of unconditionally prohibited subsidies;

▪ identifying the scope of harmful provisions as well as additional instances of harmful subsidization;

▪ the provision defining the threat of serious prejudice;

▪ the definition for public body based on their assertion that interpretation of this term for subsidizing entities by the WTO Appellate Body has been inadequate and “undermines the effectiveness of

WTO subsidy rules “.

Recommendations

▪ While the rulebook of the WTO contains disciplines on subsidies, there is a lack of coherent and comprehensive rules to effectively address market distortive practices particularly in the area of subsidies (beyond export subsidies). This regulatory gap must be addressed quickly und sufficiently.

▪ The framework for countervailing measures (CVM) should be strengthened and its application should be facilitated. In the future, CVMs should be designed in such a way to more fully address

23 Joint Statement of the Trilateral Meeting of the Trade Ministers of Japan, the United States and the European Union, 14. Januar 2020, <https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/january/joint-statement-trilateralmeeting-trade-ministers-japan-united-states-and-european-union>.

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the market-distortive effects of foreign SOEs and industrial subsidies. This can help to ensure competitive neutrality.24

▪ The EU should pursue multilateral, plurilateral (in the best case, under the WTO) and bilateral efforts (such as in free trade agreements) to develop new disciplines on industrial subsidies and state-owned enterprises.

▪ German industry welcomes the proposals of the Trilateral Initiative (EU, Japan, and the United States) on appropriate disciplines. It is an important step forward to restore fair competition.

▪ The EU should reform its CVMs. The framework for CVMs should be strengthened and its application should be facilitated. In the future, CVMs should be designed in such a way to more fully address the market-distortive effects of foreign SOEs and industrial subsidies.

▪ If the WTO Agreement on Subsidies and Countervailing Measures (SCM) cannot be modernized multilaterally, a plurilateral agreement could prove a viable interim step.

▪ BDI welcomes parallel investigations of dumping and subsidies, which reflect the reality of the trade distortive effect of industrial subsidies.

▪ In order to direct countervailing measures properly, the monitoring and reporting of industrial subsidies across sectors needs to be improved markedly. German industry supports more stringent disciplines for notifying subsidies at the WTO and a more effective enforcement mechanism.

▪ German industry supports the introduction of new types of unconditionally prohibited subsidies as put forward by the proposal.

▪ German industry recognizes the growing importance and value of trade in services and supports all efforts within the WTO to further the negotiation process on services.

Finally, it should be noted that even comprehensive reforms of the SCM agreement and the EU’s CVM regulation would mainly tackle the trade side of the issue. The problem of state induced market distortions in domestic competition, competition in third markets, investment (including M&A) or public procurement should also be addressed, if possible, in parallel by the EU. Finally, the EU will have to reassess and reform its state aid instruments to support industry in its transition towards greenhouse gas neutrality and circularity. Therefore, new multilateral or plurilateral rules on subsidies should provide a specific framework for these purposes. International approaches for this necessity are favorable over fragmented national responses.

24 BDI, alongside BusinessEurope, proposes an SOE principle that entails that EU policies are designed in a way to mitigate the impact of government induced market distortions through SMEs. Business Europe, The EU and China. Addressing Systemic Challenge, Brussels 2020, <https://www.businesseurope.eu/sites/buseur/files/media/reports_and_studies/the_eu_and_china_full_february_2020_version_for_screen.pdf>.

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