The WTO Subsidies and Countervailing Measures (SCM) agreement is a key component of the global economic system, and its provisions penetrate deep into questions of statecraft and industrial policy. Use of the SCM agreement by the European Union has already led to changes in U.S. tax law. Disciplines on subsidies and taxation have figured in the GATT since the Tokyo Round. Now countries can complement their negotiating approaches with strategic use of the WTO dispute resolution mechanism. The SCM is at the heart of the US - EU battle over the fates of the globe's two largest aircraft companies.
Boeing - Airbus dispute at the WTO
On June 30, 2010, a WTO panel released the full text of its decision finding that European aid to Airbus production of large commercial aircraft, in several instances, violated the Agreement on Subsidies and Countervailing Measures and “impaired benefits accruing to the United States” under the agreement. The panel recommended that prohibited EC subsidies be withdrawn within 90 days.
A little more than a week after the WTO release of the Airbus decision, the WTO announced on July 8 a delay in issuing a report by a panel hearing the European counter-claim, alleging that the United States and its states and local governments had violated the WTO rules by subsidizing Boeing. The Europeans are outraged by the delay. Alan McArtor, the chairman of the U.S. subsidiary of Airbus, said the announcement of the delay “smells like last week’s fish.” Airbus is confident that the U.S. will also be found in violation of WTO subsidies rules. It fears that the delay in the report will put it at a disadvantage, as the only identified offender of WTO rules, as it competes with Boeing for a U.S. Air Force contract to build fuel tanker aircraft worth $35 to $50 billion. Read more....
The SCM rules. This WTO trade agreement creates a context for corporate decision-making about the use of global supply chains. Big-box retail chains in the United States keep prices to consumers down by relying on their ability to source globally. Close to 90% of Wal-Mart's products, for example, come from China. Some of these Chinese manufacturers allegedly gain a price advantage over U.S. and other manufacturers as a result of Chinese government subsidies that are contingent on export performance and the amount of 'domestic content' in the goods produced. These two supports are, in fact, violations of SCM rules.
This has implications for metropolitan areas, cities and states facing the loss of jobs at local manufacturing plants and from locally-owned retail stores. The shrinking revenues, increased social welfare spending and new job training costs associated with these structural shifts in the economy implicate overall government revenues, budgets, taxation methods, and land-use plans.
The purpose of the SCM is to curb government financial contributions to domestic industries that disadvantage foreign industrial and agriculture competitors. (The SCM covers not only industrial producers but agricultural markets as well; click here for more information about the SCM and agriculture.) The SCM aims to restrain subsidy programs that distort the efficiency of international markets.
For example, the SCM is a potential tool for correcting unfair competition from Chinese and other foreign industrial firms. The SCM agreement allows the U.S. to take such enforcement action through the WTO dispute resolution mechanism, or through the unilateral imposition of countervailing duties.
Whatever the agreement's potential value in enforcement actions against foreign competitors, the SCM doesn't reckon well with the task of assisting distressed
communities or experimenting with new approaches to economic development and upgrading workforce skills here in the United States.
Some effective state and local programs
that assist disadvantaged regions and communities could violate SCM
rules. At the same time, ineffective state and local economic development programs might be legal under the SCM. "Smokestack-chasing" measures in the form of many wasteful incentives will not violate SCM rules if they do not
subsidize exports or if they do not distort international markets for
foreign multinationals. It's an extremely complex picture.
Defining Subsidies. The Subsidies and Countervailing Measures agreement breaks its definition of a subsidy into three critical parts, each of which has been subject to exhaustive litigation:
• A financial contribution;
• By a government or any public body within the territory of a WTO member;
• Which confers a benefit.
Examples of subsidies listed in the SCM include:
• Direct transfers of funds;
• Foregone government revenue, such as tax credits;
• Grants of goods and services, excluding infrastructure; and
• Entrustment of the transfer or granting of funds, goods, or services to a third party.
The SCM agreement prohibits certain narrowly-defined export and local content subsidies
and allows other subsidies to be challenged if a complaining country
can meet a rigorous standard of proof that its interests have been
SCM categories of subsidies
Prohibited subsidies: Prohibited or red light subsidies are of
two narrow types:
(1) export subsidies that aid domestic companies
contingent on export performance, or
(2) local content subsidies that
provide a preference for the use of domestic over imported goods.
Actionable subsidies: Actionable or yellow light subsidies are
not prohibited. They are however subject to challenge, either in WTO
dispute resolution or through countervailing measures, if they are
specific and if they are proved to adversely affect another WTO member.
An actionable subsidy must be specific, i.e. provided to a particular
company, industry-sector, or region. An actionable subsidy must
adversely affect the interests of another country in one of three ways:
Injury to a domestic industry caused by subsidized imports (the only basis for countervailing measures);
Serious prejudice or export displacement in the market of the subsidizing country or a third country market;
Nullification or impairment of benefits accruing under the General
Agreement on Tariffs and Trade, as for example when greater market
access under the GATT is offset by subsidies.
Proving that a subsidy adverse affects the interests of another country
can be difficult, usually requiring quantities of detailed
information and sophisticated economic analysis. A causal link must
be established between the subsidy and the injury.
Enforcement against SCM violations.
SCM rules may be enforced through the WTO dispute resolution process or by unilateral imposition of countervailing duties. WTO enforcement seeks a tribunal ruling that a subsidy is 'SCM-illegal' and that the subsidy must be eliminated, or will trigger retaliatory trade sanctions authorized by the WTO--such as higher tariffs on the offending country's goods.
Countervailing duties may be unilaterally imposed on the subsidized imports. This can be done under U.S. domestic law. The level of the countervailing duty is intended to offset the injury to the domestic competitor, but not to provide a protectionist wall against that import. Obviously, this is an area of intense discussion and a great deal of technical analysis--what constitutes a fair, or correct, countervailing duty?
Key WTO Case -- Foreign Sales Corporation (FSC).U.S. tax law formerly allowed U.S. firms to reduce their tax liability on profits from exports by setting up an off-shore subsidiary called a ‘foreign sales corporation.” In 1999, the European Union sued the U.S., claiming the foreign sales corporation provision in the internal revenue code violated the WTO’s agreement on Subsidies and Countervailing Measures.
In March 2000 the WTO appellate tribunal found that the FSC provision was a prohibited export subsidy under the SCM. Later that year, Congress repealed the FSC provision but also adopted the Extraterritorial Income Exclusion Act that allowed U.S. corporations to avoid some U.S. taxes on overseas earnings. The E.U. sued again, and the WTO tribunal again found that the new U.S. overseas income exclusion law was a prohibited export subsidy. Under threat of retaliatory trade sanctions, on May 11, 2006, the U.S. Congress passed a tax bill that included provisions repealing the Extraterritorial Income Exclusion Act.
This whole process has been dispiriting for U.S. exporters like Boeing that relied on the FSC and the ETI to remain competitive in world markets with European and other exporters. Under European systems of taxation, manufacturers are allowed rebates on Value Added Taxes (VAT) on their exports.