Subsidies in the Context of the WTO's Free Trade System

The international legal framework plays a significant role in regulating business, not only within nations but also across national boundaries. No country in the world is sufficient in itself and so everyone has to depend upon each other. It is widely presumed that international trade helps a nation to satisfy the demands of their consumers and supply the surplus to other nations in efficient and economical ways. As the laws relating to trade and commerce can influence the economic, political and social aspects of an individual and society, the Developing and Developed nations considered that the regulation of trade, required some well-developed organization. All the visionary ideas, goals and experiences from earlier discussions took place at the erstwhile GATT, from 1986–1994. During the Uruguay Round, based on the preliminary work and based on formative discussions, it led to the formation of the WTO. This organisation, the WTO began to function, on 1st January 1995. The discussion in this chapter briefly deals with cross border trade issues, the background information preceding the WTO trading system and then formally in the context of the WTO. Within these discussions, a brief reference to the WTO institutional set up, policy mechanisms, promotion of free trade among the Member State and the links established through provisions that forms part of one trading system is covered.

Free trade promotes private entrepreneurship, hence allows each country to specialize in producing the product in regard to which it has a comparative advantage. The free trade market system promoted by the WTO covers both industrial and agricultural sectors of any economy. Along with the promotion of free trade as a key trading principle, creation and generation of wealth by the nations, through procedural checks and balances is a matter of shared concern between the Member States. These concerns are derivatives of fair trade principles. The discussion in this chapter also attempts to figure out historical link for the present day challenges in the matters of trade across borders and between Developed, Developing and the Less Developed countries. The past connection with the issues lead to the formation of the WTO objectives. The study of subsidies is one such key issue. The area of discussion in the chapter briefly touches the specific issue of subsidies which is one of the key subject area of the international trading system based on the principle of free trade.

The trade practices of giving subsidies are normally defined as financial support in cash or in kind, if made in favour of an undertaking by the state. This support can either be direct or indirect in form, for the goods or services that any such industry produces. Trade-subsidy supported by the national government often leads to the distortion of efficient and competitive market system or can either be a protectionist measures, and hence, violates the underlying principles of fair-trade. Fair trade principle although not emphasised as the main trading principles of governing free trade, however is effectuated as a regulatory measure through the SCM Agreement provisions.

This chapter starts with a discussion on state-aid, as state-aid is one of the primary aspects of subsidies, and although not explained in the SCM Agreement in a distinct manner, it is, however, used in EU law.

Further, the study covers a brief reference to some economic principles as premises for a better understanding of international trade in practice. The analysis broadly covers the use of subsidies in international trade, investigating the reason for the differences of opinion between the Developed and Developing nations, the extent of justification in the form of justifiable subsidies for its use, as well as how the non-justifiable use of subsidies affects market efficiency. Although, the primary function of the WTO as a multilateral organisation is to regulate trade amongst the Member Nations, it is also a forum for the discussion of such crucial matters. Placing at the forefront the mentioned objectives of the WTO, this study will analyse various forms of state support as the causes of trade distortion and how they fall within the ambit of subsidies.

Subsidies in the agriculture sector, either from industrialised economies, or its unregulated use in the farm sector by the emerging economies, creates inconsistencies in the agreed trading approach to achieve the objectives of the WTO (Objectives as mentioned in the preamble of the WTO). These objectives, enshrined in the preamble of the WTO declaration are also supported by the underlying principles of fairness, equity, distribution of resources, and creating reasonable trading opportunities for all the Member States, classified as Developed, Developing and Less-Developed countries (The key objectives to promote welfare and development are as: ‘economic endeavor should be conducted with a view to raising standards of living,’ ‘recognizing the need for positive efforts to secure the share of growth in international trade of the Developing and Less Developed countries’ as inscribed in the preamble). Ironically, the promotion of free trade market policies, also concerned with the liberalisation of agricultural trade, on a phase by phase basis, for some reasons takes a narrow approach and often become restricted to trade bargains. The Agreement on Agriculture, (AoA, here after) in the context of the WTO’s trading principles is an attempt to limit the use of agricultural subsidies, mainly by the industrially advanced countries of the WTO. Whenever, discussions from the trade liberalisation policy perspectives are held, usually they get interfaced with fair trade approach, and in this concern, agricultural subsidies provided by the Developed nation is contended as an issue of trade distortion. Such measures adopted by the developed countries indeed reduces the export opportunities of the Developing and Less-Developed countries, creating an opposing trend for the development of the comparative cost advantage and welfare of the Developing and Less-Developed countries.

The political economy approach towards free trade, also leads the discussion in the matters of agricultural subsidies from the view point out of the others, as a specific set of government obligations towards the farming class, irrespective of the Developed and Developing/Less-Developing countries. Therefore, taking into account the basic objectives expressed in the AoA, i.e., to establish a free market oriented agricultural trading system, in order to promote possibility for development and the creation of market opportunities in equitable way for the Member States, the study in this chapter tries to analyse the contradictions that emerges, when despite the promise to reduce subsidies, the Developed countries, on the contrary, maintain their agricultural support level. In comparison to this, the governments in the Less-Developed countries have meagre incentives to invest in their agriculture sector. This makes the case complex, as for the Less-Developed countries the agricultural subsidies are a matter of necessity, while, for the Developed countries; they are, a matter of trade advantage. The AoA attempts to promote the idea that free trade along with the objectives of welfare and development go side by side, but how far the balance between the two agendas can be maintained, is something to be examined in this study.

With the promotion of free trade, by the WTO, the Member States have started reducing the trade barriers, both in the agriculture and industrial sectors. As a natural consequence of phasing out of these trade barriers, consumer’s access to the imported products has indeed become easier; the choices for the products have increased and because of the market competitiveness, the prices of the products have become relatively lower. Despite the promotion of these free trade objectives, the market system of the Member States have to face new forms of challenges, such as unfair use of trade-subsidies, strategic use of subsidies as a background support for predatory-pricing and also for dumping the products in the market of other countries. What further seems incompatible with the principles of free trade, is that Member States, by discarding the WTO objectives, have started reacting in an over-competitive manner in order to prevail in the market. Taking into consideration the trade statistics, it is evident that the business firms from both the Developed and Developing nations, in order to maximize profits try to out-manoeuvre in the free trading system, by resorting to the trade practice of dumping or using subsidies for dumping. Such practices have raised the issue of connection between Subsidies and Dumping for financial objectives. The issue of interrelationship between Dumping and Subsidies was raised in the case of United States-Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, WT/DS379/R and in the case of China—Countervailing and Anti-Dumping Duties On Grain Oriented Flat-Rolled Electrical Steel from the United States, WT/DS414/R. Trade practices with such characteristics and strategy base, can be an abrogation of the WTO objectives, and are considered as unfair trade practices. Such like practices are apparent both in industrial and agricultural sector. Discussing the trade practice of dumping in general, it can be stated that dumping is a strategic business practice through which products are exported at a cheaper price than their ordinary price in the domestic market or exported at less than the fair value. Now the question arises of how such types of practices are feasible. Such business objective, seems feasible as a result of well-considered measures, for instance by the means of predatory pricing policies of the firms or alternatively, it can be said, the companies being supported to cover the market risks through one or the other form of subsidies.

This chapter is part of an ongoing debate, and attempts to cover the direct and indirect forms of subsidies being provided, with the strategic-market objective of dumping the products in foreign markets. The suggestion, as an alternative, is the adoption of competition policy measures, promoting efficiency, complemented with market regulations by the Member States. The objectives of the Competition policy in effect will naturally create checks and balances in the market system. Further, it can be added that it may be a one sided opinion to say that only the Developed countries play such market games, because Developing countries also use opportunities to dominate foreign markets. This eventually forms a part of the broader discussions, about balancing free trade and fair trade objectives, for the economic advancement of the Developing and Less-Developed countries.

The discussion in this chapter continues from the previous chapters where the line of discussion follows that since the formation of the WTO, the international trade pattern has been progressing in the direction of free trade and has by and large been competitive and based on efficiency; nevertheless it is more beneficial to the multinationals. This has raised new forms of trade related issues that can be compared with benefits of several types, and one such is comparing the benefit obtained by multinationals, with the subsidies defined under the SCM Agreement.

As the present trend of trade between the Developed and Developing nations, in intermediate products is growing, so the legal requirement of the declaration of the nationality of the products and intermediate products is necessitated. Declaration of the nationality of the products will unfold the complexities involved whilst also strengthening the promotion of free trade. The declaration of the nationality of a product is the key feature of market transparency and at the procedural level, it also helps in applying the regulatory provisions. On the basis of these emerging concerns, it seems that the application of the “Rules of Origin” to determine the place of manufacture in the present day international trade is quite relevant. Furthermore, with regards to the trends in free trade, the manufacturing process of the products is no longer confined to one place or nation, but is becoming allocated to several countries. In today’s complex trading system, more and more products are being given a final shape by obtaining intermediate parts from other nations, wherever they can be cheaply manufactured or are available. The choice of the place for the manufacturing of intermediary products can often be discriminatory, as the priorities are to attain cost efficient products. From the market observation, it can be said that this newly-developed pattern of trade, based on different production places, demands a new approach in the legal analysis to uncover the production intricacies. The WTO, as a trade regulating institution, has thus included a Rules-of-Origin Agreement, so as to determine the place from which the product has actually originated or is being produced.

In this chapter, an attempt has also been made to analyse the adverse effect of applying the Agreement on Rules of Origin by the Member States.

What can then be seen, are the challenges to free trade because of the preference given to the products based on the Rules-of-Origin. With the proliferation of regional-trade agreements such as NAFTA, ASEAN, CAFTA and several others, the WTO Member States, some of which are also the members of these regional trade agreements, prefer trading among themselves by giving tariff preferences. An examination from this standpoint also covers the broader issue of trade subsidies in terms of financial contribution and benefit, which from the WTO perspective, is a form of tension between legal values and the economic compulsions associated with international trade.

Testing such obtained trade gains, within the limits of subsidies classified as prohibited or actionable subsidies in the SCM Agreement, for restricting the subsidies of exports, finally raises questions concerning the new forms of subsidies. The study in this chapter is to inquire about the unconventional form of trade benefits obtained by applying the Rules of Origin, as the features of such profits can be compared with subsidies.

The primary function of the WTO as a multilateral organisation is to regulate trade among the Member States, and this also implies discussion on issues with different set of values, such as the affect of free trade on the environment. The discussion concerning the ‘impact of trade subsidies on the environment’ revolves around two planes, (1) the principal objective of the WTO i.e., the promotion of free trade among its Member Nations together with the complex values, compounded, (2) such as sustainable development, the pursuit of which obviously goes alongside. It is ironical that within the WTO trading system, there are several agreements promoting free trade, but no explicit wide-ranging agreement, supporting environment-related issues on a parallel basis. While the WTO tries to promote free trade along with sustainable development, however, what adds to the biased position are the competing interests of the Member States in practice. The contradiction in practice is further deepened whenever the occasion arises for the multinationals to make a choice between trade and environment standards. From the analysis, it can be observed that the legislative bodies and the judicial bodies of many of the Member States follow an unbalanced approach, thus leading to a dilemma over the preference between trade and environment. This further draws attention to a question of whether the lack of a clear basis to make choices between the two objectives, also obstructs the evolution of a general normative set up of environmental values on a global basis. The issue of free trade and the environment sustainability, taken together also touches the institutional character of the WTO, which within the parameters of this discussion is tested through, several theories on environmental law.

A key concern when studying, the effect of subsidies on the environment is to analyse how far the WTO is capable of fulfilling a proper institutional role, by promoting sustainable development along with free trade. In the light of these propositions, this study seeks to make a comparative analysis, between the business attempt for benefit as a consequence of free trade, but at the cost of environment. The comparison is made by quoting several instances of the trade practices among the Member States. In this context, the benefits obtained are compared with trade subsidies for the purpose of broadly applying fair trade concepts as regulatory measures. Further, this study also attempts to examine the institutional and normative basis of the organisation, for a better understanding and in order to make informal recommendations about the WTO reform. The chapter begins by tracing the basic WTO objectives & Members State’s relationships with issues related to trade protectionism and maintaining environment standards. Due to the lack of supportive agreements in the WTO and in order to protect environment, some authors have taken a critical perspective about the functioning of the WTO, however, it seems that the institutional balance between the objectives of free trade and sustainable development is the better option.

The working of the WTO is based on specific set of objectives. The main objectives of the WTO are to promote trade liberalization and to create fair opportunities for development among its Member States. Following the liberal market policies based on the WTO system, the trading opportunities for the Member States has indeed grown, but they are obliged to follow specific set of rules as check and balances, restricting discriminatory, market distortionary and other inefficient trade practices.

This Chapter deals with the procedural measures to be applied for dispute resolution in case of disagreement between the parties. Member States are expected to follow the WTO rules and comply with the provisions of the SCM Agreement. Trade subsidies can be compared to the two sides of the same coin. For practical reasons, there can be relevant justifications for the state support in the form of subsidies, for example, during the initial phase of industrialization or when the society is transforming from agricultural to industrial mode.

After attaining membership, Member States are expected to formulate domestic policies consistent with the WTO Agreements. However, in cases where party is affected by the subsidy practices or due to the non-compliance, it has to recourse to the DSB. This chapter deals specifically with the procedure for the solutions if a party suffers from the subsidy practices by other Member States. Therefore, the discussion in this chapter is basically confined to the remedies because of the subsidies creating distortionary effect to the other parties.

The conclusions on the use of subsidies are based on discussions that start from an abstract level. Further, within the discussion, giving general explanations in terms of values to be followed while adopting the free trade market approach, both with regard to the industrial and agricultural sector, and in order to meet the objectives broadly considered as opportunities for development and welfare are advocated.