The Limited Effectiveness of the Agreement on Subsidies and Countervailing Measures (SCM) in WTO

This paper, based on an analysis of the settlement of disputes by the DSB from 1993 to 2002, explains that the SCM Agreement, grounded on criteria of specificity and serious can only be interpretative. Also, the difficulty in settling commercial disputes related to this Agreement will drag on for the simple reason that the borders of an acceptable subsidy cannot be defined. Finally, the importance placed on prejudice to the domestic industry is overstated by not taking into account the interest of consumers. In short, it matters more to call for a repeal of national legislation on countervailing measures than to have an international agreement on subsidies. Key Words: WTO; GATT; SCM; DSB; OECD; Export subsidies; Tokyo Round; Uruquay Round. Introduction These days, there can he no denying that subsidies, especially to exports, have become an important cause of trade litigation between countries. Neither the GATT or the WTO rules, nor arrangements under the OECD, appear able to contain the deviations of their member nations. Following the principle that water seeks its own level, the generalized reduction in tariff barriers has resulted in a resumption of non-tariff protection measures, which come in a multitude of forms and demonstrate varying degrees of effectiveness. At the same time, the WTO, having assumed the mantle of arbiter hut with no enforcement powers, can only rely on the will of the belligerents to reach agreement. Thus, the capacity of the WTO's rules to facilitate international trade is very limited. We will examine this in the present paper. We begin by presenting a brief overview of the provisions of the Subsidies and Countervailing Measures (SCM) Agreement. We will next examine rulings on trade disputes issued within the framework of the WTO and related to this Agreement. In order to highlight the issues, we will focus on two specific cases of litigation: U.S. tax treatment of firms selling abroad, and the softwood lumber dispute between Canada and the United States. Finally, we proceed to a critical analysis of the Agreement's effectiveness and conclude with policy recommendations. The Agreement on Subsidies and Countervailing Measures 1 Genesis The agreement on subsidies and countervailing measures displays a history that needs to be underlined. During the 1950s and 1960s, subsidies were less used by various governments and confined to few industries, such as: energy, rail road, coal, aircraft, shipbuilding, (Mersserlin, 19H7). Since the beginning of the 1970s, the world economic outlook has drastically changed due to the oil price shock, the enormous volume and complexity of financial transactions, the demise of Bretton Woods and the advent of the floating exchange rate regime. Governments then came under strong pressure to assist their domestic producers, hut were unable to raise tariffs because of the GATT rules, so they relied on Nonborder measures including export subsidies. This shift in commercial policies towards what may be called the new protectionism, led to an agreement on subsidies and countervailing measures in the Tokyo Round (1973-1979), for a better understanding and interpretation of articles VI, XVI and XXIIII, which has been in force since the first of January 1980. The Tokyo Agreement on subsidies gave rise to a certain number of controversies. First, this Agreement does not provide a definition of subsidy but rather an illustrative list. second, while it formally prohibits export subsidies, it recognizes other subsidies. As matter of fact, Article 11 states: 1. Signatories recognize that subsidies other than export subsidies are widely used as important instruments for the promotion of social and economic policy objectives and do not intend to restrict the right of signatories to use such subsidies to achieve these and other important policy objectives which they consider desirable. Signatories note that among such objectives are: a) the elimination of industrial, economic and social disadvantages of specific regions; b) to facilitate the restruct u ri ng, under socially acceptable conditions, of certain sectors, especially where this has become necessary by reason of changes in trade and economic policies, including international agreements resulting in lower barriers to trade; c) generally to sustain employment and to encourage re-training and change in employment; d) to encourage research and development programmes, especially in the field of high-technology industries; e) the implementation of economic programmes and policies to promote the economic and social development of developing countries; f) redeployment of industry in order to avoid congestion and environmental problems. …

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