Apr 13, 1984

DISCIPLINING SUBSIDIES' USE MUST DIFFERENTIATE BETWEEN INDUSTRIAL AND THIRD WORLD-

GENEVA, APRIL 7 (IFDA/CHAKRAVARTHI RAGHAVAN) -- Any efforts in GATT to discipline and bring under greater control use of subsidies affecting international trade, must differentiate between the situation of the Industrial and Third World countries.-

This position of the Third World was made clear at the meetings of the Consultative Group of 18 (CG-18) in the General Agreement on Trade and Tariffs. The meeting ended Friday.-

Third World participants at the CG-18 are reported to have strongly argued that, in any GATT effort to "evolve a more efficient legal framework for the use of subsidies" by strengthening or clarifying existing rules, there could be no going back on the dispensation provided now to the Third World in the use of subsidies, whether for production or exports, to subserve their development efforts.-Also, in efforts to reform the use of "subsidies" in agriculture and agricultural exports, the fact to be kept in mind is that agriculture in the Third World is essentially "traditional agriculture" while in the Industrial countries it is now "an industry".-

The dispensation obtaining for the Third World in the area of industry would have to be extended to agriculture too.-

In a note to the CG-18, the GATT secretariat has argued that the growing number of disputes involving subsidies, suggest that the provisions on this in article XVI of GATT or in the subsidies code could no longer provide "satisfactory solutions" to the problems.-

The GATT provisions distinguish between export and production subsidies.-

There is no obligation in respect of production subsidies, excepting that they have to be notified to GATT if they affect imports or exports, and any Contracting Party (CP) granting a production subsidy that affects the interests of another CP should consult with the other in an effort to limit the subsidy.-

Article XVI limits the use of export subsidies on "primary products" so that it does not result in a Contracting Party having more than "an equitable share of world export trade" in that product.-

Subsidies on exports of non-primary products are prohibited, if this results in the sale of the product at a price lower than the domestic price.-

But this prohibition applies only to the signatories of the 1960 declaration. Only the OECD countries are parties to it, none of the developing countries.-

The subsidies code under the Tokyo Round, prohibited subsides on exports of non-primary products and minerals, irrespective of their price effects. Developing countries were however exempted from this prohibition, and greater protection in procedures provided before any actions could be taken against them.-

The code recognised that subsidies were an "integral part of the economic development programmes of the developing countries", and formally recognised their right to use export subsidies on processed products, subject to the qualification that this should not be used in such a manner as to cause serious prejudice to the trade or production of another signatory to the code.-

Also, a developing country signatory to the code was "to endeavour to enter into a commitment to reduce or eliminate export subsidies when the use of such subsidies is inconsistent with its competitive and development needs".-

Only seven developing countries (Brazil, Chile, Egypt, India, South Korea, Pakistan, and Uruguay), and the territory of Hong Kong are parties to the code.-

One of the issues that has prevented other developing countries from acceding to the code has been the question whether when adhering to the code they must "necessarily make such a commitment" for other signatories to extend to them the benefits of the code, including the injury test, in the application of the counter-vailing duties.-The injury test is also a requirement under GATT article VI which enables an importing country to levy counter-vailing and anti-dumping duties. Before levying any counter-vailing or anti-dumping duty, the importing country has to determine that the subsidisation or dumping is causing, or likely to cause, material injury to a domestic industry.-But the U.S. did not incorporate this requirement into its own domestic law, even after joining GATT, and maintained its rights to act without showing "injury", under the "grandfather" clause of GATT (under which existing laws of original signatories that agreed to apply GATT provisionally, were saved).-Only in the Tokyo Round subsidies code, the U.S. agreed to apply the "injury test" to signatories, and even then made it conditional on the Third World signatories entering into specific bilateral commitments with the U.S. to eliminate any subsidies they provide.-Both this requirement, and refusal to apply the "injury test" to non-signatories to the code, despite its obligations under the most-favoured-nation clause and the Tokyo Round framework agreement preserving MFN rights of all CPs, have been matters of dispute in GATT, with the U.S. as a powerful trading partner refusing to give way.-The GATT secretariat note to the CG-18 on the subsidies issue notes that the disputes before GATT bodies over the last four or five years on the subsidies issue highlights the lack of consensus among the Contracting Parties on the basic issues relating to a wide-range of products and practices.-There has been considerable difference on "more than an equitable share" that a Contracting Party is required not to obtain through subsidised exports.-Again, the GATT makes a distinction between subsidising exports of "primary products" and "non-primary products", and not between "agricultural" products and "non-agricultural" products. This means that export subsidies on any processed agricultural products is prohibited.-Yet some of the Contracting Parties have been treating agricultural products, whether in their natural or processed forms, as primary products where subsidies are permitted.-Also, some of them have a long-standing practice of subsidising the primary product component of processed agricultural product exports. The legality of this has been challenged by others without any resolution of the conflict.-Presently, GATT does not prohibit production subsidies, but importing countries use counter-vailing or anti-dumping duties to deter this, and the power of investigation and levy of duties has been, abused to provide protection to domestic industries.-Moreover, the GATT secretariat notes, there is increasing lack of transparency in the number and volume of subsidies, and as a percentage of GNP such subsidies out of public revenues have been steadily increasing in the Industrial countries.-As compared to 0.7 percent for all Industrial countries in 1960, in 1981 it was 1.7 percent of GNP. Within them, it is as high as 7.1 percent of GNP for Ireland and 6.4 percent for Norway, 4.6 for Sweden, 2.6 for EEC as a whole (with considerable variations within the EEC countries).-While the GATT secretariat has argued for limiting and restraining production subsidies (which are becoming a fiscal burden to the OECD countries), insofar as they affect international trade, the Third World countries have made clear at the CG-18, that their situation was completely different, and they could not be equated with the Industrial countries.-Subsidies in their case, are neither used to prop up senile sectors nor aim at narrow sectoral ends. Even as the GATT note itself recognises, they play an important role in their development efforts.-They are used to attack imperfections in capital and labour markets, infrastructural handicaps, to speed up industrialisation, and a variety of other social and development objectives.-