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Analysis of WTO Subsidy Disputes Involving Major Basic Industries Trade policy, Industrial policy

Author Hyo-Young Lee and Jun Hyun Eom Series 14-03 Language Korean Date 2014.10.30

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Subsidy disputes under the WTO system have continuously increased in number as a result of the strengthened WTO discipline on governments’ subsidization policies which were previously viewed as intrinsic economic policy measures. In particular, as subsidization policies to support such major basic industries as steel, vessels, aircraft and energy are closely related to countries’ export growth and economic development, and thus considered to be unfair trade-related measures, there have been a number of counter -subsidy disputes to directly counteract the WTO-inconsistent activities of other Members under the WTO dispute settlement system.
This study examines the WTO rules and the practical application of the rules on subsidies related to several major key industries through legal analysis of subsidy disputes involving the aircraft, vessels, and renewable energy industries that were brought to the WTO dispute settlement system since 2005. Based on the analysis, this study has identified several important issues related to subsidy policies in major basic industries, and provided several policy and legal implications regarding the discipline on subsidies in accordance with the WTO Subsidies and Countervailing Measures (SCM) Agreement.
As a result of the analysis, we have identified several common characteristics in WTO subsidy disputes involving basic industries. First, as shown in the WTO subsidy disputes involving vessels and large-sized aircraft, a number of disputes seem to take the form of counter-subsidy disputes. This may be proof of the importance of the relevant industry in the country’s economy, and the willingness to resolve disputes in an expeditious and efficient way. Secondly, most of the direct grants and tax incentive programs provided to major key industries were determined to be government acts to provide ‘financial contribution’. This may be due to the fact that significant amounts of initial investment by the government are inevitably required to establish basic industries. On the other hand, there were different rulings regarding whether the subsidy measure provided a ‘benefit’, while the appropriate ‘market benchmark’ and consideration of both the supply and demand aspects in selecting the appropriate ‘market’ were considered to be important elements in the ‘benefit’ analysis of a subsidy. Thirdly, most of the subsidy measures in the basic industries were considered to be ‘specific’, particularly based on the documental evidence that explicitly showed that relevant subsidy programs targeted specific industries.
There are several implications for policy and legal reform that have been derived from this study: First, bilateral agreements that provide the terms for appropriate discipline on the use of subsidy measures among the parties to the agreement may be considered as an effective method for regulating subsidization practices in basic industries. In most cases, the multilateral discipline on subsidies is more desirable since a mere bilateral agreement to regulate subsidies may enable ‘free-riding’ from non-parties. However, in the case of basic industries, which are inherently dominated by a few number of competitive countries that can afford to make substantial investments in the establishment and maintenance of the industry, a bilateral form of agreement to discipline subsidization activities may actually be effective without concerns about ‘free-riding’.
Secondly, as a means to prevent subsidy disputes involving basic industries which typically involve a substantial amount of R&D programs, joint international R&D programs may be considered as another practical alternative. Compared to other industries, basic industries require more substantial amounts of fund for establishing the facilities and manufacturing the products, while appropriate economies of scale and large enough markets for the recovery of moneys from the intiial investment are also needed. A joint R&D program among WTO Members that are engaged in R&D activities in the relevant industry may help to reduce financial burdens and prevent WTO disputes at the same time.
There also lies the need for legal reform to the current WTO rules on subsidies and dispute settlement. First, many R&D contracts that are frequently ordered out by the government fall under ‘services’, whereas there are currently no rules to regulate service-related subsidies under the WTO SCM Agreement. Such absence of rules may open the door to opportunistic acts by some WTO Members, when subsidies for services have the same impact as subsidies for goods through distortions in resource allocation and competition. Furthermore, the criteria for selecting the appropriate ‘market’ for the ‘benefit’ analysis in subsidy disputes is unclear, leading to the need for reform through clarification of the ‘market benchmark’ criteria. Also, the current WTO subsidy rules do not provide clear regulations on ‘green subsidies’, of which there has recently been an apparent increase in WTO disputes involving countervailing measures.
Lastly, the prompt implementation of WTO Dispute Settlement Body (DSB) rulings is particularly important in the case of subsidy disputes involving basic industries due to the size and economic importance of the industries involved. However, the current WTO rules on subsidies and dispute settlement only provide for ‘prospective’ remedies which do not provide any reparation of damages incurred by subsidies that are paid in the past. Furthermore, despite the more expeditious dispute resolution procedures provided for subsidy disputes as compared to the general dispute settlement procedures, there appears to be a significant delay in withdrawing the illegal subsidy measure. The limitations of the current rules on subsidy dispute settlement thus require reforms to address this problem.

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