Present the third pillar of the Agreement on Agriculture: Export Competition/Subsidies

Transcription

1 MODULE 6 Export Competition ESTIMATED TIME: 5 ½ hours OBJECTIVES OF MODULE 6 Present the third pillar of the Agreement on Agriculture: Export Competition/Subsidies Outline the Conceptual Framework of the rules on export subsidies in the Agreement on Agriculture; describe the rules and the reduction commitments Members made; explain the rules for Products with no specific reduction commitments; explain anti-circumvention; explain the special and differential treatment provisions relating to export subsidies; outline the notification obligations of WTO Members concerning export subsidies. 1

2 I. CONCEPTUAL FRAMEWORK IN BRIEF In Module 2, we saw that, while the GATT 1947 prohibited export subsidies for manufactured products, Article XVI allowed exports of primary products to be subsidized. However, Article XVI obliged Contracting Parties who used export subsidies not to do so in a way that gained "more than an equitable share of the world export trade in the product" in question for the subsidizing party, taking into account representative historical trade shares and any special factors. Therefore, it could be argued that, for exports of primary products, there was not an export subsidy prohibition, but a trade effects test. Note For purposes of GATT Article XVI, primary products were defined as "any product of farm, forest or fishery, or any mineral, in its natural form or which has undergone such processing as is customarily required to prepare it for marketing in substantial volume in international trade". See Interpretative Note 2 to Section B of Article XVI of the GATT. The proliferation of export subsidies in the years leading to the Uruguay Round was one of the key issues addressed in the agriculture negotiations. The rules on agricultural subsidies are found in both the Agreement on Agriculture and the Agreement on Subsidies and Countervailing measures ("SCM Agreement"). IN DETAIL The negative effects of export subsidies on agriculture have been analyzed by international organizations, many WTO Members, as well as independent economists and academic institutions. Exporters that receive export subsidies enjoy an advantage, since they can, for example, sell below the cost of production. In most cases the subsidy depends on the difference between the world and domestic prices, which means the exporter can always match or undercut exporters in other countries. This in turn increases competition for other exporters or for domestic producers in the importing country. In addition to reducing prices and undercutting unsubsidised exporters in other countries, export subsidies also amplify world market price variations. As the level of subsidy usually depends on the difference between domestic and world market prices, if world market prices fall the subsidy increases and supply from the subsidised exporter can remain the same, or even increase. In addition, supply from the subsidising country is not affected by market prices as the subsidy increases or decreases as prices fall or rise. This exaggerates the swings in world prices by reducing supply in times of high prices and increasing it in times of low prices. 1 1 For a comprehensive examination of the Peace Clause and analysis of the trade impacts of various export subsidy and domestic support measures see Steinberg and Josling, 2003, Journal of International Economic Law 6(2), , Oxford University Press. See also World Trade Report 2006 for thematic essays on Subsidies and the WTO. 2

3 On average export subsidies lead to declining food prices. This hurts vulnerable producers in developing countries. However, most of the export subsidies are granted to temperate products like dairy and cereals. Therefore, it could be argued that consumers in net-food-importing developing countries benefit from the lower food prices although producers in these countries will suffer from the increase in subsidised. The Agreement on Agriculture provides that the level of export subsidies cannot be increased and that the existing level of subsidies could continue subject to conditions and the commitments to reduce (1) subsidized export quantities, and (2) the amount of money spent subsidizing exports. The SCM Agreement is also applicable to agricultural products. However, Members also agreed that the provisions of the SCM Agreement on export subsidies would apply "except as provided in the Agreement on Agriculture" (Article 3.1). In addition, provided a Member's use of export subsidies was within its commitments, the "Due Restraint" clause of the Agreement on Agriculture (Article 13) restricted other Members rights to challenge these subsidies until the end of At the 6th Ministerial Conference held in Hong Kong in 2005, WTO Members agreed to eliminate agricultural export subsidies by 2013, as part of the single undertaking and subject to the parallel elimination of all forms of such subsidies. This date was to be confirmed only upon completion of modalities. Article 3 of the SCM Agreement prohibits subsidies contingent in law or fact on export performance, except as provided for in the Agreement on Agriculture. The SCM Agreement 2 added precision to the rules, for example, it defined subsidies for the first time and further elaborated on subsidy disciplines, classifying subsidies into three categories (prohibited, actionable and non-actionable). It also developed definitions, concepts and methodologies relating to adverse effects, and established procedural rules for multilateral remedies. The SCM Agreement also expanded and developed existing procedural and substantive rules on the use of countervailing measures. Part VII of the SCM Agreement sets out enhanced provisions on notification and surveillance that is, transparency provisions. The Agreement on Agriculture permits export subsidies on agriculture subject to the limits set out in Members' Schedules of Commitments (which give details of their reduction commitments) and the rules in Articles 3, 8, 9, 10 and 11 of the Agreement. Export subsidies can still be used by WTO Members, but only where they used them during the base period ( ). However, although a subsidy is legal it may cause or threaten to cause harm to another Member. In these cases it may be possible to seek some of the remedies set out in the SCM Agreement. The Agriculture Agreement does not contain any definition of the term "subsidy". Under the SCM Agreement, a subsidy exists if: there is a financial contribution by a government or any public body within the territory of a Member; there is any form of income or price support in the sense of Article XVI of the GATT 1994; a benefit is thereby conferred. 2 The use of export subsidies is prohibited except those provided within the framework of the Agreement on Agriculture. Article 3 (Prohibition) of the WTO Agreement on Subsidies and Countervailing Measures stipulates that, "Except as provided in the Agreement on Agriculture ", export subsidies and subsidies contingent upon the use of domestic products over imported goods are prohibited. 3

4 In the Canada - Dairy report, the Appellate Body said that a "subsidy", within the meaning of Article 1.1 of the SCM Agreement, arises where the grantor makes a "financial contribution" which confers a "benefit" on the recipient, as compared with what would have been otherwise available to the recipient in the marketplace. 3 The same approach can be found in the Canada Measures Affecting the Export of Civilian Aircraft ("Canada Aircraft")(DS70) and the US FSC (DS108) Panel Report. 4 To sum-up, a subsidy arises when: "financed" or a "financial contribution" do not necessarily mean a direct payment of monies, they can also cover cases where someone gets a benefit as a result of a government programme. A subsidy can exist even where the benefit is granted not directly by the government but by virtue of government action. It must also be noted that exports can be supported in many different ways and that direct aid by governments is only one of these methods. Governments can also provide support to exports through export credits which offer the purchasing government or enterprise lower interest rates or easier terms than commercial banks. A state trading enterprise may also have access to government-guaranteed loans or government investments which enable it to undercut the competition. Food aid can also be used as a way to dispose of surplus stocks. In some cases, food aid could displace commercial trade in the receiving country rather than contributing to alleviation of hunger. EXERCISES: 1. What products were eligible for export subsidies under GATT 1947 and subject to what conditions? 2. In which agreement is the definition of subsidies to be found? 3 Appellate Body Report, Canada Dairy, paragraph Appellate Body Report, Canada Aircraft WT/DS70/AB/R, adopted 20 August and United States Tax Treatment for "Foreign Sales Corporations" ("US FSC"), Panel Report WT/DS108/R, adopted 20 March 2000, as modified by the Appellate Body Report, WT/DS108/AB/R. The Panel said in paragraph that Article 1 of the SCM Agreement, which defines the term "subsidy" for the purposes of the SCM Agreement, represents highly relevant context for the interpretation of the word "subsidy" within the meaning of the Agriculture Agreement, as it is the only Article in the WTO Agreement that provides a definition of that term. This is not of course to say that the definition of "subsidy" in the SCM Agreement, which applies "[f]or the purpose of this [i.e., the SCM] Agreement", is directly applicable to the Agriculture Agreement. 4

5 II. EXPORT SUBSIDIES RULES FOR AGRICULTURE As a result of the Uruguay Round, the right to use export subsidies is limited by the disciplines in the Agreement on Agriculture. Those WTO Members that have the right to use export subsidies were required to reduce the amount of money spent on export subsidies and the quantity exported with subsidies: Articles 3 and 8 of the Agreement on Agriculture prohibit WTO Members from providing export subsidies for products not specified in their respective Schedule. These Articles also require that the quantity exported with subsidies and the budgetary outlay on these subsidies do not exceed the limits set out in the Member's Schedule; Article 9 lists the types of subsidies to be reduced; Article 10 states that other measures cannot be used to circumvent export subsidy commitments and sets out some rules for export credits and food aid; and Article 11 contains the disciplines on the use of subsidies on incorporated agricultural primary products, for example, the milk incorporated into processed cheese. The right to use export subsidies is now limited to two situations: (i) export subsidies subject to product-specific reduction commitments within the limits specified in the Schedule of the WTO Member concerned; and (ii) export subsidies consistent with the special and differential treatment provision for developing country Members (Article 9.4 of the Agreement on Agriculture). In all other cases, the use of export subsidies for agricultural products is prohibited. During the period 1996 to 1999 Members that had export subsidy reduction commitments in their Schedules did have the right to exceed the limits set out in their Schedules provided they had not used their full commitment for the previous years. The amount by which a Member could exceed the limit in its Schedule was limited and at the end of the implementation period the total quantity exported with subsidies and the amount spent of subsidies had to be within the totals set out in the Schedule. Since 2000 the annual limits apply and this "roll-over-relief" provision has now expired. II.A. ARTICLE 9 (SUBSIDIES TO BE REDUCED) The export subsidies that are subject to reduction are listed in Article 9 of the Agreement on Agriculture. Article 3.3 of the Agreement on Agriculture states that a WTO Member may not provide export subsidies listed in Article 9.1 in respect of the agricultural products or groups of products in excess of the commitments specified in Section II of Part VI of its Schedule. The reduction commitments are shown in the Schedules of WTO Members on a product-specific basis. 5

6 The list in Article 9.1 covers: a) The provision by governments or their agencies of direct subsidies, including payments-in-kind, to a firm, to an industry, to producers of an agricultural product, to a cooperative or other association of such producers, or to a marketing board, contingent on export performance; b) Sales of non-commercial stocks of agricultural products for export at prices lower than comparable prices for such goods on the domestic market; c) Payments on the export of an agricultural product that are financed by virtue of governmental action, which is taken to include producer financed subsidies, such as, government programmes which require a levy on all production which is then used to subsidise the export of a certain portion of that production; d) Cost reduction measures such as subsidies to reduce the cost of marketing goods for export: this can include upgrading and handling costs and the costs of international freight; e) Internal transport subsidies applying to exports only, such as those designed to bring exportable produce to one central point for shipping; and f) Subsidies on incorporated products, i.e. subsidies on agricultural products for example, wheat contingent on their incorporation in export products such as biscuits. Although other forms of export subsidies can be provided, it is worth noting that Article 9.1 is much broader than it might appear at first sight. For example, Article 9.1(a) refers to direct payments, including payments-in-kind that are contingent on export performance. In the Canada - Dairy dispute 5 (DS103, DS113), the Appellate Body held that "'payments-in-kind' are a form of direct subsidy" and a "payment-in-kind" is just one of the forms in which "direct subsidies" may be granted. The Appellate Body indicated that "payments" and "payments-in-kind" denote a transfer of economic resources, which can be in a form other than money, from the grantor of the payment to the recipient. The Appellate Body also ruled that the mere fact that a "payment-in-kind" has been made does not by itself imply that a "subsidy" has been granted. That is, if the recipient gives full consideration in return for a "payment-in-kind", there can be no subsidy. 6 However, if the recipient gives less than full consideration for the "payment-in-kind" there is a subsidy. With respect to the requirement of Article 9.1(c) of the Agreement on Agriculture that payments be made on the export of the agricultural product, the Appellate Body in the Canada - Dairy ruled that 7 "payments... by 5 Canada Measures Affecting the Importation of Dairy Products ("Canada Dairy"), WT/DS103/R and WT/DS113/R, adopted 17 May 1999, WT/DS103/AB/R and WT/DS/113/AB/R, adopted 23 October 1999, Canada Dairy (21.5), Recourse to Article 21.5 of the DSU, WT/DS103/RW and WT/DS113/RW, adopted 11 July 1999, WT/DS103/AB/RW and WT/DS103/AB/RW, adopted 3 December 2001, Canada Dairy (21.5)(II), Second Recourse to Article 21.5 of the DSU, WT/DS103/RW2 and WT/DS113/RW2, adopted 26 July 2002, WT/DS103/AB/RW2 and WT/DS113/AB/RW2, adopted 20 December Canada Dairy; WT/DS103/AB/R and DS133/AB/R; paragraphs Canada Dairy; WT/DS103/AB/R and DS133/AB/R; paragraphs

7 virtue of governmental action" are not restricted to direct financial assistance but include benefits given to exporters that arise from government schemes. In the Canada Dairy case the benefit arose because one class of milk production was available to producers at low cost provided it was used exclusively for exports. 8 Hence, Article 9.1(c) covers many measures and policies used by governments to support exports. II.B. EXCEPTION IN ARTICLE 9.4 The Agreement on Agriculture includes certain temporary exemptions for developing countries, allowing them to subsidize marketing, cost reduction and transport in Article 9.4. Article 9.4 allowed developing countries to use subsidies aimed at reducing the cost of marketing including internal and external transport as well as handling and processing costs (that is the subsidies listed in Article 9.1(d) and (e)), provided that these are not applied in a manner that would circumvent export subsidy reduction commitments. This exemption is one of the special and differential treatment provisions of the Agreement on Agriculture and was only available during the implementation period. Strictly speaking, it has expired but the Hong Kong Ministerial Declaration states that "developing country Members will continue to benefit from the provisions of Article 9.4 for five years after the end-date for elimination of all forms of export subsidies". 9 II.C. WHO CAN SUBSIDIZE EXPORTS? 25 WTO Members (counting the EU as one) can subsidize exports, but only for products on which they have commitments to reduce these subsidies. These Members cannot: (1) introduce new subsidies for products not listed in their Schedules; (2) exceed the limits in their schedules; or (3) transfer existing commitments to other agricultural products. These 25 Members have a total of 428 individual reduction commitments. Some among them have decided to greatly reduce their subsidies or drop them completely. Members without commitments cannot subsidize agricultural exports at all. In brackets are the numbers of products involved for each country. 8 Canada Dairy; WT/DS103/AB/R and DS133/AB/R; paragraph WT/MIN(05)/DEC; Doha Work Programme: Ministerial Declaration; paragraph 6 7

8 Export Subsidy Commitments 10 Australia (5) Brazil (16) Bulgaria (44) Canada (11) Colombia (18) Cyprus (9) Czech Rep (16) EU (20) Hungary (16) Iceland (2) Indonesia (1) Israel (6) Norway (11) Panama (1) Poland (17) Romania (13) Slovak Rep (17) S Africa (62) Switzerland - Liechtenstein (5) Turkey (44) United States (13) Uruguay (3) Venezuela (72) Mexico (5) New Zealand (1) All Members For more details, see WTO Secretariat background paper "Export subsidies" TN/AG/S/8/Rev.1 and Add.1. 8

9 II.D. PRODUCT CATEGORIES The reduction commitments for the export subsidies in Article 9.1 are shown in the Schedules of WTO Members on a product-specific basis. For this purpose, the universe of agricultural products was initially divided into product groups. Code Products or groups of products 1 Wheat and wheat flour 2 Coarse grains 3 Rice 4 Oilseeds 5 Vegetable oils 6 Oilcakes 7 Sugar 8 Butter and butter oil 9 Skim milk powder 10 Cheese 11 Other milk products 12 Bovine meat 13 Pig meat 14 Poultry meat 15 Sheep meat 16 Live animals 17 Eggs 18 Wine 20 (includes 19) Fruit and Vegetables 21 Tobacco 22 Cotton 23 Incorporated products 24 Other agricultural products 25 All agricultural products Table 1: Product groupings Based on Uruguay Round Modalities document MTN.GNG/MA/W/24; Annex 8 9

10 II.E. REDUCTION RATES As was explained on page 1, the commitments regarding the reduction of export subsidies relate to both the amount of money spent (budgetary outlet) and the quantity exported (by volume). Under Article 9.2(a) of the Agreement on Agriculture, each WTO Member must specify in its Schedule of Commitments the maximum level of budgetary outlay (money spent) and the maximum quantity exported (volume) by product on an annual basis. For "incorporated products" (last item in the Article 9 list) the reduction commitments are expressed in terms of money spent only. The 25 Members which have listed commitments for reducing export subsidies, are allowed to use them, but must remain within the limits set in their Schedules. Developed-country Members had to reduce their expenditure on export subsidies by 36% from the levels in the base period, and to reduce the quantities benefiting from export subsidies by 21% over a six year implementation period (i.e. by the year 2000). Developing-country Members are required to reduce their expenditure on export subsidies by 24% over 10 years, and to reduce the quantities benefiting from export subsidies by 14% (i.e. by the year 2004). See Article 9.2(b)(iv) for reference to the reduction commitments. LDCs are not required to undertake any reduction commitments, but none of them had any export subsidies to begin with. Now they are restricted to the transport and marketing subsidies permitted under Article 9.4. Product specific reduction commitments in terms of: (Developed) (Developing) Volume 21% 14% Budgetary outlays 36% 24% Table 2: Product specific reduction commitments For the product categories, some Members, have established maximum annual expenditure and volume levels in the Schedules (Section II of Part VI). Some Members took commitments on a more disaggregated level. 12 The ceilings specified in the schedules must be respected in each year of the implementation period although limited "over-shooting" in the second to fifth year of implementation is permitted as is explained below under the heading "roll over commitments". By the last year of the implementation period, Members had to be within their final export subsidy ceilings. 12 Export subsidy reduction commitments are in Section II of Part IV of the Schedules. Furthermore, some countries such as Costa Rica and Panama, have commitments in Section III of Part IV of their Schedule, requiring them to eliminate or reduce certain incentive schemes applying to non-traditional agricultural products. But as this Section of Schedules is not covered by the notification requirements, it is not taken into consideration throughout this course. 10

11 EXERCISES: 3. Explain briefly the rules in Article 9 of the Agreement on Agriculture referred to export subsidy commitments? 4. What are the conditions on permissible export subsidies? 11

12 II.F. ROLL OVER OF COMMITMENTS For the period , WTO Members had a certain degree of flexibility with regard to their commitments on the reduction of export subsidies. For this period, Article 9.2(b) allowed a WTO Member to exceed its commitments in any given year by up to 3% of expenditures and 1.75% of the exported volume, provided that it did not exceed the overall commitments over the entire implementation period. Although the reduction commitments relate to the base period, Members were given the flexibility of starting their reduction from the 1992 levels where they used more export subsidies in 1992 than in the base period. However, they still had to reduce them to a level which represented 64% in value and 79% in volume compared to the base period (76% and 86% respectively for developing countries). Hence, for the years 1996, 1997, 1998 and 1999 exporters were able to maintain a higher level of subsidized exports provided that by the end of 2000 the total amount used from 1995 to 2000 was the same as the total set out in their Schedule. This is known as the "roll-over" principle. ROLL-OVER: ARTICLE 9.2 For example: What is the maximum value and volume of export subsidies in 1999 Year Commitment Actual Value Volume Value Volume Base Period average ?? Total In 1999 this country would be allowed to provide export subsidies greater than its commitments as follows: Value Total of Commitments for = = 1045 Total Allowed Under Article 9.2(b)(i) = *3% = 1053 Actual Value of Export Subsidies = = 810 Total Permitted in 1999 = = 243 But by 2000 the total spent from 1995 to 2000 must not exceed Volume Total of Commitments for = = 7160 Total Allowed Under Article 9.2(b)(ii) = *1.75% = 7188 Actual Volume of Export Subsidies = = 5550 Total Permitted in 1999 = = 1638 But by 2000 the total volume getting subsidies from 1995 to 2000 must not exceed

13 III. ANTI CIRCUMVENTION The reduction commitments in the Agreement on Agriculture relate to scheduled export subsidies. However, other forms of subsidising exports do exist. Export credits may also distort export competition, when the credit conditions are more favourable than those that private financial institutions would provide. Exporting state trading enterprises or single-desk traders may cross-subsidise, which would also distort trade, or have access to government guaranteed borrowing, giving them cheaper access to capital. Finally, food aid may be used as a surplus disposal instrument and disrupt or displace commercial transactions. Article 10 of the Agreement on Agriculture prevents Members from using export support subsidies that are not specifically listed in Article 9 of the Agreement on Agriculture in ways that result in or even threaten to lead to circumvention of export subsidy commitments. However, before we look at Article 10 in detail, let us look at food aid, export credits and state trading enterprises and their relation to export subsidies. FOOD AID First of all, let's clarify that the WTO is not a food aid agency. That role belongs to other institutions such as the World Food Programme of the United Nations, the Food and Agriculture Organization (FAO) and other international agencies, as well as numerous non-governmental organisations. Food aid is a very sensitive and complex issue. In many cases it is vital for delivering food in urgent situations, where the government of the recipient country has declared an emergency and people would starve if aid were not delivered. In other cases, such as after the crisis and during the recovery period, food aid may be needed to address chronic shortages. However, there are also cases where food aid is used to dispose of surpluses in the donor country. From the perspective of commercial trade there are two types of food aid: one that displaces commercial exports; and the other that that increases consumption by providing food that would not have been consumed if the aid had not been granted. If the food aid does result in extra consumption, displaces other exports or domestic production and is used to dispose of surpluses in the supplying country, it is essentially the same as an export subsidy. Studies have shown that a small proportion of the food aid that is currently provided is supply-driven rather than needsbased and is used as a disposal tool for domestic surpluses. The concern of WTO Members is twofold: Firstly, to ensure that an adequate level of food aid is provided and that trade rules do not cause any unintended impediment to dealing with emergency situations, and second to ensure that food aid results in additional consumption and does not cause commercial displacement. EXPORT CREDITS, EXPORT CREDIT GUARANTEES AND INSURANCE PROGRAMMES Export credits are loans given to importers or importing governments to buy exports from another country. Export credits can, and usually are, given without any government involvement, as many private financial institutions provide loans for purchases of imports. Where governments are involved in giving loans, however, there is often the question of whether these loans are subsidised or not in some way. 13

14 Government involvement may be via credits provided directly by the government of the exporting country or through the government guaranteeing some of the risk of default. With the government guaranteeing some of the risk, the borrowers can avail of better repayment terms and interest rates than without the guarantee. Similarly, if a government is involved in an export insurance scheme it may be able to offer better risk coverage than would be available on purely commercial terms. There may be cases, however, where the private sector would not be prepared to offer credits to the purchasing government or enterprises in the importing country. Following a financial crisis, for example, commercial banks may deem the risk of default to be too great. In these cases, the only way food could be purchased would be through official export credit guarantees or insurance schemes provided by the exporting country. According to the OECD, the overall trade distorting effect of export credits in total trade of agriculture products is very small although certain export credit programmes bias targeted importers' purchasing decisions and distort markets. 13 However, others argue that it is a very efficient way of supporting exports as a small reduction in loan costs or improvement in repayment terms can have a big impact on trade decisions. However, this study uses data from 1998 and may no longer be representative. STATE TRADING ENTERPRISES (STE) State Trading Enterprises (STE) are state owned organisations, or organisations that have some special rights or privileges given to them by a government. In some cases STEs have monopoly or near-monopoly power over the purchases and sales of a country's agricultural products. Governments could support exports through exporting STEs in a number of ways. For example: governments may provide operating capital or underwrite losses; the STE may be in a position to use price pooling between domestic and export sales which may lead to consumer financed subsidies; the STE may benefit from government guarantees; the STE may have a monopoly when buying commodities for exports; and the STE may not have purely commercial objectives for its activities as it may be required to maximise returns to producers. It has been discussed whether a monopoly given by a government to an exporting enterprise is itself suspect or whether it is the actions of the enterprise that would determine whether it is subsidizing exports or not. It has been argued that private companies can also have commercial power, use the commercial practice of differential pricing and may receive government help when struggling for existence. 13 Total export credits facilitated on average 4.4% of world trade between 1995 and 1998, but of these, only a portion are estimated to have distortionary effects. The use of export subsidies was increasing during this period, both in total as well as relative to total trade. The total subsidy element amount is estimated to have been $300 million in Of this, the US provides 86%, the EU 7% (excluding intra-eu credits), Canada 5% and Australia 2% (see figure 10). The US is the strongest user of export credits and their export credits have at 6.6% the highest subsidy content. Cereals account for almost one half of the subsidy element of all used export subsidies. OECD (2000), "An Analysis of Officially Supported Export Credits in Agriculture", OECD, Paris. 14

15 The Agreement on Agriculture does not oblige WTO Members to make reduction commitments on the subsidy components in export credits, state trading enterprises and food aid. However, it does require that the value of such support and the quantity exported with support must be within a Member's Scheduled commitment levels. That is, that it is not "applied in a manner which results in, or which threatens to lead to, circumvention of export subsidy commitments" (Article 10.1). However, the Agreement on Agriculture has some provisions for the prevention of circumvention of export subsidies commitments, including inter alia disciples on the use of export credits and credit guarantees as well as food aid as is explained below. ARTICLE 10 IN BRIEF Article 10 of the Agreement on Agriculture seeks to prevent Members from trying to circumvent their commitments in numerous ways: (i) (ii) by requiring that any export subsidy not listed in Article 9.1 is not used in a way that even threatens to lead to circumvention of commitments; by requiring Members to work towards developing disciplines on export credits; (iii) by putting the burden of proof on Members to show that exports in excess of commitments are not subsidised; and (iv) by establishing rules for food aid. IN DETAIL Article 10.1 prohibits WTO Members from applying subsidies of a type not listed in Article 9.1. Part V: Article 10 Prevention of Circumvention of Export Subsidy Commitments 1. Export subsidies not listed in paragraph 1 of Article 9 shall not be applied in a manner which results in, or which threatens to lead to, circumvention of export subsidy commitments; nor shall non-commercial transactions be used to circumvent such commitments. This prohibition applies to both scheduled and unscheduled products. According to Article 10, not only export subsidies can "threaten to lead to circumvention" of WTO Member commitments. "Non-commercial transactions" could also be used to circumvent these commitments. Article 10 refers in particular to food aid or export credits. Article 10.2 calls for WTO Members to develop internationally-agreed disciplines to govern the provision of export credits, export credit guarantees or insurance programmes in recognition that such measures could also be used to circumvent commitments. 15

16 2. Members undertake to work toward the development of internationally agreed disciplines to govern the provision of export credits, export credit guarantees or insurance programmes and, after agreement on such disciplines, to provide export credits, export credit guarantees or insurance programmes only in conformity therewith. The issue of disciplines on export credit and related programmes has been a standing agenda item of the regular meetings of the Committee on Agriculture as an implementation-related issue. The development of disciplines in this area has also been addressed in the agriculture negotiations (Special Session). In December 2005, the Hong Kong Declaration reaffirmed Members' commitment to the development of internationally-agreed disciplines for export credits. 14 During the informal consultations on implementation-related issues held in February 2006, and again in the May 2006 meetings of Committee on Agriculture, it was acknowledged that Members were prioritizing the discussion of issues under Article 10.2 in the agriculture negotiations rather than pursuing discussions in the regular Committee on Agriculture. Important Note Despite the lack of clear rules, any subsidy element that might exist in government-supported export credit, guarantee and insurance programmes is subject to the commitments in Members' Schedules and the rules in the Agreement on Agriculture. In other words, no subsidy can be used to export products not listed in a Member's Schedule nor, if there are commitments for a particular product, can it be used in a way that threatens to lead circumvention of commitments. As an additional measure against circumvention, Article 10.3 requires that exporting countries with export subsidy commitments must show that any exports above commitment levels do not receive any export subsidies. 3. Any Member which claims that any quantity exported in excess of a reduction commitment level is not subsidized must establish that no export subsidy, whether listed in Article 9 or not, has been granted in respect of the quantity of exports in question. 14 WT/MIN(05)/DEC, paragraph 6 of the Hong Kong Ministerial Declaration 16

17 This provision was litigated in the Canada Dairy. 15 The Appellate Body said: "With respect to the export subsidization part of the claim, the complaining Member, therefore, is relieved of its burden, under the usual rules, to establish a prima facie case of export subsidization of the excess quantity, provided that this Member has established the quantitative part of the claim [i.e. can show that the exporting Member has exported more than the quantity commitments in its country schedule]. However, the complaining Member is not required to lead in the presentation of evidence to panels, and it might well succeed in its claim even if it presents no evidence should the responding Member fail to meet its legal burden to establish that no export subsidy has been granted with respect to the excess quantity." This means that in relation to the anti-circumvention provisions of Article 10.3 of the Agreement on Agriculture: the complaining Member must merely show that the exports of a particular agricultural product exceed the quantity commitments in the country schedule and claim that these excess quantities are subsidized; and it is up to the defending Member to establish that they are not subsidized. A country with export subsidy commitments must prove that any exports in excess of its commitments do not benefit from subsidies. However, if a Member has no export subsidy commitments, it could be argued that the Member making the accusation needs to prove that subsidies were involved. 4. Members donors of international food aid shall ensure: (a) that the provision of international food aid is not tied directly or indirectly to commercial exports of agricultural products to recipient countries; (b) that international food aid transactions, including bilateral food aid which is monetized, shall be carried out in accordance with the FAO "Principles of Surplus Disposal and Consultative Obligations", including, where appropriate, the system of Usual Marketing Requirements (UMRs); and (c) that such aid shall be provided to the extent possible in fully grant form or on terms no less concessional than those provided for in Article IV of the Food Aid Convention Appellate Body Report, Canada Measures Affecting the Importation of Dairy Products Second, Recourse to Article 21.5 of the DSU by New Zealand and United States ("Canada Dairy (21.5)(II)"),WT/DS103/AB/RW2 and WT/DS113/AB/RW2, adopted 20 December 2002, paragraph 75 17

18 Article 10.4, covering food aid, specifies that WTO Members must ensure that: the provision of international food aid is not tied directly or indirectly to commercial exports of agricultural products to recipient countries; that international food aid transactions are carried out in accordance with the FAO "Principles of Surplus Disposal and Consultative Obligations"; and such aid be provided, to the extent possible, in fully grant form or on terms no less concessional than those provided for in Article IV of the Food Aid Convention The activities of STEs were not specifically disciplined in the Agreement on Agriculture. Article XVII of the GATT states that STEs must operate in accordance with commercial considerations and in a non-discriminatory way. As a further means of avoiding circumvention of the export subsidy commitments, Article 11 restricts the export subsidy on a processed product to the amount that would be payable on the basic product. Part V: Article 11 Incorporated Products 1. In no case may the per-unit subsidy paid on an incorporated agricultural primary product exceed the per-unit export subsidy that would be payable on exports of the primary product as such. EXERCISES: 5. What are the four ways in which Article 10 tries to prevent Members from circumventing their export subsidy commitments? 18

19 IV. EXPORT SUBSIDY NOTIFICATION OBLIGATIONS Article 18 of the Agreement on Agriculture provides for the review of the implementation of commitments by the WTO Committee on Agriculture. WTO Members are required to report "at such intervals as shall be determined" on how they have complied with the Agreement on Agriculture. All Members must notify their export subsidies to the Committee on Agriculture on an annual basis. For the vast majority of Members those without reduction commitments this involves only a statement to the effect that export subsidies on agricultural products have not been used (or a listing of those measures that may be used by developing country Members under Article 9.4 of the Agreement if this has been the case). For Members with reduction commitments in their schedules, they are required to notify the WTO Committee on Agriculture concerning their volume of subsidized exports, their expenditures on export subsidies, and the volume of un-subsidized exports, by commodity, as specified in their Schedules. Significant exporters of agricultural products are also required to notify the total level of exports. In addition, as part of the anti-circumvention provisions, Members must notify the use of food aid on an annual basis if such aid is granted. Likewise, total exports of agricultural products must be notified by Members with reduction commitments as well as by a number of other "significant exporters" as defined by the Committee. As in other areas, the export subsidy notifications form part of the basis for reviewing the progress in the implementation of the commitments by the Committee on Agriculture. These are notified in tables as explained below: ES:1 Budgetary Outlay and Quantity Reduction Commitments: Members with base and annual commitments in Section II of Part IV of their Schedule must make an annual notification along with Supporting Table ES:1. Table ES:1 shows the product group, the volume and value of subsidised exports along with the volume of food aid and the relevant annual commitment levels. ES:1 Supporting Table ES:1: Along with Table ES:1, Supporting Table ES:1 is also required showing the details of the export subsidies provided. ES:2 Notification of Total Exports: All Members with export subsidy commitments along with those Members that are significant exporters of the different product groups (i.e. over 5% of world exports) have to make a annual notification showing the total value of exports of the product group concerned. Statement of Non-Use of Export Subsidies: Members with no export subsidy commitments must make an annual statement stating that no such subsidies have been used in the past year. Statement of Non-Use: Supporting Table ES:2: Developing country Members that have availed of the exemption in Article 9.4 for marketing and internal transport are required to make list these subsidies in Supporting Table ES:2 along with the volume of goods benefiting. ES:3 Food Aid: Food aid donors are required to make an annual notification showing the total volume of food aid given in the previous year. Donors with export subsidy commitments will have already provided this information in ES:1 notification and, therefore, do not need to make and ES:3 notification. 19

20 V. DISPUTE SETTLEMENT CASES Let us look at the US "Foreign Sales Corporation" Scheme, the Canada - Dairy 16 and the EC Subsidies on Sugar cases, three of the most important cases concerning the interpretation of the provisions of the Agreement on Agriculture on export subsidies. However before we do so please read the disclaimer! Disclaimer While the case studies below are based on prior WTO Panel and Appellate Body rulings, their main purpose is not to describe and review all the arguments and conclusions in the case in detail but to highlight issues and principles addressed in the course and provide you with an outline of elements that you may wish to consider when reflecting on these cases. 16 Canada Measures Affecting the Importation of Dairy Products ("Canada Dairy"), WT/DS103/R and WT/DS/113/R, adopted 17 May 1999, WT/DS103/AB/R and WT/DS/113/AB/R, adopted 23 October 1999, Canada Dairy (21.5), Recourse to Article 21.5 of the DSU, WT/DS103/RW and WT/DS113/RW, adopted 11 July 1999, WT/DS103/AB/RW and WT/DS103/AB/RW, adopted 3 December 2001, Canada Dairy (21.5)(II), Second Recourse to Article 21.5 of the DSU, WT/DS103/RW2 andwt/ds113/rw2, adopted 26 July 2002, WT/DS103/AB/RW2 and T/DS113/AB/RW2, adopted 20 December

21 US FSC (DS108) United States Tax Treatment for "Foreign Sales Corporation" Parties Agreements Timeline of the Dispute Complainants European ASCM Articles 1 Establishment of Panel 22 September 1998 Respondent Union United States and 3 AA Articles 10, 8 Circulation of Panel Report 8 October1998 Circulation of AB Report 24 February 2000 Adoption of AB Report 20 March Measure and Product at Issue Measure at issue: US tax exemptions for Foreign Sales Corporations ("FSC") 17 in respect of their export-related foreign-source trade income. Product at issue: All foreign goods, including agricultural products, affected by the US measure. 2. Summary of Key Panel / AB Findings ASCM Art. 1.1 (revenue foregone): The Appellate Body upheld the Panel's finding that the FSC measure constituted government revenue foregone that was "otherwise due" and, thus a "financial contribution" within the meaning of Art ASCM Art. 3.1(a) (export subsidy): The Appellate Body upheld the Panel's finding that the FSC measure constituted prohibited export subsidies under ASCM Art. 3.1(a) because the FSC exemptions (i) were based upon foreign trade income derived from "export property" and (ii) fell within the language of item (e) (full or partial exemption remission... of direct taxes... ) of Annex I (illustrative list of export subsidies). The Appellate Body (and the Panel) rejected the US argument that footnote 59 to item (e) exempted the FSC measure from constituting export subsidies. AA Arts. 3.3 and 9.1 (export subsidy): The Appellate Body reversed the Panel's finding that the FSC tax exemptions were an export subsidy under AA Art. 9.1(d) and thus violated Art The Appellate Body considered that "income tax liability" that was exempted or reduced under the FSC tax regime could not be considered as "the costs of marketing exports" of agricultural products that were subject to reduction commitment within the meaning of Art. 9.1(d). AA Arts and 8 (export subsidies not listed in Art. 9.1): The Appellate Body found that the United States violated AA Art and subsequently Art. 8 because the United States, through the FSC exemptions, which were unlimited in nature (i.e. no limitation on the amount of the exemption and no discretionary element to its grant), acted inconsistently with its export subsidy commitments under the 17 FSCs are foreign corporations in charge of specific activities with respect to the sale or lease of goods produced in the US for export outside the US. In practice, many FSCs are controlled foreign subsidiaries of US corporations, as FSCs affiliated with its US supplier receive greater benefits under the programme. 21

22 AA, first, not to provide export subsidies for scheduled products (Art. 9.1) in excess of the scheduled commitments; and, second, not to provide any Art. 9.1 export subsidies for unscheduled products. ASCM Art. 4.7 (recommendation): Pursuant to Art. 4.7, the Panel recommended that the United States "withdraw the FSC subsidies without delay. The parties agreed that the date for withdrawal would be 1 November Other Issues 18 Special burden of proof (AA Art. 10.3): The Panel concluded that an AA Art claim contains a special burden of proof whereby once the complainant has proved that the respondent is exporting a certain commodity in quantities exceeding its commitment levels, then the respondent must prove that such an excessive amount of exports is not subsidized. The Panel found that this rule only applies to Members' "scheduled" products. CANADA DAIRY (DS103, DS113) Canada Measures Affecting the Importation of Milk and the Exportation of Dairy Products Parties Agreements Timeline of the Dispute Complainants Respondent United States, AA Articles 9.1, Establishment of Panel 25 March 1998 New Zealand 3.3, 10.1 and 8; Circulation of Panel Report 17 May 1999 GATT Art. II:1(b) Canada Circulation of AB Report 13 October 1999 Adoption of AB Report 27 October Measure and Industry at Issue Measure at issue: Canadian government's support system (Special Milk Classes Scheme) for domestic milk production and export, as well as Canada's tariff rate quota ("TRQ") regime for imports of fluid milk. Industry at issue: Milk and dairy product industry. 18 Other issues addressed in this case: ASCM Art. 4.2 (statement of available evidence); new arguments before the AB; interpretation of footnote 59 to item (e) of Annex I; panel's jurisdiction (appropriate tax forum); DSU Art. 6.2 (identification of products (agricultural) at issue); order of consideration of ASCM issues. 22

23 2. Summary of Key Panel / AB Findings EXPORT SUBSIDY AA Art. 9.1(a) (direct subsidy): Having reversed the Panel's conclusion that Canada's measure involved export subsidies within the meaning of Art 9.1(a) (based on the Panel's erroneous interpretation of the terms "direct subsidies" and "payments-in-kind" under Art. 9.1(a)), the Appellate Body also reversed the Panel's finding that Canada had acted inconsistently with Arts. 3.3 and 8 by providing export subsidies under Art. 9.1(a) i.e. by exceeding the support reduction commitment levels scheduled by Canada. AA Art. 9.1(c) (export subsidy): The Appellate Body upheld the Panel's finding that the provision of milk at discounted prices to processors for export constituted "payments" within the meaning of Art. 9.1(c) and that the relevant payments under Canada's scheme were financed by virtue of governmental action. Thus, it upheld the Panel's ultimate conclusion that Canada's scheme constituted an export subsidy within the meaning of Art. 9.1(c), which exceeded the reduction commitment, and thus, Canada had acted inconsistently with Arts. 3.3 and 8. AA Art (other export subsidy): The Panel found alternatively that in the event Canada's measures did not involve export subsidies under Art. 9.1(a) or (c), Canada's measures still constituted an "other" export subsidy in the sense of Art and exceed its reduction commitment levels in violation of Art TRQ REGIME (FLUID MILK IMPORTS) GATT Art. II:1(b): Recalling its earlier finding (EC Computer Equipment) that Members' Schedules should be interpreted under the general rules of interpretation set out in the VCLT, the Appellate Body concluded that Canada's limitation of cross-border purchases of fluid milk to "Canadian consumers" by specifying it as a condition in Canada's Tariff Schedule justifies Canada's effective limitation of access to the TRQ to imports for "personal use". But, it found that Canada's value limitation set at Can$20 for each importation was inconsistent with Art. II:1(b), as there was no mention of such value limitation in Canada's Schedule. (This resulted in a partial reversal of the Panel's interpretations and conclusions.) 3. Other Issues 19 Burden of proof (AA Art. 10.3): The Panel noted that AA Art shifts the burden of proof from the complainant to the respondent in cases dealing with export subsidies once the complainant has shown exports in excess of scheduled quantities. It is then for the respondent to prove that export quantities in excess of reduction commitment levels are not subsidized. 19 Other issues addressed in this case: submission of evidence (preliminary panel decision); export subsidies under both the Agriculture Agreement and the SCM Agreement (Agriculture Agreement, Art. 9.1(a) "governments or their agents"). 23