I. Introduction
One of the basic objectives of the WTO agreement is to remove the distortions present in the international trade. It is recognized that certain subsidies are trade distorting in nature and in order to remove distortions in international trade, it is important to impose disciplines on these subsidies. To achieve this goal, WTO has established a set of rules to govern subsidies and export incentives in its member countries. For non-agricultural products, subsidies and export incentives are governed by the WTO Agreement on Subsidies and Countervailing Measures (SCM). The WTO Agreement on Agriculture (AoA) disciplines the export incentives and subsidies given to the agricultural items. This paper gives an overview about the SCM agreement and discusses some important issues relating to this agreement which are particularly relevant for developing countries. This paper will also briefly discusses the agricultural subsidies and how these subsidies are treated differently from industrial subsidies in WTO.

II. Overview of the Agreement on Subsidies and Countervailing Measures
The WTO SCM Agreement contains a definition of the term "subsidy". According to the definition, a measure must have three basic elements to be considered as a subsidy. They are: (i) The measure must be a financial contribution, (ii) It should be made by a government or any public body within the territory of a Member and (iii) The measure must confer a benefit. All three of these elements must be satisfied in order for a subsidy to exist.

Even if a measure is a subsidy within the meaning of the SCM Agreement, it is not subject to the disciplines of the SCM Agreement unless the concerned subsidy is a ‘specific subsidy'. By specific subsidy the SCM agreement means subsidies which are specifically provided to a region, an enterprise or industry or group of enterprises or industries. In other words, SCM will treat a subsidy as specific subsidy if the granting authority limits access to the subsidy to certain enterprises or certain regions. For example, if the Central Government grants a subsidy exclusively to a particular state, the subsidy would be a specific subsidy even if it is available to all enterprises of that state. However, if that state government gives subsidies to all enterprises of that state, the subsidy would not be termed as a specific subsidy.

When a subsidy is made widely available by the granting authority, it is presumed that such subsidies do not lead to distortions in the allocation of resources. The basic premise of WTO SCM agreement is that only subsidies, which distort the allocation of resources within the jurisdiction of a granting authority, should be subject to discipline. Thus, non-specific subsidies are exempted and only ‘specific subsidies' are subject to the SCM Agreement disciplines. There are four types of "specificity" within the meaning of the SCM Agreement:

1. Enterprise-specificity: A government targets a particular company or companies for subsidization;

2. Industry-specificity: A government targets a particular sector or sectors for subsidization.

3. Regional specificity: A government targets producers in specified parts of it's the territory under its jurisdiction for subsidization.

4. Prohibited subsidies: A government targets export goods or goods using domestic inputs for subsidization. As product specific subsidies directly affect trade and are most likely to have adverse effects on the interests of other Members, the SCM agreement deals more stringently with these subsidies and these are termed as ‘Prohibited Subsidies' by the WTO SCM agreement.

Two categories of subsidies are defined as prohibited subsidies by the Article 3 of the SCM Agreement. The first category consists of subsidies which are contingent on export performance and the second category consists of subsidies for use of domestic goods over imported goods ("local content subsidies").

All specific subsidies are actionable under the SCM agreement^[1]. But depending upon the trade distorting nature of specific subsidies, the SCM agreement deals differently with prohibited subsidies and other types of specific subsidies. The SCM Agreement provides a graduated approach to disciplines on subsidies- closer a subsidy brings a product to the market, stricter the discipline. Thus R&D subsidies were earlier considered to be non-actionable, while export subsidies are generally prohibited.

According to the SCM agreement, if a country grants or maintains prohibited subsidies, then other member countries can initiate remedial actions against the errant country. Article 4 of the SCM agreement specifies the consultation and panel process. According to this Article, a complaining member can request consultations with the offending member. If the two members fail to reach a mutually agreed solution about the subsidy within a stipulated time period, then the matter is referred to the Dispute Settlement Board (DSB) of WTO. If the dispute settlement procedure confirms that the subsidy is prohibited, it must be withdrawn immediately. Otherwise, the complaining country can take counter-measures which may be in the form of charging extra duty (known as "countervailing duty") on subsidized imports that are found to be hurting domestic producers. However, authorization from DSB is required for the appropriate counter-measures.

However, for non-prohibited actionable subsidies, a Member country can initiate remedial measures only if it proves that there are subsidized imports from the other (subsidizing) Member country, there are adverse effects on the complaining country and there exist a causal link between the subsidized imports and the adverse effect. There can be three types of adverse effects. First, there can be injury to a domestic industry caused by subsidized imports in the territory of the complaining Member. This can be the sole basis for imposing countervailing measures against the subsidized imports. Secondly, there is the issue of ‘serious prejudice'. Serious prejudice usually arises as a result of adverse effects of subsidies in the market of the subsidizing Member or in a third country market (e.g., export displacement). Thus, unlike injury, it can serve as the basis for a complaint related to harm to a Member's export interests (Box 1 describes the criteria for determining serious prejudice). Finally, there is nullification or impairment of benefits accruing under the GATT 1994. Nullification or impairment arises most typically where the improved market access presumed to flow from a bound tariff reduction is undercut by subsidization.

Under the SCM agreement, broadly two types of remedies are possible against actionable subsidies. The affected country can conduct its own investigation to establish that subsidized imports are causing material injury to its industry. Once this is established and the procedural rules of the SCM Agreement regarding the initiation and conduct of countervailing investigations are properly followed, then the affected country can unilaterally impose an extra duty (known as "countervailing duty") on subsidized imports that are found to be hurting domestic producers. Alternately, the country can use the WTO's dispute settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. However, if a serious prejudice claim has to be established, the complainant has to go through the panel process, as it requires multilateral action.

Table 1 summarizes the discussion.

III. Developing Countries and the SCM Agreement
The Article 27.2 of the SCM Agreement exempts the developing countries with per-capita income of less than US$ 1000 from the prohibition of export subsidies. For example, India's per-capita income is less than this stipulated limit and therefore, for non-agricultural products, WTO rules do not prevent India from subsidizing its exports. However, the SCM agreement imposes two restrictions on the use of export subsidies by the developing countries. The first exception to the right of use export subsidies arises if a country reaches ‘export competitiveness' in a certain product, the SCM agreement requires that the export subsidy on that product should be phased out over a period of eight years. According to the SCM agreement, ‘export competitiveness' in a product exists if a developing country Member's exports of that product have reached a share of at least 3.25 per cent in world trade of that product for two consecutive calendar years. However, from the SCM agreement it is not clear that if a country subsequently loses export competitiveness after achieving it for more than two years, whether the country becomes once again eligible to introduce export subsidies.
Developing country Members were allowed to use local content subsidies for a period of 5-years ending on December 31, 1999. For the least developing country Members the exemption period is 8-years. India being a developing country Member has crossed 5-year exemption from prohibition on import substitution. India is now prohibited from giving such subsidies.

It should be emphasized that even if the WTO SCM Agreement allows some developing countries to have export subsidies, this does not make the exports from these countries immune from the countervailing duties. If the conditions for imposing CVD are met, then other Member countries can impose countervailing measures on subsidized imports from the developing countries mentioned under Article 27.2. However, Article 27.10 and 27.11 allows certain de-minimis level (maximum permissible level) of subsidies for developing countries and for countries mentioned in Article 27.2^[2] .

It has been established that imposition of CVDs on exports from developing countries can create instability and uncertainty for these countries. UNCTAD (2000a) points out that the adverse impact of these measures on developing countries may be greater than the actual trade involved. Initiation of countervailing actions not only has an immediate impact on trade flows but it also reduces the size of the potential market as importers tend to seek alternative sources of supply. There is also evidence to suggest that in some cases countervailing measures were initiated only to harass and threaten the suppliers as there were prior knowledge that the outcome of the investigations are likely to be negative. Also the complexity of CVD and the WTO Dispute Settlement rules and procedures put significant strain on exporters and administrators of developing countries.

Because of these potential adverse effects of these trade defense measures allowed in the SCM agreement, there is a feeling among developing countries that this agreement does not protect the interests of these countries. A proposal from India about the functioning of the SCM agreement (TN/RL/W/4) suggests that as the industries in developing countries suffer from structural weaknesses, the state will have to play a more pro-active role in assisting the industry. It emphasizes the role of input subsidies in the industrialization process of developing countries and urges WTO to take a more lenient view about industrial subsidies in developing countries. This proposal further argues that the S&D provisions given to developing countries have been inadequate to meet the concerns of developing countries. This report alleges that the benefits of the S&D concessions have largely been offset by imposition of too many countervailing duties against products originating in developing countries. Recent WTO data show that out of the 104 cases in which countervailing duty action was taken by various countries during the period 1 January 1995 to 30 June 2004, 67 cases were against developing countries. Considering the fact that the share of developing countries in world merchandise trade is less than 30 percent^[3] , this is disproportionately high.

The Doha declaration promised to look into some of the concerns of developing country about the SCM agreement. The paragraph 28 of the Doha Ministerial Declaration says:

"The ministers agreed to negotiations on the Anti-Dumping (GATT Article VI) and the Subsidies and Countervailing Measures agreements. The aim is to clarify and improve disciplines while preserving the basic concepts, principles and effectiveness of these agreements, and taking into account the needs of developing and least-developed participants.

In the initial negotiating phase, participants will indicate which provisions of these two agreements they want clarified and improved in the next phase — including provisions disciplining trade distorting practices. The ministers mention specifically fisheries subsidies; they say participants should aim to clarify and improve WTO disciplines, taking into account the sector's importance to developing countries".

The Doha Implementation Decision has also looked into some of the difficulties faced by developing countries when implementing the current WTO Subsidies and Countervailing measures Agreement. It has recognized some important issues like the need for certain subsidies for developing countries and allowing more time for some developing countries to phase out export-contingent subsidies. However, most of these issues are under negotiation and so far has not been implemented.

IV. Anti-Dumping and countervailing Duties: Similarities and Differences
While discussing the SCM agreement, one should distinguish clearly between Antidumping Duties (AD) and Countervailing Duties (CVD). Sometimes AD and CVD are referred to at the same time. This is because they share a number of similarities and also many countries handle the two under a single law, apply a similar process to deal with them and give a single authority responsibility for investigations. However, these are two different trade defense mechanisms available to WTO members and are addressed by two different WTO Agreements. If a company exports a product at a price lower than the price it normally charges in its own home market, it is said to be "dumping" the product. It is therefore a situation of international price discrimination. The Agreement on Implementation of Article VI of GATT 1994, commonly known as the Anti-Dumping Agreement (ADA), provides elaboration on the basic principles set forth in Article VI of GATT^[4] , to govern the investigation, determination, and application, of anti-dumping duties. The WTO Agreement on Subsidies and Countervailing Measures (SCM) on the other hand disciplines the use of subsidies, and it regulates the actions countries can take to counter the effects of subsidies. The fundamental difference between the two is while dumping is an action by a company, for subsidies, it is the government that acts either by granting subsidies directly or by requiring companies to subsidize certain customers.

Another important feature of AD and SCM is that the GATT agreement allow that the injured domestic industry is permitted to file for relief under the anti-dumping as well as countervailing duties. However, simultaneous imposition of both countervailing and anti-dumping duties to compensate for the same situation of dumping or export subsidization is not allowed. Article VI.5 of GATT clearly specifies, "No product of the territory of any contracting party imported into the territory of any other contracting party shall be subject to both anti-dumping and countervailing duties to compensate for the same situation of dumping or export subsidization".

V. The WTO Agreement on Agriculture (AoA)
Subsidies on agricultural goods are governed in WTO by the rules of Agreement on Agriculture. There are significant differences in the way the SCM agreement and the AoA deal with domestic and export subsidies. However, in case the subsidy on an agricultural product is found to be inconsistent with the AoA, action against it can be taken in accordance with the SCM agreement.

AoA distinguishes between support programmes that stimulate production and trade directly, and those that are considered to have no direct effect. The AoA does not impose restrictions on the later category. Support measures, which are exempt from reduction commitments, are categorized as Blue Box and Green Box subsidies. Production and trade distorting subsidies are classified as Amber Box subsidies and are subject to reduction commitments. AoA allows developed countries to have amber box subsidies up to 5 percent of the value of agricultural production. This is called the ‘de minimis' level. Amber Box subsidies above the de minimis level come under reduction commitments. It was stipulated that developed countries should reduce their Amber Box subsidies from the base period level (1986-88) over a period of five years (1999-2000) by 20 percent.

Reduction commitments of domestic subsidies proved to be least constraining during the implementation period of AoA. At the end of the implementation period, it is observed that almost all the countries have fulfilled their WTO commitments. However, it is also observed that most of the developed countries have managed to increase their total domestic support to the agricultural sector. This has been achieved through shifting of subsidies from the prohibitive Amber Box to the permissible categories of Blue and Green Boxes.

As far as export subsidies are concerned, the AoA stipulates that both the amount of export subsidies and quantities that receive export subsidies should be reduced over the implementation period. Though most of the WTO members have reduced export subsidies in the post Uruguay Round phase, its continued presence led to distortions in global markets. Agriculture is unique in this respect, as export subsidies are prohibited in WTO in all other sectors. Also, unlike the SCM agreement which allows export subsidy for poor developing countries, grant of export subsidy is prohibited under AoA. But as a Special and Differential Treatment (S&D), AoA allows developing countries to have transport subsidies for exports of agricultural products. Export credit, which has a similar distortionary effect, is not disciplined under AoA. In the Uruguay Round agreement, export credit programmes were not specifically listed as subsidies subject to reduction commitments, but were given a special status that exempted them from such commitments

The Agreement on Agriculture also contains a "due restraint" or "peace clause" (Article 13 of AoA). Peace Clause states that permissible domestic subsidies cannot be subject to countervailing duties during the implementation period, and that other ("amber") domestic support and export subsidies are subject to Countervailing (CV) action only if a determination of injury or threat thereof is established as per the Subsidies and Countervailing Measures agreement. The ‘Peace Clause' provided special immunity to subsidy providers in AoA. However, the Peace Clause has expired in 2004 and many analysts are of the opinion that after the expiration of Peace Clause, many commodity-specific EC and US agricultural subsidies will be vulnerable to legal challenges (Steinberg and Josling, 2003).

VI. Conclusion
The discussion on subsidies and their treatment in WTO show a distinct asymmetry about dealing with industrial and agricultural subsidies. Whereas Industrial subsidies have been put under considerable discipline in WTO, the rules are much more lenient towards agricultural subsidies. It is also ironical that while USA and EU are the two largest users of domestic support and export subsides in agriculture, for non-agricultural goods, these two countries are the biggest users of countervailable measures in WTO.

Many economists view this asymmetry as a fundamental problem with the prevalent multilateral trading system. For example, Stiglitz and Charlon (2004) are of the opinion that the new trade rules and domestic disciplines introduced in WTO reflected the priorities and needs of developed countries more than developing countries^[5] . According to them, many of these rules constrain developing countries' policy options and, in some cases, prohibit the use of instruments that had been used by developed countries at comparable stages of their development. Similar opinions have been expressed by Chang (2002) who argues that most developed countries, including USA and Britain, have actively used the so-called "bad" trade and industrial policies like infant industry protection and export subsidies during the earlier stages of their development. However, WTO rules are preventing developing countries from using these practices during their catch-up period. Chang eloquently describes the situation by saying that developed countries are attempting to "kick away the ladder" by which they have climbed to the top, thereby preventing developing counties from adopting policies and institutions that they themselves used. Given the asymmetric treatment received by developing countries in WTO, it is not surprising that multilateral trade negotiations are increasingly looking like an international stage for North-South confrontations. The negotiations under the Doha Development Agenda is currently on and in this round of negotiations the developing countries should emphasize and try to rectify the fundamental difference in approach taken by WTO about agricultural and industrial subsidies.

References
Ahuja. R. (2001). Export Incentives in India within WTO Framework, ICRIER Working Paper No. 72. Indian Council for Research on International Economic relations, New Delhi

Chang, H-J.( 2002): Kicking away the Ladder? Policies and Institutions for Economic Development in Historical Perspective. London: Anthem Press.

Hoda, Anwarul and Ahuja Rajeev (2003): "Agreement on Subsidies and Countervailing Measures: Need for Clarification and Improvement", ICRIER Working Paper no. 101, Indian Council for Research on International Economic relations, New Delhi

Steinberg, Richard F and Josling Timothy (2003): "When the Peace Ends: The Vulnerability of EC and US Agricultural Subsidies to WTO Legal Challenge" November 2003, available at www.ictsd.org

Stiglitz, Joseph E and Charlon Andrews (2004): "A Development Round of Trade Negotiations?" - Report prepared for the Commonwealth Secretariat by the Initiative Policy Dialogue (IPD) in collaboration with the IPD Task Force on Trade Policy.

UNCTAD (2000). Impact of Anti-Dumping and Countervailing Duty Actions, UNCTAD Paper No. TD/B/COM.1/EM.14/2.

UNCTAD (2000a): Subsidies, Countervailing Measures and developing Countries: With a focus on the Agreement on Subsidies and Countervailing Measures. UNCTAD paper no. UNCTAD/DITC/COM/23.

[1] The SCM Agreement, as it originally entered into force, contained a third category of specific subsidies called non-actionable subsidies. This category applied provisionally for five years ending 31 December 1999, and pursuant to Article 31 of the Agreement, could be extended by consensus of the SCM Committee. As no such consensus has been reached, the SCM agreement no longer recognizes this category of subsidies.

[2] 27.10. Any countervailing duty investigation of a product originating in a developing country Member shall be terminated as soon as the authorities concerned determine that:

(a) the overall level of subsidies granted upon the product in question does not exceed 2 per cent of its value calculated on a per unit basis; or

(b) the volume of the subsidized imports represents less than 4 per cent of the total imports of the like product in the importing Member, unless imports from developing country Members whose individual shares of total imports represent less than 4 per cent collectively account for more than 9 per cent of the total imports of the like product in the importing Member.

27.11. For those developing country Members within the scope of paragraph 2(b) which have eliminated export subsidies prior to the expiry of the period of eight years from the date of entry into force of the WTO Agreement, and for those developing country Members referred to in Annex VII, the number in paragraph 10(a) shall be 3 per cent rather than 2 per cent. This provision shall apply from the date that the elimination of export subsidies is notified to the Committee, and for so long as export subsidies are not granted by the notifying developing country Member. This provision shall expire eight years from the date of entry into force of the WTO Agreement."

[3] Source: International Trade Statistics 2002, WTO.

[4] Article VI of GATT 1994 authorizes the imposition of a specific anti-dumping duty on imports from a particular source, in cases where dumping causes injury to a domestic industry, or materially retards the establishment of a domestic industry.

[5] Stiglitz and Charlon use stronger language to denounce the use of WTO trade defense mechanisms as non-tariff measures by developed countries. They say: "There are four important categories of non-tariff barriers: dumping duties, which are imposed when a country sells products below costs; countervailing duties, which can be imposed when a country subsidizes a commodity; safeguards, which can be imposed temporarily when a county faces a surge in imports; and restrictions to maintain food safety or avoid, say, an infestation of fruit flies. The advanced industrial countries have used all of these non-tariff barriers to restrict imports from developing countries when they have achieved a degree of competitiveness that allows them to enter their markets. Many of these measures are described as ensuring "fair trade," but from the perspective of developing countries they ensure "unfairtrade." They are evidence of the hypocrisy of the North. Pp. 18.

May 3, 2005.