Multilateral trade rules on export subsidies and implications on SL

The terminology of subsidy has different connotations depending on the purpose, the target group and the type of the subsidies practiced by the different stakeholders under the different environments and contexts.

There are subsidies targeted for enhancing consumer welfare or subsidies aimed at developing and maintaining, infant industry, subsidies that are designed to protect domestic industry, agriculture and services sector from import competition.

The recipients of subsidies, whether it is a consumer, industrialist, farmer or service provider is a contended person as he would think that the subsidy he received enhanced his disposable income or total welfare indirectly.

However, some economists firmly believe that there is a cost for any type of subsidy targeted for any group of people and the subsidy merely serves a purpose of transferring resources of one segment of the society to the other without making any value addition or contribution to the economy. The debate on the implications of subsidy will continue to enrich the science of economics in the future.

The Multilateral Trade Rules on Subsidies on Agriculture are enumerated in the WTO Agreement on Agriculture, which is now being re-negotiated to reduce subsidies (domestic and export subsidies under the Doha Round of Negotiations).

The GATT Rules on subsidies stipulated in articles XVI is further elaborated under the Uruguay Round Negotiations in the Agreement on Subsidies and Countervailing Measures (SCM). The agreement on SCM mainly applies to industrial products which are also being further negotiated under the current Doha Round in the sphere of Rules Negotiations.

Under the SME Agreement, an industry is deemed to have received a subsidy where a benefit is conferred on the industry as a result of:

• Direct transfer from the government of funds (e.g. grants, loans or equity infusion) or government guarantees of payments of loans;
• The government foregoing the revenue that should otherwise have been collected;
• The government providing goods or services, or purchasing goods.

Any action of the government which covers the above three areas and which is not consistence with commercial consideration confers a benefit. For instance, government infusions of equity loans which are more favourable than those offered by the commercial banks or provision of goods and services by the government for less than prevailing market prices are likely to confer a benefit and come under the remit of subsidy.

The agreement

The aim of the agreement is not to restrain unduly the right of government to grant subsidies but to prohibit or discourage them from using subsidies that will distort fair competition, free flow of goods and services and consequently the adverse effects on the trade of other countries. In this context, the agreement categorised subsidies broadly into two categories viz, (a) prohibited subsidies (b) permissible subsidies). The following subsidies are prohibited.

• Export subsidies, i.e. subsidies that are contingent on export performances.
• Subsidies that are contingent on use of domestic over imported goods.

Irrespective of the level of development (developed or under developed countries) all members of WTO are prohibited to use the above subsidies. The Agreement of SCM has illustrated a list of prohibited export subsidies as follows:

• Direct subsidies based on export performances;
• Currency retention schemes involving a bonus on exports;
• Provision of subsidised inputs for use in the production of exported goods;
• Exemption from direct taxes (e.g. tax on profits related to exports )
• Exemption from, or remission of , indirect taxes (e.g. VAT) on exported products in excess of those borne by these products when sold for domestic consumptions;
• Remission or drawback of import charges (e.g. tariffs and other duties) in excess of those levied on inputs consumed in the production of exported goods;
• Export guarantee programmes at premium rates inadequate to cover the long-term costs of the programme;
• Export credits at rates below the government’s cost of borrowing, where they are used to secure a material advantage in export credit terms.

Though the agreement in spirit tends to discourage all subsidies, governments are in principle permitted to grant subsidies other than those subsidies which are prohibited. However, the permissible subsidies categorised into two groups i.e. those that are actionable and those that are non-actionable.

Actionable subsidies

Under the permissible subsidies that are actionable (Amber Subsidies), are all specific subsidies (subsidy is limited to an enterprise or group of enterprise, industrial sector or designated geographical region) are actionable if they cause adverse effect to the interest of other members. Actionable means, the member who had been inflected with adverse effect due to subsidy of other member can take this issue to the Dispute Settlement Mechanism and seek redress.

The agreement originally contained a category of non-actionable subsidies such as providing funds for research activities, providing facilities for new environmental requirements, assisting development industries in disadvantage regions. However, the category of non-actionable subsidies is no more permissible after the lapse of five years from the date of implementation of the Agreement (31 December 1999).

Despite the above strong discipline defined on subsidies, the Agreement on SCM recognises that “subsidies may play an important role in economic development programmes of developing country members”.

Flexibility

In view of these recognitions, certain flexibility in the application of the rules for developing countries is embodied in the agreement. First and foremost, all Least Developing Countries (LDCs) are not subject to countervailing duties on account of subsidies provided by them including prohibited subsidies.

The only caveat is that if any of the industry of those countries reaches export competitiveness in any product, (attained a share in the world market of any export product of 3.2 % for two consecutive years) they are expected to do away with export subsidies provided to that particular product.

In view of the basic rules on subsidies, it is important to analyse as to how Sri Lanka is placed and whether Sri Lanka has certain flexibilities in the application of the discipline on export subsidies.

Export subsidy has played a very important role both in the promotion of export-led economic growth in the country through foreign investments and as a general incentive to encourage exports.

One would realise, looking at the illustrated list of prohibited export subsidies that Sri Lanka has practiced one or two of these subsidies at least in the past to stimulate the export-led growth, particularly for promotion of investments in the export sector.

We have even recently resorted to encourage exports by providing incentives under the Exports Reward Scheme to address the global economic downturn of 2008-2009. One cannot rule out that in the future necessities will arise to resort to similar strategies subject to availability of funding to address the global economic problem.

Economic stimulation

During the period of global economic downturn, many countries including developed countries resorted to providing export subsidies of different forms as a part of economic stimulation package.  In fact, some economists now think that those stimulation packages serve well to avoid catastrophic situations in the world economy, while other schools of thought advocate early departure of such stimulation packages by the trading nations to avoid further distortion to the world trading system.

With regard to export subsidies, Sri Lanka and few developing countries, whose Gross National Income (GNI) is less than US$ 1,000 are totally exempted from rules prohibiting exports subsidies.

Sri Lanka is currently exempted from the prohibition on export subsidies contained in Article 3 of the SCM Agreement by virtue of Sri Lanka being a recognised member in the Annex VII (b) country exempted by Article 27.1 of the same Agreement.

Annex VII (b) countries are whose GNI Per Capita is less than US$ 1,000 at 1,990 constant dollars for three consecutive years. (This threshold should not be confused with current Per Capita GNP income of Sri Lanka). However, even after member graduates from Annex VII (b) that member can be brought back to the annex VII (b) flexibilities provided its Per Capita GNI records below US$ 1,000 at any one consecutive year.

The calculation of this threshold is carried out annually by the WTO Secretariat based on World Bank data and the methodology proposed by the Chair of the WTO SCM Committee and agreed upon default by the members.

An Annex VII (b) country

As at the most recent calculation available to this columnist released by the WTO in July 2009, Sri Lanka had reached the level of US$ 916 GNI Per Capita in 2007. As long as Sri Lanka remains as an Annex VII (b) country, (this is the only time limit) Sri Lanka has the right to provide export subsidies without limitation as to scope degree and level. This flexibility applies to both existing export subsidies and new subsidies which Sri Lanka may have or may put in place.

When will Sri Lanka reach US$ 1,000 GNI Per Capita at 1,990 constant dollars for three consecutive years? It is not possible to make a correct assumption or determination. This is because there is a time gap of publishing of World Bank data pertaining to constant US$ 1,995 GNI Per Capita on the basis of which WTO prepared Gross National Income (GNI) Per Capita at constant 1,990 dollars in respect of Annex VII (b) countries.



Seven subsidies programmes

There is another avenue of flexibility available for Sri Lanka though limited both in terms of scope and time. In 2002, Sri Lanka reserved its right to use the extension mechanism in the event that it graduated from annex VII (b) with respect to seven subsidies programmes listed in the document G/SCM/N/74/LKA of 7 January 2002 submitted to the committee on SCM. The list of seven programmes is related to incentive available and being granted by the government to companies invested in Sri Lanka. The programmes are

• Income tax concessions
• Tax holidays on profits generated
• Concessionary tax on dividends
• Indirect tax concessions – Internal tax exemptions
• Export development investment support scheme

•    Import duty exemption

•    Exemption from exchange control

According to the extension mechanism, Sri Lanka can use these programmes until year 2013 to be followed by a two-year phase out period till 2015. In other words, in the event that Sri Lanka graduate from annex vii (b) flexibilities, she can still use the seven programmes until 2015. The situation in the event after 2015 will remain on the evolution of dynamic of negotiations.

Unfair trade competition

Sri Lankan industrialists, farmers and some service providers have been agitating for a long period of time about the unfair trade competition emanating from imported goods and services which are being unfairly subsidised by the governments of exporting countries. Under the agreement of SCM, the direct remedial measure available to address this issue is to impose countervailing duties for such imported products.

However, Sri Lanka has no enabling legislation such as anti-dumping, countervailing and safeguard measures at present. It is learnt that these legislations have been drafted as far back in 2005, but no legislative procedure been carried out so far.

It is a welcome development that the 2011 Budget proposed to enact this legislation to safeguard domestic industry from subsidised imports. The many industrialists in the country look forward for early enactment of these legislations and establishment of institutional framework for effective implementation of those measures.

Sri Lanka’s position

In conclusion, we could summarise the position as follows:

(a)    Sri Lanka will be exempted from the prohibition on export subsidies so long as it remains in annex VII (b).

(b)    It is difficult to determine when Sri Lanka would graduate, though a very preliminary calculation shows that Sri Lanka may graduate soon considering the current economic dynamic.

(c)    In this context, according to the current decision, Sri Lanka would be able to make use of the extension mechanism as of the year it graduates, till 2013 together with the two-year phase out period of 2014-2015, if it does graduate before 2015.

(d)    The situation in the event it graduates after 2015 remains on the table.

(e)    It is high time now that Sri Lanka should formulate legislation on anti-dumping, countervailing and safeguard measures.