the subsidy regulations and vietnam’s position as a member of the wto

The concept of the subsidy in international tradeThe subsidy in international trade may be studied in terms of many different aspects,such as the linguistic, economic, political … From a

I hereby declare that the thesis has been written by myself The thesis has beenneither presented to any institution for evaluation nor previously published in itsentirety or in part Any tables and figures which are quoted from other sources havebeen acknowledged.

Acknowledgements

This thesis has been completed with the help of my supervisors: Professor ChristinaMoell and Doctor Vu Thi Hong Minh and of the Drafting Evaluation Councilmembers of the Law Faculty of the University of Lund and Hanoi Law University Iwould like to express my special thank to all for their supervision and help

Statutory Declaration 2

Acknowledgements 2

Table of Contents 3

Abstract 4 Abbreviations 5

Executive Summary 6

1 2 3 4 5 Introduction 7

The basic understanding of the subsidy in international trade 8

The subsidy regulations and coutervailing measures of the WTO and Vietnam 16

Recommendations and resolutions to improve the subsidy regulations in Vietnam 42

Conclusion 51

Table of Statutes and other Legal Instruments 55

Table of Cases 56

Bibliography 57

There are two major aspects of the subsidy issue in international trade which areusually both considered by Governments They are the subsidy on exported

commodities and the anti-subsidy which may be applied to imported commodities bythe countervailing measures

Vietnam, as a new Member of the WTO, needs to study the law on subsidy and thisthesis will concentrate on studying issues relating to subsidy and anti-subsidy Toassess the subsidy and anti-subsidy regulations of Vietnam and study them in

connection with the subsidy and anti-subsidy regulations of the WTO seems a

necessary task

The thesis consists of the three following parts:

The first part covers the basic understanding of subsidies in international trade Theconcept of subsidy is considered in terms of other fields, such as, linguistic,

economic and political It also considered in the light of the GATT 1994, the SubsidyCode 1979, the SCM Agreement and the AoA Anti-subsidy in international trade is

is also considered

In the second part covers the subsidy regulations and anti-subsidy of the WTO and ofVietnam The SCM Agreement and the AoA of the WTO were used in analysing theWTO subsidy regulations and anti-subsidy; the Ordinance was used to analyse theVietnamese regulations

In the third part we give recommendations for improving the subsidy regime ofVietnam Based on general research on the adaptation of subsidy policies elsewhere

in the World and in China in particular, suggestions for the improvement of

Vietnamese policies and laws and for strengthening its implementing mechanismsare proposed

World Trade OrganizationUnited State

Supporting subsidies and fighting against subsidies in international trade are usuallyargued for at the same time This is because they affect international trade bothpositively and negatively This thesis thus focuses on the subsidy regulations

applying to both imported and exported commodities activities It limits itself to thesubsidy regulations of the WTO and of Vietnam In addition, the thesis will makesome recommendations to Vietnam in its capacity as a Member of the WTO

Certain basic research methods will be used in the thesis They are the comparative,logical, analytical and legal research methods:

The comparative method will be used in the process of research The thesis willcompare the subsidy regulations of the WTO and of Vietnam In addition, the logicaland analytical methods will be used to identify legal issues that should be taken intoaccount Furthermore, the legal research method will look for lessons applicable tothe regulations in Vietnam

The above methods will also focus on certain issues For example, the subsidyregulations of the WTO; the subsidy regulations and policy of Vietnam before andafter its accession to the WTO In particular,, they will be used to analyze certainsubsidy disputes brought before the WTO and to make further recommendations toVietnam

1 Introduction

It would be very difficult to evaluate fully the effects of subsidies on internationaltrade, as well as those of all the direct and indirect benefits that flow from subsidypolicies The majority of subsidies come from Governments and public authoritiessince they are used as instruments of economic and social policies Thus, a subsidycan serve various purposes, such as, encouraging advanced technologies, assistingunderdeveloped areas or protecting the environment As an example, the operation ofthe steel industry and its factories may damage the environment So, on the one handthe Governments have to control pollution and on the other hand they have to helpcompanies purchase and install pollution abatement equipment Developing countriestend to rationalize subsidization by linking it to the promotion of their industrialdevelopment

However, subsidies may damage international trade as they distort free competition

In international context, a subsidy gives an unfair competitive opportunity to

subsidized products over the like products that have not been subsidized The

business receiving the subsidy will have advantages in competition with other

businesses in the market since the price of subsidized products may be lower than thecost of non-subsidized products In addition, a subsidy can undermine market access

as it can be seen as an instrument to limit the movement of commodities in the

The concept of the subsidy in international trade

The subsidy in international trade may be studied in terms of many different aspects,such as the linguistic, economic, political …

From a linguistic point of view, the meaning of “subsidy” is a grant or contribution

of money.1

In economic theory, based on its form and function, subsidies and taxes are oppositeand equivalent: a subsidy can be considered as a negative tax and vice versa.2

According to Samuelson and Nordhaus “if taxes are used to discourage consumption

of commodities, subsidies are used to encourage production…”3

The researcher Thalassorama used three criteria for defining a subsidy They aremodification of market failures, reduction of cost and enhancement of revenue Hedefined a subsidy as any government program that potentially permits a business toincrease its profits that would not exist without the government program

According to the experts studying subsidies to Aquaculture, a subsidy is a transfer offunds by a government in order to reduce the cost of production and increase revenuefor the producer.4

The WTO defines a subsidy by way of the two criteria of “financial contribution”and “benefit” By Article 1:1 of the Agreement on subsidies and countervailingmeasures of the WTO, a subsidy is deemed to exist if:

“(a) (1) there is a financial contribution by a government or any public body within

the territory of a Member (referred to in this Agreement as

“government”), i.e where:

1 Oxford Advanced learner’s Dictionary of current English, 6th Edition, Oxford, (2000).

2 Alberto Gabriel, Subsides to service sectors: A neo – protectionist distortion or a useful development tool, (2005), p.7.

3 Samuelson and Nordhaus, economics, (2001), p.78.

4 Fisheries and Aquaculture Department, The state of world fisheries and Aquaculture, (2002), part 3.

Government revenue that is otherwise due is foregone or not collected (e.g.fiscal incentives such as tax credits);

a government provides goods or services other than general infrastructure,

or purchases goods;

a government make payments to a funding mechanism, or entrusts or directs

a private body to carry out one or more of the type of functionsillustrated in (i) to (iii) above which would normally be vested in thegovernment and the practice, in no real sense, differs from practicesnormally followed by governments; or

there is any form of income or price support in the sense of Article XVI ofGATT 1994;

a benefit is thereby conferred.5

Thus, the definition of a subsidy in Article 1.1 has two elements: (1) a financialcontribution by the government (Article 1.1(a)) and (2) a benefit (Article 1.1(b)).However, regrettably, the Agreement does not define the term “benefit” This meansthat the “action” of the government is the core of the concept of “subsidy”

The point of views above show that there are many different ways to define the term.However, the form and function criteria are considered basic In short, a subsidy hasthe following characteristics:

- The subsidy is a trade policy tool encourage production;

- There is financial contribution by the government or other publicbody

- The contribution confers a benefit;

- The subsidy may indirectly impact the market

5 SCM Agreement Art.1.1 (a),(b).

2.1.2.1

The evolution of the regulation of subsidies inInternational trade

GATT and the Charter of international trade Organisation (ITO)

The first subsidy regulations were introduced at the suggestion of the ITO, and theywere prepared and submitted by the United States The document proposed tointroduce distinct regimes for export subsidies and for domestic subsidies Theexport subsidies were sub-divided into those applicable to primary commodities andnon-primary products While domestic subsidies were permitted, export subsidiesdepended on additional conditions as the resulting bi-level pricing was generallyprohibited In the agricultural sector, the latter were exceptionally permitted if notapplied in a way that might lead to acquiring more than an equitable share of worldtrade. 6 However, the ITO Charter has not entered into force It was only the GeneralAgreement on Tariffs and Trade (GATT) which provided a uniform regime for allforms of subsidies It permitted all kinds of subsidies without distinction but it wassoon realized that: this regime could not survive the first amendment of the GATT

A 1955 review session did nothing but resuscitated the old two-tier classificationprovided in the Havana Charter (1946) between domestic subsidies and exportsubsidies, as well as between export subsidies on primary commodities and non-primary products7 A separate paragraph in the form of Article XVI: 3 was devoted

to the regulation of export subsidies on primary products – the category containingagricultural products

In addition, the ambiguous and controversial concepts relating to issues like

“equitable share”, “representative period”, “special factors” remained, and theseprovisions provided a source of tension and uncertainty throughout the history of theGATT

6 Desta, M.G, the law of International trade in agriculture products, (2002), pp 100-104.

7 Ibid, p 131

2.1.2.2 The 1979 Subsidy Code

After the Review Session on Article XVI of the GATT in 1955 and the Declaration

in 1960 on Giving Effect to the Provisions of Article XVI: 4, the next big step insubsidy rule–making emerged from the Tokyo Round The Agreement on

Interpretation and Application of Article VI, XVI and XXXIII, which is known asthe Subsidy Code entered into force on January, 1st, 1980.8 The Code would beapplicable to the contracting parties that signed it More contracting parties acceptedthe Code than had accepted the 1960 Declaration The Subsidy Code confirmed theprohibition of export subsidies on non-primary products In addition, it introduced anillustrative list of export subsidies The Code also elaborated certain rules pertaining

to adverse effects and it contained special and different treatment provisions fordeveloping country signatories

The Subsidy Code introduced more detailed rules pertaining to countervailing

measures, notably in respect of procedures associated with countervailing dutyinvestigations and standards for determining whether a subsidy was a cause or threat

of material injury.

2.1.2.3 The Agreement on Subsidy and Countervailing Measures (SCM)

Neither the GATT nor the Subsidies Code 1979 contained a definition of “subsidy”.However, the SCM Agreement provided such a definition and is thus considered as alandmark in comparison with the previous laws It applies only to trade in goods.That means subsidy regulations do not apply to agriculture subsidies

According to the Articles 1 and 2 of the SCM, the concepts such as "subsidy" and

"specificity" are the keys to the entire Agreement Article 1 of the SCM Agreementstates that a subsidy is deemed to exist if a financial contribution or income or pricesupport is provided by a government, and a benefit is thereby conferred, and thatsuch subsidy is the subject of the Agreement if it is “specific” Article 2 containedprinciples for determining the following types of specificity: first, enterprise

specificity; second, industry specificity; third, regional specificity

8 2006 The Report of the WTO.

The SCM also developed definitions, concepts and methodologies relating to adverseand effects and established procedural rules for multilateral remedies and for specificexistence of the application on countervailing measures Substantively, the

Agreement clarifies the market benchmarks to be used in valuing subsidies andrequires that “all relevant factors” should be considered in determining whetherinjury is present In particular, the rules have included the elaboration of the

requirement of an investigation, the calculation of the benefits amounting from

different forms of subsidization, the existence or threat of injury, and the

establishment of causal links between subsidization and its effects on domestic

industry

2.1.2.4 The Agreement on Agriculture

The Agreement on Agriculture (AoA) emerged from the Uruguay Round It was themost complete attempt to frame explicit multilateral rules for agricultural trade.Separate provisions dealt with each of the three policy pillars defined in the

Agreement – Market access, domestic support and export subsidy.

Additionally, the WTO Agreement on Agriculture sets out a legal framework thatimposes principles in the three critical areas effecting trade in agriculture underArticle 9 First, the Agreement limits the use of export subsidies Second, the

Agreement sets agriculture trade on a predictable footing by requiring the elimination

of non-tariff barriers, such as quotas and import bans and simple tariffs Third, theAgreement calls for commitment to reducing trade-distorting domestic support,while preserving criteria-based “green box” policies that can provide support toagriculture in a manner that minimizes distortions to trade

Consequently, the Agreement on Agriculture was the first major international

attempt to reform agriculture trade policies that have depressed and destabilizedworld prices and markets for many years It limited the use of agriculture exportsubsidies while efforts were also made to increase market access and to reducedistorting domestic support

2.2 Subsidy areas in international trade

In international trade, subsidies are classified in many different ways Based onthe scope of application, subsidies can be divided into two main categories: export

subsidies and domestic subsidies; Based on the subjects receiving subsidies

(excluding consumption subsidies), subsidies are divided into two categories:

industry subsidies and horizontal subsidies; Horizontal subsidies include subsidies toprotect the environment, save energy, research and development and assistance tounder-developed areas; In industry, subsidies are separated into subsidies to non –agricultural commodities and subsidies to agriculture commodities

2.2.1 Subsidies to non-agriculture commodities

In order to guarantee equality in trading activities, and promote competition andeconomic growth, the WTO stipulates categories of subsidy Under the SCM

Agreement, non–agricultural subsidies are classified into two groups: the prohibitedsubsidies9, and actionable subsidies10 Originally, there was a third category underthe SCM Agreement, non – actionable subsidies 11, but this category only lasted for a

5 year period and ended on December 31, 1999, and has not been extended

The subsidies prohibited by the SCM Agreement include: export subsidies and local

content or import substitution subsidies The prohibited subsidies are irrefutably

presumed to distort trade Thus, these prohibitions are not new and “the developedcountries had already accepted the prohibition on export subsidies in the 1960s underGATT Article XVI Similarly, the ban on local content subsidies can be traced back

to Article III: 4 of GATT, on national treatment, specifically the prohibition onmeasures favouring the use of domestic goods”12 These two categories of subsidies

are prohibited They are designed to directly affect trade and thus are most likely tohave adverse effects on the interests of other Members

Actionable subsidies, according to the SCM, are not prohibited However, thesesubsidies would be suit in cases they cause injury to the domestic industry of anotherMember, serious prejudice to the interests of another Member or nullification orimpairment of benefits accruing directly or indirectly to other Members under GATT1994

9 Part I- Art 3, 4 – ASCM.

10 Part III - Art 5, 7 – ASCM.

11 Part IV- Art 8, 9 – ASCM.

12 2006 The Report of the WTO.

2.2.2 Subsidies to agricultural commodities

The subsidy provisions regarding agriculture differ from those applying to agricultural products in two important ways First, the Agreement on Agricultureenvisages commitments to reduction of both domestic support measures and exportsubsidies Second, the commitments to the reduction of export subsidies underlinethe reality that they are unlike subsidies on manufactures The original efforts atdisciplining agriculture protection did not contemplate the possibility of eliminatingexport subsidies At the Sixth WTO Ministerial Meeting held in Hong Kong inDecember 2005, the Members state of the WTO agreed “eliminate export subsidies

non-in agriculture by 2013 This will have the effect of establishnon-ing parity non-in the

treatment of export subsidies on manufactures and agricultural products”. 13

In the Agreement on Agriculture, domestic supports are distinguished in terms of the

degree to which they are deemed to distort markets There are so–called green,

amber and blue that are listed in subsidy reduction commitments.

A blue subsidy is a direct payment to the producers and not subject to reduction inthe WTO Agreement on Agriculture

A green subsidy is not subject to reduction under the AoA It is neither directed atspecific products nor connected to production on prices, like programs on ruraldevelopment, renewable energy and land conservation

An amber subsidy is technically called the Aggregate Measurement of Support(AMS) and is subject to ASM reduction commitments as it is regarded the mostdirectly trade-distorting

In addition, “the blue subsidies are a sub-category of amber measures, but treateddifferently in terms of liberalization commitments Blue subsidies are those that may

be deemed trade-distorting, but are contingent upon limitations in production These

subsidies are not included in the ASM” 14

The subsidy stipulations on agriculture differ from those on non-agricultural

commodities but the remedies regarding subsidized commodities derive from theSCM Agreement and are the same as the remedies on non-agricultural commodities

13 2006 The Report of the WTO.

14 2006 The Report of the WTO.

2.3 The Countervailing measures fighting against

subsidies in International trade activities

For a long time, subsidies were considered as major barriers to liberalization having

a serious effect on the market The first regulations on subsidies were provided in theGATT (1947) and then in the SCM, the subsidized were classified into differentkinds Some of them may distort the nature of trade Therefore, when the industry of

a Member is injured by direct export subsidies of other Members, countervailingmeasures can be used These measures are only to be used if the subsidy harms theindustry of the importing Member state

In order to allow this response to injury to the domestic industry of the importingcountry immediately, the SCM Agreement set out conditions for imposing temporaryCVM, these conditions being:

1 subsidized imports;

2 injury to a domestic industry; and

3 a causal link between the subsidized imports and the injury

If all of the conditions are satisfied, the injured party may apply temporary

countervailing measures These measures may be considered as countervailingduties Article VI: 3 of GATT 1994 defines the term “countervailing duties” as “aspecial duty levied for the purpose of offsetting any bounty or subsidy bestowed,directly or indirectly, upon the manufacture, production or exports of any

merchandise”.15 The SCM Agreement provides the rules on applying countervailingduty According to Article 19.2, the injured Member may apply the countervailingduty under Article 19 except the subsidies had been removed So, the Article showsthat the purpose of the application on the countervailing duty is to reduce tradinginjury However, the duty rate for imported goods of each country may be differentthus the countervailing duty rate must be based on the level of subsidy and thespecific injury in a certain case

15 SCM Agreement, Footnote 36.

A countervailing duty is used to fight against a foreign subsidy that injured domesticindustry In order to prevent any abuse of countervailing duty, Article 21.3 of theSCM Agreement provides that a countervailing duty shall be terminated no later thanfive years from its imposition To extend this time the authorities have to review thecountervailing duty by way of a new investigation procedure before the periodended The authorities can initiate a review on their own or on behalf of domesticindustry.

In conclusion, the application of countervailing measures is necessary in

international trade However, some conditions must be satisfied before measures can

be imposed They are subsidy, injury and a causal link relation between subsidy and

injury In other words, the injury should be a result of the subsidy Therefore, thesubsidizing Members have to compensate the injured Members whose domesticindustry suffers difficulties

3.

3.1

The subsidy regulations and coutervailing measures of the WTO and Vietnam

The subsidy regulations of the WTO

There are two basic multilateral agreements providing for subsidies under theWTO They are the agreement on Subsidy and Countervailing Measures (SCM) andthe Agreement on Agriculture (AoA) Besides the above agreements, subsidy issuesare covered in some other WTO agreements such as the agreement on Trade- relatedinvestment Measures (TRIMs), the General Agreement on Trade and Tariff 1994(GATT) and the General Agreement on Trade in Services (GATS) This thesis islimited to research on subsidy regulations provided by the first two agreements only

It would be noted that the SCM is a general agreement while the AoA is a specializedagreement on subsidies

3.1.1 Identification of subsidy

There are two key factors that are used in the identification of subsidies They are

financial contribution and received benefit.

"Financial contribution" is the first element that would be used in the identification ofsubsidies The SCM has listed a series of factors that could be used to address

"financial contributions" made by a government The agreement also cover cases inwhich the government may indirectly subsidize to businesses through privateorganizations A "financial contribution" may be identified by the 4 following

pointers:

First, a fund may be transferred from the government to a business It is possible thatthe government simply gives cash to a business More likely is that the governmentprovides capital with a favourable interest rate or other conditions It may also

provide insurance so that business may reduce its costs.16

Second, a subsidy can be identified by more indirect financial encouragement

provided by the government For example, tax holidays, favourable conditions on taxcollection and on the like The point is that the government give the business

favourable conditions by not taking money that would otherwise be taken.17

Third, supplying commodities or services outside the usual public infrastructure mayalso be considered as a government subsidy18

Fourth, a money contribution made by the government to a financial intermediary orany private organization which carries out any activities provided in Article 1.1 of theSCM is also government subsidy.19

The point of the fourth point is that the activities listed in the first to third points can

be regarded as financial contributions regardless of funds came from a government oranother organization

In fact, the four elements used for determining a financial contribution under WTO

raise a question The question is whether the provision uses listing skill or illustrative

technique This is because listing skill is in issue, a payment can be a financial

16 Article 1.1 (a)(i) SCM

17 Article 1.1(a) (ii) SCM.

18 Article 1.1(a) (iii) SCM.

19 (Article 1.1(a)(iv) SCM

contribution and a subsidy even if it does not match the points in the regulation, 20but,

if the list is illustrative, that may widen the meaning of the term to allow payments to

be classed as financial contributions even though they are not within the strict

meaning of the term.21 In a debate of Canada over two dispute cases,

Canada – Dairy and Canada – Aircraft it was considered that the use of the term inArticle 1.1 (a) was comprehensive rather than illustrative.22 However, according toArticle 1 of the SCM, we can affirm that the involvement of the government or publicorganizations is a crucial condition Involvement of the government or public

organizations is the first and most important requirement that is used for determining

a subsidy under Article 1.1

Secondly, that there is "received benefit" from the contribution of the government isthe second factor involved in the determination of a subsidy That means the

"financial contribution" would not be considered as a subsidy unless the contributioncreates a "received benefit" for a business However, the SCM has no definition ofthe term "benefit and there is controversy about it In order to determine the term

"benefit", the Panel as the Appellate Body of the WTO has provided explanations thatcreate the general principles to be used in cases

For example, in the case “Canada – Measures Affecting the Export of Civilian

Aircraft”, the Appellate body of the WTO affirmed that the term “benefit” was

determined by a comparison of the financial contribution and market conditions.Naturally, the comparison was used for the determination of what a business can getfrom the government financial contribution and from the market The Appellate Bodyaffirmed that “We also believe that the word “benefit”, used in Article 1.1(b) of theSCM, implies some kind of comparison This must be so, for there can be no

“benefit” to the recipient unless the financial contribution makes the recipient “better

20 Terry Collins and Gerry Salembier – International disciplines on Subsidies; GATT, WTO and Future Agenda, (1996),

p176.

21 Melaku Geboye, The Law of International Trade in Agriculture, 2003, P160-165.

22 The Canada – Dairy, report of the Panel, supra n 19, para 4.310 and Canada – Aircraff, report of the Panel, supra n 36,

para 5.27.

off” that it would otherwise have been, absent that contribution in our view, themarketplace provides an appropriate basis for comparison in determining whether therecipient has received a financial contribution on terms more favourable than thoseavailable to the recipient in the market”.23 In the case of EC – DRAMS (EuropeanCommunities-Countervailing Measures on Dynamic Random Access Memory Chipsfrom Korea, WT/DS299, Panel report adopted on 17 June 2005), the Panel affirmedthat the existence of a "benefit" is a necessary element in finding that there has been asubsidy Accordingly, “only in cases where the financial contribution provides therecipient with an advantage over and above what it could obtained an the market, atthe moment the government financial contribution be considered to have conferred abenefit and a subsidy will be considered existence”.24 However, the term "benefit"has also been indirectly explained by Article 14 of SCM which concerns the

calculation of the amount of a subsidy in terms of the benefit to the recipient, asfollows:

Government provision of equity capital shall not be considered as an SCMconferring a benefit, unless the investment decision can be regarded as

inconsistent with the usual investment practice of private investors of thatMember;

a loan by a government shall not be considered as an SCM conferring a

benefit, unless there is a difference between the amount that the firm receivingthe loan pays on the government loan and the amount the firm would pay acompatible commercial loan which the firm could actually obtain on themarket In this case the benefit shall be the difference between these twoamounts;

a loan guarantee by a government shall not be considered as an SCM

conferring a benefit unless there is a difference between the amount that thefirm receiving the guarantee pays on a loan guaranteed by the government and

23 Appellate Body Report, WT/DS70/AB/R, supra note 74, paragraphs 149-161, adopted 20 August 1999.

24 Report of EC – DRAMs, para 7.175.

the amount that the firm would pay on comparable commercial loan absentthe government guarantee;

the provision of goods or services or purchase of goods by a government shallnot be considered as conferring a benefit unless the provision is made for lessthan adequate remuneration, or the purchase is made for more than adequateremuneration

So, "benefit" is considered as the second element that is used when determining asubsidy according to SCM However, in order to determine correctly the meanings of

"benefit", "more convenience" or "more than what the business gets” they must beanalyzed and examined in terms of the specific market circumstances

Besides the two basic elements discussed above, the concept "specific sense" is alsoconsidered in some cases Though "specific sense" is not always an element used todetermine a subsidy, it is said to be a condition for the application of the special casesprovided by parts II, III and V of the SCM They are prohibited subsidies, actionablesubsidies and countervailing measures The term "specific" is not clearly defined but,based on Article 1.2 of the SCM, a subsidy can be "specific" where the receivers areeconomic organizations such as a business, economic groups or economic sectors.Legally, a specific subsidy is created in cases when the competent authority

prescribes the businesses that can receive it.25 In reality, there are some subsidies thatare not "specific" though they seem to be These kinds of subsidy are those withcertain features that lead to certain businesses only getting the subsidy; money isprovided to some businesses much more than the others.26 It may be difficult todetermine which case is in issue here However, a subsidy is created by the action ofgovernments or public organizations In order to determine whether there is a subsidy

we have to look at relevant situations, market circumstances and the relationshipbetween subsidized activities and benefits In other words, market circumstances areusually used for determining the benefit of a subsidy

25 Article 2.1(a) SCM

26 Article 2.1 (c) SCM.

3.1.2 Regulations on application of subsidy

I, the non-actionable subsidies (green light) provided in Part IV has not been allowedsince December, 31, 1999and no longer exist

Prohibited subsidies fall into two kinds under the SCM: Subsidies for exported

commodities and subsidies for using domestic commodities instead of importedgoods This provision has been applied to both developed and developing countries.However, developing countries may be treated differently during their transitionalperiod according to Article 27 of the SCM This issue will be covered in detail inpoint 1.1.3

The both kinds of prohibited subsidies said above have the same a related issue thatreflexes the situation of a country market in which the trading completion is increasedand the quantity of imported commodities is decreased

Actionable subsidies are, by definition, not prohibited However, if they cause

"injury" to other state Members, the subsidies may become actionable In otherwords, the subsidy distorting trade would become subject to the actionable subsidyregulations

It may be said that subsidies are usually "harmful actions" to other Member countries'and their interests According to Article 5 of the SCM, “harmful actions" consist ofthree kinds First, the action prejudices the domestic industry of a country as

subsidized commodities are easily imported to it Second, the action harms the otherMember's interests as provided for in the GATT 1994 And third, the action causesserious prejudice to the other Member's interests All these negatively affect domesticand/or third country markets

- Agricultural subsidy:

Agricultural subsidies are mainly governed by the AoA though the SCM is alsoapplied in some cases That means the AoA and the SCM may even be in conflict.The AoA may legally allow agricultural subsidies However, these subsidies may beactionable subsidies under the SCM if they "negatively impact" trading transactions.Members may then be requested to remove or modify the agricultural subsidies sothat they stop causing these negative effects on trading partners.

Export subsidies on agricultural products are generally prohibited unless the relevantcountries are listed in the commitment on spending cut Export subsidies on

agricultural products would be governed by the AoA For example, export subsidiesthat would be cut consist of “direct subsidies, including payments-in-kind, contingent

on export performance”; 27 businesses carrying out a non-trading export subsidy with

a price lower than the price in the domestic market…

However, subsidies complying with the AoA may be actionable subsidies under theSCM if the subsidies cause injury to producers in the import market In addition,actionable subsidies would not be allowable under the exceptional "peace

provision"28 Furthermore, after the expiry of the provision, the agricultural subsidiesunder the AoA could certainly be actionable subsidies under the SCM if they causeinjuries for trading partners Such injuries must be proved in the usual way

As to domestic subsidies, agricultural subsidies are deemed to be legitimate if theyare compatible with the AoA and the cutting commitment of the Member countries.According to the AoA, agricultural subsidies are classified into three kinds: Green,blue and "amber" Green subsidies would be not actionable since they would notharm trade while blue and “amber” would be actionable subsidies Therefore, greensubsidies would be applicable generally

To study the application of the AoA to the agricultural sector, the case on "cotton"between Brazil and the US provides a good lesson and a broad overview The case issaid to be the biggest in the agricultural sector The case is US-Upland Cotton,WT/DS267, Panel reports adopted 27 September 2002:

27 Article 9, AoA

28 Article 13(c), AoA.

Brazil complained about nine elements of the US subsidy program on cotton Fiveelement in the program (direct payment, payment for the contract on the produce,payment for domestic produced subsidy, payment for expense of the period unseatedand payment for the loan on market access) relating to basic public policy on

agriculture This policy implemented the "planed harvest" provided for in US

agricultural law in the period 1999-2003 Two others were subsidies subsidy oncotton (the second step and payment for variety of cotton trees) and the last two werecommonly applied (harvest guaranty and security of export credit) The case focused

on two key issues: First, whether these subsidies were prohibited by the AoA

Second, whether the subsidies caused injury to the trading of Brazil

After examining the case, the competent authority decided as follows:

First, although the direct payments and payment for produced contract did not causeharm, they are not "green boxes" The US was asked to notify them in future years.Second, the three subsidies consisting of payment for marketing losses, payment forexpenses of the period and payment for loans on market access were determined to beserious injuries causing pressure on the price of cotton in the world market The UShad to implement a method removing any negative impact or cancel the subsidies.Three, the second step payment (specific subsidy for cotton trees) also has a seriouseffect on the cotton price For domestic customers, the payment subsidizes localproducts as against imported commodities While the subsidy for exported

commodities had not been put on the list of the US's commitment, the US was stillasked to remove this subsidy

So, although subsidies may comply with the AoA, they are actionable if they causeinjury to trading partners

- Specificity and difference:

The WTO looks at the level of economic and commercial development of developingcountries, undeveloped countries and transforming countries when applying subsidyregulations It has provided that:

First, in the agricultural sector, the SCM provides that export subsidies are not

prohibited in the undeveloped countries For developing countries that have GNP

under 1.000 USD per capita, the export subsidy regulations would be exempted29.However, once GNP is above 1.000 USD, the subsidy must be cut within a period ofeight years For transforming countries, the period is seven years30 These countriesmay also have more time for removing certain other subsidies For subsidies thatwould be encouraged domestic products, the developing countries have a period ofeight years (from the time they became the Member of the WTO) to remove them.However, if a developing country has any product that has exporting capacity, it has

to remove that kind of subsidy within two years Undeveloped countries have to cutthat kind of subsidy within eight years from the time they became a Member of theWTO

Secondly, in the agricultural sector, the export subsidies of developing countries andtheir domestic production support under the AoA have more favourable conditions.For example, the component of the export subsidy of developed countries to be cut is36% while for developing counties its is 24%; the aggregate component to be cut indeveloped counties is 21%, in developing counties 14%; domestic subsidies,

subsidies that may cause distortion of the trading activities (amber box) in developedcountries are to be cut by 20%, in developing counties by 13% The cutting by theminimum conditions in developed countries must be less than 5% of the producingvalue while for developing countries it must be less than 10% of the producingvalue31 In fact, however, in recent years; developing countries are treated "strictly" ifthey want to become Members of the WTO.32

3.2 Regulations on countervailing measures

Countervailing measures are legal methods for the protection of domestic producedgoods from the unfair competition deriving from foreign governments subsidizingimported goods The methods are not provided for by bilateral agreements They are

29 Article 27.2 SCM

30 Article 29.2 SCM

31 Source: The WTO, explanation of the Agreement on Agriculture http://www.wto.org

32 Source: Sweden national aboard of trade (2004), P158-165.

only to be found in the WTO agreement at Article 16 of the GATT and in the SCM.Accordingly, (setting aside the provisions of the AoA for agricultural products)prohibited subsidies consist of export subsidies and subsidies for products that may

be instead of imported products The Member countries are not allowed to provide ormaintain subsidies that may cause harm to other Members’ interests If such subsidiesare found, the competent authority of the injured country Member will apply

countervailing measures However, the application of the countervailing measures has

to comply with the principles of the WTO on the determination of the subsidies, theprinciples for the application of countervailing measures, and their actual application

3.2.1 The principles governing the application of

countervailing measures

The SCM clearly provides that countervailing measures may only be applied if theperformance of imported products subsidized b other governments threatens domesticproducers of the importing country The application of countervailing measures has

to comply with the following principles:

Firstly, the countervailing duty applied to imported products must not be higher thanthe amount of money subsidizing the products The purpose of the application is toend the injury to domestic producers The countervailing duty should not be higherthan the subsidizing element in the price of a subsidized import

Secondly, the countervailing duty must be levied without discrimination

Accordingly, any countervailing duty should be levied equally on any importedproducts from all countries that are determined to be subsidy countries where thesubsidy cause harm to domestic industries, except for countries that have pledged toremove the subsidy or to present their commitment to do so with the approval of thecompetent authorities However, if there are differences between the countries, thecountervailing duty level levied on imported products may vary appropriately

Thirdly, the duration of the application of the countervailing duty may not be morethan five years with a view to preventing overuse of countervailing duties The

duration may only be extended if the competent authority carries out a new

investigation before the expiry The competent authority may implement the

investigation on its rights or on behalf of representatives of domestic production33

3.2.2 Institution for application of the countervailing measures

Government subsidized products might compete unfairly with similar products thatare not so subsidized The WTO therefore allows Members to punish subsidizedproducts that may cause serious injury to producers in the importing countries Thesecountries usually use countervailing duties to fight against subsidized products.However, the application of a countervailing duty must be in line with certain

provisions contained in the SCM according to which the application of the

countervailing duty must be unilateral-institution or multilateral institution

Application of the solo-institution is preceded by an investigation of the impact of thesubsidized products which caused injury to domestic industries

The unilateral-institution is described as follows:

The unilateral-institution is implemented through a request consultation between theinjured Member and the Member believed to be granting or maintaining the subsidy.The SCM provides "whenever a Member has reason to believe that a prohibitedsubsidy is being granted or maintained by another Member" (Article 4.1); "anysubsidy referred to in Article 1, granted or maintained by another Member, result ininjury to its domestic industry" (Article 7.1) Accordingly, the injured Members haverights to make direct a request consultation

In addition, Article 4.3 and 7.3 of the SCM provide that the purpose of the

consultation That is the consultation shall be to clarify the facts of the situation and

to arrive at a mutually agreed solution It may be said that the application of

countervailing measures by the unilateral-institution may bring to the Member apositive results

The application of countervailing measures under the multilateral institution involvesdispute resolution by way of the Dispute Settlement Body (DSB) of the

In order to determine the existence and impact of a subsidy, the competent authoritymust carry out an investigation However, in order to get the investigation (except the

33 Article 21.3 SCM

cases that are provided in Article 11.6 of the SCM on "special cases") the competentauthority needs a written request from the domestic industry of the importing country

or their representatives.34 These requests must come from producers that have morethan 50% of the aggregate production of the products in question", and the

investigation will not be implemented by the competent authority if the number ofdomestic supporting producers is less than 25% of the total on the engaged in the likedomestic production.35

The domestic producers or their representatives must produce sufficient evidence ofsubsidy, its value and the relation between the subsidy and the injury caused byimported products.36 The evidence for negative impact of the subsidy must be "right"since it is the only ground that the authority can accept.37 The investigation

proceedings must be completed within 18 month and in special cases this duration isnot more than 12 months from the date when it started.38

If a negative impact of the subsidy is found by the authority, the importing countryhas the right to use a countervailing duty on imported products The duty applying inthis situation is no "more than the amount of the subsidy found to ".39

Based on my research on the control of subsidies and countervailing measures of theWTO, I have the following comments to make:

First, the approach of the WTO on subsidies and countervailing measures manifests abalanced stand between the freedom on trade and the interests of the Member

countries

Secondly, the approach on subsidies and countervailing measures represents the point

of view of the WTO Accordingly, subsidies are not definitely prohibited The WTO

persuades the Member countries to find the best way to use the subsidy reasonablyand ensure it does not distort trade The WTO also ensures that the subsidy

regulations and countervailing measures help society to develop in a stable and equalway

After Vietnam became a Member of the WTO, one of its macro-economic policiesthat needed to be adapted is its approach to subsidies which directly and urgentlyimpacts on the implementation of its commitments Though current Vietnamesepolicy has changed to some extent, it still favours the protection of domestic industryfor export through a subsidy system The idea is that the income tax of enterprises isreduced and this helps them to compete However, subsidies are a double edgedsword If the application of a subsidy is not limited in degree and time it may causenegative effects such as inactivity and passivity

In addition, there are many forms of subsidy Some are prohibited, others would beprohibited when coupled with certain conditions while yet others are not prohibitedunder the WTO regulations On one hand, the issue here is how to select a stablesystem, which subject to apply it to, how long it can last so as to support domesticindustry and competition and finally how to avoid countervailing measures On theother hand, the laws of Vietnam must be modified in the light of the WTO and itscommitments under it and this should be done so as to minimize injury from

imported products on domestic industry

3.3.1.1 The WTO commitments of Vietnam on subsidy

One of the contents of the negotiations over WTO accession for Vietnam was

subsidy The subsidies regulations of Vietnam are provided mainly in legal

documents First, the commitments made by Vietnam relating to prohibited subsidiesfor WTO accession (From paragraph 270 to paragraph 288 of the Report of theworking party on the accession of Vietnam); Second, the regulations of the WTOitself (the SCM) These regulations would be applied in Vietnam and if they conflict,the express commitments of Vietnam would be prioritized

The key commitments on the subsidy system were as follows:

In agriculture, Vietnam committed to fully halt subsidies for export agriculturalproducts as soon as it becomes a Member of the WTO Other domestic subsidies of

up to 10% are allowed leaving Vietnam with the same level as other developingMember countries

In non-agriculture, Vietnam committed to remove subsidies for export products andfor products that can be used instead of imported products as soon as it became aMember of the WTO For garment products, all direct or indirect subsidies on exportproducts would be stopped when Vietnam became a Member All prohibited

subsidies in the form of investment privileges for export projects would be removedfive years after the time Vietnam become a Member of the WTO

In order to get accession to the WTO and to implement its commitments as a

Member of the WTO, almost all the laws and policies of Vietnam were adaptedbefore it becomes a Member Recently, Vietnam has been further improving its lawsystem to comply with the WTO regulations This improvement should help Vietnamdevelop its economy

According to a survey used by Vietnam to get accession to the WTO, it removed allforms of prohibited subsidies during the period from 2003 to 2007 This was done intwo manners Subsidies were entirely removed or they were adapted to fit WTOregulations This means the laws of Vietnam now comply with the WTO The surveyshows that the laws of Vietnam as of 15/11/2007 no longer have any policy or