Visible cash. Perhaps it is the sight of cold hard cash which attracts so much more rulemaking attention than equivalent amounts of other government action (or inaction). This is borne out by the wording of the first US countervailing duty statute, enacted in 1890, imposing a duty to offset any “bounty or grant”, which certainly sounds like a direct cash payment. It is also noteworthy that that first CVD law was aimed solely at bounties or grants given to sugar, which had also been the subject of perhaps the first multilateral subsidies discipline negotiations, the Brussels sugar talks, while there was no similar movement at the time to lower steep tariffs on sugar. Or perhaps it was a patriotic or constitutionalist defense of those tariffs - the new US CVD law was enacted to offset a system of cash grants set up by czarist Russia to exactly equal the US sugar tariff, so the US Congress arguably was only defending its prerogative to impose tariffs. This fixation on the cash payment may also explain why the doctrine of "specificity" is so counterintuitive, since it allows that financial flow if it goes to more people!
A related force that shaped the development of subsidy rules was the increase in the amount of money being spent. As large amounts of money were channeled into subsidies in the US and Europe for agriculture, those “primary products” became the subject of the first serious GATT rules on subsidies (“primary products” meant mainly, though not exclusively agriculture – no one was subsidising exports of oil or iron ore, for example). Similarly, the large inflows of government cash into domestic industrial plants after World War II and into the 1980s shifted the focus of trade policy makers from the focus on export subsidies to include large internal subsidies.
Ideology played a role as well; the SCM Agreement came at the apogee of Reagan-Thatcherism. This can be seen in the very strict limits placed in the definitions of “permissible” subsidies that , in any event, were only finally added after the election of Clinton, a pro-subsidy US president.
Institutional factors have played a role too. Subsidies have almost always been treated as a trade problem, probably because every government gives them and the people who receive subsidies internally are quite reluctant to do without. (I've seen this personally, some of the most vocal critics of foreign subsidies defending their right to receive subsidies at home, or, in the memorable words of the Chief Executive Officer of one America's largest steel companies, “but we don't get subsidies, we get tax breaks.”)
As noted, the first formal rule in response to subsidies was protection in the form of a countervailing duty. The lead negotiators for the US and EU in the SCM Agreement both had significant experience in trade remedy enforcement. Against this background, it is hardly surprising that the system for imposing countervailing duties produces most of the activity in the system of discipline of subsidies within the WTO. At a more detailed level, this means that CVDs are often treated the same as antidumping, despite the obvious huge differences in concepts, with the identical language for injury and causation, for example, which is laughable unless the purpose of CVD is protection, not subsidies discipline. At a higher plane of thought, it is also not surprising that there is a greater number CVDs, which favors large market countries (which have markets worth protecting, over small home markets for which a CVD would be useless strategically), than WTO subsidies cases.
Contingent factors played a role in shaping the details of the system. The United States proposed significant disciplines on domestic subsidies, as well as export subsidies, for the 1979 Tokyo Round
1 Law Offices of Gary N Horlick. He served as International Trade Counsel of the US Senate Finance Committee (1981),
overseeing the Department of Commerce’s implementation of the new legislation and administration of the CVD law, and then head of the Import Administration of the Department of Commerce (1981-1983), where he was responsible for all US antidumping and countervailing duty cases. Contact: [email protected]
Gary N. Horlick
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Subsidies Code, but the US proposals mostly were watered down into exhortation.2 Undaunted, the US Congress – in negotiations bookended by the 1974 Lockheed bailout and the 1979 Chrysler bailout – made CVD investigations on private petitions of domestic subsidies mandatory (until then Treasury in 99 percent of all cases had refused to investigate them), backed up by very short deadlines and strict judicial review, and moved jurisdiction from Treasury to the Commerce Department on the assumption that the latter would be protectionist (which did not occur for six years). This more or less guaranteed a large number of cases in cyclical industries as soon as the business cycle turned south. Curiously, despite a mild recession in 1980, the heavily protected US steel industry (which faced very subsidised competition from some countries, but which itself was considerably more subsidised than an equal number of countries) chose not to file CVD cases in 1980, instead relying on its tried and true friend, the antidumping (AD) laws. For whatever reason, in 1982, a flood of CVD cases started with the filing of more than 100 cases. Purely by chance, the author was head of the AD/CVD operation in the Commerce Department and I had no fixed or biased views on subsidies, having worked at a law firm that represented both domestic petitioners and foreign respondents. Even more unlikely, I’d become interested in the subsidy issues earlier (when very few lawyers cared much) through conversations with Bob Hudec in 1980 and then as chief international trade counsel at the Senate Finance Committee amid the gyrations of the world economy after the 1979 second oil shock.
I had also been convinced of the need to craft rules that would not harm US exporters in cases overseas by my immediate predecessor and by the indefatigable lobbyist for the US paper industry, who had me hauled before the (US) President's Export Counsel of business executives every quarter to explain why I wasn't doing more for US exporters in trade remedy cases outside the US. This concern can be seen in the “specificity” rule: USTR in 1980 had told the EU that cheap price-controlled natural gas in the US was not a subsidy because “everyone got it”, and a CVD case brought claiming that cheap irrigation water for a wide variety of crops was a countervailable subsidy drove home the point. For similar reasons, we did not label as potentially countervailable subsidies the elements of a package put together in October 1980 by my predecessors for the US steel industry consisting of industry- specific relaxed (environmental) regulation, more favorable tax depreciation regulations and added import protection. A Commerce Secretary willing to take the political heat in 1982-83 also made it possible to reject claims for CVD duties based on US Marshall Plan and World Bank aid “outside the territory”, government research and development, worker retraining to move industries, and so on.
More generally, the flood of CVD cases in the US, the willingness of Congress to spend the money to hire the 100-200 people to work on those cases at Commerce and the US International Trade Commission, and the coercive power of the cases, created a vast database of information on different types of subsidies far greater in number and depth than any other in the world, which served as a basis for developing the current rules.
Because of the trade focus of the Uruguay Round discussions, the current SCM Agreement focuses mainly on harm to competitors, rather than harm to competition or – much more important – harm to global public goods (such as fish stocks or climate) even in the absence of harm to competitors (and indeed, in the context that the competitors may be racing to deplete the relevant commons).
Which, if any, of these factors will shape subsidies rules in the future? Oddly enough, some of the stranger contingent factors may well be the easiest to repeat. For example, the current US/EU trade negotiations (Transatlantic Trade and Investment Partnership, TTIP) are going quite cooperatively, because of good personal relationships, even though the level of disagreement is just as much as the SCM Agreement negotiations. Much more important, however, the new factor, and the one that most likely will dominate the shape of future subsidy rules, is climate change. Nothing in the SCM Agreement except the defunct (and very limited) Article 8 does anything to protect global public goods per se. But it is quite certain that the challenge of climate change will require doing something
How Subsidies Rules Have Been Shaped
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about subsidies which increase greenhouse gas emissions, and also subsidies which might help in that area. Since it is inevitable that something along these lines will be done, possibly by environment ministers not worried too much about WTO niceties it is important that it be done soon within the WTO, and done well!
Finally, we can expect continued rewriting of the SCM Agreement by an Appellate Body which clearly thinks it understands subsidies better than did the negotiators. For better or worse, the Appellate Body has been willing to create an agricultural subsidy system out of whole cloth in Canada – Dairy; to find nearly everything in China “specific” (a contradiction in terms); to allow national authorities to find subsidies without any actual evidence in the CVDs on Korea DRAMs (dynamic random access memory semiconductors) cases; and to delete the key words from the text of Article 14(d) in Canada – Softwood Lumber IV. Fortunately, the big players have won those cases, not lost, so they either quietly pocket the gains or loudly complain about any case lost.
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