WTO Rules dealing with subsidies and its impact on China’s subsidies to its industries.

Apart from the GATT, 1994, the main WTO rules which will govern the subsidies provided by China in the present case is Agreement on Subsidies and Countervailing Measures (SCM).

The Agreement on Subsidies and Countervailing Measures (SCM):

The Agreement regulates subsidies and countervailing measures in trade in goods. Article 3.1(b) of the SCM Agreement provides the most explicit prohibition against local content measures in the WTO Agreements:

 

3.1. Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited:…

(b) Subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.

 

The prohibition is backed up by a special remedy in Article 4.7 of the SCM Agreement demanding withdrawal of the subsidy without delay if a panel found the subsidy to be prohibited. Panels specify a time period for withdrawal of the subsidy and have generally granted ninety days to do so.[1] This deviates from the ‘normal’ implementation period laid down in Article 21.3 of the DSU that provides for a ‘reasonable period of time’ of a maximum of fifteen months. Also, the DSB normally gives recommendations of bringing the measure into conformity with the WTO Agreements, whereas SCM Article 4.7 dictates what the WTO Member must do in order to be in compliance with the WTO Agreements.[2]

 

Unlike some of the obligation outlined above under the GATT and the TRIMs, the SCM Agreement applies to government procurement with respect to goods.[3] This makes the SCM Agreement particularly valuable for cases concerning local content measures in the field of government procurement against countries that are not parties to the GPA or have exempted local government, so that the measures are neither subject to Article III of the GATT because of Article III:8(a) of the GATT nor to the GPA. In order to challenge a measure under the SCM Agreement, the measure must be proven to constitute a subsidy, as defined in SCM Article 1.1. In order to establish that a measure is a subsidy, it has to grant a ‘financial contribution’, confer a ‘benefit’[4] and be specific.[5] According to Article 2.3, subsidies falling under Article 3 need not pass the specificity test in Article 2, so that we will only be concerned with the first two prongs. These remaining two elements are analysed separately – thus, a benefit conferred under a local content scheme does not automatically constitute a ‘financial contribution’. Given the numerous and diverse issues that are posed by the various types of local content measures, we shall limit ourselves to some comments.

 

As to the first prong, establishing a financial contribution in cases involving local content is not necessarily an easy operation.The requirement is explained in Article 1.1(a) of the SCM Agreement, which reads:

(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:

(i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);

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

(iii) a government provides goods or services other than general infrastructure, or purchases goods;

(iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments;

or

(a)(2) there is any form of income or price support in the sense of Article XVI of GATT 1994.

 

The complexity of the analysis is demonstrated by the fact that in Canada – Renewable Energy, Japan and Europe argued with varying preference that the feed-in tariff under discussion constitutes either a (potential) direct transfer of funds under Article 1.1(a)(1)(i), or a form of income or price support under Article 1.1(a)(2),[6] or a governmental action involving entrustment under Article 1.1(a)(1)(iv) or (should the panel so find with respect to Article III:8(a) of the GATT) a purchase of goods under Article 1.1(a)(1)(iii).[7] Indeed, a local content measure attaching a benefit to the use of local content may fall under several of these headings.[8]  The ‘purchase of goods’ variant deserves a particular mention, as it shows that government procurement of goods can constitute a relevant financial contribution.Where a feed-in tariff programme is constructed in a manner that a government agency buys the electricity produced this can be the case, as the Panel stated in Canada – Renewable Energy:

Thus, in the light of the foregoing analysis, it follows that ‘government purchases [of]

goods’ will arise under the terms of Article 1.1(a)(1)(iii) of the SCM Agreement when a

‘government’ or ‘public body’ obtains possession (including in the form of an entitlement)

over a good by making a payment of some kind (monetary or otherwise). In our view, and

for the reasons we explain in the following paragraphs, this is exactly what happens

through the FIT Programme and its related FIT and microFIT Contracts[9].

 

When the financial contribution is granted by a SOE, the issue of whether it is the government or a public body or a private body that granted the contribution arises. Both situations can fall under the SCM Agreement.Article 1.1(a)(1) uses the terms ‘government or any public body’ As noted above,[10] the term ‘public body’ (in remarkable similarity to Article 5 of the ILC Articles on State Responsibility) requires an analysis whether the relevant entity is vested with or exercises governmental authority.[11] If, under this test, the body in question is a private body, Article 1.1(a)(iv) of the SCM Agreement still assumes the existence of a financial contribution by a government if the government entrusts or directs the private body to carry out functions under Article 1.1(a)(1)(i)–(iii) that are normally vested in governments. The question of when an entity is a public body would arise, for example, should a complaint against a development bank such as BNDES ever arise. Aid by such a bank would arguably fall under Article 1.1(a)(1)(i) because the bank constitutes a public body (exercising governmental authority) and provides a loan (on favourable terms) conditioned on using a certain amount of local content.[12]

 

Analysing the next prong, namely whether the measure confers a benefit on the recipient of the subsidy (Article 1.1(b) of the SCM Agreement), can be, if anything, more problematic. In general, the prong demands that the measure makes the recipient better off economically than it would have been absent the financial contribution.[13]  This determination is made using Article 14 of the SCM Agreement as the relevant context.[14] The legal standard for evaluating a benefit should not be confused with the standard for finding an advantage under the TRIMs Agreement. This was clarified by the Appellate Body in Canada – Renewable Energy:

 

[W]hile we do not exclude that certain measures that provide an advantage within the meaning of paragraph 1 of the Illustrative List of the TRIMs Agreement may also confer a benefit within the meaning of Article 1.1(b) of the SCM Agreement, it is conceivable that a measure that confers an advantage within the meaning of paragraph 1 of the Illustrative List of the TRIMs Agreement be found not to confer a benefit within the meaning of Article 1.1(b) of the SCM Agreement.[15]

 

In many cases involving local content requirements, proving ‘benefit’ – using Article 14 of the SCM Agreement as guidance, should be possible. For the purchase of goods, as Article 14 (d) of the SCM Agreement indicates, it has to be shown that the purchase is made for more than adequate remuneration determined in relation to prevailing market conditions for the good in question.

 

However, the operation becomes complex wherever there is no real ‘market’ to speak of.

The issue of benefit thus became one of the most contested issues in Canada – Renewable Energy. Government operation on the electricity market ensured that there was no competitive electricity market that could be used as a proper comparator. Luca Rubini, in an amicus brief submitted to the Appellate Body, argued that nevertheless it should be comparatively easy to establish a benefit: where it is obvious that a state measure leads to abnormal economic behavior and this is to the advantage of the addressee of the measure, there must be a benefit. The ‘intuitive’ argument hence is: where providers of renewable energy would be absent from the market but for the feed-in tariff, clearly a feed-in tariff allowing them to be on the market must establish a benefit.[16] The CJEU seems to approve of this intuitive line of argument, as it stated simply in a case concerning the Stromeinspeisungsgesetz: ‘there is no dispute that an obligation to purchase electricity produced from renewable energy sources at minimum prices . . . confers a certain economic advantage on producers of that type of electricity, since it guarantees them, with no risk, higher profits than they would make in its absence’.[17]

 

However, the WTO dispute settlement organs rejected the intuitive line of argument. The Panel instead looked for a proper market benchmark with which the price could be compared. It rejected several benchmarks based on the concept of a single market for all electricity as fundamentally distorted.[18]  A benchmark based on a comparison between rates of return of the feed-in contracts with the relevant average cost of capital was considered, but could not be established for lack of information.[19] The Appellate Body, in its own analysis whether the recipient were ‘better off ’ than it had been in the ‘marketplace’,[20] criticized the Panel’s approach to establishing a benchmark. It considered that the Panel had not defined the relevant market properly,[21] failing to take into account different factors on the demand side, such as the type of customer,[22] as well as on the supply side.[23] The Appellate Body divides the electricity market into sub-markets, recognizing both that renewable energy cannot compete with other energies because of different cost structures and the fact that governments by choosing a supply-mix based on policy imperatives such as reducing reliance on fossil fuels effectively define the

sub-markets excluding competition between different ways to produce energy.[24] The relevant market hence is determined according to Ontario’s definition of the energy supply-mix. Granting this liberty to establish ‘artificial’ markets makes it considerably harder to establish a benefit.The Appellate Body’s reference to the policy imperatives is likely to be understood in a way that the Appellate Body will only accept such artificial market definitions where they are based on rational policy imperatives. Based on this different market definition, the Appellate Body turned to itself finishing the benefit analysis, but found itself unable to finish the analysis, observing that there were no sufficient factual findings or uncontested evidence on the records.

 

 

CONCLUSION:

On the basis of above discussion, we can conclude that the WTO rules will partially constrain the China’s 2025 goals, as the some of the sectors are in the prohibited lists, however some sectors which are part of the China’s 2025 goal is in the approved list of government subsidies.

[1] K. Adamantopoulos, Article 4 SCMA, in WTO – Trade Remedies para. 11 (R.Wolfrum et al. eds., Martinus Nijhoff 2008).

[2] The ‘normal’ recommendations are laid down in DSU Art. 19.

[3] Article. 1.1(a)(1)(iii).

[4] The two elements are determined individually, see Appellate Body Report, Brazil – Export Financing Programme for Aircraft, WT/DS46/AB/R (2 Aug. 1999) [hereinafter Brazil – Aircraft Appellate Body Report], para. 157.

[5] See Arts 1, 2 of the SCM Agreement.

[6] An extensive treatment of Art. 1.1(a)(2) can be found in the amicus brief in Canada – Renewable Energy Appellate Body report submitted by L. Rubini (also available at http://www.birmingham.ac.uk/Documents/college-artslaw/law/iel/rubini-2013-amicus-curiae.pdf).

[7] Canada – Renewable Energy Panel Report, supra n. 100, at paras. 7.169–7.180.

[8] The Appellate Body clarified that a measure may very well fall within several categories of Art. 1.1(a)(1), see Canada Renewable Energy Appellate Body Report, supra n. 4, at para. 5.121.

[9] Canada – Renewable Energy Panel Report, supra n. 100, at para. 7.231, upheld by the Appellate Body, see Canada – Renewable Energy Appellate Body Report, supra n. 4, at para. 5.128.

[10] See the analysis of Art. III:4.

[11] See, e.g., the detailed account of elements to consider in Canada – Renewable Energy Panel Report, supra n. 100, at paras. 7.232–7.241.

[12] See, e.g., Japan – Countervailing Duties on Dynamic Random Access Memories From Korea Appellate Body Report, WT/DS336/AB/R (28 Nov. 2007) [hereinafter Japan – DRAMS Appellate Body Report], para. 251.

[13] K. Adamantopoulos, Article 1 SCMA, in WTO – Trade Remedies para. 92 (R.Wolfrum et al. eds., Martinus Nijhoff 2008).

[14] See, e.g., Canada – Renewable Energy Appellate Body Report, supra n. 4, at para. 5.163.

[15] Ibid., para. 5.209.

[16] Paragraphs 71, 76. Note that the dissenting opinion seems to follow a similar line of reasoning when it states that facilitating the entry of a a technology in an existing market by a financial contribution can be considered to confer a benefit. Canada – Renewable Energy Panel Report, supra n. 100, at para. 9.3.

[17] Case C-379/98 PreussenElektra [2001] ECR I-2099, para. 54.

[18] See Canada – Renewable Energy Panel Report, supra n. 100, at paras. 7.303–7.319.

[19] Ibid., at para. 7.327.

[20] See Canada – Renewable Energy Appellate Body Report, supra n. 4, at paras. 5.163, 5.166.

[21] See ibid., para. 5.169.

[22] See ibid., para. 5.170.

[23] See ibid., para. 5.171.

[24] Ibid., paras. 5.167–5.179.

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