Meera Manoj, Intern at Cyril Amarchand Mangaldas – Advocates & Solicitors
Recently, the United States (“US”) issued an unprecedented challenge at the World Trade Organisation (“WTO”) against almost every export subsidy scheme maintained by India for violating the 1994 Agreement on Subsidies and Countervailing Measures (“ASCM”).[1]
After consultations between the US and India failed on 11th April, 2018, the WTO has initiated the process for setting up a Panel.[2] If successful, the challenge could wipe out $7 billion worth of Indian benefits just annually.[3] However, its true significance lies in the global scope of its consequences. It would have a domino effect to invalidate or shorten the period of export subsidies for twenty-two developing countries, and consequently stymie their economic growth.[4]
- The Crux of the Challenge:
The basis for the US challenge is a contentious interpretation of the ASCM which has long created a rift between developed and developing countries in the WTO. Under Article 3.1 of the ASCM, countries are prohibited from granting exports that are contingent on export performance or the use of domestic goods over imports.[5] However, Article 27.1 recognises that there must be a degree of flexibility in implementing this prohibition when it comes to developing countries.[6] Accordingly, two categories of countries are identified which can eliminate subsidies over a transition period:
- Least developing countries (LDCs) and developing countries with a GNP per capita below $1000 are grouped under Annex VII of the ASCM.[7] These Annex VII countries, under Article 27.2(a) have a transition period that ends once their GNP per capita crosses $1000 per annum.[8]
- All other developing countries are given an 8-year transition period during which they could gradually phase out their export subsidies to zero under Article 27(2)(b).[9]
When it comes to the consequences of Annex VII countries crossing the $1000 GNP threshold, WTO members hold diametrically opposing views.
- A Thorny Issue of Interpretation:
The basis for the ambiguity lies in the text of the ASCM. Annex VII(b) states that when the developing countries graduate from it they will be “subject to the provisions which are applicable to other developing Members according to Article 27.2(b).”
Article 27.2(b) excludes the export subsidy prohibition from applying to “other developing country Members for a period of 8 years from the date of entry into force of the WTO” (emphasis added). It is unclear whether “graduating” countries may enjoy an additional 8-year transition period or not.
India and other Annex VII countries argue that they indeed have an additional 8-year period to phase out subsidies.[10] They advocate for the phrase “from the date of entry into force of the WTO” (Article 27.2(b) above “the disputed phrase”) to be modified in this context to mean from the date of graduation of individual Annex VII countries.
The US and other developed countries strongly oppose this viewpoint.[11] They believe that the disputed phrase means that Article 27.2(b) refers only to the other non-Annex VII developing countries and must be ignored in its application to the Annex VII countries.
- Analysis: What Now?
The reference to the transition period in Article 27.2(b) is puzzling and there is wide scope for argumentation from both sides.
- Points in Favour of India:
India’s plea for an additional 8-year period may be justified by advocating for the adoption of a harmonious interpretation. Panels have previously recognised the principle of “effective treaty interpretation” which posits that parts of WTO Agreements must not be rendered obsolete.[12] Here, Annex VII (b) which requires Article 27.2(b) to apply to India and other countries would be rendered ineffective if the 8-year transition period is not granted.
India may rely on the fact that in such situations, Panels often refer to the object and context of the treaty.[13] For the ASCM, it is evident that the purpose of creating a category of Annex VII countries was so that they may be accorded a more liberal treatment. Once they reached a $1000 GNP, they would be put at par with other developing countries for who an 8-year transition period had been recognised as a necessity. The date of counting this period is a technicality, and it must not be used to take away the substantive right of a transition period.
India may also point out that. when it comes to individual products, Article 27.5 states that Annex VII countries must be given an additional 5-year phase out period for a product that has become export competitive.[14] It would be an incongruous proposition that a single product be given an additional five-year phase out period, whereas, when the GNP increases (not a measure of export competition and therefore not directly tied to export subsidies), there is absolutely no transition period. Annex VII countries when they reach a $1000 GNP will effectively be subject to the same standard as a developed country, instead of developing countries who had reached a $1000 GNP.
- Points in Favour of the US:
The US may support its contention that there is no transition period by emphasising that Annex VII countries have had an uncapped period to phase out subsidies and graduate from a $1000 GNP cap. India itself, graduated only in 2013, nineteen years after the WTO agreement came into force.[15] This allowed sufficient time to phase out subsidies without granting an additional eight years. Thus, it is not equitable or necessarily in furtherance of the object of the SCM to grant Annex VII countries an additional transition period, allowing more than twenty-seven years to phase out while other developing countries have been granted merely eight years.
Moreover, the U.S. may point out that the disputed phrase is not ambiguous enough to warrant being given a wholly different meaning. To do so would risk violating Article 3.2 of the Dispute Settlement Understanding, 1994 that prohibits Panels from creating new obligations under the covered agreements.[16]
- Conclusion:
To entirely adopt either side’s position on the issue would necessitate taking extreme steps, that is, to either render Annex VII(b) obsolete or to dramatically modify the wordings of the text. Interestingly, Annex VII countries – lead by India – had earlier suggested amending the text of the ASCM before the Negotiating Group on Rules by inserting a footnote to clarify that for Annex VII countries the period would begin from the date of their graduation.[17] This appears to be an implicit recognition of the fact that an amendment would be necessary to read the text in the manner that they have proposed.
However, given the high-stakes involved, especially as twelve developing countries have already graduated from Annex VII as of 2017,[18] the WTO must tread cautiously to find a balanced interpretation.
[1]Office of the United States Trade Representative, ‘United States Launches WTO Challenge to Indian Export Subsidy Programs’ (USTR, March 2018) https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/march/united-states-launches-wto-challenge; accessed 2 July 2018
[2] Livemint, ‘US may reject India’s plea to join China in tariff dispute’ (Livemint, April 2018) https://www.livemint.com/Politics/K5AJ8U5UttMPD7kn63HqaP/US-may-reject-Indias-plea-to-join-China-in-tariff-dispute.html; accessed 2 July 2018
[3] Office of the United States Trade Representative, ‘United States Launches WTO Challenge to Indian Export Subsidy Programs’ (USTR, March 2018) https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/march/united-states-launches-wto-challenge; accessed 10 June 2018
[4] Agreement on Subsidies and Countervailing Measures 1994, annex VII
[5] Agreement on Subsidies and Countervailing Measures 1994, art 3.1
[6] Agreement on Subsidies and Countervailing Measures 1994, art 27.1
[7] Agreement on Subsidies and Countervailing Measures 1994, annex VII
[8] Agreement on Subsidies and Countervailing Measures 1994, art 27.2
[9] Agreement on Subsidies and Countervailing Measures 1994, art 27.2(b)
[10] Negotiating Group on Rules, Amendment to Articles 27.2 and 27.4 of ASCM in relation to Developing Countries covered under Annex VII, TN/RL/GEN/177/Rev.1, (9 March 2011) https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/TN/RL/GEN177R1.pdf; accessed on 6 July 2018.
[11] Committee on Subsidies and Countervailing Measures, Minutes of the Regular Meeting held on 25 April 2017, WTO/AIR/SCM/15, https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&CatalogueIdList=238057,235895,235880,235893,235826,235862,235841,235860,235827,235821&CurrentCatalogueIdIndex=0&FullTextHash=&HasEnglishRecord=True&HasFrenchRecord=False&HasSpanishRec; accessed on 7 July 2018
[12] Appellate Body Report, Canada – Certain Measures Affecting the Renewable Energy Generation Sector, WT/DS412/AB/R, adopted 6 May 2013.
[13] Appellate Body Report, United States – Continued Existence and Application of Zeroing Methodology, WT/DS350/AB/R, adopted 4 February 2009
[14] Agreement on Subsidies and Countervailing Measures 1994, art 27.5
[15] Committee on Subsidies and Countervailing Measures, Note by the Secretariat, G/SCM/110/Add.14 (11 July 2017) https://docs.wto.org/dol2fe/Pages/FE_Search/DDFDocuments/237527/q/G/SCM/110A14.pdf; accessed on 5 July 2018.
[16] Dispute Settlement Understanding 1994, art 3.2
[17] Negotiating Group on Rules, Amendment to Articles 27.2 and 27.4 of ASCM in relation to Developing Countries covered under Annex VII, TN/RL/GEN/177/Rev.1, (9 March 2011) https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/TN/RL/GEN177R1.pdf; accessed on 6 July 2018.
[18] Committee on Subsidies and Countervailing Measures, Note by the Secretariat, G/SCM/110/Add.14 (11 July 2017) https://docs.wto.org/dol2fe/Pages/FE_Search/DDFDocuments/237527/q/G/SCM/110A14.pdf; accessed on 5 July 2018.