RESTRICTED
WORLD TRADE G/SCM/W/416/Suppl.1
2April 1998
ORGANIZATION(98-1337)
Committee onSubsidies
andCountervailing Measures
QUESTIONS AND ANSWERS AND COMMENTS REGARDING THE
REPORT OFTHE INFORMAL GROUP OFEXPERTS (G/SCM/W/415)
Note from theInformal Group ofExperts
Supplement
ADDITIONAL COMMENTS FROM KOREA ONTHERESPONSE OFTHEINFORMAL GROUP
OFEXPERTS (G/SCM/W/416, PP.15-16)
1. Thesecond paragraph oftheresponse indicates thattheGroup hasthemandate to"examine
matters which arenotspecified inAnnex IVtotheAgreement". However, itseems difficult toadmit
thattheadjustment ofsubsidy amount inaninflationary economy issimply oneofthematters which
arenotspecified. Fortheinflationary economy, theAgreement provides onlytheadjustment ofvalue
ofproduct, anditkeeps silent about theadjustment subsidy amount. Itisnotconceivable thatthe
negotiators intheUruguay Round justmissed thispointinadvertently, because theyclearly anticipated,
inparagraph 5ofAnnex IV,aninflationary situation inwhich something should bedone. Therefore,
weneedtorespect theirintention ofnotaddressing thesubsidy amount adjustment, while theyrequire
thevalue ofproduct tobeadjusted inaninflationary economy.
2. Thethirdparagraph saysthatparagraph 5ofAnnex IVistoeliminate theone-year timelag
byincorporating theinflation. Ithink thiscanbetaken theoretically forgranted. Then whynotsay
anything about thesubsidy amount adjustment inthesame inflationary economy, which hasthesame
weight ofimportance asofadjustment ofthevalue ofproduct, eventhough itcanbetaken alsofor
granted.
3. Thefifthparagraph indicates that"thetotalrealvalue ofagiven subsidy amount would be
lessthanitsfaceamount ifitwere allocated butnotadjusted forinflation". Idonotthink wecan
easily denythatthisistheresult which wasanticipated atthetimeofdrafting paragraph 5ofAnnex IV.
Considering that,inaninflationary economy, theprice competitiveness isweakened, andthatthe
likelihood ofcausing serious prejudice isalsodecreased, Ithink there isanample rationale foran
interpretation likethis.
4. Thesecond from thelastparagraph refers tosome specific concepts related togovernment
costs, suchasopportunity costandsocial costoftaxation. Nomatter howvalid using them maybe,
itseems verydifficult tounderstand howthose concepts canbeusedwithout anyprovision tothiseffect.
5. Asforthelastsentence oftheresponse, Iwould saythatthepricecompetitiveness wasdiscussed
justtoshow therationale oftheURnegotiator 'sintention which wasexpressed through theirsilence
ontheinflation adjustment ofsubsidy amount, while paragraph 5wasprovided inAnnex IVforthe
value ofproduct.
./.G/SCM/W/416/Suppl.1
Page2
Response
1. Thegroup takes noteofKorea 'sviewthattheabsence ofaprovision inParagraph 5ofAnnex
IV(concerning inflationary economies) foraninflation adjustment tothesubsidy amount reflects the
intention ofthedrafters totakeintoaccount theweakening ofthepricecompetitiveness ofinflationary
economies andisnottheresult ofanoversight bythedrafters. Thegroup wishes tonote, asitdid
indocument G/SCM/W/416, thatthegroup 'smandate ispurely technical, andthusdoesnotextend
toissues regarding theintentions oftheAgreement 'sdrafters astotheprice competitiveness of
inflationary economies oranyotherissue. Inanycase,theintention ofRecommendation 3oftheReport
toadjust thesubsidy amount inthecaseofallocated subsidies istoaddress aseparate matter from
theprovisions ofParagraph 5oninflationary economies.
2. Paragraph 5deals primarily withsituations where subsidies ininflationary economies are
expensed. Inthiscase,thedenominator (thevalue oftheproduct), which normally lagsoneyearbehind
thenumerator (theamount ofsubsidy), isindexed bytherateofinflation inthe12months preceding
themonth inwhich thesubsidy isgiven, soastomake thenumerator andthedenominator coincide
andremove anydistortions caused byinflation. Inviewofthis,theissueofadjusting thesubsidy amount
doesnotariseinthecontext ofParagraph 5,because thisamount, unlike thedenominator, isalready
expressed atcurrent prices.
3. Bycontrast, Recommendation 3ofthereport isnotconcerned withinflationary economies
assuch; rather, itcovers situations where subsidies areallocated overtime, andisproposed asameans
ofreflecting thecosttothegranting government oftheallocated subsidy amounts. Itwasrecognized
that,inpart,governments incur costsoveraperiod oftimeinraising funds topayforsubsidies, and
thiscontributed tothegroup 'sdecision torecommend thatthefaceamount granted should beadjusted
toreflect thesecosts. (Seethegroup 'sresponse toKorea 'soriginal comments forafuller explanation.)
Thegroup considers that,forthereasons explained above, there isnoinconsistency between this
approach andtheprovisions ofParagraph 5,because thetwodealwithseparate situations.
4. With regard toopportunity costs andthesocial costoftaxation, theGroup notes thatneither
oftheseconcepts wasdecisive indetermining thecosttothegovernment ofgranting subsidies; however,
theyformed partoftheGroup 'sdiscussion ofthisissue. TheGroup tookaccount ofthefactthat
Paragraph 1ofAnnex IVrequires subsidies tobecalculated interms ofthecosttothegranting
government, butdoesnotspecify whatthiscostinvolves, andthegroup 'srecommendation inthisregard
addresses thisquestion.
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