WORLD TRADE
ORGANIZATIONTN/RL/W/30
21 November 2002
(02-6476)
Negotiating Group on Rules Original:  English
WTO NEGOTIATIONS CONCERNING THE WTO AGREEMENT
ON SUBSIDIES AND COUNTERVAILING MEASURES
Proposal by the European Communities
I. INTRODUCTION
1. Innovations introduced by the Uruguay Round
The Agreement on Subsidies and Countervailing  Measures (ASCM) was one of the major
achievements of the Uruguay Round.  A definition of a subsidy, and the circumstances in which itwould be actionable, were outlined for the first time.  A “traffic light” classification of subsidies was
also introduced.
A subsidy was essentially defined as a financial contribution from a government which
confers a benefit.  A subsidy was subject to discipline s only if specific, the specificity aspect referring
to the fact that it was targeted at certain beneficiaries.  The “traffic light” concept was based on the
premise that some subsidies were trade distorting per se  while others were benign or even noble, and
ranged through several colours from prohibited red at one end of the spectrum (e.g. export subsidies)
to non-actionable green at the other (e.g. subsidies for environment).
Finally, Members agreed on new rules for CVD investigations (increased initiation standards,
sunset provisions, etc.) and the concept of special and differential (S&D) treatment for developingcountries and economies in transition to a market economy.
2. The ASCM  in practice
The creation of the “traffic light” system has focussed actions overwhelmingly on the “red” or
prohibited category (i.e. export and “local conten t” subsidies), with most WTO dispute settlement
under the ASCM being opened to combat such subsidies.
1  Not surprisingly, this concentration on
disciplining prohibited subsidies means that less attention was given to less detectable types of
“actionable” subsidy.
The main reason for the concentration on the “red” category is that the rules for certain types
of actionable subsidies (particularly those not granted directly to a certain product) are much less
explicit and therefore less operational and effective than those for direct export subsidies.  Similarly,
the non-actionable or “green” subsidy category (R&D, environment and regional aid) has proven to be
                                                     
1 Indeed, all but one of the eight dispute settlement cases brought since 1995 against subsidy practices
involved exclusively export subsidies.TN/RL/W/30
Page 2
ineffective and, because of its negligible impact on the actual application of subsidy disciplines, its
expiry in 1999 has gone almost unnoticed.2
As for the main CVD innovations introduced by the Uruguay Round, experience since 1995
has shown that, despite increased initiation standards, cases can still be opened without the necessaryjustification and though the “sunset” provisions have led to slightly fewer measures, the
overwhelming tendency is still to maintain measures.
II. DOHA DEVELOPMENT AGENDA AND MULTILATERAL SUBSIDIES
DISCIPLINES
The Uruguay Round introduced disciplines to deal with most types of subsidies but it is clear
that only some of these rules can already be considered operational.  Indeed, the "traffic-light"approach has proven to be in need of streamlining through establishing clear and uniform rules for all
specific subsidies.  Therefore, the main objec tive in this new Doha Development Agenda ("DDA")
should be focused on the essential disciplines set out in the current Agreement and make them
workable and effective. This objective closely follows the Doha mandate.
3  The following
improvements would go some way towards meetin g these objectives.  Nothing in this proposal
prejudges, however, in any way, the specific rules on agricultural subsidies, existing or to be
established following the DDA negotiations on agriculture.
1. Definition - More operational ru les for  “disguised” subsidies
The definition of a subsidy established in Article 1 is, in general, satisfactory.  However,
clarification is required in two areas.
Significant amounts of financial support are increasingly granted by governments for
ostensibly general activities which in fact directly benefit the production of certain products.  These
“disguised” subsidies can have equally severe trade-distorting effects and they are potentially muchmore harmful than more direct subsidies since they confer benefits in a largely non-transparent
manner.  The same applies to similar financial support granted through certain government-controlled
entities.
In view of this, the EC propose to clarify the definition of a "subsidy" in Article 1 ASCM as
follows:
(a) "Disguised” subsidies
Although the existing rules already apply to specific “disguised” subsidies , e.g.  apparently
general support - financial contribution by a government - which in fact confers benefits only to the
commercial activities of the recipients, this is no t always spelt out in enough detail for effective
implementation.  The link between the subsidy and the recipient or product is often concealed andtherefore much more difficult to establish than in cases where the funding is more up front.  In other
words, this support benefits all of the commercial act ivities of the recipient rather than being in line
                                                     
2 Pursuant to Article 31 ASCM, Article 6.1 ASCM (sub sidies presumed to cause serious prejudice) and
Articles 8 and 9 (non-actionable subsidies for R&D, environment and regional aid) expired on 1 January 2000.
The “green list” under Article 8 of the Agreement proved to be of very limited use since the definitions andprocedures were so complicated that no Member could ma ke serious use of it.  "Dark amber" subsidies carrying
the presumption of serious prejudice under Article 6.1 ASCM (e.g. subsidies above 5% ad valorem ) have only
been invoked once in dispute settlement.
3 "In the initial phase of the negotiations, participants will indicate the provisions, including disciplines
on trade distorting practices, that they seek to clarify and improve in the subsequent phase." (emphasis added).TN/RL/W/30
Page 3
with its stated "general" purpose.  To the extent that this kind of funding in an industrial sector is
significant and leads to effective circumvention of the subsidy disciplines, it is a problem that needs to
be tackled.  Therefore, the subsidy rules for industrial products should be made more operational in
order to bring these subsidies more clearly within the disciplines of the ASCM.
(b) State-controlled entities
Furthermore, the terms of the current Agreement also make it extremely difficult to act
against entities which may be providing the “subsidy” under the covert direction of governments
(e.g. the granting of loans and other financial support through financial institutions which are acting
on non-commercial terms).  Current rules could be construed to only cover such actions if there is a
clear and unambiguous showing of "direction" by the government.  Such a link is often very difficult
to prove.  To cover this “grey zone” in subsidy disciplines, consideration could be given to clarifyingArticle 1 ASCM, so that entities which are effectively controlled by the state and  acting on non-
commercial terms are covered by this provision.
An alternative would be to clarify the rules so as to cover situations where the public direction
is less apparent but nevertheless led to non-commercial behaviour in terms of the financial operationin question. Article 1.1.  ASCM does not per se apply to public enterprises acting under commercial
terms in the market.
While it is obviously not the case that all state-owned entities or enterprises should be
considered part of the government, there is a need to develop workable rules in order to prevent thecircumvention of subsidy disciplines, taking into account the WTO jurisprudence.
2. Clearer rules for “local content” subsidies
Though the rules on prohibited export subsidies (Article 3.1(a) ASCM) are reasonably
effective, as demonstrated by the number of cases initiated for this category, there are improvementsthat can be made, in particular for the rules on “local content” subsidies (Article 3.1(b) ASCM), which
are difficult to use effectively with regard to the industrial sector.  Currently, these rules do not
provide appropriate disciplines (especially as regards “value-added requirements”), given that it is
necessary not only to show that an import substitution programme exists, but also to explicitly
demonstrate that, in order to obtain the subsidy, the actual use of domestic over imported goods is
required on a case by case basis (which is a higher standard than required  for an Article III:4 GATT
1994 violation).
4
This very high threshold of proof makes it very difficult to counteract subsidies linked to
value added conditions under the ASCM prohibited subsidy disciplines, especially where a local
content requirement is only one of several alternative conditions for obtaining the subsidy.  Moreover,
the widespread lack of transparency, in particular with respect to de facto  local content subsidies, calls
for improved rules in this area.  Rules should be clarified and made operational so that any subsidy
linked to the use or purchase of domestic industrial products, and thus in breach of Article III:4 of
GATT 1994, is covered by the prohibition.  Of course, the fact that subsidies are available only to
domestic producers would not, by itself, put them in the prohibited category (Article III:8 b of GATT
1994).
                                                     
4 See Canada - Certain measures affecting the Automotive Industry  - complaint by the EC and Japan ,
Report by the Appellate Body(DS139/142).TN/RL/W/30
Page 4
3. Clarification on export financing
The ASCM does, in fact, contain rules which address export financing but again these are, on
their own, not set out in sufficient detail to be oper ational.  Therefore, the ASCM also refers to rules
on official support for export credits, which are currently elaborated in detail in the OECD
Arrangement.  This effectively provides a “safe harbour ” for this type of export financing, i.e. that the
export credit support can in no case be considered a prohibited export subsidy in the meaning of
Article 3.1(a) ASCM as long as the OECD interest rate provisions on export credits are complied
with.  But this “safe harbour” does not apply for all types of official support for export credits covered
by OECD rules.5
There is therefore a need to establish clear and consistent rules for all types of export
financing.  However, this will not prejudice in any way the specific rules on export financing existingor to be established under the Agreement on Agriculture.
In this regard, the EC consider the OECD regime on official support for export credits to be a
tested and workable set of rules.  Some Members have already indicated that WTO rules should set
out clearly the rules applicable to this area.  The EC take note of the concerns of developing countrieswho have argued that the fact that they are not members of the OECD puts them at a disadvantage.
The EC are prepared to address the legitimate concerns of developing countries in this regard.
4. More effective notification rules
The notification process for specific subsidies has completely broken down.  Only a few
WTO Members regularly notify subsidies even though there is an absolute obligation to do so under
Article 25 ACSM.  This lack of transparency needs to be urgently addressed since without
notifications it is difficult for the rules of the ASCM to be fully operational and effective.  This failure
is particularly damaging as regards “less visible” subsidies, whatever their form.  A workable and
effective notification system would be hugely beneficial for enabling these subsidies to be identified.
In view of this, we propose to explore the possibility of penalising partial or non-
notifications .  A mechanism would have to be devised through which the quality and scope of
notifications could be scrutinised and if failings were found or suspected a review procedure could be
generated through an expedited WTO dispute settlement procedure similar to the one envisaged for
spurious initiations or by referring the matt er to an empowered Permanent Group of Experts.
5. Subsidies and the environment
The DDA has reaffirmed the commitment to the general objective of sustainable development
and to the necessary mutual supportiveness between trade and environment.  Certain subsidies may
have a negative impact on the environment, but others can have a positive effect, by for instance
encouraging reductions in pollution or furthering resear ch into cleaner environment.  In view of this it
may be necessary to address the environmental dimension of subsidies and, in particular, to consider
further how to approach subsidies aimed at the prot ection of the environment, following the expiry of
the "green box".
III. DDA AND COUNTERVAILING DISCIPLINES
Under this heading, we propose changes along the lines included in the negotiating proposal
for the Anti-Dumping Agreement:
                                                     
5 The safe harbour of item k of Annex I ASCM applies only to interest rate provisions of export credits
but does not apply to export guarantees, risk premia and "matching".TN/RL/W/30
Page 5
• Strengthen rules
• Increase effectiveness
• Reduce the cost of CVD investigations
The EC also propose to focus on solving some of the problems shown up by the application of
the innovations of the Uruguay Round, in particular, with regard to initiation standards  where e.g.
successive cases are opened in respect of subsidies which have been found to have already expired orno longer used.
Moreover, the application of the sunset provisions  also gives cause for concern.  The
presumption in current rules towards expiry after 5 years is being circumvented with unsubstantiated
reviews being initiated thus prolonging life of measures.  Hence, there is a need to spell out moreclearly the requirements for extending the life of a measure for a further 5 years.
IV. DDA AND DEVELOPING COUNTRIES
As a general principle, we propose to maintain the line that rules on multilateral subsidy
disciplines should apply without exception.  In our view, tight disciplines on trade distorting subsidies
are in fact in the interests of all participants  in the world trading system, including developing
countries.
Nevertheless, the Communities recognise that certain types of subsidies can contribute to
development, and would be willing to give positive consideration to a package of S&D treatment
provisions for developing countries on the understanding that this would be for a strictly temporary
period and would be drawn up only following an agreement on rules for non-exempted countries.
S&D treatment (based on the existing Article 27 ASCM) could be considered in clearly defined
circumstances, for remedies, including countervailing duties, against certain prohibited and
actionable subsidies given by developing countries .  The Communities will also review the existing
Article 27 provisions in the light of any changes in the ASCM, to make sure that effective remedies
remain against injurious subsidies.
For least developed country members (and perhaps other low income and small economies),
we could envisage to relieve them of their notification obligation for specific subsidies under
Article 25 ASCM.  Instead, the review of this aspect of their trade policy could be conducted in the
context of the Trade Policy Review Mechanism, which already now partly covers the subject ofsubsidies.  In this process, the relevant parts of the review could be conducted in the Committee on
Subsidies and Countervailing Measures.
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