RESTRICTED
WORLD TRADE S/WPGR/W/9
6March 1996
ORGANIZATION(96-0816)
Working Party onGATS Rules
SUBSIDIES AND TRADE INSERVICES
Note bytheSecretariat
I. Background
1. Article XVoftheGeneral Agreement inTrade inServices acknowledges that,incertain
circumstances, subsidies mayhavedistortive effects ontrade inservices, andstates thatMembers
shallenter intonegotiations withaviewtodeveloping thenecessary multilateral disciplines to
avoid suchtrade-distortive effects. Thenegotiations arealsotoaddress theappropriateness of
countervailing procedures. Afootnote toparagraph 1ofArticle XVstates thatawork programme
istobeestablished todetermine how, andinwhattime-frame, negotiations onmultilateral
disciplines aretobeconducted.
2. Paragraph 1ofArticle XVfurther states thatthenegotiations shallrecognize theroleof
subsidies inrelation tothedevelopment programmes ofdeveloping countries andtakeintoaccount
theneeds ofMembers, particularly developing country Members, forflexibility inthisarea.
Finally, theArticle XVnegotiating mandate stipulates thatMembers shallexchange information
concerning allsubsidies related totrade inservices thattheyprovide totheirdomestic service
suppliers.
3. Thepresent note, requested bytheCouncil forTrade inServices atitsfirstmeeting on
1March 1995, introduces anumber ofissues thatmayariseasMembers focus ontheArticle XV
mandate. Likeprevious secretariat notes presented totheWorking Party, theobjective ofthis
noteistoidentify whatappear tobesalient issues, inorder tostimulate discussion intheWorking
Party. Itisnotintended asanexhaustive orauthoritative analysis ofquestions relating either to
subsidies affecting trade inservices ortothemanner inwhich theymight beaddressed. Thenote
doesnotattempt toaddress those aspects ofthenegotiating mandate dealing withthe
determination ofatime-frame fornegotiations, norwiththeexchange ofinformation among
Members relating tosubsidies. Thenoteisorganized under fourmain headings. Section II
contains briefcomments onthegeneral question ofsubsidies affecting trade inservices.
Section IIIexplores theapproach tosubsidy issues adopted onthegoods sideintheGATT, and
subsequently intheWTO Agreement onSubsidies andCountervailing Measures, inorder toassist
Members considering howfarthisapproach might besuitable asamodel fordeveloping
disciplines under theGATS. Mention ismade inSection IIIofhowsubsidies aredealtwithunder
theAgreement onAgriculture. Thissection alsoconsiders countervailing procedures andother
remedies against subsidy practices. Thisisfollowed inSection IVbyanexamination ofcertain
provisions already contained intheGeneral Agreement onTrade inServices thatdiscipline
subsidy practices. Finally, Section Vlistssome questions thatdelegations maywishtoexamine
inthecontext oftheArticle XVnegotiating mandate.S/WPGR/W/9
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II. Subsidies andtrade inservices
4. Pastefforts toestablish multilateral rules onsubsidies havealways attempted todefine the
middle ground between recognition thatsubsidies candistort trade inways thatundermine the
objective oftrade liberalization andacknowledgement thatsubsidies mayalsobeanimportant tool
ofsocial andeconomic policy. Thisdualistic approach isexplicit intheArticle XVnegotiating
mandate. Theneedtodefine rules thataddress boththenegative andpositive aspects of
subsidization hasimparted considerable complexity torule-making inthisarea. Ithascalled for
definitional andconceptual distinctions thatarenotalways easytomake. Anumber ofthese
difficulties arecompounded inthecaseoftrade inservices, forreasons discussed below.
5. Asecond broad consideration relates totheelement ofchoice which exists between
emphasizing disciplines toregulate theuseofsubsidies anddeveloping unilateral remedies (i.e.
countervailing action) tobeapplied inthefaceofsubsidization bytrading partners. Inthefieldof
goods, theUruguay Round wassuccessful inshifting emphasis towards greater reliance onrules
about theuseofsubsidies, buttheremedy ofcountervailing action stillplays asignificant partin
theoverall approach. Itmaybethecasethatinlightoftheconsiderable difficulties of
identification andmeasurement thatarebound toexisteveninthebestofcircumstances, an
emphasis inGATS onrules about theacceptability orotherwise ofsubsidy practices, which would
aimtodiscipline theuseofsubsidies exante, maybemore viable thananapproach which focuses
onunilateral remedies.
Aresubsidies commonly usedinservice sectors?
6. Detailed information about subsidies affecting trade inservices isunavailable. Empirical
work reveals, however, thattheuseofsubsidies iscommonplace inseveral service sectors,1
although according toanOECD study oftheincidence ofsubsidies inindustrialized economies,
some two-fifths tothree-fifths ofsubsidies granted bygovernments were classified assector-
specific, andthebulkofthese wenttonon-service industries suchassteel, ship-building and
mining.2Anumber ofgovernments typically provide subsidies ofonekindoranother tocertain
transport sectors, utilities, health, education, entertainment services, andfinancial services. This
listing isbynomeans exhaustive. Inmany countries, airtransport services aresubsidized, often
withaviewtosupporting anational flagcarrier. Inthemaritime sector, some governments
provide operating subsidies aswellassupport forthenon-service activity ofshipbuilding. The
public railway systems inmany countries receive significant levels ofsubsidy. Inthe
telecommunications sector, andtoadegree inrespect ofother utilities suchaswater and
electricity, governments maysanction orencourage cross-subsidization among product linesor
categories ofconsumers, rather thanproviding direct injections ofadditional resources.
7. Subsidies insectors suchaseducation andhealth generally underpin social objectives. On
theother hand, asarecent UNCTAD study points out,3some governments havedeveloped export
capacity inhealth andeducation services, andsubsides inthese sectors maybeviewed with
concern from atrade perspective. Subsidies provided toentertainment services aretypically
1Forauseful summary ofsome ofthiswork, seeUNCTAD, TheImpact ofSubsidies onTrade inServices ,document
UNCTAD/SDD/SER/3 (4October 1993), upon which these paragraphs draw.
2Robert Ford andWim Suyker, Industrial Subsidies intheOECD Economies ,Department ofEconomics andStatistics
Working Paper No.74,OECD (January 1990), cited inaGATT Secretariat document onsubsidies prepared fortheGroup
ofNegotiations onServices intheUruguay Round (MTN.GNS/W/98, 20April 1990).
3UNCTAD, op.cit.S/WPGR/W/9
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predicated oncultural considerations, while subsidies inthefinancial sector maybejustified on
prudential grounds. Financial service sector subsidies haveoften taken theform ofrescue
operations designed toshore uppublic confidence incircumstances where afinancial institution is
faced withcollapse. How, ifatall,should subsidies ofthisnature besubject tomultilateral
disciplines? Animportant additional question ishowfaritisfeasible todesign general obligations
relating toservices. Towhatextent would subsidy disciplines needtobedesigned forspecific
sectors inorder forthem tobeeffective andworkable?
Thenature anddefinition ofsubsidies
8. Subsidies arenoteasytodefine, astheycantakemany forms. Itwasnotuntilthe
Uruguay Round thatadefinition ofsubsidies wasestablished (seeSection IIIbelow). Prior to
this,thedistinction between production subsidies andexport subsidies hadlargely beenrelied
upon todefine rules governing subsidies. While subsidies mayoften berecognizable interms of
theireffects ongovernment revenue, either asoutpayments ortaxcredits orexemptions ofone
kindoranother, theycaninfacttakemany other forms. From aservices perspective, where
regulatory interventions canbeanimportant factor, regulations mayhavethemore orlessindirect
effect ofimparting asubsidy onservices orservice suppliers. Anissue thatMembers maywish
toconsider, therefore, ishowfarthedefinition ofsubsidy should betaken intotheregulatory
domain. Clearly, problems associated withidentifying andmeasuring subsidies willbegreater
when regulations arethesource ofsubsidy. Tosome degree, achoice exists between attempting
toaddress regulations assubsidies, andimposing disciplines onregulations perse,inthemanner
envisaged under many GATS provisions.
Particularities relating toservices
9. Several references havealready beenmade toconceptual andmeasurement challenges in
thesubsidy field. Difficulties arelikely toariseinidentifying subsidy practices, measuring the
magnitude ofsubsidization, assessing theimpact offoreign subsidies ondomestic producers, and
designing appropriate andappropriately targeted remedies. Many ofthese problems arelikely to
bemore acute inthecaseofservices thantheyhaveproved tobeingoods.4First, theabsence of
detailed statistics ontrade inservices greatly complicates anyefforts toidentify theimpact of
subsidies. Second, nodetailed andinternationally agreed nomenclature exists forservice
activities, which would permit acommon understanding ofhowspecific service activities aretobe
categorized ininternational services trade. Third, the“invisibility ”ofmany service activities
makes itdifficult tomonitor transactions. Fourth, the“customized ”nature ofmany transactions,
involving direct contact between producers andconsumers, makes theidentification ofspecific
products andtheunitprices ofsuchproducts problematic. Assessing quality differences among
“like”services issimilarly difficult. More generally, theconcept oflikeness ofproducts, which
isessential foradequate subsidy rules, ismore elusive inservices thaningoods. Allthese factors
willneedtobetaken intoaccount inthedesign ofsubsidy disciplines andinconsideration ofthe
possibility ofdeveloping countervailing remedies.
10. Theinseparability oftheproduction and/or saleofsome services from theproduction
and/or saleofgoods hasbeenwidely observed. Anatural consequence ofthis“embodiment ”
phenomenon isthatsome subsidies affecting thesupply ofservices appear, oraretreated as,
subsidies ongoods. Thismayoccur simply because aservice isembodied inagood, asfor
example, thecaseofacompact disconwhich music isrecorded, orservices maybeinputs into
theproduction ofgoods. Anexample ofthelatter isfound intheillustrative listofprohibited
4SeeMTN.GNS/W/98 foradiscussion ofsome ofthese problems.S/WPGR/W/9
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export subsidies annexed totheAgreement onSubsidies andCountervailing Measures, which
makes reference totransport andfreight charges, aswellastotheprovision bygovernments of
services more generally. Embodied services haveoften beencountervailed inactions taken
against goods. Theembodiment ofservices ingoods isyetanother factor thatmayneedtobe
taken intoaccount when considering howtotreatsubsidies totrade inservices.
III. Existing subsidy rules inthefieldofgoods andavailable remedies
11. Theearliest subsidy rules inGATT aredifferent inimportant ways from whatemerged in
theUruguay Round. Until theUruguay Round, however, theessential features oftheGATT
subsidy rules hadnotevolved much since themid-1950s. Production subsidies were exempted
from thenational treatment obligation byArticle III:8(b) oftheGATT, which states that"The
provisions ofthisArticle [national treatment] shallnotprevent thepayment ofsubsidies
exclusively todomestic producers, including payments todomestic producers derived from the
proceeds ofinternal taxes orcharges applied consistently withtheprovisions ofthisArticle and
subsidies effected through governmental purchases ofdomestic products." Article XVImade
production subsidies thesubject ofconsultation todiscuss thepossibility oflimiting those subsidies
found tocause orthreaten serious prejudice totheinterests ofanother party. Article XVIalso
entreated GATT contracting parties toseektoavoid theuseofexport subsidies onprimary
products, andrequired thatanysuchsubsidies should notgivethesubsidizing country more than
anequitable share ofworld export trade intheproduct concerned. Asfarasexport subsidies on
manufactured products were concerned, these were eventually declared illegal in1960 inan
undertaking accepted bymost industrial countries. Article VIoftheGATT gavecontracting
parties therighttotakecountervailing action against injurious subsidies granted directly or
indirectly onthemanufacture, production orexport ofaproduct. TheTokyo Round Agreement
onInterpretation andApplication ofArticles VI,XVIandXXIII fused andelaborated the
substantive rules onsubsidies andcountervailing action intoasingle Agreement, anddeveloped
procedural rules relating totheconduct ofcountervailing investigations.
TheAgreement onSubsidies andCountervailing Measures5
12. TheUruguay Round Agreement onSubsidies andCountervailing Measures (ASCM)
changed thesubsidy rules inimportant ways. Three aspects ofthese rules areparticularly relevant
tothepresent discussion. First, adefinition ofsubsidy isprovided forthefirsttime. Second,
subsidies aredivided intothree separate categories thatspecify boththeirlegality andremedies
available toparties affected bysubsidies. Third, certain changes havealsobeenmade inthebasis
forseeking remedies. Themany other changes totherules resulting from theUruguay Round are
notdiscussed here, asthese arenotrelevant tothepresent general consideration ofpossible
similarities ofapproach between current WTO subsidy disciplines andwhatmight eventually
emerge from theGATS Article XVnegotiating mandate.
5Itmaybenoted thattheAgreement contains anumber ofprovisions relating tospecial anddifferential treatment for
developing countries (Article 27). Among theareas where these provisions arerelevant areexport subsidies rules, the
determination ofserious prejudice resulting from subsidization, anddeminimis subsidy thresholds forthecountervailability
ofcertain subsidies. TheAgreement alsocontains provisions forMembers intheprocess oftransformation fromacentrally-
planned intoamarket, free-enterprise economy (Article 29).S/WPGR/W/9
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Thedefinition ofsubsidies
13. TheASCM defines a"subsidy" andprovides theconditions under which asubsidy would
bedeemed tobe"specific." Asubsidy isdefined asafinancial contribution6byagovernment or
anypublic body within theterritory ofaMember, oranyform ofincome orprice support inthe
sense ofArticle XVIofGATT 1994, which confers abenefit. Thisapproach would seem to
make iteasier toidentify subsidies thanintheprevious situation, where multilateral subsidy rules
were developed intheabsence ofadefinition ofsubsidy. Thequestion thatarises intheGATS
context, therefore, iswhether itwould behelpful toseekexplicit definitions ofwhatconstitute
subsidy measures.
14. Even when ameasure isasubsidy according totheASCM, itwould notbesubject to
dispute settlement under theprovisions oftheDispute Settlement Understanding (DSU) or
countervailing measures unless itwasa"specific" subsidy, i.e.unless ithadbeenspecifically
provided toanenterprise orindustry orgroup ofenterprises orindustries.
Theclassification ofsubsidies
15. Thethree-fold distinction intheASCM between prohibited, actionable andnon-actionable
subsidies hasalsocontributed togreater clarity withrespect tosubsidy rules. Prohibited subsidies
arethose contingent upon export performance orupon theuseofdomestic overimported goods,
except asprovided forintheAgreement onAgriculture. Non-actionable subsidies arethose
which arenon-specific andthose specific subsidies which, under certain conditions and
limitations, aredirected atindustrial research andpre-competitive product development
expenditures, regional development, andtheadaptation ofexisting facilities tonewenvironmental
requirements imposed bylawsorgovernment regulations. Theactionable subsidies category is
defined bydefault toinclude allsubsidies thatareneither prohibited nornon-actionable. A
question fortheWorking Party toconsider iswhether itwould beworthwhile toattempt a
comparable categorization ofsubsidies affecting trade inservices. Thiswould move disciplines in
thedirection ofsubstantive rules about subsidies perse.Itwould alsoopenupthepossibility of
using criteria linked toexpress policy objectives toplace arange ofsubsidies beyond thereach of
certain types ofremedial action.
Remedies against subsidies
16. Intheareaofremedies, theASCM provides fordispute settlement under theprovisions of
theDispute Settlement Understanding (DSU) andcountervailing action. Either ofthese remedies
maybeinvoked inthecaseofprohibited andactionable subsidies, butnon-actionable subsidies are
neither subject tochallenge under theDSU norcountervailable. However, ifnon-actionable
specific subsidy programmes result inserious adverse effects tothedomestic industry ofa
Member, suchastocause damage which would bedifficult torepair, Article 9oftheASCM
provides forconsultations between Members andremedies authorized bytheCommittee on
Subsidies andCountervailing Measures.
17. TheAgreement includes aspecific definition ofserious prejudice toaMember 'sinterests
which canariseasaresult ofadverse effects suchasexport displacement inthemarket ofthe
subsidizing Member orinathirdcountry market. Arebuttable presumption ofserious prejudice
iscreated where thetotaladvalorem subsidization ofaproduct exceeds 5percent, where
6TheASCM provides alistofthedifferent forms offinancial contribution.S/WPGR/W/9
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subsidies cover operating losses,7where direct debtforgiveness occurs andwhere grants are
provided tocover debtrepayment. Where serious prejudice isalleged andthematter cannot be
resolved through consultations, adispute settlement panel maybeestablished. TheASCM also
provides forrecourse totheDSU inthecaseofadverse effects intheform ofnullification or
impairment ofbenefits accruing under GATT 1994.8
18. Insum, theAgreement onSubsidies andCountervailing Measures embodies adual
approach torule-making about subsidies. Ontheonehand, certain subsidies areprohibited
outright, andontheother, subsidies ofaspecified variety orvalue giverisetoapresumption of
serious prejudice andcanleaddirectly toremedies viadispute settlement. Thisisapotentially
powerful discipline onsubsidies.
19. Countervailing action canonlybetaken ifinjury todomestic industry iscaused by
subsidized imports.9Such duties canonlybelevied following adetailed investigation ofthefacts
ofthecase, which include evidence oftheexistence ofasubsidy andcalculation ofitsvalue,
together withevidence ofactual orthreatened material injury toadomestic industry, andthe
establishment ofacausal linkbetween subsidised imports andinjury todomestic industry. The
procedural andinformation requirements forcountervailing dutyinvestigations havebecome
increasingly complex anddetailed overtheyears, reflecting aperceived needtoavoid, asfaras
possible, themisuse ofthisanti-subsidy remedy asameans ofdisguised protection. The
information requirements forcountervailing investigations intrade inservices would belikely to
prove difficult tomeet, forallthereasons mentioned inparagraph 9above.
TheAgreement onAgriculture
20. Thesubsidy rules developed intheagricultural sector intheUruguay Round aredifferent
from those ofthesubsidies agreement. Inrespect ofbothdomestic support measures andexport
subsidies, benchmark levels ofintervention havebeenestablished forMembers withsuchsubsidy
levels inprevious years. Inthecaseofdomestic support measures, anAggregate Measure of
Support (AMS) covering thewhole sector hasbeenestablished, onthebasis ofwhich Members
haveaccepted reduction commitments from thespecified benchmark level. TheAMS calculation
excludes certain types ofsubsidies whose impact onproduction andtrade isregarded asminimal
ornon-existent (“green box”measures). Certain additional exclusions from theAMS calculation
areallowed fordeveloping countries andformeasures ofanycountry thatare"partially
decoupled" from production ("blue box" measures).10Theexanteexclusion ofcertain measures
issimilar totheestablishing ofnon-actionable subsidies under theASCM. Export subsidies have
beenaddressed inacomparable manner, andannual reduction commitments havebeenset,
although inthiscasebothbudgetary outlay commitments andexport quantity reduction
commitments havebeenundertaken. Export subsidies areprohibited forthose Members without
7Subsidies tocover operating losses ofanenterprise thatarenon-recurrent, one-time measures, andaregiven toallow
timeforadjustments andtoavoid acute social problems arenotdeemed tobeseriously prejudicial.
8Theterm"nullification andimpairment" isusedintheASCM inthesame sense asitisusedintherelevant provisions
ofGATT 1994, andtheexistence ofsuchnullification orimpairment istobeestablished inaccordance withthepractice
ofapplication ofthese provisions.
9Itshould beborne inmind thatcountervailing remedies cannot provide relief insituations where subsidies cause injury
withrespect tosales intheexport markets ofacomplainant (inthesubsidizing country orathird country market), rather
thantosales initsownmarket.
10Non-exempt support levels forbothMembers withandwithout AMS reduction commitments arepermitted uptoa
deminimis level of5percent (10percent fordeveloping countries).S/WPGR/W/9
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reduction commitments (except fortwomeasures inthecaseofdeveloping countries). The
domestic support andexport reduction commitments extend forasixyearimplementation period
(tenyears fordeveloping countries), beginning in1995.
21. Asfarasremedies areconcerned, theso-called “peace clause ”contained inArticle 13of
theAgreement onAgriculture determines thecircumstances inwhich subsidies maybechallenged
during theimplementation period. Domestic support measures falling within the“green box”are
non-actionable forthepurpose ofcountervailing action, exempt from challenge ongrounds of
serious prejudice (asprovided forinArticle XVIofGATT 1994 andtheASCM), andalsoexempt
from non-violation nullification andimpairment complaints. Domestic subsidies covered bythe
reduction commitment andpermissible export subsidies maybesubject tocountervailing action,
but“duerestraint ”must beshown ininitiating countervailing dutyinvestigations. Domestic
subsidies cannot bechallenged onserious prejudice ornon-violation nullification andimpairment
grounds, unless theyareapplied toaspecific product inexcess oftheleveldecided inthe1992
marketing year. Export subsidies fullyinconformity withtheprovisions oftheAgreement on
Agriculture areexempt from actions based onArticle XVIofGATT 1994 orArticles 3
(prohibition), 5(adverse effects) and6(serious prejudice) oftheASCM. Anymeasures inexcess
ofcommitment levels maybeaddressed under WTO dispute settlement procedures.
22. Twoaspects oftheapproach adopted inagriculture seem noteworthy from theperspective
ofpossible subsidy disciplines intrade inservices. First, incontrast totheASCM, emphasis was
placed onacommitment toreduce subsidy levels, inaddition toestablishing rules onthelegal
acceptability ofvarious subsidy practices viathegreen box/blue boxapproach. Arguably, where
theoverall reduction commitments apply, theyobviate theneedtoidentify carefully thenature and
impact ofeachandevery subsidizing intervention --anarduous taskinthefaceofinadequate
information. Secondly, restraints ontheuseofremedies against subsidies formed partofthe
package involving subsidy reduction commitments. Itmaybethatsubsidy disciplines structured
inthismanner fitwellintoaframework thatenvisages progressive liberalization, which isa
defining feature oftheAgreement onAgriculture. Thequestion hereiswhether there might bea
place forcomparable step-by-step arrangements inthecaseofservices.
IV. Existing subsidy andcountervail disciplines inGATS
23. Nosystematic attempt wasmade tonegotiate subsidy andcountervail disciplines inthe
GATS prior toagreement ontheArticle XVnegotiating mandate. However, thedecision to
postpone negotiations onthisaspect oftheframework ofrules togovern trade inservices was
taken against thebackground ofcertain existing subsidy andcountervail disciplines, which arose
naturally from theconceptual structure oftheAgreement. Before theneedforadditional
disciplines andcountervailing measures canbedefined, itisnecessary todevelop aclear
understanding ofthescope oftheexisting disciplines. Such disciplines already existasaresult of
themost-favoured-nation treatment obligation andthenational treatment undertakings inthe
schedules ofspecific commitments, andunder theArticle VIIIprovisions dealing withmonopolies
andexclusive service suppliers. Thenature ofthese disciplines isspelled outbelow.
Subsidies, most-favoured-nation treatment, andnational treatment
24. Article IIoftheGATS requires thatmost-favoured-nation (MFN) treatment beextended to
allservices andservice suppliers ofanyother Member inrespect ofallmeasures covered by
GATS. Thisisageneral requirement, modified onlyincases where Members haveinscribed
MFN exemptions intheirschedules. With regard tosubsidies, theMFN principle plays aless
important disciplining rolethanthenational treatment principle (discussed below). However, in
theabsence ofanational producer, andtherefore, ofabasis forcomparison, thenationalS/WPGR/W/9
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treatment discipline isnotoperative, andhence theMFN discipline canbeimportant inensuring
non-discrimination. TheMFN discipline canalsoplaysucharolewhen itispossible fora
foreign producer tobeoffered better treatment thananational producer, as,forinstance, in
certain investment regimes. TheMFN principle significantly restricts thecircumstances inwhich
countervailing action maybeapplied, asisdiscussed inthefollowing section.
25. When Members undertake specific commitments under PartIIIofGATS, theyhavethe
possibility, inaccordance withArticle XVII, ofinscribing sectors intheirschedules freeof
national treatment limitations under anyorallmodes ofdelivery. Thenational treatment
obligation, ascontained inArticle XVII, saysthat"Inthesectors inscribed initsSchedule, and
subject toanyconditions andqualifications setouttherein, eachMember shallaccord toservices
andservice suppliers ofanyother Member, inrespect ofallmeasures affecting thesupply of
services, treatment nolessfavourable thanthatitaccords toitsownlikeservices andservice
suppliers." Thus national treatment commitments freeofsubsidy-related limitations require that
anysubsidies granted arenon-discriminatory asbetween national services andservice suppliers
andthelikeservices andservice suppliers ofother Members.11While thisruledoesnotimpose
anyrestraint onthelevelofsubsidies thatmaybegranted byMembers, itisnevertheless a
potentially powerful discipline withrespect tothenon-discriminatory useofsubsidies. But
realization ofthispotential depends onthedegree towhich Members schedule commitments, and
theextent towhich those commitments arefreeofnational treatment limitations relating to
subsidies. Itisnoteworthy thatthisapproach totherelation between national treatment and
subsidies differs sharply from thatadopted inGATT 1994. Asnoted above, Article III.8(b) of
GATT 1994 exempts subsidies from national treatment.
26. Themain reason forthisseemingly greater degree ofsubsidy discipline inGATS
undoubtedly liesinthefactthatGATT 1994 makes national treatment abasic, non-negotiable
principle ofthesystem, whereas national treatment isnegotiable viathescheduling ofspecific
commitments under GATS. Asnoted above, therealization ofnon-discrimination asasubsidy
discipline under GATS depends onthepropensity ofMembers toschedule unencumbered specific
commitments. Aninteresting aspect ofthissituation isthatcertain subsidy disciplines become
automatically tighter under GATS withprogressive liberalization --thisisnotagainthatrequires
specific attention tosubsidy rules assuch.
27. Inthepresent context, itisimportant todefine precisely thescope ofthenational
treatment obligation inGATS asitcurrently applies tosubsidies, and,inparticular, toclarify the
implications ofthemodes ofsupply approach. The"Scheduling ofInitial Commitments inTrade
inServices: Explanatory Note"12clarifies, toanextent, theterritorial scope ofthenational
treatment obligation. Paragraph 10ofthenotestates that: "There isnoobligation intheGATS
which requires aMember totakemeasures outside itsterritorial jurisdiction. Ittherefore follows
thatthenational treatment obligation inArticle XVII doesnotrequire aMember toextend such
treatment toaservice supplier located intheterritory ofanother Member." Thiswould imply that
aMember isnotobliged toextend asubsidy provided tosuppliers located initsterritory to
suppliers located outside itsterritory. Itshould benoted, however, thattheExplanatory Note
addresses specifically thetreatment ofsuppliers anddoesnotdealwithissues thatmayarisein
relation tothetreatment ofservices -especially withrespect tothecross-border supply ofa
11Several Members have inscribed intheirschedules national treatment limitations applying toallsubsidies across the
board. Others have done sowithrespect tospecific modes andspecific sectors.
12MTN.GNS /W/164, 3September 1993. Thedocument warnsthat"theanswer sshouldnotbeconsideredasanauthoritative
legal interpretation oftheGATS." Itis,however, thebasis onwhich many schedules ofspecific commitments have been
drafted.S/WPGR/W/9
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service, when theservice issupplied within theterritory ofaMember while thesupplier islocated
outside it.
28. There remains acrucial question: doesthenational treatment obligation extend across
modes ofsupply, ordomembers retain thefreedom todiscriminate between identical services
supplied intheirterritory through different modes? ThetextofArticle XVII doesnotsuggest that
themode ofsupply isaconsideration indefining "likeness" ofaservice: different modes of
supply could beusedtoprovide a"like" service. Thestructure oftheschedules, however,
implies thataMember 'scommitments aremode-specific, i.e.aMember making acommitment to
provide national treatment, doessowithin aspecific mode butisallowed todiscriminate between
thesame service supplied bydifferent modes. Thisismost starkly evident incommitments on
market access (Article XVI), where extreme discrimination between modes ispermitted, inthat
Members mayallow thesupply ofaservice through onemode andnotthrough another.
Nevertheless, thequestion remains: onceaMember hasallowed thedelivery ofaservice through
different modes ofsupply, would itbeconsistent withnational treatment todiscriminate among
them?
29. If"likeness" ofaservice isdefined independent ofthemode ofsupply, thenthere isbuilt-
inprotection within theAgreement forforeign suppliers ofservices through allmodes against
national subsidization inaparticular mode. Ineffect, ifaMember were tosubsidize itsown
service orservice supplier, thenational treatment obligation would make itnecessary toprovide
an"equivalent" subsidy totheservices ofother Members supplied within itsterritory, irrespective
ofthemode ofsupply. Otherwise, itcould beargued thatthesubsidy hadmodified theconditions
ofcompetition infavour ofservices orservice suppliers oftheMember. Ontheother hand, if
likeness were heldtodepend onthemode ofsupply, i.e.oneservice islikeanother service onlyif
itissupplied bythesame mode, thenforeign suppliers through onemode would notbeprotected
against thenational subsidization ofaparticular mode. Inthiscase, there would beagapinthe
current disciplines which mayneedtobeexamined.
30. These andseveral other issues canbeillustrated withrespect tocertain forms ofsubsidies.
Production subsidies
31. SayaMember, which hasbound itself toprovide national treatment under allfourmodes,
provides aproduction subsidy toanational services producer. Forinstance, thesubsidy may
consist ofpartial payment offuelcosts fortransporters serving aparticular domestic route. Who
elsecould claim arighttobesubsidized, given thenational treatment obligation? Non-national
producers ofthelikeservice located intheterritory oftheMember would seem tobeobvious
claimants. Inaddition, itseems clear thatasubsidy provided toasupplier leads totheproduction
ofasubsidized service. Thus, anysubsidy provided under modes 3or4,would haveanimpact
alsooncompetitive conditions under mode 1,because cross border suppliers would becompeting
against subsidized localservices. Could suchsuppliers alsoclaim arighttothesubsidy? The
answer tothisquestion willdetermine whether GATS already hasrules which ensure non-
discriminatory conditions forsuppliers through allmodes.
Investment subsidies
32. These subsidies arepertinent onlytomode 3,i.e.commercial presence. Thenational
treatment obligation would seem tosuggest thatbothnational andforeign investors would qualify
foranysuchsubsidy. However, thequestion thatarises ishowrecipients would beselected.
Since subsidy funds arenotunlimited, howcould aMember legitimately choose thesetof
successful claimants from among thepoolofcurrent andpotential investors?S/WPGR/W/9
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Export subsidies
33. Asinthecaseofgoods, itmaybepossible todistinguish between production andexport
subsidies forservices, though theempirical significance ofthedistinction needs tobeestablished.
Export subsidies would bethose contingent onexport performance. Unlike inthecaseofGATT,
these subsidies arenotprohibited intheGATS, butaMember whohadcommitted toprovide
national treatment would alsobeobliged toprovide suchsubsidies toallforeign producers with
commercial presence initsterritory. However, thisobligation would notseem toaffect a
Member whoprovides asubsidy toitsproducer located outside itsterritory.
Consumption subsidies
34. Unconditional consumption subsidies respect national treatment inthewidest possible
sense: theconsumer decision tobuyisnotbiased towards aparticular source. However,
consumption subsidies contingent upon purchase from anational source would seem toviolate the
national treatment obligation. Aninteresting question arises withrespect tothe"consumption
abroad" mode ofsupply. Would GATS disciplines cover conditional subsidies granted for
consumption abroad -conditional, forinstance, onpurchase from anational supplier located
abroad orconditional onpurchase inaparticular country? Here atension exists between the
notion ofterritory andwider notions ofjurisdiction. There maybenoobligation intheGATS
which requires aMember totakemeasures outside itsterritorial jurisdiction (asparagraph 10of
theExplanatory Note states), butifaMember doestakesuchmeasures, isitfreetoactasit
chooses -orshould there beanobligation totakesuchmeasures consistently withGATS
principles? Intheabsence ofsuchaninterpretation, itisnotclear whatthenational treatment and
MFN obligations would mean withrespect toconsumption abroad.
Countervailing action, most-favoured-nation treatment, andnational treatment
35. Itshould beapparent from theprevious discussion thattheneedtodevelop remedies will
depend ontherange oftheexisting disciplines onsubsidies intheGATS. Buthowmuch scope is
there already under existing GATS rules foraMember torespond tosubsidization byanother
Member which affects itshome orexport markets?
36. AsGATS rules stand, itwould seem thataMember would beprevented bytheMFN rule
from taking countervailing action against services orservice suppliers ofanother Member, unless
suchaction were extended onanon-discriminatory basis inrespect oflikeservices orservice
suppliers. Itis,ofcourse, alogical absurdity thatcountervailing action should betaken against all
Members inresponse tothesubsidy practices ofasingle Member, andtheessential point isthat
provision forcountervailing action hassofarnotbeenmade under GATS. Thisconstraint on
countervailing action applies toallservices, andnotonlyinrespect ofthose thataresubject to
specific commitments (unless anArticle IIexemption isinforce). Another point toconsider is
whether thenational legislation ofMembers contemplates thepossibility oflevying taxes ortaking
other restrictive measures against asubset ofproducers intheirterritory. Unless suchmeasures
were tobeapplied atthe"frontier" liketrade taxes, itmaybethatexisting domestic legislation
would havetobealtered inorder toapply some ofthecountervailing remedies thatmight be
developed under GATS.
37. Measures which arenotinconsistent withtheGATS, butnullify orimpair thebenefits of
anexisting concession maygiverisetoaso-called "non-violation" complaint under
Article XXIII:3. ThisArticle states that"IfanyMember considers thatanybenefit itcould
reasonably haveexpected toaccrue toitunder aspecific commitment ofanother Member under
PartIII[specific commitments] ofthisAgreement isbeing nullified orimpaired asaresult oftheS/WPGR/W/9
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application ofanymeasure which doesnotconflict withtheprovisions ofthisAgreement, itmay
haverecourse totheDispute Settlement Understanding. Ifthemeasure isdetermined bythe
Dispute Settlement Body tohavenullified orimpaired suchabenefit, theMember affected shall
beentitled toamutually satisfactory adjustment onthebasis ofparagraph 2ofArticle XXI
[modification ofschedules], which mayinclude modification orwithdrawal ofthemeasure. Inthe
event anagreement cannot bereached between theMembers concerned, Article 22[compensation
andthesuspension ofconcessions] oftheDSU shallapply.]
38. Most non-violation cases brought before GATT panels haveinvolved thenullification or
impairment ofanegotiated tariff concession bytheintroduction ofasubsidy. Thestandards for
bringing anon-violation complaint may, however, bequite high: there must beapre-existing
scheduled commitment andanegation ofreasonable expectations astothevalue ofthe
commitment. Twolimitations areobvious: first, there would benoremedy insectors where
commitments havenotbeenundertaken; secondly, remedies could notbesought against existing
subsidies whose continuation could bereasonably expected.
39. Itcanbeconcluded thatwhile thenational treatment obligation doesnotimpose any
restraint onthelevelofsubsidies thatmaybegranted byMembers, itisnevertheless apotentially
powerful discipline withrespect tothenon-discriminatory useofsubsidies. Butrealization ofthis
potential depends, firstofall,ontheextent towhich Members schedule commitments freeof
national treatment limitations relating tosubsidies, andsecondly, onwhether thenational
treatment obligation isinterpreted toextend across modes ofsupply. Asfarasscope forremedial
action isconcerned, theMFN obligation under GATS would seem topreclude countervailing
action against asingle Member, butthere remains scope forMembers toseekrecourse to"non-
violation" complaints ifthebenefits ofanexisting concession arenullified orimpaired. Inany
case, there isnocounterpart intheGATS totheprohibition ofexport subsidies inthecaseof
goods. Theimportance ofthisgapcanonlybeestablished byanassessment oftheempirical
significance ofsuchsubsidies.
Subsidy disciplines under therules onmonopolies andexclusive service suppliers (Article VIII)
40. Paragraph 1ofArticle VIIIrequires Members toensure thatmonopoly service suppliers
donotusetheirmonopoly power tonegate theMFN commitment ofArticle IIortoundermine
anyspecific commitments inscribed intheirschedules. Paragraph 2states thatwhere amonopoly
competes inasector outside thedomain ofitsmonopoly power, andthesector inquestion isthe
subject ofaspecific commitment, aMember must ensure thatthemonopolist doesnotabuse its
monopoly position inamanner inconsistent withthescheduled commitment. Paragraph 5makes
clear thattheabove provisions alsoapply toexclusive service suppliers. Exclusive service
suppliers aredeemed toexistwhen aMember, formally orineffect authorizes orestablishes a
small number ofservice suppliers andsubstantially prevents competition among them within its
territory. Animportant objective ofthese rules istoprevent cross-subsidization from occurring
across activities orsectors. Moreover, since monopoly suppliers aredefined inArticle XXVIII to
include bothpublic andprivate monopolies, these disciplines alsocover private pricing behaviour,
orinother words, dumping situations involving monopolists andexclusive service suppliers.
These kinds ofdumping situations maydiffer from themore familiar GATT concept ofdumping,
inthatthelatter doesnotoccur across activities orsectors.
V. Some issues forconsideration
41. TheArticle XVnegotiating mandate acknowledges thatsubsidies maydistort trade, but
alsorecognizes apositive roleforsubsidies andaneedforflexibility, particularly fordeveloping
countries. Against thisbackground, thepresent notehasraised anumber ofissues relating totheS/WPGR/W/9
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nature ofpossible subsidy disciplines under GATS. Inaddition, thenotehasemphasized that
difficulties relating totheidentification ofsubsidy practices, themeasurement ofsubsidization, the
assessment oftheimpact ofsubsidies, andthedesign ofappropriate remedies arelikely tobeeven
more acute inservices thantheyhavebeeninthefieldofgoods. Thisisattributable, among
other factors, totheabsence ofadequate statistics andanagreed nomenclature ofsufficient detail,
thedifficulty ofdefining unitprices foroutput ofcomparable quality forcertain services, andthe
elusiveness ofaworkable concept of“likeness ”among services. These kinds ofproblems will
needtobetaken intoaccount. Some ofthequestions Members maywishtoconsider are
summarized below.
- TheGATT 1994 approach tosubsidy disciplines defines subsidies andcategorizes
them inafashion thatimposes greater constraints ontheuseofthose subsidies
considered themost trade-distorting. DoMembers seearolefordeveloping rules
beyond those existing already asaresult ofGATS disciplines onnon-
discrimination, which might relyondefinitions andcategories similar tothose
employed onthegoods side?
- Certain aspects ofsubsidies inservices maybequantifiable, suchasthecosttothe
government. DoMembers consider thatquantitative subsidy reduction
commitments ofthekindapplied intheagricultural sector might playarolein
reducing distortions totrade inservices arising from subsidies?
- Ifsubsidies were tobedefined inGATS, would Members seektorelyona
relatively narrow definition ofsubsidy, based ontherevenue orfiscal effects of
government intervention, orwould Members prefer abroader definition ofsubsidy
totakeintoaccount thesubsidy-like effects ofcertain regulatory interventions?
- DoMembers seescope fordeveloping horizontally-based subsidy rules, orwould
anysubsidy rules thatmight bedeveloped havetobedefined atthesectoral level
inorder toembody thedesired degree ofspecificity anddiscipline?
42. TheArticle XVnegotiating mandate talksofaddressing theappropriateness of
countervailing procedures, presumably withtheimplication thatMembers mayormaynotregard
countervailing remedies asappropriate intheservices context. Inorder forcountervailing
remedies tobefeasible, itwould benecessary tomake provision forselective action, which at
present would notbepossible under theMFN rule(unless anMFN exemption hadbeentaken). It
isalsothecasethatcountervailing remedies cannot inanyevent bebrought tobearwhen the
injurious effects ofasubsidy ariseinrespect oftheexports ofacomplainant (i.e.inthemarket of
thesubsidizing country orofathirdcountry).
- What roledoMembers seeforacountervailing remedy under GATS?
- Ifacountervailing remedy were tobedeveloped, howmuch reliance should be
placed upon itinrelation tothealternative approach toimposing discipline viaex
antecontrol ofcertain subsidies, combined withmultilateral enforcement through
dispute settlement?