CHANAKYA NATIONAL LAW

UNIVERSITY

Subsidies

Public International Law

 TABLE OF CONTENTS

ACKNOWLEDGEMENT .............................................................................................................................................. I
RESEARCH METHODOLOGY ................................................................................................................................. II
CHAPTER 1 INTRODUCTION .............................................................................................................................. - 1 -
HISTORICAL BACKGROUND ..................................................................................................................................... - 2 -
CHAPTER 2 SUBSIDIES – DEFINITION, TYPES, AND EFFECTS................................................................. - 5 -
DEFINITION UNDER WTO......................................................................................................................................... - 5 -
TYPES OF SUBSIDIES ................................................................................................................................................ - 6 -
Grants and other direct payments ...................................................................................................................... - 6 -
Tax concessions .................................................................................................................................................. - 7 -
In-kind subsidies................................................................................................................................................. - 7 -
Cross subsidies ................................................................................................................................................... - 8 -
Credit subsidies and government guarantees .................................................................................................... - 8 -
Hybrid subsidies ................................................................................................................................................. - 9 -
Derivative subsidies ......................................................................................................................................... - 10 -
Sympathetic support ..................................................................................................................................................... - 10 -
Compensatory or countervailing support ...................................................................................................................... - 10 -
Subsidy clusters ............................................................................................................................................................ - 10 -
Subsidies through government procurement .................................................................................................... - 10 -
Market price support ........................................................................................................................................ - 11 -
EFFECTS OF SUBSIDIES ........................................................................................................................................... - 12 -
The opportunity cost of subsidies ..................................................................................................................... - 12 -
The static effects of subsidies on efficiency ...................................................................................................... - 12 -
The dynamic effects of subsidization ................................................................................................................ - 13 -
The distribution of subsidies ............................................................................................................................ - 14 -
Effects on the environment ............................................................................................................................... - 14 -
The political economy of subsidies................................................................................................................... - 15 -
CHAPTER 3 INTERNATIONAL DISCIPLINES ON SUBSIDIES................................................................... - 17 -
THE WTO AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES (ASCM) ............................................ - 17 -
Structure of the agreement ............................................................................................................................... - 17 -
Specificity ......................................................................................................................................................... - 17 -
Categories of Subsidies .................................................................................................................................... - 18 -
Prohibited subsidies ...................................................................................................................................................... - 18 -
Actionable subsidies ..................................................................................................................................................... - 18 -
Agricultural subsidies: .................................................................................................................................................. - 19 -
AGREEMENT ON AGRICULTURE (AOA) ................................................................................................................. - 19 -
Types of Subsidies under the agreement .......................................................................................................... - 20 -
1. Green Box ................................................................................................................................................................. - 20 -
2. Blue Box ................................................................................................................................................................... - 21 -
3. AMS (Aggregate Measurement of Support) ............................................................................................................. - 21 -
5. De-minimis support .................................................................................................................................................. - 22 -
THE GENERAL AGREEMENT ON TRADE IN SERVICE (GATS) ................................................................................ - 22 -
SOFT LAW ON SUBSIDIES ........................................................................................................................................ - 22 -
CONCLUSION ........................................................................................................................................................ - 24 -
REFERENCES ......................................................................................................................................................... - 25 -
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ACKNOWLEDGEMENT
Any project completed or done in isolation is unthinkable. This project, although prepared by me,
is a culmination of efforts of a lot of people. Firstly, I would like to thank our Professor for Public
International Law – Mrs. Sugandha Sinha, for her valuable suggestions towards the making of
this project.
Further to that, I would also like to express my gratitude towards our seniors who were a lot of
help for the completion of this project. The contributions made by my classmates and friends are,
definitely, worth mentioning.
I would like to express my gratitude towards the library staff for their help as well. I would also
like to thank the persons interviewed by me without whose support this project would not have
been completed.
Last, but far from the least, I would express my gratitude towards the Almighty for obvious
reasons.
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RESEARCH METHODOLOGY

 Method of Research
The researcher has adopted a purely doctrinal method of research. The researcher has made
extensive use of the library at the Chanakya National Law University and also the internet sources.
 Aims and Objectives
The aim of the project is to present an overview ‘Subsidies’ in the International scenario, and
discuss the international disciplines concerned with it.
 Sources of Data:
The following secondary sources of data have been used in the project-
1. Cases
2. Books
3. Websites

 Method of Writing:
The method of writing followed in the course of this research paper is primarily descriptive.

 Mode of Citation
The researcher has followed a uniform mode of citation throughout the course of this research
paper.
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Chapter 1
Introduction
Undoubtedly, the law relating to the development and administration of the use of subsidies
developing is one of the most difficult areas of international economic policy and rule making. It
is also one of the most pervasive problems in international trade. All the governments around
the world in some way or the other intervene in order to achieve the industrial or social policy
goals. Subsidy is one such method. In the simplest of terms, Subsidization occurs when a
government provides its producer(s) with financial contributions that give the producer(s) an
advantage in the market place.
Subsidies acquire greater importance when it comes to developing countries and least
developing countries. It is crucial or the sustenance and maintenance of their economies at
whatever stage of development these economies are..
There are theories both for and against the use of subsidies in International Trade. Economists in
favor of subsidies argue that it would be unwise on the part of the importing country to take any
action any against subsidization. Subsidies do not distort as much as other classic trade and
commercial policy instruments, viz. quantitative restrictions and tariffs. In fact, they argue that
subsidies an instrument, whereby governments, at least in a perfect competition model,
subsidize foreign consumers: a reduction in the marginal cost of foreign firms (which may be
the consequence of a subsidy) would, in general, reduce prices in domestic firms. On the other
hand, those against it argue that subsidies tend to distort international production and trading
patterns, and reduce efficiency and thus reduce world welfare.1
However, determination of analysis of impact of subsidy of international trade is another
discussion altogether which the researcher shall refrain from discussing as it beyond the scope
of the paper.
The WTO- Agreement on Subsidies and Countervailing Measures aims to compromise these
two positions. The compromise between the possibility for governments to apply subsidies and
restrictions imposed by international trade law fits well into the general picture of the WTO
legal system's overall structure. WTO law primarily imposes restrictions on governments only
insofar as it is necessary to ensure the functioning of the principles of non-discrimination and
open markets in order to ensure optimal economic welfare. However, this does not imply that
the WTO members have unrestricted freedom with regard to their trade and economic policies.
Economic activity pursued within the ambit of their regulatory freedom is also subjected to the
restrictions by WTO law.2

1 ‘Dogfight: Criticizing the Agreement on Subsidies and Countervailing Measures amidst the largest dispute in World Trade Organization
history', 32 N.C.J Int'l L.& Com. Reg. 115 (2006-2007)
2 Anwarul Hoda and Rajiv Ahuja, ‘Agreement on Subsidies and Countervailing Measures: Need for Clarification and Improvement', 39(6)

Journal of World Trade 1009 (2005)

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For the purposes of the present paper, the provisions relating to subsidies are codified under two
multilateral agreements, viz. General Agreement on Tariffs and Trade, and the Agreement on
Subsidies and Countervailing Measures.
The SCM Agreement took effect with establishment of the World Trade Organization on
January 1, 1995 and was brought into existence in order to plug the loopholes of GATT with
respect to the use of subsidies in international trade. The GATT permitted an importing country
to impose countervailing duties to offset public subsidies for the manufacture, production, or
export of merchandise, and set out the basic obligations of a GATT member country with
respect to the use of subsidies. However, these provisions were found lacking in two respects.
First, the rights and obligations were laid down in broad terms, and secondly, concepts like
subsidy, export subsidy, material injury and domestic industry were defined in terms susceptible
to a wide range of interpretations. SCM intended to bring about greater uniformity in the
interpretation of these concepts and lend precision and predictability to the rights and
obligations. The SCM agreement contains disciplines on both the subsidizing government and
on the actions taken by the government in the importing country against another government's
subsidies. But unlike its predecessors, it defines subsidy and introduces the concept of ‘specific'
subsidy for the most part, a subsidy available only to an enterprise or an industry, or a group of
industries within the jurisdiction of the authority granting the subsidy; only specific subsidies
are subject to the disciplines set out in the Agreement.3

Historical Background
The problem of subsidies has always been a subject of intense debate. There has been a
continuous evolution of the provisions relating to subsidies in the four decades of the operation
of the GATT 1947 till the Uruguay round.
There were a number of independent national rules that provided for remedy in cases of imports
being subsidized by the foreign states which can be traced back to the 19th century. However,
the elaborate development of multilateral international rules concerning subsidized trade began
primarily with the GATT.
The original GATT agreement of 1947 did not provide for exhaustive substantive rules of
subsidy practices. In the original GATT agreement of 1947, there was very little discipline on
the question of subsidizing except for the permitted response of countervailing duties. There was
a fairly general reporting requirement in Article XVI of the original GATT, plus a general
obligation in Article II, paragraph 4 against the use of new subsidies to inhibit imports into the
subsidizing country when that country had “bound” its tariff on the product concerned.4
The 1955 review session amendments to the GATT introduced the first substantive obligations
regarding subsidies into the GATT (paragraphs 2 through 5 of Article XVI). However, this

3 Autar Krishen Koul, GATT/WTO Law, Economics and Politics, (Delhi: Satyam Books 2005).
4 Debra P. Steger, The WTO Doha Round Negotiations on Subsidies and Countervailing Measures: Issues for Negotiators
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portion of GATT was confined only to export subsidies and did not apply to general, production
or domestic subsidies. In addition, the GATT rules were divided between applications to
“primary” and “non-primary” products. Furthermore, paragraph 4 of Article XVI of GATT,
which imposed an obligation for non-primary goods proved troublesome as not all countries
were prepared to adopt the declaration implementing the same. Because of these lacunae, the
GATT treatment of subsidies proved to be controversial and the disciplines weak.
Thereafter, negotiations leading to a code concerning subsidies and countervailing duties were
begun in the Tokyo Round, resulting in 1979 in an agreement on that subject. This agreement,
the Subsidies Code, was the first general comprehensive multilateral discipline of the use of
subsidies in international trade and the first elaboration of the subsidy rules since the 1955
GATT amendments. Moreover, unlike the 1955 agreement, this code explicitly provided for
domestic subsidies and was not restricted to just export subsidies. The Code also established
two-track approach to disciplining subsidies. Track I dealt entirely with countervailing duties
and ways for the country to implement their countervailing duty rules and provided for elaborate
definitions of material injury. Track II of the Code is devoted to the substantive obligations
under international rule regarding how governments should refrain from granting subsidies that
affects goods in international trade.5
The Subsidies Code, however, did not provide an express definition of ‘subsidy' except an
illustrative list of export subsidies, which should not be granted. The interpretive notes of the
Subsidies Code also did not provide any further assistance, which left the definitions of ‘subsidy'
remained unclear. Furthermore, in practice, the Code has been characterized by numerous
disputes and lack of agreement between signatories on various issues. Ultimately the Subsidies
Code proved lacking in the clarity and effectiveness to resolve the problems posed by subsidies
in international trade.
Next came the Uruguay Round text on subsidies, mandatory for all members, which was not
only a substantial change from the Tokyo Round Subsidies Code, but also a substantial
improvement. This text, officially entitled ‘Agreement on Subsidies and Countervailing
Measures' is sufficiently extensive and detailed that for most purposes it seems to supersede the
text of GATT Articles VI and XVI. Similar to the 1979 Subsidies Code, the SCM Agreement
addresses both the issues of international obligations (1979 Track I) and the issues of application
of countervailing duties (1979 Track II).6
There are eleven parts of the SCM Agreement. Part I contains “General Provisions”
circumscribing the scope and coverage of the Agreement. It defines what is a “subsidy” for the
purposes of the Agreement as well as precise rules on “specificity”. Part II contains strict
disciplines on “Prohibited Subsidies”, which are subsidies contingent upon export performance
and subsidies contingent upon the use of domestic over imported goods. Part III provides
multilateral disciplines on “Actionable Subsidies”, which are subsidies that cause adverse
effects to the interests of other WTO members. Finally, Part V stipulates the substantive and

5 John H. Jackson, The World Trading System Law and Policy of International Economic Relations, (London: The MIT Press 1997)
6 John W. Evans, ‘Subsidies and Countervailing Duties in the GATT: Present Law Future Prospects', 3 Int'l Trade L.J. 211 (1977-1978).
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procedural conditions that must be satisfied in order for countervailing duties to be imposed by a
Member on subsidized imports that are causing injury to a domestic industry.
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Chapter 2
Subsidies – Definition, Types, and Effects

The word subsidy is derived from the Latin word subsidium, which meant "support, assistance,
aid, help, protection". In medieval times it referred to a payment made to the king. While the
definition has since moved on from that, the habit of royalty accepting subsidies has not.
Research carried out by FarmSubsidy.Org, for example, has shown that in 2004 the Queen of
England and the Duke of Westminster each received half a million pounds sterling in farm
subsidies, and Prince Albert of Monaco 287,000 Euros. Republics like France and the United
States no longer have sovereign rulers, but some of their farmers live like kings, thanks to
generous subsidies.
Nowadays, to most people, a subsidy means a payment from a government to a person or
company. Many subsidies are indeed provided in that form, as grants or, more generically, direct
payments. Grants are the elephants in the subsidy zoo: they are large and highly visible. But
there are numerous other subsidy beasts which are better camouflaged, stealthier, and keep
closer to the ground.
The only internationally agreed definitions of a subsidy are those of the United Nations
Statistics Division, which is used for the purpose of constructing national accounts, and of the
World Trade Organization (WTO), which is used for the purpose of regulating the use of
subsidies that affect trade. The WTO definition is the more comprehensive of the two and can be
summed up as follows: A subsidy is a financial contribution by a government, or agent of a
government, that confers a benefit on its recipients.

Definition under WTO

Neither the GATT nor the Tokyo round Subsidies Code contained a definition of the term
“subsidy”. This changed when the WTO SCM agreement came into being.
SCM article 1 is entitled “Definition of a Subsidy” and spells out the conditions under which a
subsidy is deemed to exist.
First of all, there must be a “financial contribution by a government or any public body” (SCM
article 1.1(a)(1)7. The different forms of financial transfers that were mentioned above are listed
explicitly, namely
(i) Direct transfers of funds, including potential transfers, such as loan guarantees,
(ii) Foregone revenues that are otherwise due and
(iii) Goods and services provided by the government other than general infrastructure.

7SCM article 1.1(a)(1)(iv) also provides for the fact that a private body may make the financial contributions on behalf of the
government.
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Under the last point, government purchases are also mentioned. Article 1.1(a)(1)(iv) specifies
that subsidies are also deemed to exist if 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 under (i) to (iii).
In addition to financial contributions by a government within the meaning of article 1.1(a)(1),
SCM article 1.1(a)(2) mentions any form of income or price support in the sense of article XVI
of GATT 1994, i.e. support which operates directly or indirectly to increase exports of any
product from, or reduce imports into, a Member’s territory.
SCM article 1.1(b) stipulates that any such financial contribution or income or price support
pursuant to article 1.1(a) must confer a benefit to the recipient if it is to be considered a subsidy
in the sense of the agreement.8
Thus, in terms of the terminology used above, the SCM agreement appears to exclude from its
subsidy definition transfers falling into the third category (i.e. regulatory policies), but seems to
take a rather inclusive approach with respect to the forms transfers can take within the other two
categories.

Types of Subsidies
Grants and other direct payments

The most basic form of a subsidy, and the one that still defines a subsidy in some dictionaries, is
a cash payment or grant. Although few grants are paid out in currency any more (most are paid
via cheque or bank transfer), it is still common to refer to them as "cash" grants, payments or
subsidies.
Normally, a grant refers to a time-limited payment, either in connection with a specific
investment, or to enable an individual, company or organization to cover some or all of its
general costs, or costs of undertaking a specific activity, such as research.
Other direct payments may be linked to the volume of production or sales. In previous centuries,
and still in Australia, these types of subsidies were called bounties. They are far from archaic,
however. In some states of the United States, for example, companies producing liquid biofuels
receive direct subsidies for every gallon of ethanol they produce. Cash payments to producers
are also sometimes linked to prices. The main form is a deficiency payment, which makes up the
difference between a target price for a good (typically an agricultural commodity) and the actual
price received in the market.
Various cash subsidies are paid to workers. Canada, for example, provides targeted wage
subsidies to assist individuals to prepare for, obtain and maintain employment. Many countries

8 BMf (2003), in particular annex 1 and annex 8, Section 4,

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provide grants in order to encourage people who are out of work to undergo training in new
skills, or to relocate.
Consumers also benefit from direct payments or vouchers, particularly for the purchase of
necessities, like food, medicine or heating fuels. Alternatively, a government may regulate the
consumer price for a good or service, and instead pay a subsidy to the supplier of that good or
service, to cover its losses.

Tax concessions

In countries with well-developed tax systems, subsidies provided by reducing companies' tax
burdens are commonplace. Examples include tax exemptions (when a tax is not paid), tax
credits (which reduce a tax otherwise due), tax deferrals (which delay the payment of a tax) and
a host of other instruments. In common language these preferential tax treatments are called tax
breaks or tax concessions; public-finance economists refer to them as tax expenditures. They
should not, however, be confused with general tax reductions.
Generally, when a government provides a tax break its budget is affected in much the same way
as if it had spent some of its own money. The exception is a tax credit, which is worth more to a
corporate recipient (and costs a government more) than a direct payment of an equivalent
nominal value, as a direct payment raises a company's taxable income and therefore is itself
taxable.
Besides adding complexity to tax systems, tax concessions are often criticized by economists as
being less transparent than grants, and more resistant to change. Several national governments,
and even a few sub-national governments, produce annual tax expenditure budgets. But the
information contained in these "budgets" is often reported at a highly aggregate level.
Information on the value of tax breaks received by particular industries or companies is usually
much more difficult to find.
When creating a new tax break, lawmakers sometimes set a limit on how long it may be used.
But many tax breaks, once incorporated into the tax code, continue indefinitely. In contrast with
a grant or similar subsidy, which has to be re-approved with each budget cycle, a tax break
requires an active decision by lawmakers to eliminate it.

In-kind subsidies

The phrase "in-kind" means provided in a form other than money. Typical in-kind benefits
provided by governments are subsidized housing, specific infrastructure (like a road servicing a
single mine or factory), the services required to maintain that infrastructure, and various services
to help exporters. They may be considered subsidies if they involve expenditure (or foregone
revenue) by a government and they confer a specific benefit on the recipient. However,
government provision of general infrastructure - e.g., highways and ports - is often excluded
from the definition of an in-kind subsidy, as is the case in the WTO's general agreement on
subsidies, the Agreement on Subsidies and Countervailing Measures.
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The value of an in-kind benefit depends on the price charged for the resource, good or service.
When a government undercharges for something, the unit subsidy is usually considered equal to
the difference between the price paid and the market price. When it charges a market price, the
transaction is considered commercial, and not a subsidy. Often, however, the government is a
monopoly supplier of a good or service - i.e., there is no private market against which the
government's prices can be compared - which increases significantly the difficulty of
determining whether a subsidy is involved.
One important variant of an in-kind subsidy is privileged access to a government-owned or
controlled natural resource. Primary industries benefit greatly from such access - e.g., to public
lands for mining or grazing livestock, to state forests for logging, to rivers for irrigation, and to
foreign seas (through so-called "access agreements") for fishing - for free or at a below-market
price. International disputes over the subsidy element of privileged access to natural resources
have been among the most contentious and long-running.

Cross subsidies

A cross subsidy is a market transfer induced by discriminatory pricing practices within the scope
of the same enterprise or agency. Typically, it exists when a government-owned enterprise, such
as a public utility, uses revenues collected in one market segment to reduce prices charged for
goods in another. Some definitions also include similar practices carried out by private firms, as
when an integrated airline allocates part of the costs of its activities in a highly contested
geographical or product market (e.g., the transport of freight) to another market (e.g., passenger
transport) that is better able to bear those costs. For example, some airports cross-subsidize costs
associated with serving airline passengers through sales on duty-free goods.
One of the most common forms of cross subsidy is that between consumers of electricity and
consumers of irrigation water. Managers of large hydro-electric works that store and channel
water for irrigation as well as generate electricity have to decide how to allocate the costs that
are common to both activities (notably, the construction and maintenance of the dam and
reservoir) between farmers and buyers of electricity. Government regulations will often dictate
that an even smaller portion of the costs be allocated to irrigation than would be efficient
according to established pricing principles.
Not all instances of price discrimination are evidence of cross subsidies, however. For example,
differences in the volume (if there are economies of scale in delivery) and interpretability of
service, among other factors, can lead to different price schedules for different classes of
customers.

Credit subsidies and government guarantees

Many subsidies that have budgetary implications - that is, can create financial obligations for
governments in the long run - never actually appear in budgetary statements. These "hidden"
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subsidies are common whenever a government takes on the role of a banker or insurer to a
company or industry.
When a government loans money to a company at a lower rate of interest than a commercial
bank would offer, or requires less collateral to back up its loan, defers repayment or allows for a
longer period to pay off the loan, the company saves money.
Governments also sometimes guarantee loans taken out by companies or individuals through
commercial banks. That means that the government assumes the risk of default on the loan,
rather than the bank, which in turn means that the bank can offer the borrower more favourable
lending terms, such as a lower rate of interest.
Governments also serve as an insurer of last resort for private investments. All OECD
governments with nuclear power plants, for example, are signatories to an agreement that limits
the financial liability of power-plant owners in the event of a catastrophic accident. Similarly,
many governments would be stuck with part of the bill following the failure of a large hydro-
electric dam. For this type of support, years may pass before a government incurs any actual
costs. But when an accident does occur, the financial burden (not to mention human cost) can be
huge.

Hybrid subsidies

Economic systems can be likened to ecological systems. In the steaming jungle that defines the
borderland between private industry and government, camouflage and parasitism are common
adaptive responses to competition. Subsidy hybrids, particularly instruments that exploit the tax
system to lower the costs of private investment, are an inevitable result of those evolutionary
forces.
At the base of the evolutionary ladder are tax-free government bonds. A bond is a financial
instrument that promises its holder a fixed annual dividend over a specified period of time,
typically 10 to 20 years. National governments issue bonds to help finance their general
activities. Municipalities, sub-national governments and their agencies (e.g., air-pollution
control districts) also issue bonds, more commonly tied to specific projects, like water-treatment
plants. The dividends paid to holders of such bonds are not taxed. Since tax-free status raises the
net return on investment, particularly for bond holders in high marginal income-tax brackets, the
bonds can offer a lower rate of interest than would have to be offered to buyers of private,
commercial bonds in the same risk category.
Tax-free bonds are used also in some places to finance private investment: a corporation
borrows money from a private lender, the bond buyer, which is issued by a public authority to
become tax free.
Higher up the evolutionary ladder are instruments like tax increment financing (TIF), a peculiar
form of subsidy found in the United States. Tax-increment financing enables a city to split off
future additional property tax revenues associated with a designated development and to provide
a loan to the company undertaking that development, using the future incremental tax revenues
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as collateral. In effect, this revenue stream is diverted away from normal property tax uses, such
as the funding of schools, and into the TIF district.

Derivative subsidies

Subsidies have a tendency to beget other subsidies. Some of these are described below:
Sympathetic support: When support is used to influence the direction of technological
developments, it often does so in a manner designed to benefit domestic producers. Many
examples of this can be found in the energy sector, such as when governments support the
construction of coal-fired "demonstration" power plants that are dependent on coal from high-
cost domestic mines rather than on imported coal, or for biofuel refineries that use domestic
feedstocks.
Compensatory or countervailing support: When support leads to higher input prices for
downstream consumers, especially those that derive a significant proportion of their sales from
exports, compensation is often provided in order to keep them buying domestically produced
raw materials. Subsidies to food processing industries and to biofuel producers are common
examples.
Subsidy clusters: As the subsidy expert Doug Koplow has observed, when support -or failure
to consider opportunity costs - leads to lower prices for natural resources, a chain reaction can
take place, whereby new investment occurs to take advantage of the cheap input. Often
downstream consumers receive additional incentives from governments to do so. Hence
aluminum plants are attracted to major hydroelectric projects, which are then followed by
airframe manufacturers, and so forth.
Taken together, these derivative subsidy forms lend support to the notion that bad subsidies tend
to chase out good ones - what the agricultural economist C. Ford Runge has called "Gresham's
law of subsidies". Political economy also suggests that the "good" subsidies will over time be
politically outmaneuvered by the established groups to redirect public spending to themselves.

Subsidies through government procurement

The WTO Agreement on Subsidies and Countervailing Measures (ASCM) recognizes that a
subsidy can exist when a government purchases goods "and a benefit is thereby conferred." The
benefits the drafters of the ASCM had in mind were those resulting from purchases that take
place under circumstances that do not accurately reflect normal market conditions.
Governments practice preferential purchasing routinely, expressly favoring domestic over
foreign suppliers of similar-quality goods - e.g., by paying domestic suppliers higher prices or
offering special financing arrangements. The conflict of interest faced by governments is
understandable. They are expected by taxpayers to be savvy buyers, but are also under constant
pressure to support domestic producers.
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The magnitude of government procurement is enormous. A study from 2000 estimated that each
year OECD countries spend USD 4, 733 billion procuring goods and services, particularly for
state-run health services, public works, and the military. Much of these purchases are made at
market prices, but it is believed that a significant fraction of them include an element of subsidy.
The WTO has been trying to establish ground rules for government procurement since the
1980s. The latest rules are set out in the Agreement on Government Procurement (AGP), signed
in 1994. Being a "plurilateral" agreement it applies only to its signatories, which are mainly
OECD economies. By establishing recommended procedures for tendering, negotiating and
awarding government contracts, it outlines a desirable system of government procurement.
However, monitoring and enforcement of the AGP is weak, and there are many ways in which
governments can bypass its disciplines, such as by excluding certain types of purchases (e.g., for
the military) or setting thresholds - higher than the lower limits contained in the Agreement
itself - below which the AGP does not apply.

Market price support

Transfers of money to producers are typically divided into two broad categories: those provided
at a cost to government, such as grants and tax concessions, and those provided through the
market as a result of policies that raise prices artificially. The latter, called market price support
(MPS), may derive from a domestic price interventions (for example, a minimum-price policy),
and is usually supported by foreign trade barriers such as a tariff or quantitative restriction on
imports. The OECD defines MPS formally (for agriculture) as "an indicator of the annual
monetary value of gross transfers from consumers and taxpayers to agricultural producers
arising from policy measures creating a gap between domestic producer prices and reference
prices of a specific agricultural commodity measured at the farm-gate level."
MPS is an element that is included in many studies of support to particular goods or sectors, and
is added together with other subsidies to yield an estimate of total support.
The concept of market price support is simple enough. By maintaining an import tariff on a
good, for example, a government raises the price of that good above what it could sell at in the
absence of the tariff. From the producers' standpoint, the revenues they will receive would be
similar to those they would receive were the government instead to pay them an equivalent
premium per unit produced. The main difference is that MPS raises domestic prices, and may
therefore dampen demand compared with a budget-financed price premium, especially if there
are close substitutes that, as a result of raising the price of the targeted good, become relatively
cheaper. In such situations, such as for coal for power generation, governments have sometimes
solved the problem of changed relative prices by constraining the ability of consumers to shift to
the competing product.
From the government's perspective, the advantage of providing support indirectly, through a
market intervention, is that it is less transparent, and the transfers do not appear in its budget.
Rather than taxpayers, consumers bear the burden. For this reason, MPS is considered by
economists to be one of the most market-distorting forms of support provided through
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government policies. Unfortunately, it is also still one of the largest elements of total support,
especially in agriculture.

Effects of Subsidies
The opportunity cost of subsidies

People who defend subsidies for particular sectors often highlight the goods or services that
have been produced, or the new jobs created. What they do not normally acknowledge is that the
benefits to society of that money, if it had been spent otherwise, or left in the pockets of
taxpayers, might have been even greater.
Economists refer to the value of an expenditure in its highest alternative use as its "opportunity
cost." The concept of opportunity cost is reasonably intuitive. At the household level, if a person
spends $100 on a night on the town, that $100 is no longer available to buy necessities, like
food. Similarly, if a government spends $100,000 on a bridge that few people will use, that
money is not available to be spent on education, or health care, or any other government
priority. Because of taxes and other feedback mechanism in an economy, the analogy between
the government and a household is not perfect. But in the presence of a budget constraint, all
spending decisions, at the margin, imply trade-offs.
Ideally, a government would strive to structure its expenditures so as to achieve a return to
society that is roughly similar for each dollar spent. Subsidies can easily upset that balance. 9
Consider a hydro-electric project that also provides water to irrigate adjacent farmland. A cubic
metre of water from its reservoir has a high value when it passes through turbines and generates
electricity, but also to a farmer growing thirsty crops. Nevertheless, the incremental value of an
additional cubic metre of water may well be much higher when used to generate electricity than
to irrigate the farmer's crops. Policies - such as subsidies that allow the farmer to pump out the
water from the reservoir at a very low cost, or that artificially increase the profitability of
farming - will result in some of the water being diverted to its lower-value use. In that case, the
economy as a whole generates a smaller surplus.

The static effects of subsidies on efficiency

Economists may not agree among themselves on the precise definition of a subsidy, but they do
generally agree on their static, first-order effects. Theory shows that these depend on a number
of factors, among which are the responsiveness of producers and consumers to changes in prices
(what economists call the own-price elasticities of supply and demand), the form of the subsidy,
the conditions attached to it, and how the subsidy interacts with other policies.

9 Mitsus Matsushita, et al, The WTO Law, Practice and Policy, (London: Oxford University Press 2005)
 P a g e | - 13 -

In general terms, elasticities of supply and demand determine to what extent the actual,
economic incidence diverges from the intended impact incidence of a subsidy: in a seller's
market, consumer subsidies will be shifted onward to producers, and vice-versa. Other policies
can also influence outcomes, as when production quotas are imposed on the subsidised
activities.10
Critics often point to the economic distortions created by subsidies, especially subsidies that are
used to promote specific sectors or industries. Generally, such subsidies tend to divert resources
from more productive to less productive uses, thus reducing economic efficiency.
Those who take a more benign view argue that subsidies can serve redistributive goals, or can
help to correct market failures. But, as the public-finance economist Ronald Gerritse once
warned, subsides defended on such grounds "may have externalities that we did not bargain for."
Indeed, it is such second-order effects that have come under attack by environmental economists
in recent years.

The dynamic effects of subsidization

There is a tendency over time for the benefits from subsidy programmes to become capitalized
into the least elastic factor of production. The economist Gordon Tullock labelled this
phenomenon "the transitional gains trap". As Professor Tullock explains, the gains from
subsidies tend to be transitional, accruing mainly to those who can immediately take advantage
of a new scheme. Their successors end up paying higher prices for land, fishing licenses,
mineral rights, etc. As such, removing the subsidy thus risks imposing a transitional loss on the
subsequent owners of these assets.
The beneficiaries of a subsidy can become entrapped in a social sense as well. This is especially
the case when subsidies are used to support employment in rural industries, such as agriculture,
fisheries and mining, which require specialised skills but not necessarily much formal education.
The resulting low mobility of the affected labour force itself becomes a barrier to policy reform,
increasing subsidy dependency, and making structural adjustment all the more traumatic when it
finally does come.
Subsidies that are linked to particular technologies can have profound, long-term effects on
dynamic efficiency. Many energy-related subsidies (and regulations) have been of this sort. The
more prescriptive they are, and the less targeted at the achievement of policy outcomes, the
greater the opportunities for distortions and unintended consequences. The challenge for
policymakers is to achieve a balance between the benefits of stimulating R&D and innovation,
while not forcing technological responses to economic and environmental forces down
irreversible paths. Once governments had invested billions of dollars supporting the

10 World Trade Organization, ‘WTO Analytical Index: Subsidies and Countervailing Measures',
http://www.wto.org/english/res_e/booksp_e/analytic_index_e/subsidies_01_e.htm#article1B1 (visited 25 November 2016).
 P a g e | - 14 -

development of civilian nuclear power, for example, there was a strong impetus to continue with
the original designs. A similar phenomenon can be seen in the development of corn-based
ethanol in North America, where even if costs fall for making ethanol from cellulosic feedstock
fall, the dominant feedstock will likely remain corn (maize) for many years to come.

The distribution of subsidies

Many subsidies are defended as benefiting disadvantaged groups, or groups the politicians like
to make us believe are disadvantaged. Some do that, but even those that do benefit
disadvantaged groups often benefit richer people or companies even more.
Perversely, the distributive consequences of subsidies are often precisely the opposite of what
the framers of the policies intended. Most countries that subsidise farmers or fishers profess to
be looking out for the small owner-operator. Yet, by design, subsidies that are tied to outputs or
inputs tend to favour larger producing units. Recently, for example, the Environmental Working
Group, an American non-profit organization, counted up all the direct payments made by the
U.S. Government to farmers between 1994 and 2005 and found that ten percent of subsidy
recipients collected 73 percent of all subsidies, amounting to $120.5 billion Analyses of
agricultural support programmes in other countries appear to lend credence to the 80:20 rule -
the impression that 80% of support goes to 20% of the beneficiaries.
The conduit between a government and the intended recipient of a subsidy is often more like an
open sluice than a pipeline, with plenty of opportunities for others to dip into the stream before
it reaches its final destination. Any subsidies that are linked to the production of a good or
services require the recipient to spend money on inputs used in producing that good or service.
For example, if a farmer is paid by the government to grow corn, she will first have to spend
some of that money on seeds, fertilizers, pesticides and fuel for the tractor. What is left as an
increase in income may be only 20% or 25% of the cost to the government.
Economists call the ratio between what ends up in the pockets of the target group and what the
government spends the transfer efficiency of the subsidy. Subsidies for the purchase of inputs,
by lowering the producer's costs, can have a fairly high transfer efficiency, but only if the supply
is not limited. If the seller of the subsidized good is a monopoly, or there is a finite supply of the
input, the subsidy will mainly enrich the input provider.

Effects on the environment

Governments do not set out intentionally to damage the environment just for the sake of it. They
may not care very much about the environmental consequences of the activities they support,
but that is not quite the same thing. Rather, when people speak of "environmentally harmful
subsidies" they generally mean subsidies that support production, transport or consumption that
ends up damaging the environment. The environmental consequences of subsidies to extractive
industries are closely linked to the activity being subsidized, like fishing or logging.
 P a g e | - 15 -

Subsidies to promote offshore fishing are a commonly cited example of environmentally

harmful subsidies, with support that increases fishing capacity (i.e., subsidies toward
constructing new boats) linked to the depletion of important fishery stocks. In other industries,
subsidies that promote consumption or production have led to higher volumes of waste or
emissions. For example, irrigation subsidies often encourage crops that are farmed intensively,
which in turn leads to higher levels of fertilizer use than would occur otherwise. Moreover,
irrigation subsidies can lead to the underpricing of irrigated water, which in turn fosters the
overuse and inefficient use of water.
While many subsidies have unintended negative consequences on the environment, well
designed subsidies can be beneficial when they work to mitigate an environmental problem. In
the context of fisheries, for instance, these would include subsidies to management programs
that help ensure that fisheries resources are appropriately managed and that regulations are
enforced, or to research and development (R&D) designed to promote less environmentally
destructive forms of fish catching and processing.

The political economy of subsidies

Given the various shortcomings of subsidies, why do governments keep resorting to them?
One basic problem is that, although governments are often motivated to provide subsidies in
order to benefit specific groups of people - or, more specifically, voters - they rarely like to be
seen doing it through such blatant devices as direct income payments. Activities or things
("merit goods") tend to get subsidised rather than people.
The tendency to subsidize things, instead of helping people directly, contributes to the second,
and related, problem, which the economist Gordon Tullock labeled "the transitional gains trap".
This refers to the tendency over time for benefits flowing from subsidy programmes to increase
the value of associated fixed assets, like land or dairy quotas.
Accordingly, the gains from subsidies tend to be transitional, accruing mainly to those who can
immediately take advantage of a new scheme. Their successors end up paying higher prices for
farmland, fishing licenses, mineral rights. Removing the subsidy thus risks imposing a
transitional loss on the subsequent owners of these assets.
Subsidies themselves create a pool of money out of which recipients can influence the very
political process that channels money to them in the first place. In many instances subsidies
redistribute wealth from a large number of unknowing contributors to a smaller number of
beneficiaries. The latter lobby vigorously to defend their handouts; the former seldom bother, or
are empowered, to prevent them.
Finally, the bureaucracy itself can present an obstacle. Government ministries rarely admit to
having a vested interest in the continuation of the support programmes they administer, but it is
hard to imagine total disinterest being the norm. More subtly, the bureaucratization process
often feeds a pervasive notion that the subsidised activity forms part of the natural order of
 P a g e | - 16 -

things. Subsidies thus metamorphosize into entitlements, and any attempt to curb them becomes
politically hazardous.
 P a g e | - 17 -

Chapter 3
International disciplines on subsidies

The WTO agreement on subsidies and countervailing measures (ASCM)

he ASCM, which came into force in 1995, established rules not only on how and when CVDs
could be applied, but also on what kinds of potentially trade-distorting subsidies would be
allowed, and what remedies were available to countries that felt they had been adversely
affected by another country's subsidies.
Only two kinds of subsidies are prohibited by the ASCM (Article 2): export subsidies, and
subsidies contingent upon the use of a domestically produced over imported goods. All other
"specific subsidies", which are subsidies that benefit only particular com-panies or industries,
are allowed, but actionable. "Actionable" means that if adverse effects can be demonstrated, the
affected country can take one of several actions.
If the main concern of the complaining Member (the WTO does not use the word "country") is
displacement of goods sold in its own market as a result of a non-prohibited subsidy, that
Member may apply a countervailing duty. If the complaining Member's main concern is
displacement of its exports in the subsidizing Member, or in a third country, by a prohibited or
actionable subsidy, it may seek remedies through the WTO.
Structure of the agreement

Part I provides that the SCM Agreement applies only to subsidies that are specifically provided
to an enterprise or industry or group of enterprises or industries, and defines both the term
“subsidy” and the concept of “specificity.” Parts II and III divide all specific subsidies into one
of two categories: prohibited and actionable, and establish certain rules and procedures with
respect to each category. Part V establishes the substantive and procedural requirements that
must be fulfilled before a Member may apply a countervailing measure against subsidized
imports. Parts VI and VII establish the institutional structure and notification/surveillance
modalities for implementation of the SCM Agreement. Part VIII contains special and
differential treatment rules for various categories of developing country Members. Part IX
contains transition rules for developed country and former centrally-planned economy Members.
Parts X and XI contain dispute settlement and final provisions.
Specificity

Assuming that a measure is a subsidy within the meaning of the SCM Agreement, it
nevertheless is not subject to the SCM Agreement unless it has been specifically provided to an
enterprise or industry or group of enterprises or industries. The basic principle is that a subsidy
that distorts the allocation of resources within an economy should be subject to discipline.
Where a subsidy is widely available within an economy, such a distortion in the allocation of
 P a g e | - 18 -

resources is presumed not to occur. Thus, only “specific” subsidies are subject to the SCM
Agreement disciplines. There are four types of “specificity” within the meaning of the SCM
Agreement:
a) Enterprise-specificity:
A government targets a particular company or companies for subsidization;
b) Industry-specificity:
A government targets a particular sector or sectors for subsidization.
c) Regional specificity:
A government targets producers in specified parts of its territory for subsidization.
d) Prohibited subsidies:
A government targets export goods or goods using domestic inputs for subsidization.

Categories of Subsidies

The SCM Agreement creates two basic categories of subsidies: those that are prohibited, those
that are actionable (i.e., subject to challenge in the WTO or to countervailing measures). All
specific subsidies fall into one of these categories.
Prohibited subsidies: Two categories of subsidies are prohibited by Article 3 of the SCM
Agreement. The first category consists of subsidies contingent, in law or in fact, whether wholly
or as one of several conditions, on export performance (“export subsidies”). A detailed list of
export subsidies is annexed to the SCM Agreement. The second category consists of subsidies
contingent, whether solely or as one of several other conditions, upon the use of domestic over
imported goods (“local content subsidies”). These two categories of subsidies are prohibited
because they are designed to directly affect trade and thus are most likely to have adverse effects
on the interests of other Members.
The scope of these prohibitions is relatively narrow. Developed countries had already accepted
the prohibition on export subsidies under the Tokyo Round SCM Agreement, and local content
subsidies of the type prohibited by the SCM Agreement were already inconsistent with Article
III of the GATT 1947. What is most significant about the new Agreement in this area is the
extension of the obligations to developing country Members subject to specified transition rules
(see section below on special and differential treatment), as well as the creation in Article 4 of
the SCM Agreement of a rapid (three-month) dispute settlement mechanism for complaints
regarding prohibited subsidies.
Actionable subsidies: Most subsidies, such as production subsidies, fall in the “actionable”
category. Actionable subsidies are not prohibited. However, they are subject to challenge, either
through multilateral dispute settlement or through countervailing action, in the event that they
cause adverse effects to the interests of another Member. There are three types of adverse
effects. First, there is injury to a domestic industry caused by subsidized imports in the territory
of the complaining Member. This is the sole basis for countervailing action. Second, there is
serious prejudice. Serious prejudice usually arises as a result of adverse effects (e.g., export
displacement) in the market of the subsidizing Member or in a third country market. Thus,
 P a g e | - 19 -

unlike injury, it can serve as the basis for a complaint related to harm to a Member's export
interests. Finally, there is nullification or impairment of benefits accruing under the GATT
1994. Nullification or impairment arises most typically where the improved market access
presumed to flow from a bound tariff reduction is undercut by subsidization.
The creation of a system of multilateral remedies that allows Members to challenge subsidies
which give rise to adverse effects represents a major advance over the pre-WTO regime. The
difficulty, however, will remain the need in most cases for a complaining Member to
demonstrate the adverse trade effects arising from subsidization, a fact-intensive analysis that
panels may find difficult in some cases.
Agricultural subsidies: Article 13 of the Agreement on Agriculture establishes, during the
implementation period specified in that Agreement (until 1 January 2003), special rules
regarding subsidies for agricultural products. Export subsidies which are in full conformity with
the Agriculture Agreement are not prohibited by the SCM Agreement, although they remain
countervailable. Domestic supports which are in full conformity with the Agriculture Agreement
are not actionable multilaterally, although they also may be subject to countervailing duties.
Finally, domestic supports within the “green box” of the Agriculture Agreement are not
actionable multilaterally nor are they subject to countervailing measures. After the
implementation period, the SCM Agreement shall apply to subsidies for agricultural products
subject to the provisions of the Agreement on Agriculture, as set forth in its Article 21.

Agreement on Agriculture (AOA)

The Agreement on Agriculture was formed on April 1994 at Marrakesh, Morocco as a part of
the final Act of the Uruguay Round of multilateral trade negotiations which came into force on
1st Jan. 1995. This was a result of the long drawn talks on General agreement on Tariffs and
Trade (GATT) aimed at opening up of International markets and also to reform world trade
which was highly distorted. A major reason for the formation of the Agreement on Agriculture
was the need to reduce excessive surplus production in agricultural sector in the global
commodity markets during the 1980`s and early 1990`s. This was caused by the rising levels of
support and protection in a number of developed countries as some of the largest agricultural
exporters competed on the basis of their government`s ability to subsidised production and
exports of agriculture while limiting access to their markets to keep out foreign agricultural
products from their domestic markets. Therefore, the core objective of AOA was to establish a
fair and market oriented trading system which was to be implemented for a period of 6 years in
developed countries and 9 years in developing countries. With this, agriculture was brought
under the new rules of world trading system for the first time. There are 3 main features of the
Agreement: Market Access, Domestic support, Export subsidy.
The market access required that tariffs for agricultural product fixed by individual countries be
reduce to equivalent tariff in order to allow free trade and encourage liberalization in world
trade. Under this, the AOA required the conversion of all non-tariff barriers into tariff barriers.
This process was known as Tariffication. This was to be implemented for a period of 6 years for
 P a g e | - 20 -

the developed countries and 10 years for the developing countries, least developed countries
were exempted from undertaking such reductions.
Domestic support was targeted to reduce the subsidies given by governments within their
country for agricultural production and related activities. The total domestic support should be
below the level of de minimis within a maximum period of 3 years for developed countries and
5 years for developing countries. This was to reduce price distortion and unfair competition in
agricultural world trade.
Export subsidy aims to reduce subsidies of export related to agricultural products and to ban
the introduction of new subsidies. This aimed to protect small and marginal farmers in home
countries especially in developing countries.

Types of Subsidies under the agreement

The Agreement on Agriculture classifies domestic subsidies into different types; under various
boxes with assigned colors- Green Box, Blue Box and AMS (Amber Box). This classification is
based upon their effects on trade (whether they distort trade or not). The colour of the boxes is
quite symbolic as in traffic lights: green (permitted), amber (slow down, i.e. be reduced) and a
red box (prohibited). Colors symbolically indicate whether they are permissible or not.
Though the prominent boxes are three; a broad classification based upon all type of specific
exemption categories will make them five:
(a) Aggregate Measurement of Support (AMS) or Amber box
(b) Green box support
(c) Blue box support
(d) De minimus support and
(e) Special and differential (S&DT) treatment box.

1. Green Box

Green Box is domestic support measures that doesn’t cause trade distortion or at most causes
minimal distortion. Hence they don’t have any reduction commitments (non-reducible and
exempt). These subsidies are government funded without any price support to crops. They are
implemented as programmes aimed at income support to farmers without influencing
(decoupled) the current level of production and prices. Green box subsidies are therefore
allowed without limits provided they comply with relevant criteria.
The ‘green box’ measures are large in number. They comprise of two support groups. The first
involves public services programmes (for example, research, training, marketing, promotion,
infrastructure, domestic food aid or public food security stocks). The second involves direct
payments to producers which are fully decoupled from production. These mainly involve
income guarantee and security programmes (natural disasters, state financial contributions to
 P a g e | - 21 -

crop insurance, etc.); programmes aimed at adjusting structures and environmental protection
programmes, regional development programmes.
2. Blue Box

Blue box supports are subsidies that are tied to programmes that limit production. Hence it is an
exemption to the general rule related to agricultural support. The Blue box subsidies aim to limit
production by imposing production quotas or requiring farmers to set aside part of their land. It
covers payments directly linked to acreage or animal numbers (reduction). The blue box
measures are exempt from reduction commitments.

3. AMS (Aggregate Measurement of Support)

The AMS represents trade distorting domestic support measures. It is referred as the “amber
box” in the Agreement on Agriculture.
The AMS means annual level of support (subsidies) expressed in monetary terms, provided for
an agricultural product in favour of the producers (product specific) of the basic agricultural
product and non-product specific support provided in favour of agricultural producers in
general.
The Aggregate Measurement of Support (AMS) consists of two parts—product-specific
subsidies and non-product specific subsidies. Product-specific subsidy refers to the total level of
support provided for each individual agricultural commodity. Non-product specific subsidy, on
the other hand, refers to the total level of support to the agricultural sector as a whole, i.e.,
subsidies on inputs such as fertilizers, electricity, irrigation, seeds, credit etc. Usually, these non-
product subsidies are given to all crops.
In India, the price support given in the form of Minimum Support Prices is an example for
AMS.

4. Special and Differential Treatment Box (S&DT)

WTO gives special concessions to the developing countries under the S &DT box given the
backwardness of their agricultural sector. The S&DT measures generally comprises of (i)
investment subsidies like tractors and pump sets to farmers (ii) agricultural input services like
fertilizers to farmers. These subsidies should be provided only to low income and resource poor
producers (or poor farmers) in developing countries. Domestic support to producers in
developing country members to encourage diversification from illicit narcotic crops is also
qualified under S&D treatment box.
 P a g e | - 22 -

5. De-minimis support

De minimis support indicate the minimum level of trade distorting (AMS) subsidies that can be
given by a country to its agricultural sector. This de minimis subsidy is expressed as percentage
of the country’s agricultural GDP. The de minimis level is 5 per cent of agricultural GDP for
developed countries whereas for the developing countries including India, the de minimis
ceiling is 10 per cent.

The General Agreement on Trade in Service (GATS)

Services encompass activities as diverse as air transport, banking, tourism, telecommunications,
and the treatment of wastewater. Governments often provide subsidies to the providers of these
services through grants (e.g., for the construction of hotels), subsidies in-kind (e.g., airports),
concessional financing, and tax breaks.
When trade negotiators began drafting a General Agreement on Trade in Services (GATS), at
the beginning of the Uruguay Round of multilateral trade negotiations, they were well aware
that subsidies could distort trade in services, and some wanted to create new disciplines to avoid
such trade-distorting effects. At the close of the Uruguay Round, however, the negotiators were
unable to reach agreement on even the desirability, much less the substantive content, of any
disciplines.
Subsidies to services therefore remained unfinished business at the WTO, part of the Council on
Services' "built-in agenda" for follow-on negotiations. These commenced in 1996 and in 2001
were subsumed under the broader Doha Round of multilateral trade negotiations.
Progress on these negotiations has been slow. As of the beginning of 2007, negotiators had not
even agreed on the definition of a subsidy. The WTO Secretariat itself has suggested using the
ASCM definition of a subsidy as a starting point, but some WTO Members are nervous that it
may contain unforeseen traps. Further complicating the discussions are the different "modes" in
which trade in services takes place.
For the time being, therefore, WTO Members' subsidy practices affecting services remain
subject only to the GATS' general obligations, notably its most-favored nation (non-
discrimination) and national treatment obligations. The latter applies only in service sectors to
which countries have scheduled (i.e., formally declared) liberalization commitments. Basically,
national treatment requires that a subsidy provided to domestic service suppliers also be
accessible to foreign service suppliers.

Soft law on subsidies

The WTO and the IMF are not the only multilateral institutions that have attempted to influence
how national governments use subsidies.
Several multilateral environmental agreements (MEAs), such as the Convention on Biological
Diversity, have tried to draw more attention to the effects that subsidies have on the
 P a g e | - 23 -

environmental assets that they are charged with protecting. The need for subsidy reform in
respect of agriculture, fisheries and energy was also highlighted at the 2002 Johannesburg
World Summit on Sustainable Development.
Yet none have dared so far to consider more than studying the problem or issuing exhortatory
statements on the matter, or calling for more spending on "green" subsidies.
With the Kyoto Protocol having now come into force, the problem of subsidies to energy is
likely to become more than just an idle debating point. The Kyoto Protocol, alone among
MEAs, establishes a general obligation to take measures ("in accordance with national
circumstances") to phase out market imperfections, like "subsidies in all greenhouse gas
emitting sectors that run counter to the objective of the Convention" (Article 2.1(a)). While
substantial margin for maneuver is granted to each signatory, it is likely that subsidies will
increasingly come to the fore. And not only subsidies to fossil fuels: as the world market for
biofuels and renewable-energy technologies expands, countries will start to look much closer at
the kinds of infant-industry and domestic-supply promoting subsidies so favored by proponents
of renewable energy.
 P a g e | - 24 -

Conclusion
The etymological meaning of the word ‘subsidy’ is “support, assistance, aid, help, or
protection”, derived from the latin word ‘Subsidium’. Nowadays, to most people, a subsidy
means a payment from a government to a person or company. Many subsidies are indeed
provided in that form, as grants or, more generically, direct payments. Grants are the elephants
in the subsidy zoo: they are large and highly visible. But there are numerous other subsidy
beasts which are better camouflaged, stealthier, and keep closer to the ground.
The only internationally agreed definitions of a subsidy are those of the United Nations
Statistics Division, which is used for the purpose of constructing national accounts, and of the
World Trade Organization (WTO), which is used for the purpose of regulating the use of
subsidies that affect trade. The definition given by the WTO is the more comprehensive of the
two and can be summed up as follows:
“A subsidy, is a financial contribution by a government, or agent of a government, that confers a
benefit on its recipients.” (Art. 1, Agreement on Subsidies and Countervailing Measures)
In this research project, I have classified subsidies into 9 kinds, starting with ‘Grants and Direct
payments’, which are the most basic form of subsidy.
A grant refers to a time-limited payment, either in connection with a specific investment, or to
enable an individual, company or organization to cover some or all of its general costs, or costs
of undertaking a specific activity, such as research.
‘In-kind’ subsidies are the next type. The phrase "in-kind" means provided in a form other than
money. Typical in-kind benefits provided by governments are subsidized housing, specific
infrastructure, the services required to maintain that infrastructure, and various services to help
exporters.
Apart from these two, subsidies come in form of tax-concessions, market price support, credit
subsidies, and 4 others.
Although subsidies may appear to be financially favourable due to the goods or services that
have been produced, or the new jobs created, it must be acknowledged that the benefits to
society of that money, if it had been spent otherwise, or left in the pockets of taxpayers, might
have been even greater. This can be said to be the opportunity cost of Subsidy.
Ideally, a government would strive to structure its expenditures so as to achieve a return to
society that is roughly similar for each dollar spent. Subsidies can easily upset that balance.
Also, many subsidies are defended as benefiting disadvantaged groups, or groups the politicians
like to make us believe are disadvantaged. Some do that, but even those that do benefit
disadvantaged groups often benefit richer people or companies even more.
Perversely, the distributive consequences of subsidies are often precisely the opposite of what
the framers of the policies intended. Most countries that subsidise farmers or fishers profess to
be looking out for the small owner-operator. Yet, by design, subsidies that are tied to outputs or
inputs tend to favour larger producing units.
 P a g e | - 25 -

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