EUROPEAN MONOGRAPHS

Regulation of Subsidies and State Aidsin WTO and EC Law

Conflicts in International Trade Law

Gustavo E. Luengo Hernandez de Madrid

KLUWER LAWINTERNATIONAL

Table of Contents

Preface x j x

Acknowledgements xxi

About the Author xxiii

Abbreviations xxv

Part I: Introduction 1

Chapter 1: Preliminary Remarks 3

I. Subsidies in the International Context 3A. What is a Subsidy? 5B. Types of Subsidies 8

1. Export Subsidies 82. Domestic Subsidies 9

C. Conclusion 9II. Scope of this Work: Subsidies in the WTO and the EC 10

Chapter 2: Economic Analysis of Subsidies 13

13151517181920

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I.II.

IntroductionAnalysis of International TradeA.B.C.D.E.

Theory of Comparative AdvantageTheory of Proportion in Factors of ProductionEconomies of ScaleImperfect CompetitionConclusion

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III. Effects of Subsidies on International Trade 20A. Effects of Export Subsidies 22B. Effects of Domestic Subsidies 26C. Conclusion 27

IV. Effects of the Adoption of Countervailing Duties 28V. Concluding Remarks 30

Part II: The Regulation of Subsidies in the WTO 31

Introduction to Part II 33

Chapter 3: Evolution of the Regulation of Subsidies in InternationalTrade: From the GATT to the WTO 35

I. Introduction 35II. Subsidies in the Havana Charter 36

A. Negotiations for the Creation of the ITO: Origins ofthe GATT 37

B. Regulation of Subsidies in the HC 39C. Conclusions 41

III. Subsidies in the GATT (1947-1979) 41A. The GATT of 1947 42

1. GATT Negotiations 422. Obligations on Subsidies in the GATT 433. The Definition of 'Subsidy' in the GATT of 1947 464. Conclusion 47

B. The Reforms of 1955 471. Export Subsidies 47

a) Non-Primary Products 48b) Primary Products 49

2. Revision Clause 513. Conclusion 51

C. The Situation after the Reform of 1955 521. Notification of Subsidies 522. Export Subsidies for Primary Products 533. Export Subsidies for Non-Primary Products 574. The Definition of Subsidy after the Reform of 1955 58

a) Price Support Systems 59b) Subsidies Financed by a Non-Governmental

Levy 60c) Multiple Exchange Rates 60d) Purpose of the Subsidy 61e) Other Cases 61

5. Conclusions 62

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IV. The Subsidies Code from the Tokyo Round of 1979 63A. Negotiations During the Tokyo Round (1973-1979) 63B. The Tokyo Round Subsidies Code of 1979 65

1. Track I—Countervailing Duties 662. Track II—Obligations on Subsidies 68

C. The Situation after the Reform of 1979 741. The Definition of'Subsidy' after the Tokyo Round

of 1979 742. Situation after the Tokyo Round 763. Relevant Cases after the Reform of 1979 78

a) Export Subsidies for Primary Products 79b) Export Subsidies for Non-Primary Products 81c) Countervailing Duties 82

D. Conclusions 83V. Negotiations in the Uruguay Round (1986-1994) 84

A. The Negotiations on Subsidies in the Uruguay Round 841. Definition of'Subsidy' 85

a) The Position of the US 86b) The Position of the EC 86

2. The 'Traffic Light Approach' 873. Other Important Issues: Trade Remedies,

Sub-National Entities and Developing Countries 884. Negotiations on Primary Products 88

B. Proposals Made during the Negotiations 891. The Cartland Draft 892. The Dunkel Draft 903. The De Zeeuw Draft 92

C. Conclusions 92VI. The Final Result: Agreements on Subsidies in the WTO 93

VII. Concluding Remarks 95

Chapter 4: The Regulation of Subsidies in the Agreement onSubsidies and Countervailing Measures 97

I. Introduction 97II. Definition of'Subsidy': Article 1 ASCM 102

A. 1st Element: 1st Alternative—Financial Contribution 1031. Government or Other Public Body 1032. Territoriality of the Measure 1063. Exhaustive List of Cases Considered to be

Financial Contributions 107a) Direct Transfer of Funds or Potential

Transfers of Funds or Liabilities 108b) Foregoing of Government Revenue That

Would Be Collected Otherwise 108c) Provision of Goods or Services 110

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d) Payments to a Funding Mechanism orEntrustment/Direction of Private Bodies 111

B. 1st Element: 2nd Alternative—Income or Price Support 119C. 2nd Element: Benefit 123D. Conclusions 128

III. Specificity of the Measure: Article 2 of the ASCM 129A. The Specificity Test 132

1. 'De Jure' Specificity 1382. 'De Facto' Contingency 138

B. Specificity of Regional Subsidies 139C. Specificity per se 140D. Burden of Proof of Specificity 140E. Conclusions 141

IV. Prohibited Subsidies: Article 3 of the ASCM 142A. Export Subsidies 143

1. 'De Jure' Contingency 1442. 'De Facto' Contingency 145

B. The Illustrative List of Export Subsidies 148C. Domestic Content Subsidies 154D. Conclusions 157

V. Non-Actionable Subsidies: Article 8 of the ASCM 158A. Assistance for R&D Activities 159B. Assistance to Disadvantaged Regions 160C. Assistance for Adapting Infrastructures to New

Environmental Requirements 161D. Notification and the Opportunity for Appeal 162E. Other Non-Actionable Subsidies 163F. Conclusions 165

VI. Actionable Subsidies: Articles 5 and 6 of the ASCM 166A. Injury to the Domestic Industry of Another Member 166B. Nullification or Impairment of GATT Benefits 168C. Serious Prejudice 169

1. Cases Where a Serious Prejudice is Presumed(Subsidies Prohibited Prima Faciej 170

2. Cases Where Serious Prejudice May Exist(Prohibited Subsidies) 172a) Displacement or Impediment of Imports 172b) Displacement or Impediment of Exports 173c) Price Undercutting by the Subsidized Product 174d) Increase in the World Market Share of the

Subsidized Primary Product 177D. Conclusions 177

VII. Remedies: Disputes and Countervailing Duties 178A. Multilateral Forum: Disputes before the DSB 180

1. Procedures for the Different Categories of Subsidies 180

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a) Red Category: Prohibited Subsidies(Article 4 of the ASCM) 181

b) Amber Category: Actionable Subsidies(Article 7 of the ASCM) 182

c) Green Category: Non-Actionable Subsidies(Article 9 of the ASCM) 183

2. Results of These Procedures: Withdrawal, Repaymentor Removal of the Effects 184

3. Conclusion 187B. National Forum: Countervailing Duties 187

1. Substantive Requirements 189a) Existence of a Specific Subsidy 189b) Material Injury to a Domestic Industry 191c) Causal Link 192

2. Procedural Requirements 193a) Initiation and Consultation 193b) Calculating the Amount of Countervailing

Duties 194c) Duration and Termination of Countervailing

Duties 197d) Possibilities for Judicial Review of the

Countervailing Duties 197C. Conclusions 198

VIII. Notification and Monitoring of Subsidies: The Role ofthe SCM Committee 199

IX. Exceptions for Developing Countries: Article 27 of the ASCM 201A. Prohibited Subsidies 202B. Actionable Subsidies 202C. Countervailing Duties 204D. Conclusions 204

X. Concluding Remarks 204

Chapter 5: The Regulation of Subsidies in the Agreement onAgriculture 207

I. Introduction 207II. The Agreement on Agriculture 208

A. Commitments on Domestic Support 2091. Amber Basket 2102. Blue Basket 2133. Green Basket 214

a) General Services 215b) Food Security Industry 215c) Domestic Food Aid 215d) Direct Payments to Producers 215

4. Conclusion 216

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B. Commitments on Export Subsidies 2171. Export Subsidies for Products Subject to Reduction

Commitments 218a) List of Export Subsidies (Article 9.1. of

the AoA) 2191. Direct Subsidies 2192. Export Sales under the Domestic

Market Price 2203. Export Payments for Agricultural Products 2214. Subsidies to Reduce Costs of Marketing or

Transporting Exports 2245. Upstream Subsidies 225

b) Other Export Subsidies (Article 10.1 of the AoA) 225c) Conclusion 227

2. Export Subsidies for Products Not Subject toReduction Commitments 227

3. Conclusion 230C. Conclusions 230

III. The Application of the ASCM to Basic Agricultural Products:The Relationship Between the ASCM and the AoA 231A. Definition of 'Subsidy' in the AoA 231B. Specificity in the AoA 234C. Conclusions 235

IV. Trade Remedies: The Expiration of the Peace Clause 235A. The Peace Clause: Exceptions to Article 13 of the AoA 236

1. Exceptions for Domestic Support 2372. Exceptions for Export Subsidies 2383. Expiration of the Peace Clause: Application of

the ASCM 239B. Lack of Conformity of a Measure With the AoA:

Withdrawal of the Subsidy (Article 4.7 of the ASCM) 240C. Conclusions 242

V. Concluding Remarks 242

Chapter 6: Subsidies in the WTO: The 'Foreign SalesCorporations' Case 245

I. Introduction 245II. The DISC Case 249

A. Group of Experts in DISC 251B. Group of Experts in the European Cases 252C. The Aftermath of These Cases 254D. Conclusions 255

III. The US-FSC Case 256A. The FSC-First Panel and AB Reports 257

1. Measures in Relation to the FSCs 257

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2. First Panel Report 260a) EC Arguments 261b) US Arguments 262c) Conclusions of the Panel 264

3. First AB Report 2684. Conclusions 270

B. The ETI-Second Panel and AB Reports 2711. Measures Introduced by the ETI 2722. Second Panel Report 2733. Second AB Report 2764. Conclusions 277

C. Developments of the FSCIETI Case 277IV. Conclusions from the FSC Case 280

Part III: EC Rules on State Aids 283

Introduction to Part III 285

Chapter 7: Evolution of the State Aid Rules in the EC 287

I. Introduction 287II. State Aids in the History of the EC 291

A. Rules on State Aids: From ECSC to EEC 282B. Evolution of the Rules on State Aids After the EEC

Treaty 293C. Conclusions 296

III. State Aids Nowadays: Statistics 296IV. Concluding Remarks 303

Chapter 8: The Notion of 'State Aid': Article 87.1 of the EC Treaty 305

I. Introduction 305II. The Notion of 'Aid in Any Form' 307

A. Examples of Advantages Granted by the State 3091. Participation in the Capital of Enterprises 3092. Loans 3103. Government Guarantees 3114. Sale of Public Goods 3115. Acquisition of Products or Services by the State 3126. Provision of Public Services by the State 3127. Conclusions 314

B. Intention of the Government When Granting theMeasure 314

C. Indirect Advantages 315D. Form of the Aid 315

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III. Granted by a Member State or through State Resources 315A. The Meaning of'State' 316B. Notion of 'State Resources' 318C. Aids 'Granted by the Member States or through State

Resources' 321D. Conclusions 327

IV. Distortion in Competition: Selectivity 327A. Distortion in Competition 328B. Selectivity of the Measure 330C. Conclusions 336

V. Effect on Trade between Member States 336VI. Concluding Remarks 338

Chapter 9: State Aids Compatible with the Common Market 341

I. Introduction 341II. State Aids per se Compatible with the Common Market 342

A. Aids with Social Character 343B. Aids to Repair Damages Caused by Natural Disasters 344C. Aids to Certain Regions of the Federal Republic of

Germany 344D. Conclusions 345

III. State Aids Which May be Compatible with the CommonMarket 346A. Aids to Improve the Development of Certain Regions

Where the Standards of Living are Abnormally Lowor Where There is a Serious Unemployment Situation 350

B. Aids for Projects of Common European Interest or toRemedy a Serious Disturbance in the Economy of aMember State 353

C. Aids to Promote the Development of CertainActivities or Regions: Sectoral, Horizontal andRegional Aids 3551. Regional Aids in Article 87.3(c) of the EC Treaty 3562. Sectoral Aids 359

a) Transport 361b) Motor Vehicles 363c) Steel and Coal 364

3. Horizontal Aids 365a) Aids for the Protection of the Environment 365b) Aids for R&D 366c) Aids for Employment and Training 368d) Aid for SMEs 370e) Aids for Rescuing and Restructuring

Companies in Crisis 371

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D. Aids to Promote Culture 374E. Aids Authorized by the Council 375

IV. Conclusions 377

Chapter 10: Procedural Issues: Control of State Aids in the EC andRecovery of State Aids 379

I. Introduction 379II. Procedures to Control State Aids in the EC 380

A. State Aid Control by the European Commission 3801. Notified Aids 3812. Non-Notified (Unlawful) Aids 3873. Control of Existing Aids 389

B. Appeals before the CFI/ECJ on State Aids 3901. Commission Decisions Subject to Appeal 3912. Types of Actions and Locus Standi 3913. Review by the ECJ 3944. Consequences of the Review 396

C. Role of National Courts in the Control of State Aids 396D. Conclusions 400

III. Remedies—Recovery of State Aids 401A. Powers of the European Commission in State Aids:

Suspension, Modification or Recovery 401B. Exceptions on the Recovery of State Aids 403C. Calculation of the Amount of Aid to be Recovered 404D. Subjects Obliged to Return the Aid 406E. Conclusions 406

IV. Concluding Remarks 407

Chapter 11: Agricultural Subsidies in the EC 409

I. Introduction 409II. State Aids to Agricultural Products 410

III. The CAP: Agricultural Subsidies in the EC 413A. The CAP in the EC Treaty: Objectives 414B. CMOs: Types of Subsidies for Agricultural Goods

in the EC 4161. Price Support through Regulation of the Markets 4162. Income Support: Production Subsidies 4173. Storage Systems and Compensation for Remnants 4174. Common Mechanisms for the Stabilization of

Imports and Exports 4185. CAP Funding: EAGGF 418

C. The Reform of the CAP 420IV. Concluding Remarks 423

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Part IV: Comparative Analysis of the Regulation of Subsidies in

the WTO and the EC: Consequences 425

Introduction to Part IV 427

Chapter 12: Comparison of the WTO and EC Rules on Subsidiesand State Aids 429

I. Introduction 429II. Systemic Approach to Disciplining Subsidies 430

A. Analysis of National Measures in the WTO 4311. Framework of the ASCM 4322. Framework of the AoA 433

B. Analysis of Government Measures in the EC 435C. Notification and Control of Subsidies and State Aids 437D. Conclusions 439

III. Definition of 'Subsidy' versus Notion of 'State Aid' 440A. Origin of the Measure: Government versus State 440B. Benefit versus Aid 442C. Nature of the Resources Used 443

1. FSC versus Sloman Neptun 4462. Canada—Aircraft and US—Export Restraints versus

PreussenElektra 4483. Price Fixing Systems 449

D. Conclusions 449IV. Specificity versus Selectivity 450

A. The Term 'Certain' 451B. Undertakings and Industries/Productions 452C. Measures Granted by Sub-National Entities 454D. Conclusions 455

V. Prohibitions and Exceptions in the WTO and the EC 455A. Red Category—Prohibited Subsidies and Aids

Incompatible with the Common Market 4561. Export Subsidies 4582. Import Substitution/Domestic Content Subsidies 4613. Conclusion 463

B. Green Category—Permitted Subsidies and AidsCompatible with the Common Market 4631. Aid for R&D 4642. Aid for Underdeveloped Regions 4663. Aid for the Adaptation of Existing Facilities to

New Environmental Requirements 4684. Conclusion 469

C. Amber Category—Actionable Subsidies and AidsWhich May be Compatible with the Common Market 4691. The Adverse Effects Standard 470

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2. The Compensatory Justification Standard(Community Interest) 472

3. Comparison of Both Standards 473D. Conclusions 474

VI. Remedies: Withdrawal of the Subsidy versus Recoveryof the Aid 475A. Remedies at the Multilateral Level: Withdrawal

of Prohibited Subsidies versus Recovery of UnlawfulAid 476

B. Coercive Means of Enforcement 478C. Remedies at the National Level: The Role of Individuals 480D. Conclusions 481

VII. Reasons for the Differences between the WTO and the EC 482A. Scope and Systemic Approach 483B. Definitions of 'Subsidy' and 'State Aid' 484C. Prohibited and Permitted Government Measures 486D. Control and Remedies 487E. Conclusions 489

VIII. Concluding Remarks 490

Chapter 13: Conformity of the EC State Aid Rules With theWTO: Suggestions 493

I. Introduction 493II. Conformity of State Aids With the WTO Rules on Subsidies:

Conflicts 495A. Scope of the Regulation: Subsidy versus State Aid 495B. Objectives of the Regulation: Adverse Effects on Trade

versus Community Objectives 496C. Conclusion: Lack of Conformity 499

III. A Different Case: Conformity of Agricultural Subsidies inthe EC with the AoA 499A. Domestic Support 500B. Export Subsidies 501C. Other Issues: Expiration of the Peace Clause 502D. The AoA in the EC Legal System 502E. Negotiations on Agriculture in the Doha Round 502F. Conclusions 503

IV. Consequences of the Lack of Conformity 504A. Consequences for the EC and the Member State 505

1. Government Measure = Subsidy * State Aid 505a) Multilateral Level—WTO 506

(i) Distribution of Competences with Respectto the WTO Agreements 506

(ii) The Dispute Settlement System in Practice:Representation on Behalf of the EC 509

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(iii) Retaliatory Actions: The Requirement ofUniformity in the Action 511

(iv) Conclusions: Joint Responsibility of theEC and the Member State 512

(v) Consequences for the EC and theMember State Derived from the ASCM 513

b) Community Level—EC 513c) Conclusions 515

2. Government Measure = Subsidy = AuthorizedState Aid 516a) Multilateral Level—WTO 516b) Community Level—EC 519c) Conclusions 520

B. Consequences for Individuals 5201. Government Measure = Subsidy = Authorized

State Aid 5212. Government Measure = Subsidy * State Aid 5263. Conclusion 527

C. Conclusions 527V. Suggestions: Ways to Improve the Conformity of the EC

Rules on State Aids with the WTO 528A. Modification of the Notion of 'State Aid' 529B. The Community Interest 'Plus' Standard 531C. Indirect Effect of the Provisions of the ASCM 532D. Conclusions 532

VI. Concluding Remarks 533

Chapter 14: Final Remarks 535

I. Introduction 535II. Main Conclusions of This Work 536

III. Subsidies in an International Context: Reflections and Roomfor Improvement 548

IV. Conclusion: A Look into the Future 555

Table of Cases 559

I. GATT/WTO 559A. GATT 559B. WTO 560

II. EC 563A. ECJ 563B. CFI 567

Bibliography 569

Index 581