TWN Info Service on WTO and Trade Issues (Mar20/04)
3 March 2020
Third World Network

Developing countries facing systemic crisis at the WTO
Published in SUNS #9079 dated 2 March 2020

Geneva, 28 Feb (D. Ravi Kanth) -- Developing countries face a systemic crisis at the World Trade Organization following aggressive attempts by the United States and other developed countries to introduce a one-size-fits-all approach through their separate proposals on industrial subsidies and on market-oriented conditions, trade envoys told the SUNS.

At an upcoming General Council (GC) meeting on 3-4 March, the US will formally introduce its controversial proposal on "the importance of market-oriented conditions to the world trading system."

The US proposal will be discussed along with its other proposal for changing the negotiating function by denying special and differential treatment (S&DT) to developing countries in the current and future trade negotiations.

Although the agenda for the GC meeting does not include a joint trilateral proposal by the US, the European Union, and Japan on "industrial subsidies" that was agreed among the trade chiefs of the three members on 14 January, it is expected to be introduced at the WTO's 12th ministerial conference in Nur Sultan, Kazakhstan, in June, said a proponent, who asked not to be quoted.

The two proposals seem to be intrinsically linked to a "one-size-fits-all approach," said a trade envoy, who asked not to be quoted.

Even though the three developed countries privately argued that the two proposals are targeted at "non-market economies in general, and China in particular," the underlying rationale of these proposals is aimed at bringing about "systemic" changes in the WTO's rule-book so as to deny "policy space" for developing countries that are at differing levels of economic development, said another developing country trade envoy, who asked not to be quoted.

Recently, the US unilaterally changed the de minimis parameters for imposing countervailing duties so as to deny S&DT to developing countries.

The trilateral proposal of the US, the EU, and Japan on industrial subsidies intends to "strengthen existing WTO rules on industrial subsidies."

It says that "the current list of prohibited subsidies provided for in Article 3.1 of the Agreement on Subsidies and Countervailing Measures (ASCM) is insufficient to tackle market and trade distorting subsidization existing in certain jurisdictions [China]."

"Therefore, new types of unconditionally prohibited subsidies need to be added to the ASCM".

The proposal from the three members has listed the following types of subsidies that ought to be treated as prohibited subsidies:

a. unlimited guarantees;

b. subsidies to an insolvent or ailing enterprise in the absence of a credible restructuring plan;

c. subsidies to enterprises unable to obtain long-term financing or investment from independent commercial sources operating in sectors or industries in overcapacity;

d. certain direct forgiveness of debt.

The three members had agreed to "continue working on identifying the scope of prohibitions and additional categories of unconditionally prohibited subsidies."

Further, the three members said that "certain other types of subsidies have such a harmful effect so as to justify a reversal of the burden of proof so that the subsidizing Member must demonstrate that there are no serious negative trade or capacity effects and that there is effective transparency about the subsidy in question."

The US, the EU, and Japan suggested that subsidies to state-owned enterprises, including "subsidies that prop up uncompetitive firms and prevent their exit from the market, [and] subsidies creating massive manufacturing capacity, without private commercial participation, and, subsidies that lower input prices domestically in comparison to prices of the same goods when destined for export", must be included in the prohibited list of the ASCM.

The three members claimed that though the current provisions in the WTO's ASCM refer to "serious prejudice to the interests of another Member", it is not sufficient as they do not refer to situations where the subsidy in question distorts capacity.

Hence, "an additional type of serious prejudice linked to capacity should be therefore added to Article 6.3 of the ASCM," the three members argued.

Without naming China and other developing countries, the proponents argued that "the current rules of the ASCM do not provide for any incentive for WTO Members to properly notify their subsidies."

They called for adding naming and shaming provisions to Article 25 of the ASCM, "rendering prohibited any non-notified subsidies that were counter-notified by another Member, unless the subsidizing Member provides the required information in writing within set time-frames."

The three members suggested that "the current rules of the ASCM are insufficiently prescriptive when it comes to the determination of the proper benchmark for subsidies consisting of the provision of goods or services or purchase of goods by a government in situations where the domestic market of the subsidizing Member is distorted."

"Therefore, the ASCM should be amended to describe the circumstances in which domestic prices can be rejected and how a proper benchmark can be established, including the use of prices outside the market of the subsidizing Member," the US, the EU and Japan claimed.

Significantly, the trilateral proposal on industrial subsidies in January was closely followed by the US proposal on the importance of market-oriented conditions to the world trading system on 20 February (see SUNS #9068 dated 14 February 2020).

Surprisingly, the EU and Japan are not signatories to the US proposal on "market-oriented conditions" even though they concur with its goals, said a trade envoy, who asked not to be quoted.

The US proposal, which will come up for discussion at the GC on 3 March, wants members to affirm that businesses "should operate under market-oriented conditions."

The US suggested various elements to ensure "market-oriented conditions exist for market participants". The elements include:

i. decisions of enterprises on prices, costs, inputs, purchases, and sales are freely determined and made in response to market signals;

ii. decisions of enterprises on investments are freely determined and made in response to market signals;

iii. prices of capital, labour, technology, and other factors are market-determined;

iv. capital allocation decisions of or affecting enterprises are freely determined and made in response to market signals;

v. enterprises are subject to internationally recognized accounting standards, including independent accounting;

vi. enterprises are subject to market-oriented and effective corporation law, bankruptcy law, competition law, and private property law, and may enforce their rights through impartial legal processes, such as an independent judicial system;

vii. enterprises are able to freely access relevant information on which to base their business decisions; and

viii. there is no significant government interference in enterprise business decisions described above.

In short, the two proposals - i. e. new disciplines for industrial subsidies by the US, the EU, and Japan, and creating a framework for market-conditions ostensibly for ensuring "a level playing field" - are linked, said a trade envoy, who asked not to be quoted.

The two proposals will usher in "systemic" changes at the WTO by bringing a one-size-fits-all approach that would further undermine policy space for developing countries for pursuing industrial development, the envoy said.

Ironically, these separate proposals from the US, the EU, and Japan are being floated at a time when the world economy is facing grave headwinds due to the COVID-19 virus pandemic, said trade envoys, who asked not to be quoted.

The US has already announced large-scale subsidy payments to its farmers while declaring that it will not hesitate to support its markets due to the sudden change in the economic climate. +