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Info Service on WTO and Trade Issues (May23/13) Geneva, 29 May (D. Ravi Kanth) — The African Group has called for major reforms in the World Trade Organization’s rules governing subsidies and countervailing measures so as to enable the developing countries to re-balance the “trade rules to promote industrialization and to address emerging challenges such as climate change, the concentration of production and digital industrialization.” It is common knowledge that the United States and the European Union along with other developed countries are immersed in a new wave of industrialization by providing subsidies worth hundreds of billions of dollars to address climate change and the semiconductor sector, despite allegedly violating the provisions in the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM). As part of the WTO reforms as agreed at the WTO’s 12th ministerial conference (MC12) on 17 June 2022, the African Group has proposed changes in the ASCM to enable the developing countries to implement their industrialization programs. The proposal (WT/GC/W/880) from the African Group, titled “A Case for Re-balancing the Agreement on Subsidies and Countervailing Measures (ASCM) – Policy Space to Promote Industrialization in Developing Countries”, was circulated on 26 May. “It is a contribution to the discussions and negotiations towards the reform of the WTO agreed by (Trade) Ministers at MC12,” the African Group emphasized. Unlike the seemingly “hegemonic” positions adopted by the US and other developed countries to pursue their industrialization programs in alleged violation of the WTO rules, the African Group seems to have adopted a legitimate route by raising the issue at the WTO as a multilateral concern for developing countries. Acknowledging that subsidies are a “critical instrument in the toolbox that national governments use to address market failures and achieve a variety of policy goals,” it noted that the ASCM “contains multilateral rules that discipline the type and scope of allowable subsidies or limits within which subsidies may be provided by a Member.” It said the ASCM also regulates the actions that members can take to counter the effects of (actionable) subsidies which can be enforced either through the WTO dispute settlement mechanism or through the imposition of countervailing duties or measures. Further, it said under Article 27 of the ASCM, which recognizes the central role of subsidies in the economic development of developing countries, special and differential treatment (S&DT) provisions are provided for developing countries. At a time when the world is mired in poly-crises or multiple crises ranging from the ongoing effects of the COVID-19 pandemic, the existential climate change crisis, the economic consequences of geopolitical tensions, to the global food and energy crises, the developing countries are caught in the maelstrom of a cost-of-living and simultaneously debt crisis due to the high-interest rate policies implemented by the US and other developed countries. Against this backdrop, the African Group has argued persuasively that “it is important to consider how flexibilities, not only in the context of S&D as provided for in Article 27, can be availed to developing countries to provide them with the requisite tools to respond to the poly-crisis.” According to the African Group, subsidies in developing countries aimed at “achieving “legitimate development goals”, including support for regional growth, technology research and development, production diversification, and development and implementation of environmentally sound methods of production should not have to face countervailing measures or other actions from other governments.” EQUITY IN MULTILATERAL TRADING SYSTEM “Yet, it is instructive in this regard that developing countries have been the main targets of countervailing measures by developed economies,” the African Group argued, exposing the alleged double standards being adopted by the developed countries that are currently providing massive subsidies to promote industrialization. Seeking a level playing field, the African Group called for “flexibilities to be granted to developing countries so as to provide requisite flexibilities to developing countries to respond to the poly-crisis and to drive their structural transformation, industrial development, and diversification.” It said the time has come for the ASCM disciplines to be re-calibrated and re-balanced “to infuse certainty and equity in the multilateral trading system.” The African Group’s proposal aims to provide “a non-exhaustive list of issues that can be considered by Members to re-balance trade rules to enable industrialization within the framework of the ASCM to enable sustainable economic transformation in developing countries and in particular Africa.” Given the magnitude of the multiple crises “confronting the global economy, inequality and disparities in levels of development of countries and regions, highly concentrated patterns of production, and the lack of sufficiently diversified economies in developing countries,” the African Group’s proposal calls for urgent action at a multilateral level to devise rules that are fit for purpose. The industrialized countries, according to the African Group, are currently implementing “industrial policies as a viable option for accelerating sustainable economic growth as a means of advancing national economic priorities, including the de-risking of supply chains.” Instead of de-coupling from the supply-chain network dominated by China, the EU last month proposed a new strategy of “de-risking” to confront the challenges posed by China. Recently, the leaders of the G7 industrialized countries adopted “de-risking” as their strategy for confronting China. In its proposal, the African Group emphasized the importance of “industrialization” as an indispensable factor in the development process and is critical in the process of the enhancement and expansion of productive capacities to achieve economic diversification. However, “many developing countries struggle to diversify their economies”, it said, adding that it is therefore important to explore how WTO rules can facilitate the industrialization efforts of Members. It said “Africa’s growth trajectory is limited by its dependence on production and exports of agricultural and extractive primary commodities which leaves it vulnerable to global shocks.” While countries in North and South America, Europe, and several nations in Asia seem to have achieved a greater degree of export diversification, the same is not the case with the African countries, which over the last three decades, “recorded only a slight improvement in export diversification, that is, a 0.03 points decrease in the export diversification index.” Forced to implement their nationally determined contributions as negotiated under the Paris Agreement, “with ambitious carbon reduction and mitigation targets,” the African Group said that “the increasing adoption of decarbonization targets with extraterritorial application imposed through trade measures by their main export markets also underscores the urgency to diversify their economies and integrate into environmentally-friendly and high-value manufacturing value chains as key producers and suppliers of products in the green economy, e.g. electric vehicles and their components such as energy storage systems, domestic solar and wind energy products, etc.” According to the United Nations Conference on Trade and Development (UNCTAD) Technology and Innovation Report 2023, “developing countries now have opportunities to catch up, reduce poverty, and at the same time help tackle climate change and set the world on a more sustainable course.” The report also highlights “the critical role of WTO trade rules towards this ideal, such as the disciplines under the ASCM, including local content requirements and public procurement and the need for their review to bring them in sync with the Paris Agreement.” Besides, said the African Group, R&D (research and development) “is critical to industrialization, including promoting green mobility and, with that, renewable energy solutions, as well as structural transformation into new, or more sustainable industrial activities.” Unlike the fact that the successes of public-private cooperation in R&D to enhance research activities and translate research outcomes into a production plan for commercial use are well-documented, the story of PPP (public-private partnerships) in developing countries is different. In developing countries, the public sector is invariably forced to undertake much of the burden in R&D with the near-absence of the private sector in R&D. “The constraints imposed by disciplines in the ASCM can hamper public sector support for R&D purposes that is necessary for developing countries to develop their nascent industries, keep up with the pace of technological advances at competitive levels, and undermine efforts to harness or beneficiate their natural resources to move up production value chains or decarbonize existing and future production capacities,” the African Group argued in its proposal. It said with the “expiry of the carve-outs contained in Article 8 of the ASCM which allowed for non-actionable subsidies of up to 75 percent of industrial research or no more than 20 percent of costs of adaptation to new environmental requirements or regulations,” the chances of industrialization are further stifled. Subsequently, with the expiry of the carve-outs, existing exports from developing countries face the risk of non-compliance with increasingly stringent sustainability standards, it added. Also, the thresholds in the expired carve-outs are too conservative for the climate change response necessary to decarbonize. In addition, the African Group said that the “prohibitions contained in Article 3 of the ASCM on local content requirements presents a further constraint to the ability for developing countries to structurally transform and diversify their productive sectors.” Notwithstanding the flexibilities provided for in Article 27.3 of the ASCM, which have since lapsed on 31 December 1999 and 31 December 2002, the African Group argued that “the uncertainties with respect to this provision in view of the restriction in the Agreement on Trade-Related Investment Measures (TRIMS) on the domestic content requirement created ambiguity and uncertainty on its practical applicability.” Due to the capital required to achieve “economies of scale in production which are often impossible to realize through domestic markets alone,” it said there is an urgent need for more flexibilities for the development of domestic capacities along a value chain and promoting sustainable regional value chains. DEVELOPMENT DIMENSION IN ASCM In view of the “poly-crisis and the need for Governments to respond in the interests of all,” the African Group wants WTO members to consider the need to “extend flexibilities required within the context of the ASCM to enable developing countries to grant subsidies, including complimentary localization initiatives to promote regional growth, industrial development and structural transformation, production diversification and development, technology research and development funding, and the promotion of environmentally sound methods of production (i.e. green industrialization) and green industries to confront climate change, including freight rebates to mitigate against high transport costs.” It identified the relevant provisions in the ASCM for pursuing industrialization in developing countries. The provisions, aimed at pursuing “legitimate sustained and sustainable development goals”, are: * The criteria of determining prohibition of paragraph 1(a) of Article 3 under the terms of paragraph 2(a) of Article 27 shall be revised with a view to, among others: i. updating the threshold of GNP per capita of $1,000 per annum, and ensuring re-inclusion of a Member when its GNP per capita falls back below the agreed threshold, ii. incorporating additional objective criteria to expand reach of the provision such as the level of export diversification, the global share of exports, etc., and iii. taking account of regional investment needs to promote regional integration and achieving desired economies of scale. * The prohibition of paragraph 1(b) of Article 3 shall not apply to developing country Members and least developed country Members provided the use of domestic goods does not exceed the threshold to be agreed by Members. * In the case of actionable subsidies, the threshold for the termination of countervailing duty investigation of a product originating in a developing country Member shall be increased to x percent of its value calculated on a per unit basis; The standard for negligibility should also be revised to be based on a market penetration test, rather than on imports as a percentage of total imports-test, i.e. if exports from an individual developing country are less than x% of the market where goods are being exported to, there should be no cumulation with imports from other countries. * The expiry in 2000 of Article 8 of the ASCM that used to provide some policy space for Members to address technological, poverty, and environmental challenges – all crucial issues for sustainable development is an issue that Members need to reconsider in view of emerging global challenges. Article 8 of the ASCM provided cover for non-actionable (green-light) subsidies toward research and development, regional development, and environmental protection. Some nations took advantage of these provisions, but their full potential had not yet been realized when Article 8 expired in 2000. It is proposed that Article 8 of the ASCM be reinstated to enable developing countries to grant subsidies, including through complimentary localization initiatives, for industrial development and structural transformation, including technology research and development funding, production diversification and development and to allow measures to promote green industrialization to confront climate change and freight rebates to mitigate high transport costs. In hindsight, the scale of the climate change crisis and subsequently ambitious multilateral commitments to urgently respond to this global challenge seem to have been underestimated when Article 8 reforms were adopted. Its reinstatement must be coupled with an increase in applicable thresholds respectively in relation to R&D, and the cost of adaptation to new environmental requirements imposed by law and/or regulations. * Article 27 of the ASCM on Special and Differential Treatment of Developing Country Members is further proposed for consideration on the following elements: i. remedies to be considered by developing countries, ii. increasing the de minimis margins, iii. revising the standard for negligibility and cumulative assessment of the effects of imports to be based on market penetration, iv. increasing the volume of negligible volume of imports. According to the African Group, “the applicability of the flexibilities and subsidies envisaged above, including their duration, shall be contingent on criteria and procedures to be agreed, taking due regard of the objective of fostering resilient and sustained development.” In conclusion, the African Group called for “focused discussions by Members to address the constraints inherent in certain WTO agreements which limit the policy space to drive industrialization, economic diversification and structural transformation programmes, including the ability to respond to emerging challenges such as climate change.” +
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