This is a guest post by Victor Crochet, an Associate at Van Bael & Bellis, Brussels, and Vineet Hegde, a PhD researcher in WTO Law at the Leuven Centre for Global Governance Studies
Professors Jennifer Hillman and Chad Bown are working on finding solutions to resolve the problem of Chinese subsidies. Among other things, they highlight the problem of identifying who the “giver” of the subsidy is. In this post, we intend to highlight another issue that might become increasingly common when looking at subsidies, that is where the “taker” of the subsidy is located.
In April 2019, the European Commission [Commission] received a complaint to initiate anti-subsidy investigation against import of glass fibre fabrics from China and Egypt. The interesting aspect of this investigation is that the summary of the complaint mentions subsidization to Egyptian producers from “financial contributions granted indirectly via Chinese government-owned or controlled banks or other Chinese state-owned or state-controlled entities [SoEs] (directly or via Egyptian entities) to foster foreign investment in the special economic zones by virtue of the agreements between the Chinese and the Egyptian governments”. In short, the complainants allege that Egyptian producers are being subsidized by the Chinese government.
Similarly, in October 2019, the Commission initiated another anti-subsidy investigation against hot rolled stainless steel sheets and coils from China and Indonesia. From the Notice of Initiation of this case, it seems that the complainant puts forth similar arguments as “the complainant alleges that some of the subsidies are directly granted by the Government of Indonesia, and some by the Government of China. According to the complaint, an Indonesian exporting producer, which is situated in an industrial park, is Chinese-owned. The complaint alleges the existence of loans transferred from Chinese State-owned or State-controlled entities to this Indonesian exporting producer.”
As China increasingly speaks of accelerating its “going global” objective through initiatives such as the Belt and Road Initiation, many Chinese companies are expanding and opening subsidiaries in foreign countries.
As Chinese industries expand abroad, complaints such as those described above are likely to become increasingly more common. However, such complaints lie on extremely shaky legal grounds and the fact that the Commission is even investigating them is worrying when considering that adherence to WTO rules has significantly decreased over the last few years.
Indeed, Article 1(a)(1) of the SCM Agreement states that a subsidy exists if “there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as "government")”. This seems to point that a transfer of funds by a government of a country which is not the exporting country is not a subsidy as demonstrated by the ordinary meaning of Article 1. EU law is even clearer than the SCM Agreement as Article 3 of the EU anti-subsidy regulation indicates that for there to be a subsidy there needs to be a financial contribution by “a government in the country of origin”.
A quick look at the context of Article 1 of the SCM Agreement also points towards the conclusion that the financial contribution must be granted by the government of the country of export:
- Article 2 states that for a subsidy to be specific, it needs to be granted to an enterprise/industry or a group of enterprises/industries “within the jurisdiction of the granting authority”;
- Also, Article 18 solely envisages the possibility that the “government of the exporting Member agrees to eliminate or limit the subsidy or take other measures concerning its effects”. By not giving such possibility to governments other than that of the exporting Member, the SCM Agreement acknowledges that a financial contribution only qualifies as a subsidy if it is granted by the government of the exporting Member;
- Finally, Article 25 of the SCM Agreement is clear that Members only have to notify to the WTO subsidies “within their territories”. By not requiring that governments notify subsidies granted to entities outside their territories, the SCM Agreement acknowledges that a financial contribution only qualifies as a subsidy if it is granted by a government to an entity within its territory.
The negotiating history of the SCM Agreement also seems to point in the same direction. The SCM Agreement’s predecessor – the GATT Tokyo Round Subsidies Code, did not contain any definition of “subsidy”. However, as recalled by Prof. Gary Horlick, the first draft of the SCM Agreement was negotiated by Canada, Japan, the European Communities and the US. At the time, 90% of all anti-subsidy cases had been initiated by the US and their practice served as the basis to draft Articles 1 and 2 of the SCM Agreement. He states that the phrase “within the territory” first came into US law because of cases filed in 1982 claiming that World Bank loans, Japanese war reparations to Korea, Marshall Plan aid to European Countries, or West German subsidies to West Berlin, should be treated as subsidies and, therefore, countervailable. These claims were all rejected. Based on this practice, Gary Horlick highlights that the countries at the negotiating table decided “not to treat as countervailable those subsidies given by a government outside of its territory”. Therefore, an analysis of the text, context, and the negotiating history, all indicate that the WTO members did not intend to include financial contributions by a government to a foreign producer outside its territory.
While it would appear from the start of our analysis, that countervailing financial contributions granted by a government to a producer in a different country would violate WTO law, the fact that such requests have been brought to the Commission twice in less than a year shows that this issue will become increasingly relevant.
The authors of this blog post will further inquire into solutions and reform proposals regarding where the “taker” of a subsidy is located and will keep you updated.
