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2 - Do the World Trade Organization Disciplines on Domestic Subsidies Make Sense? The Case for Legalizing Some Subsidies

Published online by Cambridge University Press:  03 May 2010

Kyle W. Bagwell
Affiliation:
Stanford University, California
George A. Bermann
Affiliation:
Columbia University, New York
Petros C. Mavroidis
Affiliation:
Columbia University, New York
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Summary

Introduction

Prior to the Uruguay Round, the multilateral trading system did not contain any enforceable legal disciplines on domestic subsidies. The treatment of such subsidies in the General Agreement on Tariffs and Trade (GATT) was ambiguous: On the one hand, their legitimacy as tools of public policy was affirmed while their capacity to distort trade was also acknowledged. On the other hand, self-help against such subsidies was permitted in the form of countervailing duties (CVDs), provided that the subsidies caused “material injury” to domestic industry in the importing country. The Uruguay Round Agreement on Subsidies and Countervailing Measures (SCM Agreement) introduced a category of domestic subsidies called “actionable,” which can be challenged in World Trade Organization (WTO) dispute settlements, thus for the first time providing a multilateral legal remedy against subsidization. For a subsidy to be challenged in a WTO dispute settlement as actionable, it has to fall within the definition of subsidy in Article 1 of the SCM Agreement, which means it must entail a “financial contribution” governmental financial assistance to firms (from cash payments to equity infusions to provision of goods and services below market prices), and also confer a “benefit” on an enterprise; the subsidy must also be “specific,” either de jure (legally targeted at a particular industry or enterprise or group of industries or enterprises) or de facto (in fact used only or disproportionately by a particular industry or enterprise or group of industries or enterprises).

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Chapter
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Publisher: Cambridge University Press
Print publication year: 2009

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References

Bagwell, and Staiger, , “Strategic Export Subsidies and Reciprocal Trade Agreements: The Natural Monopoly Case,” Japan and the World Economy, Vol. 9, 1997, 491–510CrossRefGoogle Scholar
Bagwell, K. and Staiger, R.W., “Will International Rules on Subsidies Disrupt the World Trading System?96(3) The American Economic Review June 2006, 877–895CrossRefGoogle Scholar
Regan, D., “What Are Trade Agreements For?4(4) Journal of International Economic Law 2006, 951–988CrossRefGoogle Scholar
Howse, R. and Nicolaidis, K., “Enhancing WTO Legitimacy: Constitutionalization or Global Subsidiarity?16(1) Governance 2003, 73–94CrossRefGoogle Scholar
Howse, R. and Teitel, R., Beyond the Divide: The Covenant on Economic, Social and Cultural Rights and The World Trade Organization, Teitel, Ruti, co-author. Occasional Paper #30, Friedrich Ebert Stiftung, Geneva, April 2007Google Scholar
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