The US Challenge Against Indian Export Subsidies

Guest Contributor: Meera Manoj

On  March 15, 2018, the United States issued an unprecedented and all-encompassing challenge at the World Trade Organisation against almost every export subsidy scheme maintained by India, for violating the 1994 Agreement on Subsidies and Countervailing Measures (ASCM). These schemes include the Merchandise Exports Scheme, Export Oriented Units Scheme and several sector-specific schemes including the Special Economic Zones scheme. If successful the challenge could wipe out $7 billion worth of benefits just annually.  However, its true significance lies in the global scope of its consequences. It would have a domino effect to invalidate or shorten the period of export subsidies for over twenty-two developing countries, and consequently, stymie their economic growth. It would also necessitate a perilous balancing act by the WTO Dispute Settlement Body (DSB) to addresses concerns of developing countries while not overstepping its mandate.

The Crux of the Challenge:

The basis for the U.S. challenge is a contentious interpretation of the ASCM which has long created a rift between developed and developing countries in the WTO. Under Article 3.1 of the ASCM, the WTO prohibits countries from granting exports that are contingent on export performance or the use of domestic goods over imports. However, when the ASCM was drafted in 1994, it was recognized under Article 27.1 that there must be a degree of flexibility in implementing this prohibition when it comes to developing countries. Accordingly, two categories of countries were identified who could eliminate subsidies over a gradual period: The first category under Annex VII of the ASCM includes least developing countries (LDCs) and developing countries with a GNP per capita below $1000. Annex VII countries, as per Article 27.2(a) did not have an absolute cap on their transition period. Rather, they were to graduate from Annex VII once their GNP per capita crossed $1000 per annum. The second category includes all other developing countries that are given an 8-year transition period during which they could gradually phase out their export subsidies to zero under Article 27. (2)(b).

When it comes to the consequences of Annex VII countries crossing the $1000 GNP threshold, WTO Members hold diametrically opposing views. One faction led by India argues that on graduation, Annex VII countries will be entitled to an additional transition period of 8 years as was given to the other developing countries. The opposing faction led by the United States, however, contends that on graduation, Annex VII countries will immediately have to cease providing all export subsidies.

A Thorny Issue of Interpretation:

The basis for the ambiguity lies in the text of the ASCM. Annex VII (b) states that when the developing countries graduate from it they will be “subject to the provisions which are applicable to other developing Members according to Article 27.2(b).”

Article 27.2(b), excludes the export subsidy prohibition from applying to “other developing country Members for a period of 8 years from the date of entry into force of the WTO.” On the face of it, it is unclear whether graduating countries may enjoy an additional 8-year transition period or not.

India and other Annex VII countries argue that they indeed have an additional 8-year period to phase out subsidies. They advocate for the phrase “from the date of entry into force of the WTO” (the disputed phrase) to be construed to mean from the date of graduation of individual Annex VII countries.

Amongst the developed countries, particularly the U.S., there is strong opposition to the above viewpoint. They believe that the provision must be interpreted literally. The disputed phrase means that Article 27.2(b) refers only to the other non-Annex VII developing countries. It cannot be extended to grant an equivalent transition period to Annex VII countries. They argue that the former part must be ignored, that is, “for a transition period of 8 years.”

Possible Arguments that may be Advanced:

Although neither party has revealed their argumentation or the written submissions to support their positions, this section suggests certain arguments that they may advance.

  1. In Favour of India:

India’s plea an additional 8-year period may be justified by advocating for the adoption of a harmonious interpretation. Panels have previously recognized the principle of “effective treaty interpretation” which posits that parts of WTO Agreements must not be rendered obsolete. Here, Annex VII (b) which requires Article 27.2(b) to apply to India and other countries would be rendered ineffective if the 8-year transition period is not granted.

India may rely on the fact that in such situations, Panels often refer to the object and context of the treaty. For the ASCM, it is evident that the purpose of creating a category of Annex VII countries was so that they may be accorded a more liberal treatment. Once they reached a $1000 GNP, they would be put at par with other developing countries for who an 8-year transition period had been recognized as a necessity. The date of counting this period is a technicality, and it must not be used to take away the substantive right of a transition period.

India may also point out that when it comes to individual products, Article 27.5 states that Annex VII countries must be given an additional 5-year phase-out period for a product that has become export competitive. It would be an incongruous proposition that a single product is given an additional five-year phase-out period, whereas, when the GNP increases (not a measure of export competition and therefore not directly tied to export subsidies), there is absolutely no transition period. Annex VII countries when they reach a $1000 GNP will effectively be subject to the same standard as a developed country, instead of developing countries who had reached a $1000 GNP.

  1. In Favour of the U.S.:

The U.S. may support its contention that there is no transition period by emphasizing that Annex VII countries have had an uncapped period to phase out subsidies and graduate from a $1000 GNP cap. India itself, graduated only in 2013, nineteen years after the WTO agreement came into force.  This allowed sufficient time to phase out subsidies without granting an additional eight years. Thus, it is not equitable or necessarily in furtherance of the object of the SCM to grant Annex VII countries an additional transition period, allowing more than twenty-seven years to phase out while other developing countries have been granted merely eight years.

Moreover, the U.S. may point out that the disputed phrase is not ambiguous enough to warrant being given a wholly different meaning. To do so would risk violating Article 3.2 of the Dispute Settlement Understanding, 1994 that prohibits Panels from diminishing obligations under the covered agreements.

It may also use the principle of effective treaty interpretation to argue against rendering the disputed phrase redundant.

Further, the U.S. may draw attention to the fact that certain Annex VII countries have previously appeared to implicitly recognize that the interpretation they propose is impossible to derive from the ASCM’s current text. To this effect, they have suggested amending the text before the Negotiating Group on Rules by inserting a footnote to clarify that for Annex VII countries the period would begin from the date of their graduation. India itself had been one of the proponents of this suggested amendment. It would be incongruous to argue that a provision can be read in a certain way when having previously indicated that an amendment would be necessary to accord it such a meaning.

Future Implications:

The current dispute throws up several complex points of interpretation. With consultations between the US and India failing on April 11th, 2018, the WTO has initiated the process for setting up a Panel. It will be a high-stakes case for all the developing countries involved, as twelve Annex VII countries have graduated according to a 2017 Report of the WTO Secretariat. Moreover, the WTO itself will be put in a delicate situation. It must either take the bold decision to ignore the words “from the date of entry to the WTO” or adopt a rigid textual interpretation that would barrel many developing countries down the road of economic ruin. The challenge will also be compounded due to immense political pressure. The current U.S. administration has in the past accused it of judicial overreach to block the appointment of Appellate Body Members and even affirmed its intent to flout unfavorable WTO ruling in its official Trade Policy 2018. The WTO Panel will, therefore, have to balance the needs of developing countries while not overstepping its mandate under the DSU to provoke the ire of the U.S. Its ruling could very well be a defining moment of global confidence in the WTO system.