Introduction
As the world becomes increasingly interconnected, global trade is facing new challenges to tackle unfair trade practices. One such challenge is to effectively tackle the embedded subsidies in the export goods which may cause economic harm to the industries in the importing country. Traditionally, anti-subsidy investigations, conducted under the World Trade Organization’s (‘WTO’) framework of Agreement on Subsidies and Countervailing Measures (‘SCM Agreement’), have focused on subsidies given by the government of the exporting country to companies located within its territorial jurisdiction. Given the text of the SCM Agreement, one may argue that the drafters of the agreement did not envisage a situation where a financial support can be provided by the government of a third country to companies established in the territory of another country (the exporting country), typically called as a ‘transnational subsidy’.
With the expanding horizons of global corporations across continents coupled with a complex set of agreements entered between governments promoting or facilitating trade and funding/investment, this has increasingly become a reality in today’s world. As the WTO member countries grapple with the challenge to counter the transnational subsidies within the framework of the present SCM Agreement, in this article, the author analyses some important developments on this front. The first section of the article focuses on discussing the present framework of the SCM Agreement, the second section focuses on developments in the European Union (‘EU’) and the United States of America (‘USA’), and finally the third section discusses the way forward for India.
Framework of the WTO SCM Agreement and transnational subsidies
The gaps in the SCM Agreement regarding transnational subsidies have already led to legal challenges, as there are no explicit provisions that address them. On the contrary, certain provisions of the SCM Agreement emphasize territoriality of a subsidy, thereby inferring that cross border or transnational subsidies are out of its scope. To recall, under the SCM Agreement, a ‘subsidy’ is defined as a financial contribution by a government or any public body within the territory of a WTO member country which confers a benefit to the recipient entity and is ‘specific’.
Article 2 of the SCM Agreement which defines ‘specificity’[1] provides that a subsidy must be granted to an enterprise or industry within the jurisdiction of the granting authority. This implies that the recipient of the subsidy must be located within the subsidizing country’s territory, thereby inferring that transnational subsidies are not covered in the scope of the SCM Agreement.
Furthermore, Footnote 63 to Annex IV reinforces this territorial requirement by specifying that, for the purpose of calculating the subsidies, the recipient firm must be in the territory of the subsidizing member country. This provision tries to ensure that only subsidies benefiting firms within the subsidizing member country’s territory are considered. Article 25.2 of the SCM Agreement adds another layer by requiring WTO members to notify the subsidies that are specific and granted within their territory, implying that subsidies granted outside the territory of the subsidizing member are not covered. Additionally, Article 14(a) of the SCM Agreement requires assessing whether a government’s equity contribution deviates from private investor practices within the subsidizing member country's territory. Thus, transnational subsidies present a unique challenge, especially when the government granting the subsidy is not the same as the producing/exporting country’s government.
Despite the above provisions, the SCM Agreement has certain provisions which can be interpreted in a manner to provide room for coverage of transnational subsidies. Article 1.1(a)(1) of the SCM Agreement defines a subsidy as a ‘financial contribution by a government or any public body within the territory of a Member’. It may be argued that the territorial qualifier ‘within the territory of a Member’ applies to the ‘government or public body’ granting the subsidy and not the ‘financial contribution’. This is because the term ‘by a government or any public body’ is not enclosed in commas. Moreover, a key interpretational distinction arises from the use of within the territory of ‘a Member’ rather than ‘the Member.’ The use of the indefinite article ‘a’ suggests that the provision is not tied to a specific Member but applies broadly to any WTO Member. This broader language facilitates the inclusion of financial contributions made by a government in one Member country to a recipient in the territory of another, even when the recipient is outside the subsidizing Member’s jurisdiction. However, this interpretation of the SCM Agreement can be subject to judicial review given the context of the other provisions in the SCM Agreement as explained above.
US and EU approach to counter transnational subsidies
Both the USA and the EU have taken concrete steps to address transnational subsidies. On 25 March 2024, the USA finalized a new law aimed at addressing transnational subsidies.[2] This came after the U.S. Department of Commerce (‘Commerce’) proposed new regulations on 9 May 2023, inviting public feedback and comments.[3] After receiving public feedback, Commerce finalized the rule in March 2024, marking a significant shift in US trade policy to provide stronger tools for ensuring fair competition and addressing the growing challenge of cross-border subsidies. This regulatory shift echoes the legislative ambitions of a bill introduced in Congress in 2021, ‘Eliminating Global Market Distortions to Protect American Jobs Act,’ which had sought to amend the definition of a countervailable subsidy to encompass cross-border financial aids. The bill had defined ‘transnational subsidy’ as any subsidy given by a foreign government to a producer, exporter, or supplier of a product destined for the USA market, even when that production or export does not occur within the subsidizing country’s borders.[4] The need for this change arose from the limitations in existing law, which previously only allowed to countervail subsidies if granted within the same country where the product was made or sold. The issue became more pressing with the rise of foreign initiatives, such as China’s Belt and Road Initiative (‘CBR’), which allegedly affected the US markets.
Unlike the USA, which has taken steps to amend its laws, the EU has relied on the principle of ‘attribution’ within its existing legal framework to deal with transnational subsidies under its anti-subsidy laws. This principle allows the EU to attribute financial contributions made by one country to another, when the latter effectively ‘adopts or facilitates’ those actions. In practice, this means that even if subsidies originate from a third country, they can be attributed to the exporting country in which the beneficiary enterprise is located, provided that the exporting country’s government plays a role in adopting or endorsing those subsidies. A key example of this approach can be seen in the case of certain glass fiber fabrics imported from Egypt (Commission Implementing Regulation (EU) 2020/870, 24 June 2020), wherein the European Commission (‘EC’) imposed countervailing duties on Chinese enterprises based in Egypt. The Commission argued that, although the subsidies originated in China, the government of Egypt had effectively ‘adopted’ them, making them subject to countervailing measures under WTO rules of the SCM Agreement. This approach targeted not only direct subsidies from Egypt, but also indirect subsidies provided by China to its enterprises operating in Egypt.[5] The matter was also litigated by the Egyptian entities in the EU courts. The General Court (First Chamber, Extended Composition) (‘GC’) affirmed the EC’s view, holding that EU law does not require the financial contribution to come directly from the government of the country of origin or export. Instead, it is sufficient for the subsidies to be attributed to the country of origin or export, even if the financial contribution is granted by a third country, such as China.[6] An appeal filed with the European Court of Justice (‘ECJ’) against the General Court's decision was also rejected. The ECJ emphasized that the provisions of the SCM Agreement do not exclude financial contributions originating from one WTO member government to another, as long as they meet the criteria for subsidies. The Court applied customary international law principles, particularly Article 31 of the Vienna Convention, interpreting the agreement in good faith by considering its ordinary meaning, context and purpose.[7]
Way forward for India
India may also sooner than later consider addressing transnational subsidies to protect its domestic industries from unfair competition. The transnational subsidies, granted by foreign governments to companies in third countries, may result in goods being exported to India at artificially low prices, potentially harming local industries. Currently, India’s CVD framework aligns with the provisions of the SCM Agreement. However, subsidies granted by foreign governments to companies in third countries were treated as countervailable if the host country played a role in accepting or facilitating those subsidies.
It remains to be seen if India could consider a similar approach if evidence on record shows that such subsidies significantly impact Indian markets. It may augur well for India to issue a guidance on the way forward on this front so that the trade and relevant authorities can handle such cases. The guidance could inter alia outline the conditions under which transnational subsidies could be treated as countervailable. By drawing insights from the frameworks established by the USA and the EU, India has the opportunity to refine its trade defence mechanisms and protect its industries. The approach India takes moving forward will play an important role in responding to the evolving dynamics of international trade.
[The author is an Associate in International Trade & WTO practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]
[1] A subsidy is specific if it is granted to ‘an enterprise or industry or group of enterprises or industries’
[3] US DOC proposal, as available here.
[4] Bill defining ‘Transnational subsidy, available here.
[5] Commission Implementing Regulation (EU) 2020/870, available here.
[6] Available at: CURIA - Documents
