Specificity test

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DRAFT

THE SPECIFICITY TEST IN THE AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES

Olga Dios

Introduction

The specificity test is a requirement of the Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) to determine whether a domestic subsidy is subject to the application of countervailing duties. Articles 1.2 and 2 of the SCM Agreement establish the legalcriteria for a determination of specificity.

In practice, this test is only performed on domestic actionable subsidies, since all prohibited subsidies -those which are contingent on exports or upon the use of domestic goods over imported goods- are deemed to be specific, as established by Articles 2.3 and 3.1 of the SCM Agreement.

This paper explains why the members of the WTO members arrivedat the consensus for the need to establish such a test, thus limiting the scope of application of countervailing duty laws. The first developments of the theory in domestic law in the United States, as well as at the regional level in both CUSTA and NAFTA, will be examined along with European Community Law on specificity in subsidies. Furthermore, this paper also discusses the negotiating historyof this issue from GATT 1947, to the Tokyo and Uruguay Rounds Subsidies Agreements. Finally, it presents the current state of the law as construed under the GATT and WTO jurisprudence.

Prior to address the legal consequences of the specificity requirement and the political reasons behind why it was agreed upon, it is necessary to understand the economic rationale underlying the requirement ofspecificity for the purposes of imposing countervailing duties on a domestic subsidy.

The first question that arises is: what constitutes a subsidy? From the purely economic perspective, there is no unique answer to that. It is used synonymously with many types of government action favouring private actors, such as direct transfers of money, providing goods or services at below market prices,or, more broadly, a group of governmental policies favourably affecting the competitive position of private entities[1].

Why are subsidies of concern to the multilateral trading system? According to Sykes[2], the answer stems from three main reasons:

- Subsidies can undermine market access commitments of importing nations;
- They can divert customers from one exporting nation to another;and,
- Many observers blame subsidies for “tilting the playing field” in a way that is unfair or objectionable, independently of whether or not they frustrate the market access expectations associated with GATT/WTO commitments, distorting comparative advantages and producing a less efficient global division of labour, leading to lower economic welfare.

However, not every time one of thesemeasures is enacted it has a negative effect on the overall trading system. Therefore, an issue that is unresolved is under which circumstances should a subsidy be actionable and subject to the imposition of countervailing duties?

Among the various views on this matter, the one that apparently prevailed in the mind of the drafters of the SCM Agreement was the assumption that any subsidy conferredby programs of general application is uniform across industries. This means that subsidies affect all industries equally and do not confer any net advantage. They are therefore counteracted by an offsetting movement in exchange rates[3]. On the contrary, programs that have a narrow applicability and target particular industries might be assumed to confer a relative advantage.

Specific subsidieshave an impact on the costs of production of firms having selectively received this subsidy. This leads to an artificial overproduction of subsidized products as compared to what these firms would have chosen to produce, had the price of subsidized products been able to reflect their real cost of production[4]. Had the subsidy been granted generally to all industries, the beneficial effect of...
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