What is the criterion for WTO Compliant Export Incentives Scheme?

[YAGAY andSUN]

The World Trade Organization (WTO) sets specific criteria for export incentives and subsidies to ensure that they align with international trade rules, particularly with regard to fairness, non-discrimination, and the avoidance of trade distortions. These rules are outlined mainly in the Agreement on Subsidies and Countervailing Measures (SCM Agreement) and the Agreement on Agriculture (AoA).

Criteria for WTO-Compliant Export Incentives

To ensure that export incentives are WTO-compliant, they must meet several key criteria that align with the WTO's commitment to fair trade and market access. These criteria are aimed at preventing harmful trade distortions and protecting against unfair competition. Here's a breakdown of these criteria:

1. Non-Export Performance Requirements:

The WTO prohibits export subsidies that require firms to achieve specific export targets as a condition for receiving incentives. For an export incentive to be compliant, it must not be contingent on the amount of goods exported or the destination market.

• Example of Non-Compliant Export Subsidy: A government providing subsidies only to firms that increase their exports, thereby encouraging the expansion of exports over domestic sales.
• WTO-Compliant Approach: Export incentives that do not impose export performance requirements are more likely to comply with WTO rules. Subsidies should be available irrespective of export volume or market destination.

2. Prohibition of Export Subsidies in Developed Countries:

Under the WTO SCM Agreement, developed countries are prohibited from providing export subsidies. The primary goal of this rule is to prevent wealthier nations from giving their exporters an unfair competitive advantage in global markets.

• Developed Countries: These countries are required to eliminate export subsidies for most products. For example, agricultural export subsidies were largely eliminated under the WTO’s Agreement on Agriculture following the Uruguay Round of trade negotiations.
• Developing Countries: Developing countries, however, are allowed more flexibility in applying export subsidies, but they are subject to certain limits and time frames for phasing out these subsidies.

3. Consistency with Specific Commitments and Agreements:

WTO-compliant export incentives must align with specific commitments made by individual member countries in various agreements, such as the Agreement on Agriculture (AoA) or the General Agreement on Tariffs and Trade (GATT).

• Agricultural Export Subsidies: The Agreement on Agriculture requires that developed countries reduce their agricultural export subsidies over time and cap them at certain levels. Developing countries are given more leeway but must also work towards reducing such subsidies.
• Countervailing Measures: If a country perceives that export subsidies from another country are harming its domestic industries, it can apply countervailing duties (anti-subsidy tariffs) to neutralize the effect of the subsidies. Therefore, export incentives must not lead to countervailing duties unless they comply with specific WTO guidelines.

4. Avoidance of Trade Distortions:

WTO rules aim to avoid trade distortions caused by export subsidies that may interfere with the natural flow of goods and services in international markets. Incentives should not distort market prices or create unfair competition.

• Subsidy Caps: The WTO imposes limits on how much subsidy can be given, particularly in sectors such as agriculture, to prevent market distortions.
• Transparency: WTO members are required to notify the WTO about any export incentives they provide, ensuring transparency and accountability.

5. General and Prohibited Subsidies (Under the SCM Agreement):

The SCM Agreement categorizes subsidies into prohibited, actionable, and non-actionable subsidies. Export incentives must fall within the “permissible” categories:

• Prohibited Subsidies: Any subsidy directly linked to exports is prohibited. For instance, if a government provides direct financial support that is contingent upon export performance, it is considered a prohibited export subsidy under the WTO rules.
• Actionable Subsidies: These are subsidies that, while not prohibited, can be challenged if they cause harm to another country (e.g., causing serious injury to domestic industries). They can include export-related incentives but must be justified and not cause market distortion.
• Non-Actionable Subsidies: These subsidies are not prohibited or subject to challenge. For example, government incentives for research and development or environmentally friendly technologies may be deemed acceptable, provided they do not distort trade.

6. Ensuring No Adverse Impact on Developing Countries:

The WTO recognizes that developing countries may need export incentives to support their industries and promote growth. As a result, the organization provides special provisions for these countries:

• Grace Periods and Flexibility: Developing countries are given more time to phase out export subsidies and may apply them more extensively than developed countries, although within certain constraints. These subsidies should not adversely affect the economies of other countries, particularly the least developed countries (LDCs).

7. Notification and Transparency:

To ensure compliance, the WTO requires that members notify the WTO Secretariat about any subsidies they provide, including export incentives. The purpose of this requirement is to ensure transparency in the use of export incentives and to enable the WTO to assess whether they meet the established criteria.

• Regular Reporting: Member countries must regularly report their subsidies, including export incentives, to ensure they comply with the rules and avoid violations.

8. Subsidies to Promote International Competitiveness (No Trade Distortion):

Export incentives may be considered compliant if they promote international competitiveness without unduly distorting trade. For example, subsidies aimed at research and development or improving energy efficiency in production are often seen as legitimate, as they enhance global competitiveness without directly subsidizing exports.

Examples of WTO-Compliant Export Incentives:

• Research and Development (R&D) Subsidies: Incentives to encourage R&D can be WTO-compliant if they do not directly affect export performance but instead focus on improving overall industry competitiveness.
• Environmental Subsidies: Subsidies for adopting environmentally sustainable practices or producing clean energy technologies can be WTO-compliant if they are not linked directly to exports and are in line with international environmental agreements.

Conclusion: For export incentives to be WTO-compliant, they must avoid directly tying the subsidy to export performance, be transparent, not distort market competition, and not violate specific agreements related to agricultural subsidies or other sectors. Developed countries must largely refrain from providing export subsidies, while developing countries have more flexibility but are still subject to specific limits and requirements. The WTO's rules on subsidies aim to maintain fair competition and ensure that incentives do not lead to unfair trade practices or harm other countries' industries.