Do Russia's plans for new subsidies comply with its WTO commitments?

18.01.2013

AEB Business Quarterly, Autumn 2012

WTO is not just about duties, it is about fair international competition.

Russia has undertaken the commitment, under its Protocol of Accession to the WTO, that upon accession the Russian Federation would either eliminate or modify all subsidy programmes so that any subsidy provided would not be contingent upon export, or upon the use of domestic over imported goods.  Russia also declared in its Protocol of Accession that any subsidy programme in place at the time of accession, or established after accession, would be administered in conformity with the WTO Agreement on Subsidies and Countervailing Measures. 

Situation 

The Russian Federation intends to establish a new type of subsidy, under the sub-programme "Technical and Technological Upgrading and Innovative Development" of the 2013-2020 Government Programme for Development of Agriculture and Regulation of Agricultural Products, Raw Materials and Food Markets (approved by Russian Government Resolution No. 717 dated 14 July 2012). This would provide financial support out of the federal budget to agricultural machinery manufacturers in the form of compensation for any revenue shortages arising from discounted sales to agricultural producers.

The yet to be effected Resolution of the Government “On the approval of the Rules for providing subsidies from the federal budget to agricultural equipment manufacturers to reimburse lost profits from sale of agricultural equipment to producers of agricultural products” establishes new rules setting out in more detail the terms and conditions under which the Ministry of Agriculture will administer this subsidy scheme.

A first reading of the draft legislation allows some preliminary conclusions to be drawn regarding its compatibility (or not) with WTO law. 

Analysis

Is the proposed measure a subsidy within the meaning of Article 1 of the WTO Subsidies and Countervailing Measures Agreement?

The measure in question seems to fulfil the required elements of a subsidy. That means that it is a financial contribution which is being given by the government of a WTO Member, and provides a benefit to the recipients in a way that the recipient could not get from the market, e.g. through bank loans or other financial instruments.

More specifically, the Draft Resolution provides, in paragraph 2, that: “The subsidies are granted in the amount of 15 per cent of the price of the goods sold to producers of agricultural products, exclusive of value added tax. The subsidy provided to an enterprise is equal to a discount granted in the amount of 15 per cent on the cost of the sold equipment. The subsidies are granted within the scope of budget allocations duly envisaged to the Ministry of Agriculture of the Russian Federation for the purposes indicated in clause 1 hereof.”  The financial contribution seems to take the form of a direct transfer of funds, such as a grant, falling within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement.

This direct transfer of funds could arguably provide the recipients of the subsidy with a financial benefit which would not be available to them on the market. The determination of a market benchmark is a technical and complex exercise. However, it seems safe to say that no bank or other commercial lender, or other entity, would give away money to agricultural equipment manufacturers in order to compensate for their decision to sell their equipment with a discount.

Is the proposed measure a subsidy which is specific within the meaning of Article 2 of the SCM Agreement?

The title of the Draft Resolution is “Rules for providing subsidies from the federal budget to agricultural equipment manufacturers to reimburse lost profits from sale of agricultural equipment to producers of agricultural products.” In addition, paragraph 1 of the draft rules provides that the subsidy will be provided only to “self-propelled agricultural equipment  (tractors, grain and combine harvesters)”.  There is therefore a de jure  restriction on the identity of possible recipients who must be manufacturers of the specific agricultural equipment to qualify for this subsidy.

In this sense, the measure in question should be deemed as a ‘specific subsidy’ within the meaning of Article 2.1(a) of the SCM Agreement because the legislation pursuant to which the granting authority operates explicitly limits access to the subsidy to certain enterprises. Being a ‘specific subsidy’, it can be challenged by any party affected (a WTO member country) and is, therefore, an actionable subsidy.   

However, if such a measure is also considered to be a prohibited subsidy, there is no need to establish its specificity under Article 2 of the SCM Agreement.

Is the proposed measure a prohibited subsidy within the meaning of Article 3.2 of the SCM Agreement?

Article 3 of the SCM Agreement defines prohibited subsidies as those deemed to be specific ipso facto, without the need to establish the applicability of Article 2 (see paragraph 3 of Article 2 above). The only thus element that a WTO Member needs to establish in order to prove their existence is that one of the two conditions below exist:

3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited:

(a) subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I5;
(b) subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.

3.2 A Member shall neither grant nor maintain subsidies referred to in paragraph 1.”

The draft Resolution provides that “The aggregate value added created by the enterprise during the reporting period during supply, manufacture and sale of a unit of the equipment model on the territory of the Russian Federation amounts to at least 35%.”

Is that legal? 

The answer lies in WTO case law. The Appellate Body in the Canada – Autos  case stated that a proper examination of each specific value-added requirement is necessary, in particular as regards the actual value-added levels required so as to scrutinize properly whether the requirements could in fact be satisfied without the use of domestic goods. In addition, the Appellate Body found that, if the level of the value-added requirements is very high, it is possible that the use of domestic goods would be necessary to fulfil such a high requirement. However, if the level of the value-added requirements is low, the Appellate Body considered that it would be easier to meet the requirements without using domestic goods.

In the present case, the question to ask would be whether, theoretically, a manufacturer could satisfy the value-added requirement without using any domestic goods.

The draft rules provide that the 35% value-added requirement to be created within the Russian Federation will be calculated by providing, inter alia, evidence that:

“- the applicant must perform the following operations on the territory of the Russian Federation:

with respect to tractors:
•           frame (where applicable) assembly, welding and painting;
•           production either of the engine or the transmission or the axle;
•           assembly of the engine, transmission, axle;
•           production, assembly and painting of exterior elements;
•           production, assembly and painting of the cabin;
•           installation and painting of the engine unit, axles, transmission and draft hitch(es);
•           installation of the electrical equipment and  water equipment systems.

with respect to self-propelled grain and combine harvesters:
•           frame (frame structure) assembly, welding and painting;
•           production either of the engine or the transmission or the axle(s);
•           assembly of the engine, transmission, axle(s);
•           assembly (and painting where necessary) of exterior elements;
•           production, assembly and painting of the cabin;
•           production, including welding (where necessary) and painting of the bunker (if envisaged);
•           production, including welding and assembly of draft equipment (platform, adapter);
•           production, including welding and assembly of draft hitches;
•           installation and painting of the engine unit, axles, transmission and draft hitch(es);
•           installation of the electrical equipment and  water equipment systems.”

It can be argued that the requirement to produce either the engine, transmission or the axle of a tractor or harvester as well as the production of the cabin and exterior elements of a tractor or harvester would require the use of domestic goods.

Should this assumption be correct, then it may be that this requirement is contingent upon the use of domestic goods over imported goods, which would make this subsidy a prohibited one within the meaning of Article 3.1.b of the SCM Agreement.

ANALYSIS OF THE MEASURE’S COMPATIBILITY WITH THE WTO GENERAL AGREEMENT ON TARIFF AND TRADE 1994

It could be argued that the proposed measure could also violate Article III.4 of GATT 1994 which provides that WTO members must abide by the National Treatment principle, and must therefore afford to imported products treatment no less favourable than that provided to like domestic products.

Firstly, it seems that in our case imported and domestic agricultural equipment are “like products” within the meaning of GATT Article III:4 and they are in a competitive relationship. It would have to be further examined whether the definition of the products eligible to receive the subsidy is solely based on the origin of the goods, based on the value-added criterion that aims at promoting the use of Russia-originated goods.

In addition, the proposed measure is based on a domestic “law, regulation or requirement”. The fact that private companies would need to take some action in order to comply with the value-added requirement does not mean that there is no governmental requirement. The Panel in the Canada - Autos dispute stated that a “determination of whether private action amounts to a ‘requirement’ under Article III:4 must rest on a finding that there is a ‘nexus’ between that action and the action of a government, such that the government can be held responsible for that action; here the Panel found that the Letters of Commitment containing Canadian value added requirements met the criteria of ‘requirement’ under Article III:4.”

Moreover, the proposed measure affects the “internal sale, offering for sale, purchase, transportation, distribution or use” of the relevant good within the meaning of Article III:4 of GATT 1994. The word “affecting” has been interpreted by the panel in the Canada – Autos case as “any laws or regulations which might adversely modify the conditions of competition between domestic and imported products.” The first paragraph of the Draft Resolution suggests that the subsidy will be provided in order to “reimburse lost profits from sale in the Russian Federation of new self-propelled agricultural machinery and equipment to producers of agricultural products”. It is thus a measure that affects the “internal sale and offering for sale” of the relevant products.

Finally, the proposed measure seems to accord to imported goods less favourable treatment than to domestic goods. However, the Appellate Body in the Thailand- Cigarettes dispute stated that “an analysis of whether imported products are accorded less favourable treatment would require a careful examination grounded in close scrutiny of the fundamental trust and effect of the measure itself, including of the implications of the measure for the conditions of competition between imported and like domestic products. This analysis, need not be based on empirical evidence as to the actual effects of the measure at issue in the internal market of the member concerned.”  The implication of the contested measure for the equality of competitive conditions are, first and foremost, those that are discernible from the design, structure and expected operation of the measure.

The less favourable treatment standard should not be established by an assessment of the degree of likelihood that an adverse impact on competitive conditions will materialise. It must simply be a genuine relationship between the measure at issue and its adverse impact on competitive opportunity for imported versus like domestic products to support a finding that imported products are treated less favourably. In the Canada – Autos case, the panel found that “the Canadian value-added requirement, as a condition for eligibility for the duty exemption, adversely affected the conditions of competition, thereby resulting in ‘less favourable treatment’ to imported products, in violation of Article III:4” of the GATT.

It could thus be argued that the Russian value-added requirement could also be, by analogy, a violation of Article III:4 of the GATT 1994.

Overall, it can be concluded that the proposed new subsidy may be violating Russia’s obligations under WTO law. We would be happy to explain in a following article the possible remedies available to discriminated companies. 

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Ksenia Soboleva

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