2.1 Indifference to the Purpose and Effects of Subsidies

This inability to make any distinction whatsoever between domestic subsidies, so that all such subsidies are potentially susceptible to being countervailed or to being challenged at the multilateral level, is surely one of the most criticized aspects of the SCM Agreement. Many commentators, indeed, deem this lack of ability to distinguish between certain types of subsidies to be problematic, particularly so in the context of the global fight against climate change.Footnote ²⁰ This is all the more true in that the SCM Agreement contains no exception provision sheltering environmental subsidies or certain other types of public policy measures. Furthermore, it does not contain any reference to GATT’s general exception clause, Article XX, and there is very little support for the proposition that this provision would be of any help in a dispute involving a domestic subsidy under Part III of the agreement, let alone in a CVD investigation where such a subsidy would be under scrutiny.Footnote ²¹ It should nevertheless be emphasized that the US has recently taken the opposite stance, going so far as to state that ‘the ability to invoke exceptions under Articles XX and XXI of the GATT 1994 for claims under the TRIMs and SCM Agreements is clear.’Footnote ²² Be that as it may, the issue described here is not purely academic: environmental or ‘green’ subsidies are routinely countervailed when scrutinized by investigating authorities in countervailing duties proceedings.Footnote ²³ For instance, in the course of the CVD investigation, by the United States Department of Commerce (USDOC), into forged steel fluid end blocks from the Federal Republic of Germany, a German producer challenged the USDOC’s determination that its receipt of a certain tax relief was countervailable on the grounds that the relevant taxes are imposed to decrease ‘greenhouse gas emissions and not to raise government revenue’.Footnote ²⁴ The US Court of International Trade rejected such arguments and sustained the USDOC’s determination with respect to those programs, stating that ‘neither the statute [i.e. the implementing statute of the SCM Agreement] nor the regulation considers the purpose of the tax’ and that ‘neither [the USDOC] nor the court is at liberty to evaluate the environmental rationale of the [impugned] measures’.Footnote ²⁵

The other aspect of subsidy disciplines that has drawn criticism is the lack of soundness from the standpoint of economic rationality.Footnote ²⁶ To be sure, subsidy disciplines may provide a useful remedy to a domestic industry facing harmful trade-distorting subsidies.Footnote ²⁷ It is also important to recognize that trade remedies, such as countervailing duties, can function as a kind of ‘release valve’ for certain economies.Footnote ²⁸ By providing a mechanism through which countries can address concerns about the impact of foreign subsidies on their domestic industries, these remedies help make the international trade regime more acceptable to some stakeholders and governments. The existence of such instruments allows states to manage domestic pressures and perceived unfairness, thereby contributing to the overall stability and legitimacy of the global trading system.

The purpose of this article is therefore not to suggest that those disciplines should be eliminated altogether. That being said, an exhaustive appraisal of the current framework should not obscure the fact that it has been suggested that the SCM Agreement is ‘one of the least economics-informed agreements in the WTO’Footnote ²⁹ and that ‘economic theory on CVDs is clear and unambiguous – there is nothing to be said for them – and law and economics scholars have an obligation not to obfuscate this simple truth’.Footnote ³⁰ The overall assessment of the regime is that it tends to be welfare-reducing and self-harming for the country imposing CVDs.Footnote ³¹ Furthermore, even under the assumption that subsidies’ disciplines are to be properly construed ‘not in terms of global economic efficiency, but rather as an entitlement of domestic producers to be totally immunized from the effect of foreign subsidies’,Footnote ³² which is probably a fair depiction of the regime,Footnote ³³ the framework nevertheless fails to withstand scrutiny from an economic standpoint. Assuming arguendo that the purpose of the disciplines concerning domestic subsidies hinges on the idea that domestic firms are ‘entitled to that domestic market outcome which would have resulted from a “fair”, competitive process, by which is meant one which has not been “manipulated” by foreign government subsidization’,Footnote ³⁴ it is nonetheless necessary to acknowledge that the SCM Agreement goes beyond this purported objective of restoring the conditions of competition by neutralizing the effect of the subsidy. This is because the SCM Agreement fails to duly assess whether a ‘benefit conferred’ by a subsidy has any actual impact on the conditions of competition, i.e. whether it actually lowers the recipient’s marginal costs of producing the good in question.Footnote ³⁵ In this regard, it must be stressed that the injury to the domestic industry (or threat thereof) requirement in CVD investigations found in Part V of the SCM Agreement and also the corresponding factor for actionable subsidies, found in Article 5(a), do not call for an examination of whether a particular impugned subsidy causes injury. Rather the relevant inquiry focuses on whether the imports of the subsidized product, irrespective of the nature of the magnitude of the subsidy, do so.Footnote ³⁶ What is more, the determination of whether foreign and domestic industries are on the proverbial ‘level playing field’ requires a ‘comparison of the totality of domestic and foreign policies and economic environment’.Footnote ³⁷ Yet, the SCM Agreement simply does not mandate such an examination. Lastly, even though the focal point of a serious prejudice analysis under Article 6.3 is the ‘effect of the subsidy’,Footnote ³⁸ this does not ensure that Part III of the SCM Agreement contemplates that only ‘unfair’ subsidies are actionable. Indeed, the argument that a complainant, challenging an actionable subsidy under Part III, has necessarily to come with ‘clean hands’, i.e. to demonstrate, in each case, that its like product is non-subsidized as a requirement to establish displacement or impeding of exports of its like product into a third country market within the meaning of Article 6.3(b) and 6.4 has been outright rejected.Footnote ³⁹ Also, there is no basis in the text of the other parts of the agreement to support a ‘clean hands’ requirement.Footnote ⁴⁰ To be sure, the complainant’s subsidization of its like product could nonetheless come into play as part of a panel’s causation analysis ‘[d]epending on the arguments and evidence that the parties put before [it]’.Footnote ⁴¹

As a result, under the current framework, domestic subsidies conferring no actual advantage to the foreign industry are subject to being challenged on the multilateral plane or countervailed at the domestic level. The preamble to the US’ implementing regulation of the SCM Agreement offers a striking example of a subsidy providing no net benefit to the recipient but that may nonetheless be countervailed:

One is left wondering why, under such counterfactual, the US automobile industry should now be entitled to the protection afforded by CVDs if it was not in the status quo ante, i.e. before the promulgation of the seat belts requirement. Under this example, the financial contribution provided by the foreign government has done nothing to alter the conditions of competition in favor of its industry, i.e. the ‘benefit’ resulting from the foreign government’s grant to its automakers exists only if the costs imposed by the regulation to which the financial assistance is linked are ignored. It is also worth underlining that the abstract conception of the benefit bestowed upon the recipients, suggested in the example above, means that the exercise of finding a benefit ignores the governmental constraints under which the foreign industry is operating. This could prove to be more costly and burdensome than those under which the US industry is operating. This benefit determination also ignores whether the domestic industry (here, the US industry) is itself required to install seat belts in back seats and, if so, whether it can avail itself of a similar subsidy program.Footnote ⁴³ As commentators have noted, in such an example, where a foreign subsidy is countervailed despite its lack of effects on the conditions of competition in favor of the foreign industry, ‘[t]he resulting duty is a wholly artificial disincentive which not only leads to socially inefficient utilization of the plant but also denies American consumers the benefits of purchasing goods at prices which reflect their true resource costs’.Footnote ⁴⁴

That being said, one needs to acknowledge that this inability of the system to detect true subsidization of an industry ‘except by chance’,Footnote ⁴⁵ while unfortunate, is surely an inevitable corollary of the limited resources that can be devoted to proceedings involving domestic subsidies. Indeed, it is unrealistic to suggest that investigating authorities or WTO panels could conduct a holistic assessment of the net impact of a government intervention on the competitive position of an industry with regard to every alleged subsidy as such exercise would certainly be overly burdensome and error-prone.Footnote ⁴⁶

2.2 On the Necessity of Having Recourse to Subsidies to Overcome Global Challenges

It is a truism to state that subsidies are an effective tool that may be employed by governments to remedy market failures,Footnote ⁴⁷ i.e. situations where there is an ‘inefficient distribution of goods and services in the free market’.Footnote ⁴⁸ It is also conventional wisdom that the knowledge-creation process is one that is prone to a sub-optimal outcome; i.e. if left solely to market forces, there is underinvestment in aggregated R&D expenditures and subsidies are an efficient mean to overcome this failure.Footnote ⁴⁹ The environment is a sector where market imperfections are particularly acute and where government intervention is not only warranted but also necessary.Footnote ⁵⁰ In order to meet the net-zero emissions target by 2050 and to limit the global temperature increase to 1.5°C above the pre-industrial level as called for by the Paris Agreement,Footnote ⁵¹ it is necessary to develop technologies, that are generally capital and knowledge intensive.Footnote ⁵² Particularly noteworthy is the fact that the International Energy Agency considers that technologies not yet available on the market could deliver up to 35% of the reductions needed to meet the net-zero emissions target by 2050.Footnote ⁵³ There is thus little doubt that a pressing need for massive R&D will prevail in the short- and mid-term.Footnote ⁵⁴ Nevertheless, as made abundantly clear from the above, the righteousness of a subsidy and the importance of an underlying wrong that it seeks to address provide no justification to avoid subjecting the financial contribution to CVDs or to a multilateral challenge.

3.1 A GATT Article XX-like Exception

One of such proposals is surely the introduction in the SCM Agreement of ‘an explicit environmental exception along the lines of Article XX of GATT’.Footnote ⁵⁷ As underlined above, the SCM Agreement contains no such exception clause in its text and the prevailing line in commentary is that, under the current state of the law, GATT Article XX cannot be relied upon to avoid an action under Part III of the SCM Agreement or countervailability under a domestic investigation.Footnote ⁵⁸ From an economic perspective, the fact that GATT Article XX is available to safeguard equivalent trade measures, such as taxes,Footnote ⁵⁹ or even for measures potentially far more trade-restrictive, such as a complete ban of a product, is somewhat puzzling.Footnote ⁶⁰ Yet, this may appear unsurprising given that the SCM Agreement, as mentioned previously, is not to be understood as a product of economic rationality.

Conceptually speaking, the idea of ensuring greater consistency among the treatment of environmental measures by including an environmental exception in the SCM Agreement is surely appealing – and even warranted. It is rather from a practical standpoint that the proposal loses attractiveness. Wording would crucially matter here. Drawing from treaty practice, it is reasonable to posit that reliance on this exception would be subjected to a requirement that the measures, for which the protection of the exception is sought, are not applied in a manner that would constitute a means for arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, as is the case per the chapeau of GATT Article XX. Then, depending on the option chosen by the drafters, the impugned subsidy would either have to be ‘necessary to’ or relate to the protection of the environment. Each formulation has its potential problems.

First, an exception that would safeguard measures ‘necessary to’ the protection of the environment would probably be too restrictive to have any meaningful effect on the capacity of WTO Members to implement subsidy programs without having to face a potential challenge of those programs, whether at the multilateral or the domestic level. This would entail subjecting the impugned subsidy to a necessity test, that is determining whether there would be an alternative measure that ‘achieve[s] the same level of protection while being less trade restrictive’.Footnote ⁶¹ Yet, subsidies do not fit neatly into this analytical framework for assessing necessity, which was developed by the Appellate Body.

On the one hand, it is questionable whether subsidies lend themselves well to the exercise of determining whether an alternative less trade restrictive measure exists. Consider a scenario where a government introduces a refundable tax credit that covers 20% of qualified R&D expenditures specifically related to technologies aimed at combating climate change. For the purposes of this example, it is undisputed that the subsidy at hand incentivizes companies to invest in innovative solutions that could significantly reduce carbon emissions and promote sustainable practices. The issue is rather that a complaining government can demonstrate that a similar tax credit with a 17% rate would yield the same results in terms of R&D incentive.Footnote ⁶² It is reasonable to posit that the measure would, in such circumstances, be deemed not ‘necessary’ as a reasonably available measure exists that achieves the same level of protection while being less trade-restrictive.Footnote ⁶³ Nevertheless, this efficient environmental measure was not conceived with a protectionist purpose and would, hypothetically, still be subjected to countervailing duties or a multilateral challenge.

On the other hand, and more fundamentally, we can envision that administering a necessity test would be both intricate and onerous for investigating authorities. Such an endeavor would inevitably result in elevated costs for the participating parties. The multifaceted nature of these evaluations is likely to extend the duration of investigations, thereby further depleting the resources of investigating authorities and the governments and enterprises involved. In light of the considerable administrative complexity that would inevitably arise from the implementation of such a necessity test by investigating authorities, serious doubts may be raised as to whether this constitutes the most promising avenue for reforming countervailing measures disciplines.

Second, an exception designed to cover measures ‘relating to’ the protection of the environment is also not practicable: it is potentially too large. The ‘relating to’ standard exhibits greater flexibility compared to the ‘necessary to’ standard:Footnote ⁶⁴ it requires ‘“a close and genuine relationship of ends and means” between that measure and the [purported] objective of the Member maintaining the measure’.Footnote ⁶⁵ A measure would thus still fall under the ‘relating to’ purview even when a WTO-consistent and less trade-restrictive measure was reasonably available to the concerned government.Footnote ⁶⁶ Hence, it is conceivable that many environmental measures would be covered by an exception drafted in such terms, including measures with an important protectionist component. Measures with a close and genuine relationship with the protection of the environment – and that are thus ‘relating to’ this objective – may well also (either intentionally or unintentionally) serve protectionist purposes depending on their design.Footnote ⁶⁷ To return to the example given above of the R&D tax credit for expenditures that relate specifically to technologies aimed at combating climate change, this measure would, on its face, be considered a measure ‘relating to’ the protection of the environment. Nonetheless, the tax credit could at the same time create an economic advantage that improves the competitive standing of the beneficiary if the financial contribution went beyond what is required to address the market failure it seeks to remedy.Footnote ⁶⁸ This could be the case for example if that hypothetical tax credit were raised to 30% while a 20% rate would suffice to eliminate the relevant distortion. Surely, at some point, the magnitude of the tax credit could be such that it could no longer be ‘reconciled with, or … rationally related to, the policy objective of the measure’Footnote ⁶⁹ and would therefore fail to satisfy the requirements of the chapeau of the exception clause that the measure not be ‘applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade’.Footnote ⁷⁰ This threshold would certainly be high, and determining whether it was reached would be a complex and costly exercise, especially for participants in a CVD investigation.Footnote ⁷¹ The possible result with the introduction in the SCM Agreement of an environmental exception framed in such a manner is that countries would lose oversight (whether in the form of actionability or countervailability) over a significant tranche of financial contributions as potentially every kind of subsidy is subject to be designed in a protectionist fashion.Footnote ⁷² This risk, along with the administrative complexity associated with administering such a test, would most likely deter several economies from considering it an acceptable solution.

3.2 Reinstatement of a ‘Green Light’ Category of Subsidies

Drawing on the principles of the defunct Article 8 of the SCM Agreement, numerous proposals have been made to reinstate a category of non-actionable and non-countervailable subsidies in this agreement.Footnote ⁷³ Acknowledging the importance of subsidies as environmental measures, the proposals elaborated by commentators have sought to design an operational framework that would shelter certain financial contributions from both multilateral and unilateral actions.Footnote ⁷⁴

In criticizing the arbitrariness of the conditions set out by Article 8 as well as the inherent administrative difficulties linked to the application of this expired provision, Howse questioned whether it would ‘be possible to think about a new approach to “non-actionability” in the climate change context’Footnote ⁷⁵ and suggested a ‘principle-based approach’.Footnote ⁷⁶ This would make policies listed in Article 2.1 of the Kyoto ProtocolFootnote ⁷⁷ non-actionable subject to the requirement that the subsidies in question, ‘on the basis of available evidence and sound scientific and economic principles’, ‘contribute to the goals of the Kyoto Protocol’Footnote ⁷⁸ and their consistency ‘with the basic principles of the GATT/WTO system, including non-discrimination and transparency’.Footnote ⁷⁹

In a similar vein, Cosbey and Mavroidis suggested a ‘hybrid approach’ incorporating elements of both GATT Article XX and Article 8 of the SCM Agreement.Footnote ⁸⁰ Under their proposal, ‘subsidies that pursue global public goods – goods that have benefits beyond the border of the implementing country’, which include subsidies ‘that internalize externalities with respect to climate change’, ‘that advance research and development in clean technologies’ as well as basic research and development and public health subsidies would be sheltered.Footnote ⁸¹ The authors leave open the question of whether their proposed exception clause should be accompanied by an equivalent of the chapeau to GATT Article XX, but seem to imply that such a clause could usefully serve in distinguishing protectionist from genuine environmental measures. They give the following example: ‘[a] straight [feed-in tariff (FIT)] would easily pass such a filter, but a FIT with local content requirements would not, as LCR is a tool of industrial policy’.Footnote ⁸²

In a recent contribution, Cima and Etsy have made a proposal according to which the SCM Agreement’s rules pertaining to domestic subsidies ‘should be refocused on a questioned subsidy’s purpose and whether the impact of the subsidy is sustainability-positive or negative’.Footnote ⁸³ Under this suggested reform, subsidies would be divided into four categories: green box (allowed), a category of non-actionable and non-countervailable subsidies ‘that produce positive sustainability outcomes and relatively little in the way of trade distortions’; yellow box (rebuttable presumption of consistency with WTO law); red box (rebuttable presumption of inconsistency with WTO law); and double red box (prohibited – obligation to phase out).Footnote ⁸⁴

Leonelli and Clora, for their part, focus on net-zero subsidies (i.e. ‘subsidies aimed at mitigating climate change and promoting and accelerating the net-zero transition’Footnote ⁸⁵) and articulate a conceptual framework that would allow for a classification between three groups of such subsidies: group I (unconditionally justifiable, non-actionable, and non-countervailable), group II (conditionally justifiable), and group III (unconditionally prohibited). In essence, their proposed demarcation line hinges on an analysis on ‘the extent to which specific categories of net-zero subsidies may tackle a specific environmental externality and address market or regulatory failures, as opposed to pursuing reshoring goals (protective application) or de-risking goals (discriminatory application)’.Footnote ⁸⁶ Their proposal would provide for excluded categories of subsidies, namely energy, electricity, and industrial decarbonization.

The above-mentioned proposals all have their merits and would certainly constitute a positive development in trade law in the context of the fight against climate change. The principal issue with these proposals is rather whether they are genuinely likely to garner the necessary consensus among WTO Members for their implementation.Footnote ⁸⁷ The starting point for this discussion may be to recall that even though the scope of Article 8 was rather narrow, its introduction was ‘very controversial’.Footnote ⁸⁸ Upon the expiration of its provisional application, WTO Members could not reach an agreement on the extension of the application of this circumscribed provision. As the issue of governmental support to their domestic enterprises is highly sensitive, it seems unlikely that countries will reach an agreement on what would be tantamount to granting a ‘free pass’ for certain types of financial interventions – no matter how commendable those interventions might be. This is particularly true because of the potential for virtually all financial contributions to be designed in a protectionist manner or to cause adverse effects to a foreign industry, be it as an unintended consequence of the granting of the subsidy. In this respect, Leonelli and Clora lucidly observed that an ‘[a]greement on the application of a “green box” approach to unconditionally justifiable but unquestionably trade-distorting renewable energy and decarbonization subsidies would be very difficult to reach’.Footnote ⁸⁹ Moreover, reaching such an agreement under the WTO framework is probably illusory in the short-term, due to the prevailing dominance of China in green technologies, such as solar panels and electric vehicles.Footnote ⁹⁰ It is difficult to conceive that the US (and potentially even the European Union) would be prepared to adopt such a regime under these circumstances.

According to some proposals, the solution to this issue of potential lack of scrutiny on certain financial contributions may involve applying a stringent test to the qualification of the subsidy to ensure that the financial contribution in question meets the criteria for the permitted category. While this suggestion could make the proposals more acceptable in light of the concerns expressed by WTO Members with respect to the potential trade-distorting impacts of subsidies, it also renders it less appealing from the standpoint of administrative simplicity. Whichever would ultimately be the scope of the ‘green light’ category of subsidies, determining that a financial contribution does indeed fall into this category would certainly require the application of an intricate weighing and balancing exercise. This, on the one hand, would need to involve an assessment of the measure’s contribution to the protection of the environment or to the achievement of the net-zero transition. On the other hand, an evaluation of its protectionist conception or trade-distorting effects would be needed. In a context where the bulk of the litigation pertaining to subsidies occurs in the course of CVD proceedings, one can wonder whether the implementation of such tests would really be advisable. Needless to recall that those proceedings are already costly for investigating authorities as well as for interested parties (be it industries or governments); adding a highly subjective test would further complicate them. What is more, it would leave uncertainty ex ante as to what environmental subsidies are sheltered from actionability and countervailability. In sum, while the intent to protect environmental subsidies through a ‘green light’ category approach is commendable, the practical implications of such proposals may undermine their effectiveness and lead to less clarity in international trade law.

4.1 The Original ‘Net Subsidy’ Approach

As mentioned in Section 2 above and as made abundantly clear from the travaux préparatoires, the Uruguay Round’s Negotiating Group on Subsidies and Countervailing Measures’ fundamental objective in strengthening subsidies and countervailing disciplines was addressing trade-distorting subsidies. Yet, as underlined by the GATT Secretariat in its checklist of issues for negotiations, this fundamental objective was to be understood in light of the necessity of reaching an adequate balance on the use of both domestic subsidies and countervailing measures.Footnote ⁹¹

It is within this negotiation mandate that the ‘net subsidy’ approach was put forward, first by Canada. In a discussion pertaining to how multilateral rules could be refined to diminish uncertainty as to what subsidy practices should be subject to action or CVDs, Canada has formulated a first iteration of the ‘net subsidy’ approach, namely the principle that ‘the determination of the amount of the subsidy should be based on the difference between the subsidy on imports and the subsidy on domestic production of the like products’.Footnote ⁹² In explaining its proposal, Canada clarified that:

Thus, according to the rationale put forward by Canada, in a scenario where both the domestic and the foreign industry received subsidies, a CVD would not constitute a solution to address a trade distortion but would rather be an additional cause of this distortion. As for the procedural aspects of this preliminary approach, it was suggested that the domestic industry should be required to disclose the amount of subsidies it received, and that the exporting country should be allowed to ‘bring forth verifiable evidence of subsidization of producers of the like products in the importing country’.Footnote ⁹⁴

The proposal did receive support from certain participants who emphasized the equity rationale of the approach. The supporters of the ‘net subsidy’ method stressed that, to the extent that subsidies must be regarded as an unfair trading practice,Footnote ⁹⁵ the ‘unfairness’ only arises with respect to ‘the difference between the respective levels of subsidies’Footnote ⁹⁶ received by the domestic and the foreign industry. They also argued that the suggested approach could potentially ‘discourage industries from bringing frivolous cases’.Footnote ⁹⁷ The suggested approach, of course, did not achieve consensus among the participants: some claimed that the approach would complicate the administration process of CVD investigations, while others contended that its effect ‘would be to freeze the existing levels of subsidies rather than to encourage their elimination’.Footnote ⁹⁸ Another argument raised against the implementation of the ‘net subsidy’ approach was ‘that this approach had already been to some extent present in the determination of material injury, where conditions of a domestic industry would reflect the fact that it had been receiving a subsidy’.Footnote ⁹⁹

The notion of ‘net subsidy’ as introduced by Canada was eventually considered carefully by participants and garnered support from several delegations.Footnote ¹⁰⁰ Participants were even provided with an overview of how this conceptual proposal could be implemented in practice. Two approaches were preliminary suggested: the ‘double-tracked’ and the ‘sequential’ investigative approach. Essentially, under the ‘double-tracked’ approach there would have been simultaneous procedures where subsidies received by the domestic industry would be treated like those received by the foreign industry allowing for a finding of the per unit level of subsidization for both industries. The final CVD rate for the foreign industry would then be obtained by subtracting the corresponding level of subsidization enjoyed by the domestic industry.Footnote ¹⁰¹ For its part, the ‘sequential’ investigative approach, upon reaching the stage of definitive duty under the framework currently foreseen by the SCM Agreement, would instead have mandated a supplemental inquiry into subsidies received by the complaining industry. The purpose of this supplemental inquiry would have been to assess a definitive CVD rate for the foreign industry that would equate to the conditional duty (as determined at the first stage) less the amount of subsidization of the domestic industry of the like product.Footnote ¹⁰²

The proposed concept did not ultimately achieve consensus among the participants. Amongst the reasons given for the rejection of this concept, the most compelling for opponents might have been the idea that ‘the objective of countervailing duty action was to offset injury caused by subsidized imports and not to deal with subsidies in general’Footnote ¹⁰³. Be that as it may, this argument underscores a fundamental principle of the SCM Agreement as it stands: the focal point of an assessment of a subsidy’s effects is the injury to the domestic industry. The proposal of introducing the ‘net subsidy’ concept was reiterated by Canada in the early 2000s in the context of the Doha Round. As is the case for the entire negotiation cycle, this proposal did not materialize.Footnote ¹⁰⁴

4.2 The ‘Renewed Net Subsidy’ Approach

As is the case for the original version, the ‘renewed net subsidy’ approach determines the applicable CVD rate by calculating the difference between the per-unit subsidy for the foreign (exporting) industry and that for the domestic (complaining) industry. However, unlike the original version, the renewed approach does not purport to account for all subsidies received by the domestic industry but rather to focus on those subsidies that benefit the domestic industry and that are substantially similar to those found to benefit the foreign industry. To put it differently, under this proposed approach, subsidy programs found to benefit the foreign industry would be scrutinized, and where equivalent programs would also be available to the domestic industry. The foreign and the domestic subsidy programs would offset so that the foreign subsidy would not count in the calculation of the CVD rate of the foreign industry. To be clear, a determination of ‘equivalence’ of the relevant subsidy programs would entail a finding that the design and operation of both programs, as well as the magnitude of the benefit respectively provided by those programs, are sufficiently comparable to each other. Where this comparability could be established, this would result in a full offset, meaning that the importing country’s program would not be countervailed at all.Footnote ¹⁰⁵ At the operational level, determining whether the domestic industry had benefited from equivalent subsidies than those found to benefit the foreign industry would require the investigating authority to examine the subsidy programs that benefited the domestic industry by applying the same investigative methodology it had applied to determine the existence of countervailable subsidies used by the foreign industry.Footnote ¹⁰⁶ A finding of equivalence could be based either on the similarity between (1) the respective programs’ purpose and structure or between (2) the purpose and the magnitude of the benefit. Finding equivalence on the first factor could for instance happen in a scenario where the fiscal legislations of both the exporting and the importing country respectively provide for a tax credit that equals 20% of the capital cost of expenditures resulting from the installation of solar panels on eligible manufacturing buildings, and both industries have been found to use the respective tax credits. As for the second equivalence factor, an example illustrating a possible finding of equivalence would be where the exporting country’s fiscal legislation provides a refundable tax credit for apprenticeships of 1000$ for each hired apprentice working in a prescribed sector. No such tax credit would exist in the importing country, but the ministry of labor of that country would manage a program pursuant to which enterprises are entitled to a 1000$ grant for each hired apprentice working in a prescribed sector. The investigation reveals that the foreign and the domestic industry have respectively used the program available in their country. Here, despite the notable differences in the design of the two subsidy programs (the former is a foregone revenue under Article 1.1(a)(1)(ii) of the SCM Agreement, whereas the latter is a direct transfer of funds (i.e. a grant) under Article 1.1(a)(1)(i)) an equivalent benefit for a similar purpose is nonetheless provided by the governments to their respective industry.

Here is an example of how the ‘renewed net subsidy’ approach could be implemented in practice: Country X is investigating imports of certain widgets from Country Y and determines that Country Y’s industry has benefited from three countervailable subsidy programs: an accelerated depreciation program allowing taxpayers to claim the accelerated depreciation of certain manufacturing machinery, a R&D tax credit for eligible expenditures incurred in that country, and a grant to promote energy efficiency through the replacement of fuel-consuming manufacturing equipment by zero-emission machinery. The programs are assigned an ad valorem CVD rate of 3%, 3%, and 4%, respectively. Country X and Country Y happen to have similar tax systems and both the accelerated depreciation program and the R&D tax credit found to have benefited Country Y’s industry thus have their functional equivalent in Country X and are available to, and used by, its domestic industry. Equivalence between the subsidy programs is thus found under factor 1. Under the proposed ‘renewed net subsidy approach’ the equivalent tax programs would offset each other and would be subtracted from Country Y’s CVD rate, meaning that Country Y’s final CVD rate would be 4% as only the energy efficiency grant would be countervailed, instead of the 10% CVD rate that could be imposed under the current prevailing methodology.

The ‘renewed net subsidy’ method, akin to the original proposal, is founded on principles of fairness and economic soundness. Indeed, both rely on the idea that the petitioner ‘should come forward with “clean hands”’Footnote ¹⁰⁷ and that the distortion induced by a subsidy exists to the extent that it leads to an improvement in the competitive standing of the beneficiary. Subsidy programs that are respectively available to both the foreign and the domestic industries should not in theory improve the competitive standing of the foreign industry relative to its domestic counterpart. What is more, as a matter of equity, it is doubtful why the petitioning industry could complain about the financial contributions it also receives from its own government. Some may be tempted to argue that the solution to correct the ‘unfairness’ that arises from this situation lies in the foreign industry also bringing its own CVD petition in order to have imports of the original complainant’s like product also hit by CVDs, thereby leveling the playing field in both markets. This proposal appears to be a viable solution only if the respective economies of both industries are of comparable size and the trade flows of the product in question are analogous. Behm provides an example of the disproportionality of the effects of CVDs on industries where there is no comparison of the respective significance of the share of the output that is exported to the other country. By referring to the US and Canada, he explains that a disbalance exists due to the fact that ‘a relatively large percentage of Canadian production is exported while in the United States the major portion of production is for the internal market’.Footnote ¹⁰⁸ He hypothesizes an example wherein a US firm and a Canadian firm are respectively given a similar subsidy by their respective government for a product both firms can sell in both countries. He explains that ‘[b]ecause of population differences, application of each of the countries’ respective countervailing duty laws would result in the potential imposition of duties on ninety percent of the Canadian firm’s potential output while the United States firm would face a countervailing duty on only ten percent of its potential output’.Footnote ¹⁰⁹ This hypothetical serves to illustrate the inherent inequity of cross-CVD petitions in markets with disparate economic scales: the trade remedies applied respectively by both governments simply do not match each other in a way that would fully restore the conditions of competition across the economies in question.

Although it is true that, for reasons of equity, all subsidies benefiting the petitioning industry should duly be taken into account (as proposed under the original ‘net subsidy’ method), these considerations cannot prevail here due to the necessity to propose a credible approach that is likely to be acceptable in the eyes of WTO Members. This explains why my proposal is limited to netting out the substantially equivalent subsidies benefiting the respective industries. Under the ‘renewed net subsidy’ approach, the faculty of a member to countervail injurious subsidized imports would solely be limited by the subsidy programs it offers to its own industry, thereby leaving great latitude to respond to ‘unfair’ subsidies benefiting the foreign industry. Limiting the assessment to substantially equivalent programs is further justified from the standpoint of efficiency and administrative simplicity. Upon presentation of credible information to the effect that an alleged subsidy being investigated has a substantial equivalent in the importing country, the investigating authority of that country should be required to make a determination regarding the existence and the comparability of the program in question. This should generally be a fairly simple determination to make. A positive determination to this effect should render moot all other aspects of the investigation regarding the program in question and there should be no further inquiry into this program as a matter of judicial economy.

It should be acknowledged, however, that the proposal would not shelter all economically justified subsidies that purport to address climate changes, let alone all other global issues. The above practical hypothetical that applies the ‘renewed net subsidy’ method has consciously singled out the environmental subsidy (i.e. the energy efficiency grant) to underline this possibility. But as the saying goes: ‘perfect is the enemy of the good’ and this prospect should therefore not impede the implementation of a methodological approach that would constitute a great improvement compared to the current rules. Furthermore, it should not be overlooked that as the fight against climate change intensifies, governments will likely adjust their respective subsidy programs to ensure equivalence. As recently held by the ICJ, States have a duty to co-operate for the protection of the environment. This duty arises both under climate change treaties and other environmental treaties and customary international law.Footnote ¹¹⁰ Consequently, and even though the possibility of isolated opportunistic actions by governments designing their subsidies in a fashion to retain the faculty to countervail foreign similar subsidy programs may not be ruled out, it is reasonable to believe that the proposed method could ultimately protect many environmental subsidies. Of course, the approach suggested here would not solve the issue of the consideration of a complainant’s subsidization of its like product in the context of a challenge of an actionable subsidy under Part III of the SCM Agreement. The renewed net subsidy approach, as proposed in this article, would not prevent the challenge by a WTO Member of a subsidy granted by a foreign government to its like products even though that complainant provides itself subsidies, whether equivalent or not, to its own industry. While providing a definitive solution to this deficiency in the multilateral framework for subsides is beyond the scope of this article, there is no doubt that it is an area where improvements would be welcome. The method proposed in this article could serve as a starting point in order to advance thinking.