Introduction

The United States has upped the ante in its efforts to – what it perceives – rebalance its trade dynamic with other countries. This has inevitably led to a trade war between the United States and other major economies, particularly China. In the middle of this trade war, the United States has also aimed its barrels at India, initiating a dispute at the WTO against India (DS 541) in respect of its alleged export subsidy programmes. The United States has challenged a list of India’s export subsidy programmes as being in violation of the WTO’s Agreement on Subsidies and Countervailing Measures ("SCM Agreement"). In its consultations request of 19 March 2018, the United States has challenged the following programmes operated by India:

  1. Export Oriented Units Scheme and sector specific schemes, including Electronics Hardware Technology Parks Scheme
  2. Merchandise Exports from India Scheme
  3. Export Promotion Capital Goods Scheme
  4. Special Economic Zones
  5. Duty-free imports for exporters

This article presents a brief overview of the issues involved, the claims by the United States, and India’s possible defence at the WTO.

Relevant Provisions of the SCM Agreement

The SCM Agreement disciplines the provision of subsidies by WTO Members to its domestic producers and exporters. Article 3.1(a) of the SCM Agreement specifically prohibits the provision of subsidies that are contingent upon export performance, i.e., export subsidies. However, Article 27 of the SCM Agreement has a special and differential (S&DT) carveout for developing countries in paragraph 1, which recognizes that subsidies may play an important role in the economic development of developing countries.

For the purposes of this objective, Article 27.2 exempts developing countries from the prohibition on providing export subsidies under certain conditions. This category of developing countries has been bifurcated by Article 27.2 as Annex VII countries [Art. 27.2(a)] and non-Annex VII countries [Art. 27.2(b)]. While non-Annex VII countries were permitted to provide export subsidies for a period of eight years from the date of entry into force of the WTO Agreement (i.e., till 2003), a different set of rules applied to countries in Annex VII to the SCM Agreement.

While Annex VII (a) wholly excludes Least Developed Countries (LDC) from the obligation against providing export subsidies, Annex VII(b) identifies a list of 21 countries (including India) which become subject to the provisions of Article 27.2 (b) upon reaching GNP per capita income of $1000 per annum. The 2001 Doha Decision on Implementation-Related Concerns clarified that Annex VII(b) countries can maintain their export subsidies till their per capita income reaches the above income threshold and remains so for three consecutive years ("graduation"). However, considerable ambiguity among WTO members remains over the effect of graduation on an Annex VII(b) Member’s right to continue to provide export subsidies.

Claims by the United States

The trigger for the United States’ dispute apparently is India’s graduation from the income threshold. According to the SCM Committee’s latest annual report (2018), India’s GNP per capita income has been more than $1000 per annum for the years 2014, 2015, and 2016. Thus, according to the United States, India’s provision of export subsidies is inconsistent with the provisions of Article 3.2 of the SCM Agreement, which prohibits countries from either granting or maintaining export subsidies.

Possible defence by India

Before proceeding into the merits of India’s possible defence under the SCM Agreement, it would be pertinent to note that, whether some of India’s impugned programmes are actually subsidies would depend on the actual design, operation and implementation of the scheme. Under paragraph (i) of Annex I to the SCM Agreement (Illustrative List of Export Subsidies), programmes which are designed to remit or drawback import duties paid on inputs used in the production of exported products would not constitute subsidies unless the import duties remitted or drawn back are in excess of those actually consumed in the production of the exported product. This requires the government of exporting Member, i.e, India in this case, to implement a system or procedure of verifying or confirming which inputs are consumed in the production of the exported product and in what amounts.

If the dispute reaches the panel stage, it is highly anticipated that India would argue that it is within its rights under the SCM Agreement to provide the impugned subsidies. In fact, India’s stand has always been that the text of Annex VII(b) (see End Note 1) when read with Article 27.2 (b) (see End Note 2) entitles India to maintain its subsidies for another eight years upon graduation and gradually phase them out. In the past, India has argued that it would not be obliged to eliminate these export subsidies as such upon graduation.

The problem however is the interpretative ambiguity surrounding the relation between Annex VII(b) and the language of Article 27.2(b). The right to provide export subsidies under Article 27.2(b) is for a period of eight years from the time the WTO Agreement came into force. It is therefore in this context that its application to Annex VII countries becomes incongruous as Article 27.2(b) is a time-bound provision (till 2003) and the eight-year extension may apply beyond 2003. India has therefore argued that the provisions of Annex VII(b) with the provisions of Article 27.2(b) need to be harmoniously constructed, so as to permit it to maintain subsidies for eight more years after it graduates.

In fact, in a joint proposal made to the SCM Committee in 2001 by India and other countries, this interpretative ambiguity surrounding the relation between Annex VII(b) and the language was highlighted by India. It was proposed that Article 27.2(b) be amended to reflect that the eight-year countdown for phasing-out subsidies for Annex VII countries would begin from the year they graduate. However, given the morbidity of rule-making at the WTO, the larger WTO Membership has maintained status quo on this proposal.

Conclusion

In the midst of the ongoing trade war and the impasse over the appointment of Appellate Body members, the dispute between India and the United States over India’s provision of export subsidies has raised the stakes for the multilateral trading system. In any case, if India decides to withdraw its export subsidy programmes, then the government may have to consider alternatives within the policy space available under the WTO Agreements to meet its ambitious export targets. Some of these alternatives could be the provision of consumer subsidies, and domestic producer subsidies that are not contingent upon export performance. In the meanwhile, both India and the United States should strive to arrive at a mutually satisfactory solution as desired by the Dispute Settlement Understanding, given the developmental stakes involved and the WTO’s commitment to these goals.