RESTRICTEDWORLD TRADE
ORGANIZATIONG/SCM/W/440
12 April 2001
(01-1888)
Committee on Subsidies
and Countervailing MeasuresOriginal:  English
QUESTIONS AND COMMENTS CONCERNING PROPOSALS
ON IMPLEMENTATION-RELATED ISSUES REFERRED TO
THE COMMITTEE IN THE 15 DECEMBER 2000
DECISION OF THE GENERAL COUNCIL
Questions and Comments of the United States
The following communication, dated 11 April 2001, has been received from the Permanent
Mission of the United States.
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Pursuant to the suggestion of the Chair at the Committee’s informal meeting of 2 April 2001,
the United States wishes to provide the following written comments and questions concerning the
discussion papers submitted by Colombia (G/SCM/W/429, regarding its proposal to amend
footnote 61 of the Subsidies Agreement);  India (G/SCM/W/430, regarding its proposal concerning
aggregate and generalized rates of remission of import duties and inputs consumed in the production
process);  and the Dominican Republic et al.  (G/SCM/W/431/Rev.1, regarding their proposal
regarding Article 27.6 of the Agreement).
The United States welcomes the written submissions that these delegations provided, as they
have helped to clarify both the nature of their concerns as well as the approaches they suggest for
addressing them.  We provide our own comments and questions in the same spirit, with a view to
identifying and clarifying implementation problems and determining whether a basis for a consensus
can be found about possible responses.  We offer these comments and questions without prejudice atthis stage as to whether or not we endorse or concur with any or all of the analyses and conclusions
which those Members proposing clarifications or amendments have advanced.  We look forward to
continuing a serious discussion of these issues in the Committee.
Questions/Comments on G/SCM/W/429, Submitted by Colombia
1. Colombia’s paper focuses on capital good imports that it claims developing countries need to
maintain and enhance their competitiveness in worl d markets.  Colombia points out that “exporting
companies of developing countries are faced with the prospect of higher tax rates than in the
developed countries, owing to the serious problem of fiscal deficit and tariff policies which imposehigh tariffs and taxes on goods in line with their greater degree of processing.”  Moreover, as the
paper points out, these are capital goods for which it is most often the case that there are no domestic
substitutes .  Given this, it is not clear why any country in this position would tax the imports of such
goods in the first instance.  Rather than focusing on developing even more complex rules and
procedures than those currently reflected in the Agreement which would respond to this problem only
indirectly, wouldn’t that country – particularly if it is concerned about international competitiveness –
be better off giving its exporters access to critically needed capital goods at world market prices?G/SCM/W/440
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2. What is the connection between Colombia’s proposal, which concerns the definition of
“consumed in the production process” in footnote 61, and the analysis of the first part of item (h) of
the Illustrative List?  Is it Colombia’s position that the first part of item (h) provides justification for
the proposed amendment to footnote 61?  If so, we fail to see the relationship insofar as neithermentions nor seems to be relevant to the provisions of the other.
3. In paragraph 13 of Colombia’s discussion paper, it is argued that the price of a good is
inexorably linked to its average total cost and, therefore, that taxes that affect any element of that cost
diminish the international competitiveness of the good.
- If we understand this correctly, an average total cost-based argument for indirect tax
and duty rebates cannot be limited logically to capital goods, since it necessarily
extends with equal force to all taxes on all inputs, e.g., real estate and payroll taxes
and income and profit taxes.  If that is so, on what grounds does Colombia limit its
average total cost theory to indirect taxes on capital good imports?  And if, as we
understand it, the theory cannot logically be so limited, what assurance can Colombiaprovide that accepting this theory would not completely eviscerate any discipline
against abuse or manipulation of the provisions of items (h) and (i)?
4. Paragraph 29 of Colombia’s paper appears to say that indirect taxes on capital good imports
should be exempted or remitted, but not import charges, e.g., import duties.  Is our reading correct?
Would the exclusion of import charges be based on the understanding that the provisions of item (h)
are limited to indirect taxes?  Otherwise, what is  the rationale for treating indirect taxes and import
charges differently?
Questions/Comments on G/SCM/W/430, Submitted by India
Aggregate and Generalized Rates of Remission of Import Duties
1. Paragraph 2.7 of India’s paper describes a statistical analysis to be performed in order to
determine the amount of various inputs required for the manufacture of one unit of the final product.
However, the analysis seems only to focus on the types and amounts of inputs without distinguishing
whether or to what extent the inputs in question have historically been sourced domestically orimported.  Is that what is intended, or is India proposing an analysis that would include some type of
assessment of the extent to which the producers of the good in question (in the aggregate) rely on
imports and domestically sourced inputs?
2. If India’s proposal does not contemplate such an analysis, by what process would India ensure
that the aggregate and generalized rate of remission of import duties accurately reflects the aggregate
utilization rate of imported inputs?  Also, would the single  aggregate and generalized rate of
remission of import duties be estimated only on the basis of inputs consumed in production at the
surveyed companies, or does India envisage using a system of multiple  duty remission rates, i.e., one
for each input?
3. The last two sentences of paragraph 2.7 appe ar to suggest that India would calculate an
aggregate and generalized rate of remission of import duties that would reflect the norm of using
100 per cent imports in the production process and th en make a downward adjustment in the case of
an input that is both imported and sourced domestically.  How would that work, given that firms
generally utilize inputs at different rates?  Why not just calculate directly aggregate and generalized
rates of duty remission for each input?   If these sentences refer not to input-specific adjustments, but
company-specific adjustments, wouldn’t such adjustments require the very type of data and recordsG/SCM/W/440
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that India argues that its small enterprises don’t have?  What would prompt such a downward
adjustment on a company-specific basis, and wouldn’t it lead generally to an overrebate situation?
4. How often would the proposed analysis be done?  Does India envision an annual update?
Every 5 years?  What would be the time period?
5. If substitution drawback of import charges is claimed on domestically sourced inputs, how
would India ensure the conformity of su ch substitution drawback with item (h)?
6. Paragraph 2.7 suggests that India would rely, in part, on “market responses” to ensure that the
estimated aggregate and generalized rate of remission of import duties will be neither too liberal nor
too conservative.  While we would agree with the general principle that markets are self-correcting,we aren’t convinced that the type of “ market responses” described here can fully or adequately
substitute for a systematic practice of checking or benchmarking regularly the estimated aggregate
and generalized rate of remission against actual company experience and verifying the accurateness
and completeness of the data underlying the estimate.  Is India proposing that this kind of regular and
systematic benchmarking and verification be done, in addition to relying on “market responses”?
7. We also are puzzled somewhat by India’s stated rationale for this proposal.  The discussion
paper states that the proposal is intended to address a problem facing developing countries, because
small production units find the necessary record-keeping to be onerous and burdensome.
- To the extent that it may be that such record-keeping constitutes a particular burden
for small business, that would not seem to be an issue exclusive to the special
situation of developing countries, nor doe s it explain why the proposed solution
would also apply to the activities of large corporations resident in developing
countries – especially to the extent that those enterprises may be more apt to beinvolved in export trade and competing with the enterprises, both large and small, of
other Members who may not be similarly advantaged.
- Moreover, we would question whether the issue of maintaining a system or procedure
to confirm the identity and amounts of inputs consumed in the production process
isn’t really more relevant for examining th e role played by government authorities
rather than enterprises.  In that regard, we believe it is important to note thatreasonable and effective procedures for overseeing the proper operation of indirect
tax rebate schemes and duty drawback systems can be, in themselves, important
safeguards against corruption or incompetency which can hinder economic
competitiveness and faith in public authorities.
Definition of Inputs Consumed in the Production Process
1. In paragraph 3.2 of India’s paper, there is a suggestion that “capital goods” could be read
into the scope of the standard of “consumed in the production process” by means of reference to the
term “catalyst.”  India appears to argue that capital goods are like catalysts in that they undergo nochange or are not literally consumed in the production process.  Since catalysts are covered by
footnote 61, India argues, so should capital goods.  But catalysts typically are consumed in the
production process, in that they are depleted and must be replenished on a regular and often frequent
basis.  The Concise Oxford Dictionary definition that India cites does not dispute this fact, but says
only that a catalyst is a substance that undergoes no chemical change.  Chemical change and depletionare two separate and distinct concepts, and one  does not imply anything about the other, i.e., “no
chemical change” does not necessarily mean “not depleted or otherwise used.”  Moreover, in terms of
“useful life,” catalysts, as a general rule, have a much shorter life span than machines and equipment.
In this regard, catalysts and machines and equipment are very different, and the United States seesG/SCM/W/440
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little basis for reading “capital goods” into the scope of footnote 61 by means of reference to
“catalyst.”
Questions/Comments on G/SCM/W/431/Rev.1, Submitted by Cuba, Dominican Republic,
Honduras, India, Indonesia, Malaysia, Paki stan, Tanzania, Uganda and Zimbabwe
1. As an initial and general matter, the United States is troubled by the assumption that seems to
underlie the paper, i.e., that export subsidies should be perceived as key to developing countries’
efforts to strengthen their industrial sectors and achieve export competitiveness.  Export subsidies are
commonly viewed as inherently distortive; in recognition of this, many Members (including some of
the sponsors of this paper) are seeking the elimination of export subsidies in the ongoing agriculture
negotiations.  It is difficult to understand why the facts should be any different when considered in thecontext of trade in industrial goods.  Any reliance on export subsidies to strengthen one’s industrial
base and achieve export competitiveness can only in the long run fail to ensure that one’s exporters
have developed the right kind of tools needed to compete on their own in world markets.  At the same
time, the use of such subsidies will result in unfair disadvantages being imposed on one’s trading
partners, which will lead in turn to wasteful co mpetition in subsidization, trade frictions and/or
protectionist responses.
While Article 27.1 affirms that Members recognize that subsidies may play an important role
in economic development programmes of developing country Members,  export subsidies are
explicitly discouraged by both the Agreement’s general rules and even in the rules specific todeveloping country Members (e.g., Article 27.4's references to the obligation to phase-out export
subsidies, to avoid increasing the level of export subsidies and to more rapidly eliminate export
subsidies when their use is inconsistent with the Member’s development needs).  Thus, we believe
that in looking at what may be both feasible and appropriate to do with respect to Article 27.6, the
Committee should not lose sight of these general facts concerning export subsidies.
2. On more practical grounds, we note that since the entry into force of the Agreement over six
years ago, there have been no notifications to the Committee or computations made by the Secretariat,
pursuant to Article 27.6, that any developing country Member has yet reached a level of export
competitiveness with respect to any product.  In  light of this situation, on what basis do the
proponents believe that there is a genuine, actual problem that would warrant amendment of these
provisions of the Subsidies Agreement via a procedure under Article X of the Marrakesh AgreementEstablishing the WTO?  Do any of the proponents of the proposal in G/SCM/W/431/Rev.1 believe
that they have reached export competitiveness as defined by the existing provisions of Article 27.6?
If so, on what basis (i.e., according to what percentage of “world trade” and what four-digit section
heading of the HS)?
3. Article 27.5 currently provides that when export competitiveness has been achieved with
respect to a given product for a developing country Member other than those referred to in Annex VII,
it shall phase out its export subsidies on that product over a period of two years.  Thus, if export
competitiveness were to be identified today for a developing country Member in the above-described
circumstance, it would need to phase out its export subsidies over a period ending in 2003.  However,under the general rules governing the use of export subsidies by developing country Members set
forth in Article 27.2 and 27.4, the Agreement’s general prohibition of export subsidies comes into
force as of 1 January 2003 for most developing country Members (i.e., developing country Members
other than those referenced in Annex VII).  Therefore, as a practical matter, any decision to extend the
period used to define export competitiveness in Article 27.6 would likely benefit only thosedeveloping country Members referred to in Annex VII – a development which would logically raise
some questions about the balance of rights, obligations and benefits originally agreed in the Subsidies
Agreement.G/SCM/W/440
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4. Putting aside for the moment the question of whether any modifications or clarifications
might separately be made to Annex VII itself, the group of Members presently referenced in the
Annex includes a number of least-developed and other poor countries which likely lack the resources
to engage in significant export subsidization or which have notified the Committee that they currently
maintain no specific subsidies as defined by the Agr eement.  This means, therefore, that any decision
which might be made to change the terms of Article 27.6 along the lines suggested by this proposal
would necessarily be of use only to a limited subset of the developing country Members referenced in
Annex VII.
5. In light of the above, the United States is concerned that a modification of the requirements of
Article 27.6 along the lines suggested in W/431/R ev.1 would enable certain Members to secure
significant export market shares in specific products for considerable periods of time, in part throughthe use of export subsidies, at a time when most other Members – both developed and developing –
would not enjoy similar advantages.  This would seem to provide scope for exacerbating, through
artificial means, the disparities among the competitive positions of developing country Members.
- If certain Members are permitted to extend (and, potentially, expand) their use of
export subsidies in product lines where they’ve achieved or may be achieving export
competitiveness, how would this impact t hose developing country Members that are
having to discontinue export subsidization, or those least-developed or poorer
Members without the resources to export-subsidize on such a scale?
- Moreover, for those developed countries which have recently enhanced their
preferential market access programmes in order to help the poorest and
least-developed countries increase the benefits they derive from the multilateral
trading system, there are legitimate questions to be asked as to whether such
modifications to Article 27.6 could take away much of what the preferenceprogrammes are intended to provide, viz., by enabling some countries to claim
through export subsidies market access opportunities that might otherwise be newly
opened for those intended to benefit from the trade preferences.
6. The proposal points to the need to factor out volatility in the international market as one
leading reason for extending the period to determin e export competitiveness from two to five years.
This may well be a legitimate concern in situations where a developing country Member having amarket share below 3.25 per cent of world trade experiences a sudden one- or two-year increase due
to extraordinary and temporary developments largely beyond its control.  However, this logic would
obviously be less persuasive in circumstances wh ere a developing country Member’s share of world
trade may already be above 3.25 per cent, and perhaps well above that level, for two or more
successive years for reasons largely or exclusively unrelated to market swings.  How would thisproposal ensure that the extension of the export competitiveness period operated only to correct the
legitimate problem of a change in a Member’s share of world trade resulting from externally-imposed
volatility?
7. Another justification cited for extending the period for determining export competitiveness is
the vulnerability of developing countries to external influences, such as natural disasters.  Natural
disasters, of course, will not be limited to those few developing countries which will be able to make
use of these provisions, as modified.  Why wouldn’t those countries be made even more vulnerable by
the ability of some to continue to use export subsidies, while they would not be?  Moreover, in
situations of serious natural disasters, one has to question more fundamentally whether stretchedfinancial resources are best dedicated for use as wasteful export subsidies rather than to meet more
pressing social and infrastructural needs.G/SCM/W/440
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8. The proposal also suggests that “once the share of their export of a product decreases to a
level below 3.25 per cent in world trade of that product,”  those developing countries should
automatically be permitted to reintroduce export subsidies.  In light of other provisions of Article 27,
in particular paragraphs 2, 4 and 5, for what period of time do the proponents suggest that such
reintroduced export subsidies be permitted?  How would the reintroduction of such subsidiescorrespond to the obligation set forth in Article 27.4 that “a developing country shall not increase the
level of its export subsidies”?
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