RESTRICTED
WORLD TRADE G/SCM/Q2/AUS/14
10November 1997
ORGANIZATION(97-4909)
Original: English Committee onSubsidies
andCountervailing Measures
SUBSIDIES
Replies toQuestions Posed bytheEUROPEAN COMMUNITY1andKOREA2
Regarding theNewandFullNotification ofAUSTRALIA3
Thefollowing communication, wasreceived 24October 1997, from thePermanent Mission
ofAustralia.
_______________
REPLIES TOQUESTIONS POSED BYTHE EUROPEAN COMMUNITY
Question:
(a) Passenger Motor Vehicle Export Facilitation Scheme (PMVEFS) andTextile Clothing and
Footwear Import Credits Scheme (TCFICS)
Australiaclaimsthatneitheroftheseschemesconstitutesasubsidy.TheCommunitycannot
accept thisconclusion andwould askAustralia toanswer thefollowing questions:
(1) Dotheschemes involve afinancial contribution from theGovernment? (For
example, Government Revenue foregone ornotcollected -Article 1.1(a)(ii)).
(2) Isabenefit thereby conferred (Article 1.1(b))? Ifnot,whynot?
(3) Isthesubsidy contingent upon export performance (Article 3.1(a)) andtherefore
specific (Article 2.3)?
(4) Inview oftheabove, does thesubsidy notfallintotheprohibited category
(Article 3)?
SubjecttoAustralia'sanswerstotheabovequestions,itseemspossiblethatboththeschemes
involve theprovision ofexport subsidies, which aretherefore prohibited under Article 3ofthe
1G/SCM/Q2/AUS/11, G/SCM/Q2/AUS/12.
2G/SCM/Q2/AUS/13.
3G/SCM/N/3/AUS.G/SCM/Q2/AUS/14
Page2
SCM Agreement. Since both schemes involve exemptions from import duty conditional upon
exports, itisdifficult toseehowanyother conclusion canbereached.
Could Australia therefore givefulldetails ofitsplans tophase outthesubsidies, indicating
thelevelofsubsidy tobeprovided eachyearuntil phase out?
DidAustralia consider notifying either scheme under Article 28oftheAgreement?
Response:
(1) ThePMV scheme operates toprovide forimports ofproducts thatareeither notproduced in
Australia orforwhich thereisonlyalimited supply, atreduced levels ofduty. Australia hascompletely
vacated thesmall andlightcarmarket segment. Instead theyareimported from anumber ofother
destinations, including theEC,Japan, Korea, andtheUnited States. Asignificant proportion ofthese
imports would beimported dutyfree. Similarly imports ofluxury cars,especially forcarfleets, would
beimported from countries suchasGermany dutyfree. Themechanisms forallowing such an
interchange forthepurposes ofglobalization areachieved through tariffpolicies suchasimport credits.
Thetariff regime isnotoperated forrevenue butrather protective purposes. Inourviewthemethod
ofoperation ofthescheme issuchthatitdoesnotconstitute anotifiable subsidy. Thegeneral PMV
Plan, including tariffs, doesprovide assistance totheindustry andsomayinaneconomic sense be
regarded asaform oftransfer from consumers totheproducers andimporters. Thisisaseparate
question toitsstatus under theWTO.
TheTCFScheme hassimilar aspects, though theindustries arequitedifferent andsothePMV
andTCFPlandooperate indifferent ways. Beneficiaries under theTCFScheme gainadvantage from
purchases ofimport credits made byimporters togainaccess toaconcessional method ofentry similar
tothose made available under Australian tariff concession andpolicy by-law systems. Inbriefthe
latterprovide, interalia,forreduced tariffs onproducts thatarenotcompetitively produced inAustralia
orwhere theGovernment hasdecided tofacilitate dutyfreeimports despite theexistence ofalocal
industry thatwould otherwise benefit from thetariff arrangements. Again, inourviewthemethod
ofoperation ofthescheme issuchthatitdoesnotconstitute anotifiable subsidy. Thegeneral TCF
Plan, including tariffs, doesprovide assistance totheindustry andsomayinaneconomic sense be
regarded asaform oftransfer from consumers totheproducers andimporters. Thisisaseparate
question toitsstatus under theWTO.
(2) Theissue ofbenefit, oradvantage, under theschemes iscomplex, especially ifonetriesto
differentiatebetweenbenefitfromtheimportcreditarrangementsandotheraspectsofthePlans,including
thegeneral tariff levels. Manufacturers benefit from thePlans asawhole butsodoimporters, both
offinalproducts andintermediate goods. Exporters inother countries arealsomajor beneficiaries
ofthePlans. Thedirect advantage gained bytheimport credit isofcourse atthetimeofimportation
andsothedirect beneficiaries areAustralian consumers, theimporters andoverseas suppliers.
Only asmall proportion ofautomotive components manufacturers benefit directly from the
automotivescheme,sincetheirimportrequirementsarelimited.Forthem,importcreditsaretransferred
toclient companies tosecure business orsoldatadiscount toimporters. Major beneficiaries areforeign
carcompanies without manufacturing operations inAustralia, cardealers andparts suppliers and
distributors whoobtain andusecredits earned bythemanufacturers fortheirownbenefit.
(3) No.Asindicated inG/SCM/Q2/AUS/10 Australia doesnotregard theschemes asfalling under
SCM Article 3.1(a).G/SCM/Q2/AUS/14
Page3
(4) No,asindicated above.
Thecurrent Plans forboththePMV andTCFindustries rununtil2000 when theEFSand
ICSwillbeabolished. TheAustralian Government hasannounced thatthearrangements beyond then
willofcourse beconsistent withAustralia 'sinternational obligations, including those under theWorld
Trade Organization SCM Article 28wasconsidered nottoberelevant tothetwoPlans.
Question:
(b) TheFactor (f)Scheme
Australia claims thatthisscheme doesnotconstitute asubsidy. TheCommunity cannot
accept thisconclusion andwould askAustralia toanswer thefollowing questions:
(1) Does thescheme involve afinancial contribution from theGovernment? (For
example, Article 1.1(a)(iii) oftheAgreement.)
(2) Isabenefit thereby conferred (Article 1.1(b))? Arethegoods purchased formore
thanadequate remuneration (Article 14(d))?
(3) Isthesubsidy specific (Article 2.1(a))?
(4) Isacommitment toincrease domestic value-added acondition ofreceiving the
subsidy? Ifso,isthesubsidy prohibited under Article 3.1(b)?
Subject toAustralia 'sanswers totheabove questions onthisprogramme, itseems possible
thattheFactor (f)scheme constitutes asubsidy, andthat, totheextent thatitiscontingent upon
increasing domestic value-added, itistobeprohibited under Article 3.1(b). CanAustralia provide
details ofplans tophase outthissubsidy ortobring itintocompliance withtheAgreement by
eliminating thedomestic content requirement?
Response:
(1) ThePharmaceutical Benefits Scheme (PBS) ensures thatAustralian consumers haveaccess to
acontinuous supply ofsafeandefficacious pharmaceuticals atareasonable cost. However indoing
this,theGovernment, asthemonopsony purchaser ofpharmaceuticals through thePBS, suppresses
theprices paidtopharmaceutical manufacturers fortheir products, with aresultant impact on
manufacturing, research andinvestment activities inAustralia. TheGovernment makes payments to
pharmaceutical manufacturers through theFactor (f)Scheme tocompensate forthelowprices paid
through thePBS. These payments aremade asnotional price increases onarange ofproducts listed
onthePBS, regardless oftheirorigin. There aresome industry development aspects tothescheme
andweareconsidering whether weshould notify thescheme totheCommittee, eventhough itwould
beimpossible todifferentiate between thedifferent aspects ofthescheme andtodetermine theextent
ofanybenefit. Thiswillbeconsidered aspartofawider review under thenextfullnotification.
(2) Thecompensation payments topharmaceutical companies lifttheprices paidfornominated
products tothose prevailing intheECmarket. Presumably theECwould notconsider thattheprices
initsmarket areinexcess ofadequate remuneration.
(3) Theanswer tothisdepends onwhether payments areconsidered tobesubsidies. Theactual
payments arelimited toaparticular industry. Rather, itprovides amechanism tocompensate forPBS
prices thatfallbelow world andEuropean averages.G/SCM/Q2/AUS/14
Page4
(4) Oneofthequalifications forparticipation isvalue added inAustralia bythemanufacturer
involved. Even assuming forthesakeofargument thatthemeasure wasaspecific subsidy intheterms
oftheAgreement, thenitwould stillnotbeinbreach ofSCM Article 3.1(b). Most, ifnotall,subsidies
haveasacondition, expressed inonewayoranother, thatthere beavalue added inthecountry
concerned. How often doesacountry intheECorelsewhere provide aninvestment incentive for
acompany toproduce product inanother country. However thescheme doesnotrequire acompany
tousedomestic overimported product, i.e.theprohibited conditionality setoutinSCM Article 3.1(b).
Thecurrent Factor (f)Scheme ends in1999. TheAustralian Government announced a
replacement scheme inApril 1997. Thisnewscheme continues tocompensate thepharmaceutical
industry fortheeffects onactivity ofthelowprices negotiated bytheGovernment under thePBS.
Question:
(c) Sub-federal programmes
When willAustralia beinaposition tonotify allspecific subsidies granted bystate
governments?
TheAustralian Industry Commission indicated thatconsiderable amounts ofinvestment
incentives andother subsidies aregranted bystates. Article 25oftheSCM Agreement provides
forthenotification ofthese subsidies; notification wasdueon30June 1995. Until nowthe
Community hasbeen deprived oftheopportunity toreview sub-federal subsidies.
Response:
WehavebeentoallStates andTerritories seeking answers tothequestions thathavebeen
putbytheECandother Members. Wehavenotyethadafullresponse butarefollowing thatup
andwillrespond asquickly aswecan.
Thesubsidies indicated bytheIndustry Commission areinlarge partnotnotifiable tothe
Committee, because theyareonservices notgoods, orarenotspecific. Moreover, theStates are
constitutionally barred fromproviding subsidies (atleastinthesense ofdirect payments) onproduction
orexports ofgoods (apart fromgold, silver andother metals). Accordingly, theprogrammes referred
tointhemainareminor withlittleifanytrade effect. Nonetheless weshallbeseeking toanswer the
questions put.
Inthelonger termweintend amajor exercise inthecontext ofthenextfullnotification in
respect oftheStates andTerritories, inseeking advice onnotifiable measures.G/SCM/Q2/AUS/14
Page5
REPLIES TOQUESTIONS POSED BYKOREA
Question:
A. Textiles, Clothing &Footwear Import Credit Schemes
- Australia explained, initswritten reply (G/SCM/Q2/AUS/10) of23April 1997, thatthe
TCFICS doesnotprovide subsidies within themeaning oftheAgreement onSubsidies
andCountervailing Measures.
- However theinformation inourpossession would indicate thatunder thescheme, reduction
orexemption ofcustoms duties isprovided toTCF manufacturers when theyimport
TCF-related rawmaterials. Specifically, thescheme provides reductions andexemptions
toTCFmanufacturers intheform ofacredit, theamount ofwhich isdetermined bytheir
exports.
- CanAustralia confirm thisinformation?
- Given thatthisscheme seems toinvolve agovernment revenue forgone ornotcollected
(Article1.1(a)(ii))andbecontingentuponexportperformance(Article3.1(a)),canAustralia
elaborate indetail onwhich provisions oftheSCM Agreement itfound thiswasnota
subsidy?
Response:
TheTCFPlandoesinvolve asoneaspect arrangements allowing dutyfreeimport ofproducts
inthesectors.
Beneficiaries under theTCFScheme gainadvantage from thepurchase ofimport credits in
order togainaccess toaconcessional method ofentry similar tothose made available under Australian
tariff concession andpolicy by-law systems. Inbriefthelatter provide, interalia,forreduced tariffs
onproducts thatarenotproduced competitively inAustralia orwhere theGovernment hasdecided
tofacilitate dutyfreeimports despite theexistence ofalocal industry thatwould otherwise benefit
from thetariff arrangements.
Differentiating between indirect benefits under theImport Credit Scheme, andother aspects
ofthearrangements suchasthegeneral tarifflevels andconcessional entry methods isdifficult. Whilst
manufacturers benefit fromthePlanasawhole, importers ofbothfinalandintermediate goods also
benefit. Exporters inother countries arealsomajor beneficiaries ofthearrangements. Thedirect
advantage gained from theimport credit isofcourse atthetimeofimportation sothatthedirect
beneficiaries areAustralian consumers, importers andoverseas suppliers. Inourview themethod
ofoperation ofthescheme issuchthatitdoesnotconstitute anotifiable subsidy. Thegeneral TCF
Plan, including tariffs, doesprovide assistance totheindustry andsomayinaneconomic sense be
regarded asaform oftransfer from consumers totheproducers andimporters. Thisisaseparate
question toitsstatus under theWTO.G/SCM/Q2/AUS/14
Page6
Question:
B. Export Facilitation Scheme Arrangements fortheAutomotive Sector
- Australia explained, initswritten reply (G/SCM/Q2/AUS/10) of23April 1997, thatthe
EFSdoesnotprovide subsidies within themeaning oftheAgreement onSubsidies and
Countervailing Measures.
- However theinformation inourpossession would indicate thatunder thescheme, reduction
orexemption ofcustoms duties isprovided tothemanufacturers ofautomotive machine
toolsandautomotive tooling anddesign, development andproduction services, when they
import related rawmaterials. Specifically, thescheme provides reductions andexemptions
torelated manufacturers intheform ofacredit, theamount ofwhich isdetermined by
their exports.
- CanAustralia confirm thisinformation?
- Given thatthisscheme seems toinvolve agovernment revenue forgone ornotcollected
(Article1.1(a)(ii))andbecontingentuponexportperformance(Article3.1(a)),canAustralia
elaborate indetail onwhich provisions oftheSCM Agreement itfound thiswasnota
subsidy?
Response:
ThePMV Plandoesinvolve asoneaspect arrangements allowing dutyfreeimport ofproducts
inthesectors. Thelevel ofpotential import credits islinked tothelevelofexports buttheirvalue
(i.e.thecredits) isrealized onlyupon importation ofeligible products intheform ofadutyrebate
(i.e.noimports, nobenefits).
Automotive machine tools, andautomotive tooling anddesign, development andproduction
services (excluding royalties) arecovered bythePMV Plan. Note thatsome ofthese areservices,
underlining theglobalizing nature ofthescheme.
Thequestions imply thatthemanufacturers aretheusers ofthedutyfreeentitlements. This
isnotthecaseforalarge majority ofmanufacturers, since import credits earned aretransferred or
soldatadiscount toimporters ofautomotive products (cars, original equipment components andselected
after-market parts). Inamajority ofcases, theuserwhobenefits isnotthemanufacturer butrather
theimporter.
Thescheme operates toprovide forimport ofproducts thatareeither notproduced competitively
inAustralia orforwhich there isonlyalimited supply, atreduced levels ofduty. Australia has
completely vacated thesmall andlightcarmarket segment. Instead theyareimported fromanumber
ofother destinations, including theEC,Japan, Korea, andtheUnited States. Asignificant proportion
ofthese imports would beimported dutyfree. Similarly imports ofluxury cars, especially forcar
fleets, would beimported fromcountries suchasGermany dutyfree. Themechanisms forallowing
suchaninterchange forthepurposes ofglobalization areachieved through tariffpolicies suchasimport
credits. Thetariff regimes arenotoperated forrevenue butrather protective purposes. Again, in
ourviewthemethod ofoperation ofthescheme issuchthatitdoesnotconstitute anotifiable subsidy.
Theoverall Plan, including tariffs, doesprovide assistance totheindustry andsomayinaneconomic
sense beregarded asaform oftransfer from consumers totheproducers andimporters. Thisisa
separate question toitsstatus under theWTO.G/SCM/Q2/AUS/14
Page7
Theissue ofbenefit, oradvantage, under thescheme israther more complex, especially if
onetriestodifferentiate between benefit fromtheimport credit arrangements andother aspects ofthe
Plans, including thegeneral tariff levels. Manufacturers benefit fromthePlans asawhole butsodo
importers, bothoffinalproducts andintermediate goods. Exporters inother countries arealsomajor
beneficiaries ofthePlans. Thedirect advantage gained bytheimport credit isofcourse atthetime
ofimportation andsothedirect beneficiaries aretheimporters andexporters from other countries.