WORLD TRADE
ORGANIZATIONG/SCM/34
3 August 2001
(01-3851)
Committee on Subsidies
and Countervailing Measures
CHAIRMAN’S REPORT ON THE IMPLEMENTATION-RELATED
ISSUES REFERRED TO THE COMMITTEE ON SUBSIDIES AND
COUNTERVAILING MEASURES IN THE 15 DECEMBER 2000
DECISION OF THE GENERAL COUNCIL
Mr. Chairman, I am presenting this report to the General Council on my own responsibility,
as Chairman of the Committee on Subsidies and Countervailing Measures ("SCM Committee"),
pursuant to the Committee's 9 February 2001 decision as well as at your request.  Because the issues
that the Committee has been considering are highly technical, the report is by necessity an overview,and thus must be read in conjunction with the papers that have been exchanged by Members, the
records of the Committee's meetings on these issues , and the other documents referred to herein.
Mr. Chairman, last December, the General Council referred three issues to the Committee on
Subsidies and Countervailing Measures ("SCM Committee"):  (1) all issues related to Articles 27.5and 27.6 of the Agreement, including the possibility to establish export competitiveness on the basis
of a period longer than two years, and (2) and (3) the issues of aggregate and generalized rates of
remission of import duties, and of the definition of "inputs consumed in the production process",
taking into account the particular needs of developing countries.  The Committee has been engaged in
an intensive work programme to address these issues to try to find solutions to the identified
problems.  In this regard, Members have exchanged many papers containing proposals and reactions
thereto, and I have conducted a series of informal consultations and formal and informal Committeemeetings.
All Members have engaged in these consultations and meetings constructively, and in my
view the debate has been exhaustive.  Attached is a comprehensive overview of the points raised, and
the views expressed by Members, as well as an identification of issues on which there is growingconvergence of views, and issues where divergent views remain.  I believe that this work has been
very beneficial.  First, I see some encouraging signs pointing to a possible solution on one issue, and
second, where differences of view remain, the discussions certainly have increased all Members'
understanding of the very complex and technical issues raised by the referred tirets.
Export competitiveness (SCM Articles 27.5 and 27.6)
In short, Mr. Chairman, in respect of the issue of export competitiveness, I believe, without
prejudice to the positions of any Members, that it would be useful for work to continue on this tiret.
A number of Members have indicated a certain degree of flexibility in respect of some aspects of thisissue, and many Members see merit in addressing the Agreement's lack of clarity on what happens
when a Member loses export competiveness on a product.  The discussions of this tiret have
highlighted the technical complexity of the issues ra ised by the proposals.  Therefore, while there are
encouraging signs of willingness on the part of Members to continue engaging constructively towards
a possible solution, this would necessarily require more work in the Committee.  With this in mind, I
have indicated that Members will have the opportunity to continue addressing these issues in
September.G/SCM/34
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Definition of inputs consumed in the production process
Concerning the definition of inputs consumed in the production process, unfortunately,
divergent views remain and it is my view that consensus cannot be reached in the Committee, not
because of lack of political will but because of an enormous amount of technical problems which
cannot be resolved in this process.  Some Members have noted that footnote 61 was specifically
negotiated to exclude capital goods and therefore could not lend itself to interpretation as including
such goods.  A number of Members also were reluctant to completely forego any rights to pursue
either dispute settlement action or countervailing action in this context.  Members also expressed
concern regarding accuracy and transparency of proposed systems to estimate depreciation associated
with exported goods.  One of the proponents has expressed the view that the Committee hasthoroughly considered the technical aspects of this issue.  Many Members, while taking full note of
the intention behind these proposals, felt that this was not an issue of implementation, but rather an
issue which could only be considered in the context of a new round of negotiations.
Aggregate and generalized rates of duty remission
Members have engaged constructively with proponents including through sharing information
on various Members' domestic duty drawback procedures.  This said, for a number of Members, the
system proposed in respect of this tiret represented an unworkable framework, due to its technical
complexity as well as the general complexity of the issue of duty drawback, and their concerns overthe accuracy and transparency of the proposed system.  The proponent has expressed appreciation for
the efforts of Members in assessing the proposal and in sharing information concerning their own duty
drawback systems, and has acknowledged that these are extremely technical matters that require
further discussion and consideration by experts.  The proponent has indicated a wish to put the
proposal to the side temporarily, to allow for continued consultations with interested Members, buthas made clear that in doing so it has not withdrawn the proposal.  I have accordingly encouraged
Members to continue with these consultations and to  report any developments to me as they occur.
Therefore, discussion of this issue will continue over the month of September.
*  *  *
Mr. Chairman, I would like to take this opportunity to express my appreciation to all
Committee Members for their willingness to engage constructively and to work cooperatively with me
as Chairman, and to the previous Chair of the Committee for her very hard work on these issues.  I
would particularly like to thank the Secretariat fo r the extraordinary amount of support given to me in
this difficult process.  I believe, Mr. Chairman, that my report is balanced, and points to some positive
areas for future deliberations.
_________________________________________
Remo MORETTA
Chairman
Committee on Subsidies and Countervailing Measures
31 July 2001G/SCM/34
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Technical summary
Procedure
1. In paragraphs 6.2 and 6.3 of its 15 December 2000 decision, the General Council referred to
the Committee the following three issues:  (1) all issues related to Articles 27.5 and 27.6 of the SCM
Agreement, including the possibility to establish export competitiveness on  the basis of a period
longer than three years, and (2) and (3) the issues of aggregate and generalized rates of remission of
import duties, and of the definition of “inputs consumed in the production process”, taking into
account the particular needs of developing countries.
2. On 9 February 2001, the SCM Committee adopted procedures for its consideration of these
issues1.  In particular, the Committee decided to examine the issues primarily on the basis of written
proposals by Members, although this would not preclude oral submissions at meetings.  Further, the
Committee decided to conduct its substantive discussions in a series of informal meetings, punctuated
with formal meetings at which the Chair woul d report to the Committee, on his or her own
responsibility, on the discussions that had been held during the informal meetings.  In addition, the
Committee decided that it would be guided in its work by deadlines established by the GeneralCouncil on implementation issues, and that the Committee would direct the Chair to provide an
interim report to the General Council with a view to concluding work by 31 July 2001.
3. In addition to its 9 February 2001 special meeting to adopt the above-described procedures,
the Committee met in informal session to discuss the substance of the referred issues on 2 April, 1
May, 3 May, 31 May, 22 June and 20 July 2001, and in formal session on 27 July 2001.  Concerningthe reporting on the ongoing discussions, the previous Chairperson presented a Chair’s report at the
Committee's regular formal meeting of 3 May; I made an oral report to the General Council on 8 May;
and I summarized the discussions up to now at the Committee's special formal meeting of 27 July
2001.  In between these meetings and reports, I have circulated Chairman’s non-papers and informal
written summaries of discussions, and have held numerous rounds of informal consultations withMembers, in an effort to advance the discussions as much as possible.
4. In accordance with the agreed procedures, Members have conducted their discussions and
consideration of the referred issues on the basis of written proposals by Members, and written
questions and answers exchanged among interested Members.  In addition, certain Members have
submitted technical information as well as suggestions and ideas in respect of some of the proposals.
2
The Committee’s consideration of the referred topics has focused in large part on the technical aspectsand implications thereof.  Members have participated very actively and constructively in thesetechnical discussions.  A number of Members have made clear, however, that they have policy
concerns over any possible weakening of the subsidy disciplines of the Agreement.  These Members
have indicated that for this reason, their substantive technical participation has been without prejudice
to their final positions.
                                                     
1 G/SCM/30.
2 The proposals can be found in documents G/SCM/W/429, G/SCM/W/430, G/SCM/W431/Rev.1, and
G/SCM/W/455.  The questions and answers, and additional submisssion from Members, can be found in
documents G/SCM/W/433-440, G/SCM/W/442-445, and G/SCM/W/447-459.G/SCM/34
Page 4
Export competitiveness
5. In its 15 December 2000 decision (WT/L/384), the General Council referred the following
issue to the Committee:
"6.2 The Committee on Subsidies and Countervailing Measures (SCM Committee) shall
examine as an important part of its work all issues relating to Articles 27.5 and 27.6 of the
SCM Agreement, including the possibility to establish export competitiveness on the basis of
a period longer than two years."
6. Pursuant to the procedures agreed by the Committee, a group of 10 delegations (Cuba,
Dominican Republic, Honduras, India, Indonesia, Malaysia, Pakistan, Tanzania, Uganda and
Zimbabwe) submitted a proposal in respect of this issue3.  Members have exchanged a series of
written questions and responses, as well as additional proposals and ideas responding to the initial
proposal4.  In addition, on 11 June 2001, I circulated a Chairman's non-paper5 which attempted to
draw together a number of elements, ideas and questions that had been put forward by Members in
documents and informal consultations concerning the original proposal.  These documents, and the
discussions based thereon in the Committee's discussions on export competitiveness at theCommittee's informal and formal sessions on the implementation issues, have focused primarily on
technical issues and questions.
7. Turning to the substance, the e xport competitiveness proposal contains two elements:  (1) the
proponents seek a change from 2 years to 5 years for the period over which export competitiveness is
to be established under Article 27.6; and (2) the proponents seek a mechanism to allow developingcountries that have achieved export competitiveness in a product to resume export subsidies on that
product if exports thereof fall below the export competitiveness threshold.
8. The following general points  have been made concerning the proposal in
G/SCM/W/431/Rev.1:
• General – Several Members have expressed concerns about weakening the principles of
the SCM Agreement, in particular the underl ying philosophy that export subsidies are
inherently trade distortive and thus are prohibited; these Members worry about
transforming a system of phasing out export subsidies into one in which such subsidies
would be treated as a tool with which to gain export competitiveness.  Certain Members
have expressed the concern that the proposed combination of lengthening the two-year
period for determining export competitiveness and introducing flexibility concerning thephase-out of export subsidies would effectively write out of the Agreement the obligation
for Annex VII developing countries to remove their export subsidies.  Thus, for certain
Members, the two elements of the basic proposal are mutually exclusive.  Some other
Members have suggested that, as the issue of allowing reintroduction of export subsidies
seems to raise many more questions and complexities than the question of the period for
establishing export competitiveness, perhaps the two issues could be dealt with
sequentially.  A number of Members have signalled that they wish to participateconstructively in the discussion of this proposal, but that nevertheless, such participation
is without prejudice to their positions in respect of the export competitiveness proposal or
any of the elements thereof that the Committee has been considering.
                                                     
3 G/SCM/W/431/Rev.1
4 See footnote 2.
5 Attached as Annex 1.G/SCM/34
Page 5
• Definition of "product" in Article 27.6 – The definition of "product" in Article 27.6 for
purposes of Article 27.5 has been discussed, and the question has been raised in
particular whether the text of this definition (the English text defines a product as a
"section heading" of the Harmonized System) refers to a four-digit "heading" of the HS,
or a multi-chapter "Section" of the HS.  The proponents have noted that the text was
negotiated in English, and argue that the definition of a product as a "section heading" inthe English text of Article 27.6 of the Agreement reflects the negotiators' intention to
define a product as a "section" of the Harmonized System. Proponents have indicated
that they have no flexibility on this point. The Secretariat was asked to look into the
terminology used in the French and Spanish versions of the Agreement, and found that
the corresponding definitional terms used in the French and Spanish versions of
Article 27.6 ("position" and "partida", respectively) refer to the four-digit level, and that
the word "section", which in all three languages refers to a group of HS chapters, appearsonly in the English text.  Some Members have indicated that they believe the correct
interpretation of the definition of product in Article 27.6 is as a 4-digit heading in the
Harmonized System, and that in any case they consider this to be an indispensable
underlying assumption or condition of any potential agreement in respect of export
competitiveness.
• Countries covered by the framework under discussion – Proponents argue that the
proposal would apply to all developing coun try Members, whether or not in Annex VII,
on the basis that Articles 27.5 and 27.6 apply to all developing country Members.
Proponents have indicated that they have no flexibility on this point. Other Members
disagree with the proponents' interpretation of Articles 27.5 and 27.6,  stating thatbecause the eight-year phase-out period for export subsidies of developing country
Members other than those in Annex VII will expire at the end of 2002, as a practical
matter the export competitiveness provisions of the Agreement, and any adjustments
thereto, would be relevant only to countrie s in Annex VII.  Moreover, for a number of
these Members, the limitation to only Annex VII countries would be a necessarycondition of any eventual agreement to a framework on export competitiveness.  In
addition, some Members have indicated that any decision that might be taken in respect
of export competitiveness would need to be revisited should there be a decision in the
General Council in respect of the scope or coverage of Annex VII.
9. Concerning the first element  of the proposal in G/SCM/W/431/Rev.1, (on the establishment
of export competitiveness), the following ar e the main points that have been raised:
• Proposed change to the period for establishing export competitiveness – Concerning the
proposal to change the period for establishing export competitiveness from two
consecutive years as set forth in Article 27.6 to five consecutive years, a number of
Members have indicated that they may have a certain amount of flexibility to extend the
two-year period.  That said, some of these Members have indicated that a change from
two to five years would be too long, and that they could more readily envision anextension to something between two and five years.  Proponents have indicated that they
have no flexibility on this point.
• Procedural aspects – The question has been raised whether changing the two-year period
referred to in Article 27.6 to some longer period could be accomplished by an
interpretation, or only through amendment of the Agreement.  For some Members, such achange would require amendment, which in their view would go beyond the scope of
implementation.  On this point, the proponents have stated that the procedural aspects of
the issue should not be the main focus of the Committee's discussion at this stage, butG/SCM/34
Page 6
that the Committee should rather concentrate on the substance for the time being, with
the possibility of procedural issues being addressed by the General Council.
• Volatility – It has been recalled by some Members that the basic concern underlying the
original proposal is that a developing country Member might erroneously be identified as
having reached export competitiveness, purely on the basis of relatively short-termmarket volatility, due to the brevity of the two-year period in Article 27.6.  In this regard,
the development of a statistical measurement of market volatility has been suggested as
an alternative to the proposed extension of the two-year period.  Under such an approach,
a two-year period over which the export competitiveness threshold was exceeded would
be examined, on the basis of agreed criteria, to determine whether it had been "volatile"
or "not normal" (due for example to exchange rate fluctuations).  If so, then there could
be an agreed interpretation that if a Member exceeded the export competitivenessthreshold over that particular volatile two-year period, it would not be deemed to have
reached export competiveness.
• Trigger for eight-year phase out period – It has been suggested that the eight-year phase
out period for export subsidies would only begin upon an initial
determination/calculation that export competitiveness had been reached, regardless ofwhether export competitiveness had in fact been reached before the period on which the
calculation was based.
10. Concerning the second element  of the proposal (i.e., the possibility to allow developing
countries who have reached and then lost export co mpetitiveness to resume export subsidies) the
following are the main points that have been raised:
• Rationale for and approach to the discussion of the second element – Proponents'
rationale for their proposal in respect of the second element is that the Agreement is
silent and thus unclear concerning what would happen in the event that a developing
country Member loses export competitiveness after having reached it; and also on the
basis that it may take a considerable amount of time for a developing country to reachexport competitiveness, while export competitiveness can be lost very quickly due to
external and internal factors.  Some Members see this as an issue where clarification
would be useful, due to the Agreement's silence on this point.  Other Members have
indicated that of the two elements of the basic proposal, this is the one on which they
have less flexibility, because this second element would effectively free countries fromany obligation to phase out their export subsidies.  Some Members note that the most
complicated and technical questions and concerns that have arisen in the Committee's
discussions have been in respect of this element of the possible framework under
consideration.
• Criteria for loss of export competitiveness – A number of Members, while expressing
openness to exploring the second element of the proposal, have indicated that certain
criteria would need to be established for de termining whether export competitiveness has
been lost, and thus to determine whether the country was eligible to resume export
subsidization on that product.  On this point, the proponents have indicated flexibility.
• Period for determining loss of export competitiveness – On the specifics, Members
generally appear to believe that if there was to be the possibility to resume export
subsidization after a loss of export competitiveness, one necessary criterion would be aminimum period of consecutive years below the export competitiveness threshold (share
of world trade in the product) for the country to be deemed to have lost exportG/SCM/34
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competitiveness.  In this regard, most delegations have suggested a minimum of two
years.  For some Members, there would need to be symmetry of this period with the
period for establishing export competitiveness; that is, if a two year period was decided
for loss of export competiveness, then there should be no change to the two years
specified in the Agreement for establishing export competitiveness.  Likewise, if therewas agreement to extend the specified two years for establishing export competitiveness,
the same period should apply for determining loss of export competitiveness.  Proponents
have argued against such symmetry, indicating no flexibility on this point.  Given their
view that export competiveness can be lost much more rapidly than gained, they thus
maintain their position in favour of five years for establishing export competiveness,
while indicating that they could accept two consecutive years for establishing its loss.
• Threshold share of world trade in a product – Some delegations have argued that, for
determining loss of export competitiveness, the threshold share of world trade in a
product should be lower than that for reaching it, and in this regard have suggested
3.0 per cent for loss of export competitiveness.  Proponents have indicated that they
could accept a 3.0 per cent threshold for loss of export competitiveness.  Other Members
have indicated flexibility in this regard, in particular stating that they could accept the3.25 per cent threshold for loss of export competitiveness.
• Automatic recalculation two years after loss of export competitiveness – It has been suggested
that, under any scheme to re-allow export subsidiza tion after a loss of export competitiveness, the
Secretariat should automatically recalculate the involved Member's share of world trade in the
product in question two years after the loss of export competitiveness.  There seems to be nodisagreement with this suggestion.
• Timing of loss of export competitiveness, and re-gaining of export competitiveness after having
lost it – A number of questions have been raised concerning the implications of the timing of a
loss of export competitiveness and of a subsequent re-gaining thereof.  In particular, questions
were raised concerning what would happen in respect of a loss of export competitiveness(1) during, and (2) after the end of, the eight-year phase-out period for export subsidies referred to
in Article 27.5.  In particular, the questions raised in respect of these scenarios were the
conditions if any under which export subsidi zation be resumed, for how long, and how many
times (assuming repeated loss and re-gaining of export competitiveness).
• EC "stop-the-clock" proposal – In response to the questions under the preceding tiret, the EC
submitted for discussion a "stop-the-clock" approach6.  Under this approach, if a developing
country Member that had reached export competitiveness then lost it during the ensuing eight-
year phase-out period, the "clock" for that phase-out period would be stopped until export
competitiveness was again reached, at which time that Member would have the remainder of its
eight-year period to complete the phase-out of its export subsidies on that product.  If, however,there were less than two years remaining of the eight-year period at the time that export
competitiveness was lost, the Member would have two years to complete the phase-out of the
export subsidies.  Similarly, if export competitiveness were lost after the end of the eight-year
phase-out period, under the "stop-the-clock" a pproach the Member could re-introduce export
subsidies on that product, and then would have two years to phase them out once export
competitiveness was re-reached.  The proponents have indicated their willingness to use this
approach as the basis for further discussion and elaboration in respect of the second element oftheir proposal.
                                                     
6 G/SCM/W/457.G/SCM/34
Page 8
• Possible duration of export subsidization - Certain Members have expressed concern that
under the stop-the-clock proposal there might been an endless loop of export
subsidization, in particular if a country were to fluctuate above and below the export
competitiveness threshold even for extended periods, so long as those periods were less
than the minimum periods for reaching and losing export competitiveness.  It has been
noted in this regard that perhaps a change from two years to some longer period for
establishing export competitiveness might address this concern, in the sense that the
longer the period for establishing export competitiveness, the less the need there might
be for having a "re-entry" mechanism, as a longer period would make the system react
more slowly, thus leading to fewer exits and re-entries.  A further point noted here was
that symmetry of the periods for establishing and losing export competitiveness might be
the most appropriate way to deal with this question.  The point also was made in this
regard that, should there be an extension of the period for establishing exportcompetitiveness, this would provide time for Members to continue to discuss methods to
prevent such ad infinitum  entry and exit in respect of export subsidization.
• Level of subsidy: Several members have requested clarification of the idea in the EC
paper that resumed levels of export subsidies should not be "excessive," as it was not
clear to them how, and by whom, this appropr iate level of subsidy could be determined.
The proponents disagree that there should be any such limitations, noting that the
Agreement does not establish such limits.  The view has been expressed that the
reference to a non-excessive level of subsidization in the EC's stop-the-clock paper
seems to be premised on the assumption that developing country Members subject to the
eight-year phase-out period would phase out their subsidies in a progressive manner overthat period, rather than keeping them fully in place for the whole period and only
removing them, in their entirety, at the end of the period.  It was noted, however, that in
practice the latter scenario might be more probable than the former, especially as in the
view of some Members the Agreement does not require developing countries to
progressively phase out their export subsidies during the phase-out period.  Thus, someMembers have noted that such a cap would operate as an incentive to maintain maximum
levels of export subsidies throughout the phase-out period.  The EC, as originator of the
stop-the-clock idea, has expressed flexibility regarding the level of subsidization, noting
that it probably could accept simply a reference to the level of subsidization immediately
prior to the loss of export competitiveness, rather than trying to identify an appropriate ornon-excessive level.
• Transparency/Monitoring: Some Members have noted that a system such as the one
outlined in the stop-the-clock paper would require detailed monitoring to function
properly.  In this regard, it has been noted that at present there is a lack of basic
transparency concerning Members' subsidies, given the poor compliance with the
Article 25.2 subsidy notification requirement7.  For some Members, there would need to
be a specific transparency requirement if any agreement were to be reached on thesecond element of the proposal.  The question has been raised whether some additional
transparency requirement would need to be established, as it might be evident from a
calculation pursuant to Article 27.6 that a country has reached export competitiveness in
a product, while there might be no information as to whether that product was benefiting
from export subsidies. In this regard, the provisions of Article 25 have been recalled, inparticular Article 25.8 which provides for requests for information concerning subsidies.
The question has been raised whether these provisions would be adequate for monitoring
any export competitiveness system that might be established.  For some Members, a
                                                     
7 The Committee has recently taken positive steps to reduce the burden of notifications, with a view to
improving compliance.G/SCM/34
Page 9
specific transparency requirement would need to be an integral part of any eventual
solution in respect of the second element of the export competitiveness proposal.
Definition of "inputs consumed in the production process"
11. In its 15 December 2000 decision (WT/L/384), the General Council referred the following
issue to the Committee:
"6.3 The SCM Committee shall examine as an important part of its work the
issue[] … of the definition of "inputs consumed in the production process", taking
into account the particular needs of developing-country Members.
12. Pursuant to the procedures agreed by the Committee, Colombia and India submitted proposals
in respect of this issue.8  Members have exchanged a series of written questions and responses in
respect of these proposals, primarily focused on the technical issues raised by the proposals.
Proposals of Colombia
13. Colombia has submitted two proposals concerning capital goods used in the production
process.  The first seeks an interpretation or amendment of footnote 61 to include capital goods as an
input consumed in the production process.  The second proposal involved agreement by Members,under one of three alternative scenarios, to refrain from dispute settlement action or countervailing
action in respect of tax and duty exemptions, deferrals and under one scenario remissions on capital
goods used to produce exported goods.  Under two of the scenarios, all Members could take
advantage of this agreement, while under the third scenario, only developing country Members could
do so.
14. Concerning Colombia's original proposal, a number of Members have expressed various
technical difficulties, in particular concerning Colombia's underlying assumption that footnote 61, and
items (h) and (i) of the Illustrative List of export subsidies, are ambiguous.  For these Members, the
allowance permitted under items (h) and (i) for exemptions, deferrals and remission of prior-stage
cumulative indirect taxes and import charges on inputs consumed in the production process representsa clear carve-out from a general rule, and the cross-reference in those items to footnote 61 makes clear
that capital goods are not included.  Some Members have expressed the concern that under
Colombia's original proposal there could be excessive amounts of tax exemption or deferral on
particular exported goods.  In this respect, the suggestion has been made that, given that the identified
problem is the excessive taxation of imported capital goods, the most direct and effective means of
addressing this problem would be the reduction or elimination of taxes on all capital goods, rather
than only those used for producing exported products.  Colombia has indicated that reliance on tariffsfor revenue needs prevents this solution from being possible.
15. Concerning footnote 61 itself, some Members have indicated that for them the language
defining its scope is clear, and the absence of a reference to capital goods is a deliberate result of
explicit negotiations on this subject, and not an oversight by negotiators.  In this regard, some
Members have indicated in particular that the word "catalysts" in footnote 61 does not in their viewlend itself to an interpretation that would include capital goods.  Thus, for some Members, the
                                                     
8 G/SCM/W/429 and G/SCM/W/455 (Colombia), and G/SCM/W/430 (India).  India and Colombia
were asked whether they could rationalize or combine their proposals in respect of inputs consumed in theproduction process.  While India's initial reaction was that  Colombia's approach might not address all of India's
concerns, at the SCM Committee's 20 July informal and 27 July formal meetings, India indicated that it could
associate itself with Colombia's original proposal, as India feels that the issue arises out of a lack of legal clarityin the Agreement.  (See below concerning India's proposal in respect of inputs consumed in the production
process.)G/SCM/34
Page 10
Agreement is clear and therefore this issue is not appropriate for resolution as an implementation
issue.  Further in this respect, some Members have indicated that while they could not agree to amend
footnote 61 as an implementation issue, they would be  prepared to consider such a proposal as part of
a round of negotiations.
16. On the basis of these reactions, Colombia submitted its revised proposal.  In this respect,
Colombia has noted that in presenting its revised proposal it is not departing from the rationale for the
original proposal, i.e., what Colombia sees as a lack of legal clarity in the text of the Agreement, but
rather is seeking to address from a different angle the same issue.  Thus, unlike some other Members,
Colombia believes that through whatever means, this issue is clearly an implementation issue and
should be addressed as such.
17. In respect of the specifics of the revised proposal, under the first scenario, Members would
agree to refrain from dispute settlement action and countervailing action in respect of tax and dutyexemptions, remissions and deferrals by any Member on capital goods used in the production of
export goods.  The second scenario would cover only such tax and duty exemptions and deferrals, and
not remissions, also for all Members.  The third scenario would cover such tax and duty exemptions
and deferrals, and not remissions, for developing country Members only.
18. Concerns that remain open in respect of Colombia's second proposal include (1) whether
accepting this proposal would require amendments to Members' domestic legislation, which some see
as problematic, particularly outside the context of implementing the results of a more comprehensive
negotiating round; (2) a degree of discomfort on the part of some Members with the idea of being
unable even to initiate dispute settlement consultations in respect of the measures described in
Colombia's revised proposal (in which regard, some Members have indicated that they were morecomfortable discussing on the basis of the first than the revised proposal); and (3) whether Colombia
envisaged its proposed stand-still on dispute settlement and countervailing action as being permanent
or temporary.  In this regard, the view has been expressed that such a standstill would be difficult to
accept as a permanent measure, while as a temporary measure, e.g., during a broad negotiating round,
the question of standstills would need to be addressed horizontally, rather than Committee by
Committee.  That said, one Member has indicated its support for the approach in Colombia's revised
proposal, and its preference for the third (developing-country only) scenario.
19. Colombia has indicated that in its view, the Committee's discussion of its proposals has made
clear that developing country Members need to be able to acquire capital goods under positive
conditions as an indispensable element to improve their competitiveness; that there are a number of
factors of a fiscal and other nature that limit the ability of developing country Members to use the
same instruments as those used by developing countries to successfully confront this question; andthat concerning capital goods, the SCM Agreement establishes different conditions in respect of
different types of import charges, in particular duties versus indirect taxes, and that under the
Agreement there are various possible means to achieve the goal of fiscal neutrality in respect of
capital goods.  That said, in Colombia's view, the Committee has exhausted its technical debate on
this issue.
Proposal by India
20. India's proposal on the definition of inputs consumed in the production process, like
Colombia's original proposal in this regard, advocates including capital goods in the definition in
footnote 61 of inputs consumed in the production proces s.  India’s proposal argues that capital goods,
like catalysts, are not physically incorporated in the goods, and that if catalysts, which undergo nopermanent chemical change in the production process, can be considered "inputs consumed", so
should capital goods, which are depreciated during the production process.  In response to a question
raised at an informal meeting of the SCM Committee, India at the Committee's 20 July informal andG/SCM/34
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27 July formal meetings indicated that it could associate itself with the original proposal by Colombia,
as India, like Colombia, believes that this issue arises out of a lack of legal clarity in the Agreement.
21. India's proposal takes a different approach, however, involving firstly the calculation of
amounts of depreciation on capital goods to be attributed to particular exported products, and
secondly the refund of import duties and indirect taxes on imported capital goods based on thisproduct-by-product attribution of depreciation expense.  It was clarified during the Committee's
discussion that India does not propose requiring each individual company to calculate these amounts
for itself, but rather that the amounts would be based on industry-wide average rates of depreciation
for capital goods used in the production of each exported product.
22. In addition to questions of interpretation raised by this proposal (including, in particular,
certain Members' questions over the relevance of the treatment of catalysts to that of capital goods), a
number of technical concerns have been identified in the Committee's discussions of this proposal.  Inthe main, these have to do with issues of transparency and accuracy, and consequent doubts as to
whether the system could ensure that no excessive amount of rebate would be payable.  One major
concern raised by a number of Members has been whether an industry-wide averaging system could
accurately capture the extent of depreciation of capital equipment associated with particular volumes
of particular exported goods.  In this regard, the same general concerns have been raised overindustry-wide averages as were identified in the context of India's duty drawback proposal (see next
section, below).
23. In addition, and specifically in respect of industry-wide average rates of depreciation, it has
been noted that accounting standards, including for depreciation, may vary for tax and other purposes,
and from one industry, or even one company, to another.  In particular it has been noted that althoughthe generally accepted accounting principles ("GAAP") referred to by India do, in fact, include
depreciation schedules, the national tax codes of many countries often allow accelerated depreciation
that is unconnected to accounting useful life.  In view of this, some Members have expressed the
concern that the accelerated depreciation permitted under these codes could lead to an over-rebate of
taxes, and competitive advantages, early in the life of the capital good that might not be offset later in
its life when it is fully depreciated.
24. In addition, it has been noted that in many cases a given piece of capital equipment may be
used to make goods both for domestic consumption and for export, that different capital goods may be
depreciated over varying and sometimes lengthy periods, that some capital goods may be used to
make a range of different products, and that some goods may not easily be identifiable as either
capital goods or final goods, i.e., the definition of the term "capital goods" is not clear.  All of these
issues would complicate the accurate calculation of the amount of depreciation of a capital goodattributable to a unit of a given exported product.  Again, the Members raising these issues have
indicated that their underlying concern is that it would be very difficult in practice to verify that
excessive amounts of depreciation, and thus excessive amounts of duty and tax exemption or rebate
on capital goods, would not be attributed to exported goods.  For these Members, the issues raised
highlight the difficulty of minimizing the negative impact of taxes on export competiveness, while atthe same time guarding against rebates that would unfairly confer a competitive advantage upon
exports.
25. Some Members also have raised the general concern that any multilateral approach to capital
goods would need to be able to be applied by all WTO Members, and have voiced doubts in this
respect over the system proposed by India.  He re again, differences in GAAP among countries have
been cited as one potential problem with such a system, given their potential to generate different
results in different countries applying the proposed system.G/SCM/34
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26. In general response to some of the broad concerns raised, India has argued that no unfair
competitive advantage would be conferred upon exports in light of the fact that the idea of the
proposal is to provide a level playing field for exporters.  Furthermore, in India's view the proposal
would not confer an unfair advantage on exports in view of the fact that while developing country
exporters have to pay customs duty on capital goods, those in other countries either have the facilityof procuring indigenously-manufactured capital goods or importing such goods at a very low rate of
customs duty.
27. In response to some of the more specific calculation-related issues raised, India has responded
that information would need to be maintained by enterprises concerning their annual turnover and the
proportion of their production that is exported, some of which information is already maintained for
taxation purposes.  The de preciation rates would be determined on the basis of GAAP, and allocation
of duty relief to different products produced on a single piece of equipment would not present asignificant problem because most small and medium-sized enterprises produce only a single product
or a very narrow range of products.  The apportionment of use of capital goods as between domestic
and export production would be based on the proportion of production that was exported, and no
remission would be allowed in respect of products sold domestically.  In addition, India has presented
a definition of a capital good.
28. Concerning the question of depreciation for taxation and other purposes, India has explained
that although some national tax codes may allow accelerated depreciation, the depreciation that would
be used for remission or drawback of import char ges on capital goods would be an amount based on
details in the financial statement prepared in accordance with GAAP.  Re garding multiple products
produced on a given piece of equipment, India has explained that the rate of depreciation allowed oncapital goods for the purpose of duty remission would be based on the proportion of annual
production resulting form the use of capital goods which is subsequently exported.  Finally, India has
asserted that its proposal guards against over-rebates by linking the use of capital goods to a certain
quantity of an exported product which would be based on the following factors:  customs duty paid on
the capital goods; rate of depreciation allowed on the capital goods; and the proportion of the actualproduction resulting from the use of capital goods which is subsequently exported.
29. Certain Members have requested further clarification as to which GAAP-consistent financial
statement(s) would be used, and in particular whether such financial statement(s) would be industry
averages over all companies in an industry survey.  Also regarding the use of GAAP, the question has
been raised whether accelerated depreciation would be used if allowed for both tax and accounting
schedules.  Furthermore, India has been asked to  provide a step-by-step explanation of how the
statistics under the proposal would be calculated.
30. India has indicated that the proposal does not envisage calculating average depreciation of all
companies, and that indeed the question of an average financial statement is not a component of the
proposal.  Further, India has stated that the depreciation appearing in the financial statement of a
given entity, rather than the amount of depreciation that was calculated for taxation purposes, would
be used for the purposes of calculating duty remission or exemption.
31. Finally, the view has been expressed by some Members that if the problem is high tariffs on
capital goods, a better and simpler approach to this problem would be to reduce or eliminate import
duties and taxes on imported capital goods.  In this regard, India has indicated that this approach
would not address the needs and problems of developi ng countries.  In particular, India has indicated
that its proposal was made to take into account the imperatives of revenue generation for manydeveloping countries, particularly in view of their frequently narrow tax bases, which may make it
impossible immediately to reduce taxes.  In the view  of India, there is no level playing field where
exported products bear import charges.  India was therefore disappointed that other Members
interpreted the relevant provisions of the SCM Agreement in an over-restrictive manner.G/SCM/34
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Aggregate and generalized rates of duty remission
32. In its decision of 15 December 2000, the General Council referred the following issue to the
Committee:
"6.3 The SCM Committee shall examine as an important part of its work the
issue[] of aggregate and generalized rates of remission of import duties … taking into
account the particular needs of developing-country Members.
33. Pursuant to the procedures agreed by the Committee, India submitted a proposal in respect of
this issue.9  Members have exchanged a series of written questions and responses in respect of this
proposal, primarily focused on the technical issues that it raises.
34. The main idea behind India's proposal on this issue is that the existing rules in the Agreement
concerning the accounting for duty drawback are too difficult for small and medium-sized enterprises,particularly in developing countries.  India therefore proposes allowing developing-country Members
to establish national averages for the use of imported inputs, based on statistical studies and published
sources, instead of requiring every company to maintain its own detailed records of the amounts of
imported and domestically-produced inputs that it uses in producing goods for export.
35. In the initial discussions of this proposal, Members have raised a number of technical and
operational questions.  These include: whether adequate published data would be available to perform
the necessary calculations; whether and how often the averages would be updated; how different
levels of usage of input materials among producers would be taken into account; and in general how
transparency and verifiability would be ensured, and circumvention prevented, such that the final
amount of total duty exemption or remission in respect of a given input would be no greater than theamount of duties actually collected or owing on imports of that input incorporated into exported
products.  A question also was raised about the implications of this proposal for competition (i. e., the
possibility of industry collusion).  In addition, a further question was whether the system proposed by
India in practice could be implemented by all WTO Members.
36. More specifically, some Members have expressed concern over the possibility of over-rebate
due to the fact that under India's proposal the aggr egate rate of duty remission would be calculated on
the basis of the input utilisation rates averaged across many surveyed companies, whose production
efficiencies would necessarily vary.  In this context, some Members have suggested that since
exporters tend to be the most efficient companies in a given industry, India's proposal would tend to
generate over-rebate for exporters.  Moreover, the id ea of sampling an entire industry, rather than just
exporters, has been questioned in the light of item (i) of the Illustrative List of export subsidies, which
refers specifically to exports.  Here, Members have questioned the rationale for India's suggestedindustry-wide averaging, on the basis that if sampling an entire whole industry and sampling just
exporters are both methods of estimating the average duty drawback for a given exported product, and
the latter method is always more accurate than the former, why the proposal should be based on the
former.  Some Members also have noted that while the population of exporters in an industry
constantly shifts (as has been noted by India), the same is true of an industry as a whole, such thatbroadening a survey to include companies other than exporters may not, in fact, increase accuracy.
37. India has replied generally that it has the administrative machinery both to construct the
statistical norms on the basis of company studies and published information, and to verify the norms
on an ongoing basis to ensure their accuracy.  More specifically, India has explained that the extent of
                                                     
9G/SCM/W/430.G/SCM/34
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remission of import charges would be based on statistical norms drawn from a representative sample
of the industry, the results of which would be subject to periodic verification; in other words, duty
remission would be calculated on an aggregate i ndustry-wide basis rather than a company-specific
one.  Concerning the universe of companies to be included in the sample, India has suggested that
exporters are not necessarily the most efficient producers in an industry, noting that instead, exportersoften produce the highest quality goods, which require greater usage of inputs.  Given this, taking an
industry average would not result in excess duty re mission.  Further, India has emphasized that the
quality of the industry survey would depend on statistical sampling based on a representative sample
of the industry.  In this regard, India has indicated that a sampling of just exporters would not give an
accurate picture, as in a dynamic industry it would be difficult to determine exactly who exports
goods.
38. Some Members have sought clarification as to how the aggregate rates of duty remission
would be adjusted for imports used in the producti on of exported goods, as well as how to ensure that
this adjustment would not result in over-rebate, requ esting information as to the basis, sources of data,
and actual mechanics of the adjustment.  India has indi cated in this regard that to ensure no excessive
remission of import duties on imported inputs used in exported products, the lowest transaction values
from Customs would be used to value the imported inputs, and that there would be monitoring toensure that the total amount of remission paid did not exceed the amount of duties collected on the
imported inputs.  The remission would then be calculated by applying the applicable rate of customs
duties.
39. Some Members have noted here that while India has focused on the value component of the
adjustment for imports used in the production of exports, their main concern would be with thepossibility of over-rebate because of miscounting the amount of imports consumed.  Concerning the
suggested lowest available international price, Members have sought clarification on how price
variation, currency fluctuations, quality differences , country of origin, inter-company transactions,
seasonal or market volatility, and long-term negotiated prices versus "spot-market" prices would be
taken into account.
40. In general, some Members have suggested that, in view of the technical issues and questions
surrounding this proposal, a simpler way to address the problems identified would be to establish tax-
free zones, or to apply "end use" tariffs, which apply reduced tariff rates on input products.  India has
indicated that these alternatives would not address the specific problems of developing countries, due
to revenue needs and due to the fact that many companies produce for domestic consumption as well
as for export, a particular point relevant to a country like India.
41. In the more recent phases of the Committee's discussion of this proposal, it has been noted
that the question of duty drawback primarily arises in the context of countervailing duty
investigations, where the exact specification of the product definition is established in the petition.  In
the view of some Members, this means that it would not be possible to calculate averages, in advance,
for every potential product specification that might be the subject of a countervail petition.  By the
same token, if calculations of the type described had to be performed only once a petition was filed,this would be too time-consuming to fit within the timeframe of a countervail investigation.
42. For all of the reasons cited, a number of Members have indicated that any duty drawback
system based on averaging across companies, industries or sectors would not be acceptable, as there
would be no way to assure that excessive amounts of drawback were not being paid to individual
companies.  Thus, for these Members, only company-specific calculations are deemed to beacceptable in terms of the rules of the SCM Agreement.
43. That said, Members have indicated a considerable willingness to discuss simplified
approaches that could be applied by individual co mpanies, i.e., averaging or aggregation methods forG/SCM/34
Page 15
individual companies, so that in a countervail in vestigation those companies would not have to prove
that a given individual imported part or component has been physically incorporated into a given unit
of an exported product.  In this regard, I have  requested all Members to share summaries of their
individual duty drawback schemes, and in particular, about the kinds of record-keeping necessary
thereunder for a company to claim duty drawback, including in particular any summarizing oraveraging of data that is permitted.  The idea was to increase Members' understanding of duty
drawback, which is a very technical area, and to generate if possible some useful ideas for India in
this respect.  A number of Members provided such summaries.
10
44. During the course of the Committee's discussions of this proposal, India has stated that it has
noted the problems identified and the positions expressed by Members in respect of this proposal.
India further noted that it might be able to pursu e the question of the treatment of duty drawback in
countervailing duty investigations bilaterally with  interested Members.  Subsequently, India has
indicated that it has had some bilateral contacts on th is issue, and that due to the nature of the issues,
the involvement of technical experts is needed.  India also has indicated openness to engage in
additional such contacts with other interested Members.  While India has stated that it is not
withdrawing its duty drawback proposal, it has asked the Committee, in view of these ongoing
discussions, to this proposal to the side for the time being, and to return to it in September.
                                                     
10 Australia, Canada, Norway, and Thailand.G/SCM/34
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Annex 1
Chairman's non-paper of 11 June 2001
Possible elements on export competitiveness proposal
This non-paper is put forward on the Chairman's responsibility as a summary of his
understanding of possible elements which have emerged in informal consultations with Members
concerning the implementation proposal on export competitiveness (G/SCM/W/431/Rev.1).
The consultations were held as a follow-up to the Committee's 31 May informal meeting, at
which a number of Members (including proponents and non-proponents) indicated that they coulddiscuss the original proposal on the basis of certain proposed amendments and additional conditions
suggested by Switzerland (G/SCM/W/450).  In th e informal consultations, a number of Members
outlined additional considerations, and further elaborations on the elements and conditions put
forward by Switzerland, which for th em would be relevant in further discussions of the proposal in
G/SCM/W/431/Rev.1.  This non-paper is intended to outline the additional considerations andelaborations that were identified by certain Members in this context.  It is not intended to suggest a
consensus on any issue, and it is as well without prejudice to the views of any Member.  It is intended,
rather, as a basis for reflection by the proponents as well as by other Members, and for further
discussion at the Committee's 22 June informal meeting on implementation-related issues.
*  *  *  *
A number of Members appear to recognize that the definition of export competitiveness for
purposes of SCM Article 27.5 should reflect stable conditions rather than temporary fluctuations, and
that there is a gap in the Agreement regarding what happens to a developing country that loses exportcompetitiveness in a product, after having once reached export competitiveness.  Some Members have
indicated that they may be able to consider the proposal in respect of these issues, subject to certain
conditions.  The proposal by Switzerland has been used as the starting point of the discussion in this
regard.  This non-paper first outlines the main elements of the Swiss proposal and then summarizes
the further considerations and conditions put forward by some Members as a possible basis for
continuing discussion on this issue.
Proposal of Switzerland (G/SCM/W/450)
1. Some extension of the two-consecutive-calendar-year-period for determining export
competitiveness may be possible.
2. Loss of export competitiveness would be determined based on two conditions:  (1) the share
of world trade in the product falls below 3 percent, (2) for two consecutive calendar years.
Switzerland notes that in practice the export competitiveness provisions (and any changes thereto)
would be predominantly of interest to Annex VII c ountries, given that the eight-year transition period
for elimination of export subsidies that applies to all other developing countries ends on 31 December
2002.
Further elaboration of possible elements of a framework on export competitiveness
• The working assumption underlying the outlined fr amework is that a "product" for purposes of
Article 27.5 is a "heading"/"position"/"partida" of the HTS (i.e., 4 digits).G/SCM/34
Page 17
• Only countries listed in Annex VII and which m eet the criteria for inclusion in Annex VII would
be eligible.
• Period for determining export competitiveness – An y change yet to be identified.  There are some
doubts about changing this period, in particular to as long as five consecutive calendar years.
• Loss of export competitiveness – there should be a period of some number of consecutive
calendar years for determining this – i.e., some multi-year period where the share of world trade
in the product remains somewhere below 3.25 per cent.
• The period for determining the existence of export competitiveness should be the same as the
period for determining loss of export competitiveness.  (Symmetry.) (I.e., if the period fordetermining export competitiveness is extended to five consecutive calendar years, a country
would be deemed to have lost export competitiven ess if its share of world trade remained below
the relevant threshold share of world trade in the product for five consecutive years.)
• The numerical threshold (percentage share of world trade in the product) for determining a loss of
export competitiveness would need to be identified – a consideration here might be the length ofthe period over which export competitiveness was determined (e.g., the longer the period the
lower the threshold).
• Once export competitiveness was lost, the calculation of the share of world trade in the
product would be automatically reperformed 2 years later to monitor the situation.
• The calculation to determine export competitiveness (based on the most recent period of X
consecutive years for which data are available) would be the trigger for the 8-year phase-out
(even if export competitiveness had in fact been reached before that period).
Questions to clarify:
1. If export competitiveness is lost after the end of the eight-year phase-out period, what
happens? (That is, could export subsidization be resumed, and for how long; e.g., until export
competitiveness was again reached, with then a new eight-year phase-out period?)
2. If export competitiveness is lost during the eight-year period, what happens?  (That is, would
export subsidization be permitted until export competitiveness was again reached, with then a new
eight-year period if and when export competitiveness was again reached?)
3. Would all of the same time-frames/procedures, and the possibility to resume export
subsidization, apply indefinitely no matter how many times export competitiveness was lost and
reached again?
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