RESTRICTEDWORLD TRADE
ORGANIZATIONS/WPGR/W/31
16 March 2000
(00-1073)
Working Party on GATS Rules Original:  English
COMMUNICATION FROM ARGENTINA AND HONG KONG, CHINA
Development of Multilateral Disciplines Governing Trade Distortive Subsidies in Services
The following communication is circulated at th e request of Argentina and Hong Kong, China
(HK,C) to Members of the Working Party on GATS Rules. This paper is submitted without prejudice
to the authors’ positions in the WTO on this matter.
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Article XV of GATS mandates Members to enter into negotiations with a view to developing
multilateral disciplines which would avoid the distortive effects that subsidies in services may have ontrade in services. The negotiations shall take account of the needs of developing country Members.
Singularly little progress has been made on this area of GATS rule making in the last five years. This
paper aims to move the debate forward. It first considers the (inadequate) data that exists on subsidies
in services and  on their prevalence and distortiveness. It then suggests ways to improve the available
data. Finally it postulates what sorts of principles might need to be addressed and discusses a numberof areas which might be fruitful in pursuing disciplines.
I. BACKGROUND
2. A useful starting point is the two notes prepared by the Secretariat in 1996 and 1998 in
response to requests by the Working Party on GATS Rules. The first Note, circulated on 20 May 1996as S/WPGR/W/12, described subsidy provisions relating to trade in services that existed in regional
trade agreements notified at that time. The second Note, circulated on 26 January 1998 as
S/WPGR/W/25, presented some empirical evidence of subsidy programmes in services, based on
WTO Trade Policy Reviews (TPRs).
3. The information in S/WPGR/W/25 offers some tentative insights into Members’ subsidy
practices in services. It permits an examination of the negotiating challenges facing the development
of such disciplines, and the potential economic benefits that could be derived from such disciplines
through reduced distortion of international trade.
A. ANALYSIS OF TRADE POLICY REVIEWS
4. S/WPGR/W/25 covered subsidy programmes reported by Members within the context of the
31 TPRs carried out between 1995 and the end of 1997. The reviews cover 30 Members, including 17
developing country Members and 13 developed country Members (counting the European
Community as one). The Secretariat pointed out that the results have to be treated with caution, since
they depended largely  on the efforts made by the respective governments to collect and report
information about national or sub-national subsidies in services. We would say that the data needs toS/WPGR/W/31
Page 2
be considered with considerable caution, since it is apparent that some Members had discounted
altogether subsidies in certain important areas (see para.5 below).  Nevertheless while the data is only
indicative, some insights can be derived.
5. Evidence cited in S/WPGR/W/25 suggests that subsidies may be concentrated in certain
sectors, for example: audio-visual services, air and maritime transport, tourism and banking services.
The note indicates a number of interesting features of each of these sectoral subsidies. The
programmes in tourism, for example, appear to be operated primarily by developing Members and
rely mainly on tax holidays and other fiscal advantages rather than on cash benefits. In contrast, the
audio-visual sector appears to be subsidised more by developed Members. A significant number of
both developed and developing Members subsidise air and water transport. 9 Members reported
subsidising banking (though the authors understand that several Members which have provided suchsubsidies did not report them). Only 4 governments reported providing subsidies for health and
education activities, only 3 reported providing subsidies for telecommunications, and only 2 reported
providing subsidies for energy production. However, these low levels beg the question of whether or
not all subsidies were being reported or identified. Indeed, there is some evidence that sectors such as
insurance, postal services, construction, research and development services and advertising, may besubsidised.
6. While the information provided in S/WPGR/W/25 is very sketchy, some pointers might be
drawn. First, direct subsidising of exports of services seems not to be very prevalent
1.  This could be a
reflection that Members are more concerned about the protection of domestic industries than theenhancement of international competitiveness of those industries.  Secondly, domestic subsidies thatpotentially distort international trade also seem to be mainly concentrated in a few sectors. While the
Secretariat note sheds only limited light on the objectives of these sectoral subsidies, one might
postulate that they respond to challenges specific to the individual services sectors and, in many cases,
serve non-economic policy objectives. For example, in land transport, subsidies are frequently
targeted at a number of externalities, including th e environmental benefits associated with the greater
use of public as against private transport, the desire to maintain public transport in thinly populated
areas, the conversion of state-owned transport systems into privatised firms, and the achievement of
various national security objectives. In audio-visual services, subsidies are provided to preserve
national culture, and to support the arts in general. Health and education are subsidised both to
promote social stability and social mobility.
B. S
UBSIDIES RULES IN REGIONAL TRADING ARRANGEMENTS
7. Additional insights into possible approaches to the development of multilateral disciplines
might be obtained from the information provided in S/WPGR/W/12 on the subsidy disciplines in
services contained in existing regional trade agreements. S/WPGR/W/12 indicates that only a few of
such agreements contains provisions on subsidies.  Article 11 of the Australia-New Zealand Closer
Economic Relations Trade Agreement (ANZCERTA) states the “Member States shall not introduce
new, or expand existing, export subsidies, export incentives and other assistance measures having a
direct distorting effect on trade between them in service sand shall work towards the elimination of
any such measures by June 30, 1990” . Article 92 of the EC Treaty states that unless otherwise
provided “any aid granted by a Member State or through State resources in any form whatsoever
which distorts or threatens to distort competition favouring certain undertakings or the product ofcertain goods, shall in so far as it affects trade be tween Members States, be incompatible with the
common market” .  Article 93 provides the Commission with the authority to instruct the Member
State concerned to abolish or alter a state aid. The Note also includes that Article 92 has been applied
in certain services sectors, including air transport and banking.
                                                     
1 However, subsidised export credits, guarantees and insurance programmes do seem to occur in some
sectors, for example constructionS/WPGR/W/31
Page 3
8. Existing regional trade agreements (as at 1996) thus provide two separate approaches to the
issue of subsidies in services-elimination/prohibition of export subsidies (Australia/New Zealand),
and a general obligation to avoid state aid that distorts international competition. Implementation of
the latter obligation within the European Community has been accompanied by a great deal ofguidance by the Commission on a sector by sector basis, as provided for in Article 93 of the EC
Treaty.
II. POSSIBLE AVENUES FORWARD
A. A
DDITIONAL DATA
9. It is clear from the foregoing that there is a great shortage of reliable data. It is therefore
important that Members endeavour to complete the subsidies questionnaire.  In this regard, it is alsosuggested that Members could bring forward any specific subsidy related problem or situation they
may have encountered or identified in foreign mark ets, particularly in relation to subsidies with an
import substituting or export enhancing effect . However, there are other areas which we would also
pursue to improve our data.  The authors propose that:
(a) The Secretariat be asked to update S/WPGR/W/25, to include the TPR material on
Members reviewed in 1998 and 1999. Some 32 Members were reviewed in the
period, and this should considerably enhance the data that can be drawn from this
source.
(b) The Secretariat be asked to update W/WPGR/W/12 to cover new RTAs notified since
1996. As more of the recent RTAs have had a service component, there could be more
material on subsidies here.
(c) The Secretariat be asked to undertake an analysis of the subsidies scheduled in
Members specific commitments (SCs), both  to take further S/WPGR/W/13 and to
update the paper for the Basic Telecommunications and Financial Services
Commitments made since the paper was done. As S/WPGR/W/9 points out, where
SCs have been undertaken in the national treatment (NT) column, Members
maintaining subsidies must either enter them  or bring them into conformity with the
NT provisions. Thus an analysis of the SCs should provide some additional data.
(d) The subsidies question should be kept in mind when undertaking the MFN Exemption
Review, as it appears some Exemptions are related to subsidies.
(e) The Secretariat be asked to do more research on:
(i) the implementation of the disciplines on export subsidies in the ANZCERTA
agreement (i.e. the prohibition of new export subsidies). How was this implementedand have there been any cases?
(ii) the “jurisprudence” on the application of the EEC rules on state aid as regards
services sectors. The paper could also include some information on the guidelines on
state aid developed by the European Commission regarding certain services sectors(e.g. maritime transport)
This background material would help in the discussion suggested under paragraph
10(d) of this paper.S/WPGR/W/31
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(f) The Secretariat be asked to do factual research into the work of other relevant
international bodies/institutions in the area  of subsidies in services or related to
services sectors.
B.P OLICY ISSUES FOR CONSIDERATION
10. There are many important policy issues that need to be addressed when considering any
subsidy disciplines. In this regard, S/WPGR/W/9 of 1996 remains a valuable source of background
material and of identifying the issues we need to tackle.  The below focus on five issues:
(a) Factors to be considered in developing any subsidies disciplines?
It would be useful to consider what sort of basic elements should be considered when
developing any subsidy disciplines. These would probably point the way to the issues
that need to be addressed. The following would seem to need to be considered in
developing elements for subsidies disciplines:
- questions of MFN and NT
- issues relating to the problem of Mode specificity  and “ like services ”
-- territorial application : the question of Mode 3 versus modes 1 and 2
- transparency
- whether the concept of  “ necessity ” has a role
- whether the concept of  “ least trade restrictiveness ” has a role
- trade distortive effects , as set out in Art XV
- the remedies , if any, including countervailing measures, that we would wish to
contemplate.
- possible exceptions
- timeframes for elimination- flexibility for developing and least developed country Members.
Some of these elements are discussed below.
(b) Social objectives of subsidy programmes
Subsidies in many areas have a very high social objective, for example in health,
education and social welfare . Indeed many Members, certainly for the purposes of
TPRs, do not seem to view such as a “financial contribution by a government…..
which confers a benefit” . In such circumstances, how should they be dealt with?
Some ideas, not necessarily mutually exclusive, might be:
(i) creation of a “green box” concept in services for allowable subsidies.
(ii) moving towards a position where any subsidies had to be undertaken on an NT
basis.
(iii) introduction of a requirement to spell out the specific objectives of the subsidy,
and a necessity test on whether its method of implementation was the least
trade restrictive available.S/WPGR/W/31
Page 5
(c) Should countervailing action be a part of any disciplines?
Article XV:1 of GATS mandates that the negotiations shall address the
appropriateness of countervailing measures. S/WPGR/W/9 flagged up the problems
with considering countervailing measures as a remedy against subsidies. It can beargued that use of countervailing measures would be inappropriate in the context of
services and that other remedies would be more appropriate. Art 4 of the Agreement
on Subsidies and Countervailing Measures provides some ideas.
(d) A gradual approach to elimination or reduction of subsidies?
It can be argued that the way to deal with subsidies is not through an (aggressive)
approach, such as countervailing measures but rather on a gradual basis, possibly by a
similar approach to that in agriculture and TRIMS : ie. a programme under which
Members agree: to cap the current levels of subsidies; and  to reduce their subsidies
(in a range of sectors to be agreed multilaterally). Discussion of the experiences of
New Zealand and Australia on the prohibition of new and expanded export subsidiesand the elimination of existing export subsidies might in instructive- as might
discussion of the experience of the EU in containing and reducing state aid that
distorts international competition
(e) Does national treatment overcome many subsidies problems?
As flagged up in Secretariat paper S/WPGR/W/9 and Hong Kong, China’s response
of the Questionnaire S/WPGR/W/16/Add 3,  a high degree of commitments in the NT
column would go a long way in reducing the adverse trade effects of subsidies. In this
regard it is necessary to consider the interaction of Modes 3 with modes 1 and 2 andthe question of the extent of NT across modes of supply and outside the territorial
jurisdiction of a Member. The distinction between the “service” and the “service
supplier” is important here. The recent Chair’s Note Job No 782 also deals with this
issue.
(f) Sectoral versus horizontal approach
The available data suggests that subsidies are concentrated in certain sectors. A
possible way to tackle matters is thus through a sectoral approach. We have achieved
some disciplines on subsidies through the Basis Telecoms Reference Paper. It is
possible that the dual track approach (i.e. pursuing the development of Article XV
disciplines and exploring the possibility of sectoral disciplines in parallel) is likely tobe the most effective.
11. Through this paper the authors hope to stimulate debate and to move the discussion forward
so that good progress can be made in 2000.
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