RESTRICTEDWORLD TRADE
ORGANIZATIONG/SCM/W/416/Suppl.2
14 September 1998
(98-3445)
Committee on Subsidies
and Countervailing Measures
QUESTIONS AND ANSWERS AND COMMENTS REGARDING THE
REPORT OF THE INFORMAL GROUP OF EXPERTS (G/SCM/W/415/REV.2)
Note from the Informal Group of Experts
Supplement
JOINT COMMENTS FROM THE DELEGATIONS OF BRUNEI DARUSSALAM, INDONESIA,
MALAYSIA, MYANMAR, PHILIPPINES AND THAILAND ON THE RECOMMENDATION OF
THE INFORMAL GROUP OF EXPERTS CONCERNING ARTICLE 6.1(A) AND ANNEX IV OF
THE AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES
Recognizing the perseverance and thorough effo rt of the Informal Group of Experts on their
recommendation on the interpretation of Article 6.1(a) and Annex IV in accordance with the
Footnote 53 of the Agreement on Subsidies and Countervailing Measures ("Agreement"), the
delegations of Brunei Darussalam, Indonesia, Malaysia, Myanmar, Philippines and Thailand would
like to forward the following comments to clarify our position on the matter.
The point that we are raising is, in our view, the fundamentals of a fair and logical
interpretation of Article 6.1(a) and Annex IV of th e Agreement.  It should be comprehended with a
sense of common business practices in a competitive multilateral trading system.
It is the above delegations' view that Article 6.1(a) and Annex IV of the Agreement
sufficiently deal with subsidies granted during the start-up period and subsidies granted thereafter,
therefore, it renders allocation of subsidies overtime unnecessary.  Paragraph 7 of Annex IV wascreated simply for the purpose of including the residual effect of the pre-WTO subsidies into
conformity and, thus, aggregate into the calculation of post-WTO subsidies.
In view of the aforementioned position, the a bove delegations would like to present the
following arguments:
1. Allocation of subsidies granted after the effectivity of the WTO Agreement (hereinafter
referred to as "post-WTO subsidies") would constitute a de facto amendment of
Article 6.1(a) as implemented by Annex IV of the Agreement on Subsidies and
Countervailing Measures (SCM Agreement).
(a) Article 6 of the SCM Agreement provides, among others:
"6.1 Serious prejudice in the sense of paragraph (c) of Article 5 shall be deemed to
exist in the case of:
(a) the ad valorem subsidization of a product exceeding 5 per cent; ...".G/SCM/W/416/Suppl.2
Page 2
(b) With reference to Article 6.1(a), Footnote 15 provides that such total ad valorem
subsidization shall be calculated in accordance with the provisions of Annex IV of the
SCM Agreement.
(c) Paragraph 2 of Annex IV states the general rule1 that "in determining whether the
overall rate of subsidization exceeds 5 per cent of the value of the product, the value
of the product shall be calculated as the total value of the recipient firm's sales in the
most recent 12-month period for which sales data is available, preceding the period in
which the subsidy is granted".
(d) Allocation of subsidies, i.e. the amortization of the benefits  of a subsidy beyond the
period in which it is granted, effectively increases the maximum level of flow of
subsidies within a given period  to indeterminate levels higher than 5 per cent
depending on the period of amortization, thus rendering nugatory the flow/period
relationship circumscribed under Article 6.1(a), as implemented by Annex IV.
2. The specified maximum limit2 of the flow of subsidies  within a given period for purposes
of the presumption of serious prejudice is measured by the cost to governments , rather
than the duration of the effects thereof to the r ecipient enterprise for accounting purposes .
(a) While generally-accepted accounting principles and practices may recognize or allow
the amortization of certain flows of resources to recipient firms for purposes of costaccounting and/or profit and loss calculation, these accounting principles are relevant
only in respect of the duration of the effects  to recipient enterprises, rather than the
cost to governments.
(b) For purposes of Article 6.1(a), the duration of the effects of subsidies to the recipient
enterprise is irrelevant:  what is relevant is the cost to the granting government.
Paragraph 1 of Annex IV provides:
"1. Any calculation of the amount of a subsidy for the purposes of paragraph 1(a)
of Article 6 shall be done in terms of the cost to the granting government"
(emphasis supplied).
3. There is no basis under the SCM Agreement fo r the allocation of post-WTO subsidies.
(a) Paragraph 7 of Annex IV provides:
"7. Subsidies granted prior to the date of entry into force of the WTO Agreement,
the benefits of which are allocated to future production, shall be included in
                                                     
1 Paragraphs 3 and 5 of Annex IV are "exceptions" to the general rule.  However, for purposes hereof,
it would suffice to state that paragraphs 3 and 5 of Annex IV are but variants of the general rule;  that what is
specified in paragraphs 2, 3 and 5 of Annex IV (as the measure of the maximum amount of subsidy for purposesof the presumption of "serious prejudice", the present  flow of subsidies to a subsidized enterprise in relation to
the results of past developments, i.e. the total value of the present flow of subsidies in relation to sales during
the preceding 12-month period in which the subsidy is granted.
Paragraph 4 of Annex IV refers to "start-up" subsidy, and is discussed in paragraph 4 hereof.
2 The use of the word "limit" with reference to the rates specified in paragraphs 2, 3, 4 and 5,
respectively of Annex IV should not be construed to imply that subsidies below those limits are authorized per
se.  Throughout this presentation, the use of the word "limit" is for purposes solely of the level beyond which
the presumption of serious prejudice arises.G/SCM/W/416/Suppl.2
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the overall rate of subsidization."  (Such subsidies shall hereinafter be
referred to as "pre-WTO subsidies".)
(b) Aside from paragraph 7 of Annex IV of the SCM Agreement, there is no provision in
the SCM Agreement, particularly in relation to post-WTO subsidies, authorizingamortization of benefits "allocated to future production".
(c) In specifying pre-WTO subsidies solely  as capable of being amortized and included
in the overall rate of subsidization, paragraph 7 of Annex IV expressly distinguishes
between pre-WTO subsidies and post-WTO subsidies, thus excluding the latter from
the coverage of the textual operative basis for allocation (which is the phrase "the
benefits of which are allocated to future production").
(d) The differentiation in treatment between pre- and post-WTO subsidies must be
understood in light of the non-existence,  prior to the effectivity of the WTO
Agreement, of provisions similar to Article 6.1(a) and Annex IV of the SCM
Agreement.
4. Allocation of post-WTO subsidies is not consistent with Annex IV of the SCM
Agreement.
(a) Annex IV does not distinguish between recurring and non-recurring subsidies.
Neither does it distinguish between subsidies and short-term effects and long-term
effects to the recipient enterprise.
(b) Annex IV does distinguish between subsidies granted during the start-up period
3 and
subsidies granted thereafter.4
(c) Allocation of post-WTO subsidies granted during the start-up period based on their
effects to the recipient enterprise is inconsistent with paragraph 4 of Annex IV of the
SCM Agreement.  Annex IV spec ifies two straightforward limits:
(1) 15 per cent of total funds invested during the start-up period;  and
(2) 5 per cent of the value of sales during the preceding 12-month period for
subsidies granted thereafter.
For example, during the start-up period, a subsidy equivalent to 20 per cent of the
total funds invested is granted to a recipient firm composed of:
With long-term effect: 15 per cent
With short-term effect:   5 per cent
If allocation were authorized, it could thus then be argued that a subsidy granted
during the start-up period amounting to more than 15 per cent of the total funds
invested is permissible, because subsidies with long-term effects could be allocated to
                                                     
3 Paragraph 4 of Annex IV relates to subsidies granted during the "start-up period" which is defined as
a period which does "not extend beyond the first year of production".  The overall rate of subsidization limitduring this period (15 per cent) applies to subsidies both with short-term and long-term effects.
4 Subsidies granted after the start-up period are covered by paragraphs 2, 3 and 5 of Annex IV.  Such
paragraphs do not likewise distinguish between subsidies with short-term and long-term effects.G/SCM/W/416/Suppl.2
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future production.  This is inconsistent with paragraph 4 of Annex IV, and renders the
same effectively non-operational.
A similar example could be cited for subsidies granted after the start-up period which
would effectively inflate the 5 per cent limit, whether under paragraphs 2, 3 and 5.
5. Allocation of post-WTO subsidies woul d effectively render each Member unable to
determine with a reasonable degree of certainty WTO-consistency (or inconsistency) of
the granting of a subsidy as of the particular  point in time when the subsidy is granted .
(a) The essence of a multilateral agreement is that each Member is able to determine
WTO-consistency of an act or omission as of the particular time of occurrence ofsuch act or omission.
(b) If allocation were to be allowed WTO consistency would depend on developments
after each particular subsidy is granted.
For example, after the start-up period, a subsidy equivalent to $40,000 is granted to a
recipient firm with sales of $100,000 during the previous 12-month period.  Let us
assume that the subsidy is allocated for a period of eight years.  Under the above
example, there would be no violation as of the year in which the subsidy is granted,
because the allocated benefit for that year, $5,000, is not more than 5 per cent of thesales during the previous 12-month period.  However, in the next seven years, the
government granting the subsidy could alternately be deemed as in violation or not in
violation, depending on the level of sales of the recipient firm during successive 12-
month periods.  Thus, a government granting the subsidy could be deemed not in
violation in respect of a particular subsid y in a given year, but could be deemed in
violation in respect of the same subsidy in the succeeding year, and again not in
violation in the year thereafter, and so forth.
Response
The Group has taken careful note of the points made by the delegations of Brunei
Darussalam, Indonesia, Malaysia, Myanmar, Philippines and Thailand regarding the report, which
focus on the Group's recommendation to allocate certain subsidies over time.
The Group, throughout its discussions, took into account its terms of reference, which were
derived from footnote 62 of the SCM Agreement.  In particular, the Group attempted to identifyissues that were not specified in Annex IV, and issues with respect to which the Group felt that further
clarification would be useful.  It was in this spirit that all of the Group's recommendations (including
those on expensing versus allocation) were forwarded for the Committee's consideration.
As discussed in the report at paragraphs 1 through 4, the question of whether and under what
circumstances subsidies should be allocated was extensively discussed by the Group. Throughout this
discussion, the Group recognized that certain subsidies tend to have an impact on firms which persists
over time.  The Group also recognized that alloca tion of subsidies might make it more difficult for
Members to predict whether a given subsidy would give rise to a presumption of serious prejudice in a
given year.  Ultimately, however, the Group concluded that expensing all subsidies could yield twopotentially illogical results, in the context of Article 6.1(a).  First, if allocation were not possible, even
a single very large subsidy bestowed for the purchas e of fixed assets would have no effect beyond the
year in which it was granted.  Second, and conversely, if allocation were not possible, the ad valorem
subsidization during the year in which the subsidy was granted could be overstated.  In either case,G/SCM/W/416/Suppl.2
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there would be implications for findings and remedies.  Under the first case, by the time a finding was
reached, the subsidization and any "adverse effe cts" therefrom would have expired, calling into
question the possibility of any remedy.  Under the second case, an unjustified presumption of serious
prejudice could be created.
Most importantly, the Group views paragraph 7 of Annex IV (referred to in paragraph 2 of its
report) as suggesting that allocation of certain subs idies was foreseen in the context of Article 6.1(a).
The Group further noted that if post-WTO subsidies could not be allocated, the same type of subsidy
(e.g., a large grant bestowed for the purchase of fixed assets) would be treated differently simply
based on whether it was provided before or after the SCM Agreement.  In this context, the Group
discussed that one effect of paragraph 7, as noted by the commenting delegations, was to clarify that
pre-WTO subsidies might in some cases be subject to Article 6.1(a), i.e., that such subsidies were notautomatically beyond the reach of this provision merely by having been granted before the entry into
force of the Agreement.
Finally, regarding the question of "cost to government", the calculation of ad valorem
subsidization of a product involves the division of the value of a subsidy (expressed in monetaryterms) by the value of the relevant sales (also expressed in monetary terms).  Thus, an ad valorem
subsidization calculation by definition is an expression of the impact of a subsidy on the recipient
firm.  In this connection, the Group viewed paragraph 1 of Annex IV's reference to the "amount" of
the subsidy as meaning the monetary value of the subsidy (i.e., the numerator), and that it was this
value that could and should be calculated in terms of the cost to the granting government.  The Groupviewed paragraphs 2 through 5 as having to do with both the absolute value of the denominator, and
the calculation of the ad valorem  subsidization (i.e., the subsidy's impact on the firm).
COMMENTS OF THE UNITED STATES REGARDING THE REPORT OF THE INFORMAL
GROUP OF EXPERTS
This Committee established the Informal Group of Experts in June of 1995.  Its mandate was
to examine matters not specified in Annex IV to the Subsidies and Countervailing Measures
Agreement and to make recommendations to the Committee for purposes of developing an
understanding among members regarding such matters.  All members of the Committee were invitedto nominate experts to the group.  Members of the Group, serving in their personal capacities, came
from Australia, Brazil, Canada, the European Community, Japan, Korea, Mexico and the
United States.
The Group issued a lengthy report which made twenty-one specific recommendations.  The
Report addresses almost every generic type of subsidy and makes recommendations on calculation
methodologies for each such type.  While the Report clearly demonstrates that the Group considered
deeper theoretical issues, in the interests of transparency, predictability and administrability, the
Group deliberately kept its recommendations as simple as possible.  Although it was unable to agree
on all of the issues it discussed, compromises were put forth for those areas where agreement had tobe reached if meaningful, comprehensive recommendations were to be issued.  In this regard, let me
be very clear: the United States does not itself subscribe to all the compromises made.  If we had
written the report, it would have been different.  On balance however, the United States believes that
the Report makes a constructive contribution in the direction of providing greater clarity and
predictability to the application of Article 6.1(a) and Annex IV of the Agreement.
As we all know, issues relating to subsidies, their valuation and their effects can be highly
complex, and are often controversial.  The question of how governments implement certain aspects of
their economic policy often touches on the sensitive issues of national sovereignty and the proper roleG/SCM/W/416/Suppl.2
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of government in furthering economic development.  Consequently, consensus on subsidy disciplines
has often been difficult to achieve.
Today, the Committee has the opportunity to adopt a set of recommendations, issued by an
independent group of experts from around the world, which due to their comprehensive coverage ofhighly sensitive and technical subject matter, would have been practically impossible to negotiate in
the normal multilateral setting.  Today, we have a chance to take a significant step forward;
unfortunately, it appears that progress will be held back.
As I have noted, the United States does not agree with all of the Group’s recommendations.
In light of the failure of the Committee to reach a consensus on the Report’s adoption, we now feel
obligated to delineate those areas of the Report with which we disagree.
In this regard, I would highlight Recommendation Three, which covers the allocation of
subsidy benefits over time.  As has been recognized by most, if not all, countries which have
employed countervailing measures and, as has been provided for in the Subsidies Agreement, it is
appropriate to allocate the benefit of certain subsidies over some period of years.  As has also beenrecognized, the real value and significance of a subsidy must be maintained as it is apportioned over
the allocation period.  To do this, the Group recommended an approach - which was clearly a
compromise of opposing viewpoints - using the relevant inflation rate and a portion of the real interest
rate in the country in question.  Use of this adjustment factor unquestionably understates the cost of
the subsidy to the granting government.  It is the position of the United States that, at a minimum, theappropriate adjustment factor should be based on the bond rate of the granting government.
In another important area, the Group failed to reach any agreement.  I refer specifically to
paragraph sixty-seven of the Report.  The Group was unable to reach agreement on whether export
subsidies should be attributed exclusively to export sales when calculating the ad valorem  rate of
subsidization.  A similar disagreement arose with respect to the issue of whether subsidies tied to
particular markets should be attributed to sales of that particular market.  In both instances, it is our
position that any subsidy tied to particular products should be attributed solely to those products as a
more accurate reflection of the subsidy’s value.  In the opinion of the United States, this approach is
specifically provided for in paragraph three of the Annex IV to the SCM.
Finally, the United States is concerned that the Report fails to address adequately the issue of
commercial risk.  All too often we have seen governments investing in projects or companies, which,
given the attendant level of risk, would have never been undertaken by a private investor.  While the
Report does mention the issue of risk in certain sections, the problem in our view is that the subject is
inadequately addressed in many other sections of the report.  We view this as perhaps an oversight by
the Group.  If the Group continues to meet, we would request that this issue be specifically and morefully addressed.
In closing, let me say that the United States stands ready to reach agreement on an appropriate
set of valuation rules under Article 6.1(a).  However, particularly but not exclusively in light of the
absence of consensus on the report before us, the United States will, of course, reserve its right toadvance methodological and other arguments it deems appropriate in the context of any future dispute
settlement panel which may be convened.
We will make this statement available in wr iting to other WTO Members, and respectfully
ask that it be circulated as a formal Committee document.  We also expect that the substance of ourremarks will be fully reflected in the minutes of this meeting.G/SCM/W/416/Suppl.2
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Response
The Group takes note of the specific points made by the United States regarding the report
and recommendations.  With respect to the adjustment factor for allocated subsidies, as the report
indicates and as the United States notes, the factor recommended by the Group represents acompromise among the different points of view expressed during the Group's discussions, one of
which was that the government bond rate should be used.  Regarding the question of the sales
denominator for export subsidies, the report indicates that this is one of the issues to which the Group
intends to return for further discussion in future m eetings, as is the question of risk in the context of
ad hoc loan guarantees.  The Group also will consider whether to discuss as a general issue the
question of commercial risk.
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