RESTRICTEDWORLD TRADE
ORGANIZATIONG/SCM/M/31
5 February 2002
(02-0532)
Committee on Subsidies
and Countervailing Measures
MINUTES OF THE SPECIAL MEETING
HELD ON 27 JULY 2001
Chairman:  Mr. Remo Moretta (Australia)
1. The Committee on Subsidies and Countervailing Measures held a special meeting on
27 July 2001.
2. The purpose of the meeting, as set forth in WTO/AIR/1596, was to continue the discussion of
the implementation-related issues referred to the Committee in the 15 December 2000 decision of theGeneral Council.
3. The Chairman recalled that under the procedures agreed by the Committee in February, at the
end of the month the Chairman would be submittin g a Chair's report to the General Council on the
Committee's work on the implementation-related issues referred to it.  He had convened this formal
meeting to give Members an opportunity to express their views on the record, which would greatlyassist him in preparing his report.
4. The Chairman informed the Committee that on 25 July he had attended a meeting called by
the General Council Chairman, Mr. Harbinson, who had been seeking clarification from the Chairs of
various bodies as to their plans for reporting back on the implementation issues referred to them in the
General Council's 15 December 2000 decision.  Mr. Harbinson had been particularly concerned that
such reports be submitted in time to be taken into consideration at a General Council Special Session
on Implementation that would be held probably in very early October.  Mr. Harbinson had indicated
that this Committee's internally-established reporting deadline of end-July fit very well into his wishes
for reporting by subsidiary bodies to that Special Session.
5. The Chairman noted that the General Council was expected to refer one additional
implementation-related tiret -- Tiret 80, a review of the provisions of the Agreement regarding
countervailing duty investigations -- to the Committ ee the following week, with a reporting deadline
of the end of September.  Thus, the Committee would need to take up work on that new tiret, if
referred, after the summer break.  The Chairman suggested that the Committee make some
contingency plans for how to conduct the work on the expected new tiret, thus avoiding the need for a
further special meeting the following week for pur ely procedural purposes, should the referral be
made as expected.
6. Because the topic covered by Tiret 80 was quite broad and the issues that Members might
raise under it almost certainly would be quite technical, the Chairman recommended that the
Committee continue its current procedure of basing its implementation-related work primarily on
written submissions from Members.  The Chairman proposed on that basis that, should the referral be
made as expected, Members wishing to raise specific countervail-related matters for focusedconsideration by the Committee should submit to the Secretariat no later than 27 August short papersG/SCM/M/31
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identifying the particular relevant provisions of the Agreement, describing briefly the implementation-
related concerns or problems related thereto, and proposing any solutions.
7. The Chairman further proposed that the Committee hold three meetings – 11, 18 and
28 September – to consider the expected new tiret, and noted that these meetings could be used as
well to try to make further progress on the is sues that had been referred to the Committee in
December 2000.
8. The Committee so decided.
9. Turning to the first of the three implementation-related issues that had been before the
Committee for several months – export competitiv eness -- the Chairman recalled that at the
Committee's most recent informal meeting (a summary of which he had circulated by fax at the
request of Members - attached), a theme that had emerged was that some Members found it useful to
consider the two elements of the proposal in G/SCM/W/431/Rev.1 separately.  That is, on the one
hand the basis for establishing export competitiveness, and on the other hand a possible mechanism to
re-allow export subsidization if export competitiveness was lost.  For some Members the second issue
appeared to raise more questions and complications than the first, and they had suggested dealing with
the two elements sequentially, first seeing whether a consensus could be arrived at regarding the basis
for establishing export competitiveness, and after that continuing the detailed consideration ofpossible conditions for re-introduction of export subsidies after a loss of export competitiveness.
10. A range of views had been expressed on the first element, the basis for establishing export
competitiveness.  Proponents sought a change from two consecutive years to five consecutive years,
and argued that the definition of "product" in Article 27.6 should be understood as a "section" of the
Harmonized System nomenclature.  Other Members, including those who had indicated that theymight have some flexibility regarding the number of years for establishing export competitiveness,
had generally indicated that an extension to five y ears would be too long, but that they might be able
to envision a compromise somewhere between 2 and 5 years.  Some of these Members also had
indicated that they believed the correct interpretation of the definition of product in Article 27.6 was
as a 4-digit "heading" in the Harmonized System, and that in any case for them this would be anindispensable underlying assumption or condition of any potential agreement on an extension of the
period for establishing export competitiveness.  Thus, while the Chairman had noted quite
encouraging signs of a certain degree of flexibility in respect of that first element, he also noted that a
number of important questions and issues remained open.
11. On the second element, a number of general issues had been identified concerning the
necessity or wisdom of establishing a framework to cover the situation of loss of export
competitiveness.  While a number of Members were sympathetic to the point made in the originalproposal that there might be a gap in Agreement in the event of loss of export competitiveness, others
had concerns that trying to fill that gap -- by allowing the re-introduction of export subsidies – ran
counter to one of the fundamental goals of the Agreement, namely to eliminate export subsidies.
Some Members viewed the approach under discussion as in fact encouraging the use of export
subsidies as an instrument to achieve export competitiveness.  Moreover, there were significant
differences of view as to whether countries other than those in Annex VII would be eligible for any
solution in respect of loss of export competitiveness.
12. In addition to those general concerns, a significant number of detailed questions and issues
had been posed concerning some of the specific ideas and proposals that had been raised in regard to
the second element, both the Swiss proposal concerni ng basic criteria for determining loss of export
competitiveness and consequent re-allowance of export subsidization, and more recently the EC
"stop-the-clock" idea.  Of particular concern for some Members was the apparent potential under the
latter idea for almost infinite maintenance of export subsidization, at a relatively high level, evenG/SCM/M/31
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where the export competitiveness threshold had been surpassed numerous times; the implications for
the system of symmetry or asymmetry in the periods for establishment and loss of export
competitiveness; and the issue of transparency, both as to the initial existence and amount of export
subsidization, and as to levels and phase-outs of export subsidization after reaching export
competitiveness.
13. The delegate of the Dominican Republic, on behalf of Cuba, the Dominican Republic and
Honduras, thanked the Chairman for his efforts to  make progress on the implementation-related
issues, and for his summary of the most recent informal meeting of the Committee, which the
delegations considered to be a factual presentation of all points that had been raised there.  He recalled
that according to the decision taken by the Committee on 9 February 2001 on procedures for
consideration of the implementation-related issues, a group of delegations had submitted document
G/SCM/W/431/Rev.1, in which they set forth the specific issues and their proposal on exportcompetitiveness, and then had submitted document G/SCM/W/443 with replies and comments on
questions submitted by the Australia; Canada; the European Communities; Hong Kong, China; Japan;
Switzerland; and the United States.  Subsequently they had submitted G/SCM/W/448 with further
clarifications requests by the United States, and G/SCM/W/456 addressing issues contained in the
informal Chairman's paper dated 11 June 2001.  Throughout that process, the delegations for whichthe delegate of the Dominican Republic was speaking had shown flexibility in respect of most of the
issues.  While understanding the concerns voiced by other delegations, the delegate of the Dominican
Republic noted that certain delegations had not shown the same flexibility and understanding for the
difficulties which developing countries experienced.  The delegations on whose behalf he spoke felt
that their proposal had been enriched by the proposals of Switzerland and the European Communities.The delegate of the Dominican Republic thanked those delegations for showing the constructive spirit
needed to continue the discussion.  The appropriate combination of the original proposal and the
Swiss and EC proposals might provide the basis for a solution.
14. Nevertheless, the delegate of the Dominican Republic wished to reiterate those points in
respect of which the group of delegations for which he spoke could not go beyond the flexibility theyhad already shown, as to do so they would give up rights under the Agreement:
(a) They could not accept the proposal would refer only to countries listed in Annex VII,
since Article 27. 5 and 27.6 included all developing countries;
(b) They could not accept that the definition of product in Article 27.6 be a four digit HS
heading, since the English text of the Agreement, which was the language in which it
had been negotiated, refered to "section heading" which meant a series of chapters;
(c) They could not accept symmetry in the periods for reaching and then losing export
competiveness.  As they had indicated, export competitiveness could be lost in one
day in an unexpected manner, while reaching export competitiveness could take
several years of effort.  The situations were different and therefore they could not be
dealt with in the same fashion.
15. The delegate of the Dominican Republic reiterated the proposal that Article 27.6 be extended
from 2 to 5 years, since the 2-year period was not enough to determine whether export
competitiveness really had been reached.
16. The delegate of the Dominican Republic thanked the Chairman for his efforts, and was
confident that the Chairman's final report would be balanced in the same manner as his informal
summaries of discussions had been to date.  At the same time, the delegations were disappointed thatthe Committee had not been able to reach a positiv e recommendation to resolve this implementation
problem.  The delegations hoped that in the time remaining it would be possible to arrive at aG/SCM/M/31
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satisfactory conclusion and that they could look forward to satisfactory results at the upcoming
Ministerial Conference.
17. The delegate of the United States thanked the delegate of the Dominican Republic and the
other delegations for their efforts in the implementation exercise, which required significant effort and
commitment of time.  The United States also appreciated the Chairman’s summary, which constituteda useful and constructive document.  The delegate of the United States noted for the record that his
delegation's participation and discussion of the implementation-related issues had been of a technical
nature and should not be considered as necessarily reflecting any endorsement of any of the proposals.
Secondly, the United States' general approach to the implementation issues was to ensure that no
proposal would undermine the basic orientation of the Agreement in respect of export subsidies.  In
the view of the United States, those were the most distortive subsidies, which could lead to a very
substantial misallocation of resources.  The substance of the WTO prohibition on export subsidies andthe general obligation in the Agreement to elim inate them formed the heart of the Subsidies
Agreement and must be preserved under any outcome that might be reached.
18. Turning more specifically to the question of e xport competitiveness, the United States agreed
with the characterisation in the Chairman's summar y that the two sets of proposals under review were
separate and distinct proposals, and should be considered as such.  The United States viewed them asmutually exclusive; it could not envisage a situation in which there would be a lengthening of the
period for determining export competitiveness, and a mechanism for either "stop-the-clock" or re-
entry under Article 27.5.
19. Regarding the period for determining export competitiveness, the United States continued to
be very open to discussing that issue and woul d do so very constructively during the meetings in
September.  That issue had not been adequately discussed, and there were still several areas that
needed to be addressed.  For example, extendin g the period could result in export competitiveness
never being achieved, which in essence would read that provision out of the Agreement.
20. Regarding the proposals associated with the framework under Article 27.5 and ideas on "stop-
the-clock" and re-entry, the United States believed that there had been much useful and interestingdiscussion, and appreciated the efforts of the Swiss and EC delegations to offer creative options and
responses to the proposals that had been made.  The discussion at the most recent informal meeting of
the Committee had revealed that the issues regarding such a mechanism or framework might be very
complex and could have significant implications that would have to be explored fully.  The
United States would approach further discus sions of this issue with that in mind.
21. The delegate of Switzerland thanked the Chairman for his efforts, and for his summaries of
the whole informal process.  Switzerland attached great importance to all three issues which had been
referred to the Committee by the General Council and had tried to work constructively in moving the
discussion forward.  Switzerland had done so not because it would benefit from any of those issues
but because the issues merited a fair and open approach, as they were very high on the agenda for
many developing countries Members, and it was important to show seriousness in tackling those
concerns.  However, if principles and disciplines of the Subsidies Agreement would be weakened,Switzerland would have concerns.  The discussion so far had been fruitful, and had helped
Switzerland to understand the special challenges the developing countries were facing in the area of
subsidies.  Switzerland’s initial reactions to all proposals under the three items, which remained valid,
had been circulated to the Committee in document G/SCM/W/433.
22. Concerning export competitiveness, Switzerla nd had felt from the beginning that a solution
might be possible and desirable in respect of both of the concerns that had been raised under that tiret:
first, the extension of the time-period for establishing competitiveness; and second, addressing theG/SCM/M/31
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issue of resumption of export subsidization after a loss of competitiveness.  Switzerland’s position in
respect of this proposal had been circulated in G/SCM/W/450.
23. In Switzerland's view, as a general rule, once export competitiveness had been reached or
reached again, export subsidies had to be phased out.  That said, on the first issue Switzerland could
agree to an extension of the time-period necessary to establish export competitiveness in Article 27.6.
Secondly, a resumption of export subsidies was acceptable if export competitiveness was lost, as
Switzerland considered the Agreement to be silent on that point.  For the possibility of resumption,
Switzerland felt that the following criteria would need to be met:  the loss of export competitiveness
would need to be for a period of at least two y ears, and the share in the world trade of the product
(which in Switzerland's view was defined as a f our-digit heading of the HTS) would need to fall
below 3 per cent.  In that respect, Switzerland di d not completely agree with the Chairman's summary
in which he had signalled a general acceptance that the threshold should remain at 3.25 per cent inboth directions, given that previously, many Members seemed to have accepted the 3 per cent for the
downward direction.  Switzerland was interested, as  an alternative solution regarding time periods, in
the symmetry argument which had many merits for the beneficiaries of such a resumption possibility.
Switzerland was open to working on that or other solutions on that issue.
24. Switzerland also could work on the "stop-the-clock" understanding as proposed by the EC.
That is, as soon as export competitiveness was reached again, the remaining phase out period would
be at the disposal of the country to eliminate all export subsidies.  If the remaining period was less
than two years, nevertheless two years would be av ailable.  If export competitiveness was lost after
the phase out period, the concept of reinclusion would allow the entitled Members to resume
providing export subsidies if they so wished.  It seemed to Switzerland from the previous meeting thatcommon ground had been found for two years as the time-period for phasing out those subsidies.
Regarding the number of times resumption of export subsidies would be allowed, an open approach
could be taken, taking into account the long time periods they were considering there in practical
terms.  Regarding the level of subsidies, Switzer land could agree on the reference to the level of
subsidization just prior to the loss of export competitiveness, as no obligation could be found in theAgreement on how an actual phase-out process must be shaped.
25. Regarding transparency obligations Switzerla nd proposed that in the case of resumption an
obligation to immediately notify the Committee should  be incorporated in any eventual decision on
the subject in order to facilitate monitoring.  Finally, as a necessary condition for Switzerland of any
eventual Agreement to a framework on export compet itiveness, the resumption possibility would need
to be restricted only to the developing country Members referenced in Annex VII of the Agreement.
Switzerland had explained their legal grounds for this view in their earlier submissions.
26. It seemed to Switzerland that a solution on this issue was possible, and that progress in the
implementation process should be achieved.  Switzerland hoped that its listing of points would be
helpful in pointing toward a possible framework for a mutually agreed solution regarding the
implementation of Article 27 taking into account the percentage share of exports of individual
developing country Members.
27. The Chairman clarified that in his summary of the previous meeting, he had referred to
3.25 per cent as a possible acceptable basis for determining loss of export competitiveness because
some Members had expressed non-acceptance of 3 per cent.  That said, clearly the Committee had not
taken any decision to that effect.
28. The delegate of Australia thanked the Chairman for the efforts he had put into the discussion
of the implementation proposals before the Committee.  Australia had put considerable effort into
considering and analyzing the export competitivene ss proposal along with the other implementationG/SCM/M/31
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proposals before the Committee, and to all associated documents that had been provided, including
the Chairman's latest summary.
29. Australia's comments concerning the implementation of Article 27 of the SCM Agreement,
where Australia had some concerns, were made in  the context of technical discussions and were
without prejudice to any future conclusions on this issue.
30. On the specifics, in Australia's view the application of the export competitiveness provision in
Article 27.6 and the amendment of the criteria to extend the period from 2 to 5 years, was moot for
non-Annex VII countries beyond the end of the 8-year phase-out period for export subsidies.
Australia considered that that provision was unlikely in practice to apply to non-Anex VII developing
countries given that the eight year period was coming to an end.  Australia considered that at the end
of the 8-year implementation period, Article 3.1 (a) applied to developing countries.  For Annex VII
countries, as there was no export subsidy prohibition as provided under Article 27.2 (a), the right tomaintain export subsidies was foregone once export competitiveness was reached, and the subsidy
was required to be phased out over 8 years under Article 27.5.  There was a presumption in the SCM
Agreement that export subsidies were the most egregious form of subsidy that necessarily caused
serious trade effects to other WTO members.  The thrust of the SCM Agreement was not to increase
the level of export subsidization.  That issue had to be addressed in any phase-out of subsidization,whether or not export competitiveness had been lost.  As Australia had noted before, the core
principles of the Agreement needed to be upheld, namely that the levels of export subsidization
should not be increased nor should the phase-out period for export subsidies be expanded.
Article 27.5 and Article 27.6 needed to be read in the context of Article 27.  Australia considered that
it was crucial to address those core principles when considering the questions put by the Chair,namely, the basis for determining export competitiveness, on the one hand, and the question of what
happens to a country that loses export competitiveness after having reached it, on the other hand.
31. Australia disagreed with the view previously  expressed in discussions that there was no
obligation in the SCM Agreement for progressive elimination of export subsidies or equal annual
instalments.  The Brazil - Aircraft  panel had examined the provisions of Article 27.4 and the issue of
the "progressive" phase out of export subsidies.  On this point Australia had some concerns with the
Chairman's summary.
32. Australia was mindful of the purpose of Article 27 of the SCM and its recognition that
subsidies might play an important role in economic development programmes of developing
countries.  Australia questioned, however, whether subsidies for economic development purposes
were permitted to be contingent on export indefinitely for Annex VII countries.
33. Australia did not consider that the phase-out periods provided under Article 27.5 were
additional to the overall phase-out period which commenced from the date of entry into force of the
WTO Agreement or that they allowed circumvention of the clear obligation of the SCM to phase out
export subsidies over eight years.  Article 27.5 suggested that the eight-year phase-out period for
Annex VII countries occurred at any point once competitiveness was reached.  The fact that
Article 27.5 indicated that Annex VII countries must phase out export subsidies once exportcompetitiveness was reached reinforced the Agreement's prohibition on export subsidies.
34. For Australia, some flexibility might be possible in the application of the Agreement in terms
of treatment for Annex VII countries.  However, as Australia had stated on many occasions in the
informal discussions, once export competitiveness was reached for Annex VII countries, they could
not increase their subsidization, and under the provis ions of Article 27.5 would have to phase out their
export subsidies over a period of eight years.G/SCM/M/31
Page 7
35. Australia considered that to have unlimited cessation and resumption of subsidization was
contrary to the thrust of the SCM and would in effect be encouraging unlimited export subsidization.
It was for that reason that it considered the EC's "stop-the-clock" proposal worthy of further
discussion, as it would cap subsidization and not expand in effect the phase out period of eight years.
36. Australia believed that the relevant provisions within the Agreement were difficult to assess
without some core data and without establishing some minimum information for transparency
purposes.  It was difficult to assess claims and counter-claims over the issue of the 3.25 per cent
deeming level for export competitiveness if Members had no sense of what the impact of this deeming
level was.
37. The delegate of Saint Lucia stated that her presence and intervention were predicated on
certain areas of interest to the Committee's deliberations, which had arisen in the most recent Special
Session of the General Council on Implementation concerning Tiret 68.  The discussion in theGeneral Council had suggested that the Committee Chairman would report on the matter pertaining to
the use of export subsidies by developing countries taking into account the percentage share of
exports of individual developing country Members' products in import markets and global trade.  The
Committee Chairman's summary of the most recent meeting, however, focussed on the issues of
export competitiveness defined in terms of 3.25 per cent of world trade for two consecutive calendaryears, in particular regarding the length of time for defining competitiveness, as opposed to the much
broader issues raised, which were of crucial importance to her delegation.  Therefore, Saint Lucia was
seeking clarification as to whether or not the deliberations of the Committee had in fact been more
extensive than reflected in the Chairman's summary, or whether as suggested by the representative of
the Dominican Republic that summary was indeed a factual representation of the matters that hadbeen discussed.
38. In the view of Saint Lucia, the SCM Agreement was designed to remove, and/or provide
remedies for, the most distortive use of subsidies.  Criteria which would take into account the
percentage share of exports of individual Members' products in import markets and in global trade
would respect the fundamental approach of the Agr eement to the treatment of subsidies.  Therefore,
Saint Lucia was disappointed that that issue appeared not to have been explored in the Committee's
debate.  Had the terms of reference from the General Council to the Committee covered that broader
concern, St. Lucia would have presented a written submission to the Committee mirroring that which
Saint Lucia and Jamaica had presented to the General Council in the course of the previous year's
informal consultations on implementation.  Therefore, if this issue was part of the Chairman's remit,
Saint Lucia would produce a paper to enrich the discussion; if it was not part of his remit the
delegation of Saint Lucia would like a clarification to that effect.
39. The Chairman stated that Tiret 68 had never been referred to the Committee.  Rather, the
Committee had had three issues referred to it:  first, export competitiveness; second, footnote 61 in
relation to the incorporation of capital goods as inputs consumed in the production process; and third,
duty drawback.  If, however, the General Council referred Tiret 68 to the Committee, the Committee
would take it up.
40. The delegate of Canada thanked the Chairman for his summary of the discussion from the
most recent informal meeting, which Canada considered accurately and comprehensively reflected the
discussion held.  The discussion demonstrated that Members had indeed taken a constructive
approach to the issues at hand.  In respect of export competitiveness, Canada agreed that the SCM
Agreement was unclear regarding what happened if  a Member lost export competitiveness in a
product, and Canada was willing to take efforts to clarify the situation.  However, the purpose of the
SCM Agreement was to discipline trade distortive subsidies and Canada wanted to ensure that any
agreement on that proposal would take that into account.  More specifically, Canada remained open to
further discussion on the period for determining export  competitiveness as well as the criteria for theG/SCM/M/31
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loss of export competitiveness.  However, there w ould need to be a limit to the number of times a
given Member could be allowed to re-introduce export subsidies, and a limit on the level of
subsidization that would be permitted.  In that respect the most recent informal discussions had raised
a number of issues and concerns that would need to be further explored, including the issue of
transparency which should be an integral part of any future decision.  Concerning some of theelements of the proposal, Canada considered that a working assumption underlying the outlined
framework would need to be that a product for purposes of Article 27.5 would be at the four-digit
level of the HS.  In addition, Canada considered that only the Members listed in Annex VII and which
met the criteria for inclusion in Annex VII would be eligible.  Lastly, with respect to the symmetry
question, Canada continued to believe that the time-period for determining export competitiveness
should be the same as the time-period for determining loss of export competitiveness.
41. The delegate of Chile thanked the Chairman for his summary, as it helped to focus attention
on certain aspects.  In Chile's view, the basis of the Agreement was that export subsidies distort trade
and therefore that developing countries not listed  in Annex VII would need to eliminate them by
2003.  In connection with Annex VII, Chile wanted to be clear that any decision they would take
would be conditional and subject to the present status of Annex VII and Article 27.  If there were a
future change in Article 27 and Annex VII, any decision the Committee might have taken on the issueof export competitiveness would need to be reconsidered.  As to the issue of reaching or losing export
competitiveness, Chile could be flexible in terms of symmetry, and for the period could consider
something less than five years.  Regarding the EC's "stop-the-clock" idea, Chile would need to
conduct a technical analysis of how the concepts of  "symmetry" and "extension" would relate to the
EC proposal.
42. The delegate of New Zealand stated that the Chairman's summary of the discussions at the
most recent informal meeting was essentially accurate and effectively encapsulated the range of
thinking that was on the table, and also fairly reflected the range of New Zealand thinking in relation
to the issues before the Committee.  New Zealand was happy to explore the range of implementation-
related issues on subsidies in a constructive manner, and had been doing so in recent months.  NewZealand was prepared to show a sufficient degree of flexibility, particularly in relation to the period of
determining export competitiveness, but would be most uncomfortable to see any marked lessening of
the disciplines that were specifically contained in the Agreement, particularly Article 27.  In that
regard New Zealand considered that no solution on loss of export competitiveness should go beyond
the "stop-the-clock" on the phase-out period.  In other words, it should neither set the clock back to
zero nor allow an increase of export subsidies above the level to which they had been phased down.
In relation to the question of Annex VII countries that had been raised, New Zealand agreed withSwitzerland and others that the framework and the discussions they were focussing upon in relation to
Article 27 concentrated on Annex VII countries.  Th e delegate of New Zealand suggested that the
Chairman's summary of the previous meeting be attached to the formal minutes because most
members referred to it indicating whether they generally agreed with the thrust of the Chair's
summary of discussion.
43. The Chairman stated that he intended to do so, to allow a comprehensive reading.
44. The delegate of the European Communities stated that the summary was accurate and
sufficiently exhaustive and was a good reflection of what had been said.  It was understood that the
summary had to be seen in conjunction with the written submissions made.  In addition the EC
understood that the Chairman would add the summary to the minutes.
45. The delegate of India thanked the Chairman for his work on the issues under discussion, and
also thanked the delegations of Switzerland and the EC for their helpful suggestions in trying to find
solutions to those issues.  Having said that, India associated itself with the statement made by the
representative of Dominican Republic, and reiterated that India had shown flexibility with regard toG/SCM/M/31
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suggestions made by Members on time periods and conditions for reinclusion of countries in that
category.  However, India would not commit itself to any restrictive interpretation of the phrase
"section heading of the Harmonized System Nomenclature" as it appeared in Article 27.6.  In India's
view, "section heading" denoted a group of chapters of the HS nomenclature.
46. The delegate of Mexico thanked the Chairman for his summary of the discussion at the most
recent informal meeting, and for his efforts to try to find solutions.  In general concerning the
proposals on export competitiveness as well as on the inclusion of capital goods in the definition of
inputs, first, having attentively followed the di scussions, and the arguments put forward by the
proponents and other delegations, Mexico continued to be concerned that the proposals in question
might undermine the basic disciplines of the Agreement, particularly the basic principle on which the
Agreement was based, namely, that export subsidies distorted trade and might cause injury to the
trade interests of Members, for which reason they were prohibited outright or should be eliminatedgradually over a specific period or once a suitable export competitiveness was reached.
47. Second, since the proposals were to be seen in the context of the implementation review,
Mexico considered that that should not and could not lead to a basic change or modification of the
Agreement or to the balance of the rights and obligations of Members enshrined therein, particularly
with respect to those Members that had carried out the necessary changes in order to bring theirpolicies into line with the Agreement's disciplines.  Without prejudice to that position and with the
purpose of participating constructively in that debate, Mexico had carefully studied the technical and
practical aspects of the proposals.  From Mexico's analysis a number of questions had not yet been
resolved.  Specifically with respect to the proposal on export competitiveness, Mexico had a number
of questions regarding the practical viability of the "stop-the-clock" mechanism that had beensuggested to determine what would happen once competitiveness was reached but then lost again.
Regardless of these technical complications, Mexico wanted to put clearly on the record that it was
not convinced of the economic grounds of the proposal.  As far as the second element of that proposal
was concerned, the idea that a Member could reach competitiveness and lose it again for an unlimited
number of times, and therefore could indefinitely maintain export subsidies, continued to causeMexico difficulties.  Additionally, the proposal should not be considered in isolation; rather, any
decision that might be taken in that regard should be a function of whatever was decided regarding the
proposal that had been put forward on Annex VII.
48. There were still a number of unresolved issues in respect of the proposals under discussion,
and without prejudice to its position regarding the essence of those proposals, Mexico was ready to
continue participating in discussions to determine whether there were solutions to the problems that
had been identified, so long as Members did not lose sight of the goals of the Agreement, and so longas its disciplines were not undermined.
49. The delegate of Brazil thanked the Chairman for his summary of the discussions, which
reflected what had happened in the most recent meeting, and built on the discussions at other meetings
as well.  The delegate of Brazil also thanked the delegations that had submitted elaborations of the
original proposal, especially Switzerland and the EC.  The "stop-the-clock" mechanism was veryinteresting, and on the basis of that mechanism Brazil had been doing some modelling in capital to see
how the original proposal for the extension from 2 to 5 years and the re-entry suggestions would fit
into that sort of mechanism.  It was more complex than the example cited in the EC proposal, and it
was raising some doubts on how the mechanism would wo rk in practice.  Brazil was prepared to share
some of those doubts with the rest of the plenary as  the discussions evolved in September.  Since the
proposal had a link with the situation of Annex VII c ountries, Brazil had some difficulties in taking it
into account in isolation from other proposals that were being discussed in other fora in the context of
implementation.  Brazil agreed with Chile and others that there was a link between the two exercises.
Brazil saw that there remained some divergence in the plenary on the coverage of the beneficiaries of
the proposals, i.e., whether it would affect only Annex VII countries or all developing countries.G/SCM/M/31
Page 10
50. The delegate of Costa Rica thanked the Chairman for his summary which had been very
useful.  Costa Rica's intervention should not be inte rpreted as approval or disapproval of any of the
proposals.  Rather, Costa Rica wanted to contribute to the debate and clarify some points.  First, the
export competitiveness proposal was considered by Costa Rica in a broad context taking into account
all the negotiations on the issue, and its final position would depend on the overall balance that wasfound.  Therefore, the document on implementation presented by the Chairman should be viewed in
conjunction with other proposals being examined in other bodies.  If proposals were to be accepted it
would be important to limit the number of times an industry could require protection again and again.
The mechanism suggested by the EC was a good one in that it would limit the number of years over
which a Member would be entitled to such protection, and it also involved the presumption that the
protection should be eliminated gradually over eight years once competitiveness was regained, with
only a limited further period if export competitiveness was lost again.  Furthermore, Costa Ricaagreed that those who would benefit from the pro posal would be those currently in Annex VII.  In
addition, because those Members were entitled to an eight-year period to eliminate protection, five
years for establishment of export competitiveness would be excessive, bearing in mind that protection
might be reintroduced if export competitiveness was lost.
51. The delegate of Japan stated first that extension of the period for determining export
competitiveness from two years to five years obviously would require amendment of the Agreement
and that issue went beyond the scope of implementation.  Second, regarding the basis for determining
export competitiveness, in previous meetings Japan had proposed an idea for additional flexibility in a
case where trade share temporarily exceeded 3.25 per cent due to short term instability.  One example
would be to introduce a statistical method to account for the effects of such short term fluctuations.Third, concerning the situation after a loss of export competitiveness, in Japan's view further
discussion was needed.
52. The delegate of Malaysia thanked the Chairman, and delegations for proposals.
Unfortunately there was no consensus in the Committee's discussions.  Malaysia believed some
changes could be made to the Chairman's summary of  the previous meeting to make it more balanced.
It did not come out clearly that proponents had presented proposals in writing, and had given written
answers to questions, as the delegates from India and Dominican Republic had noted.  Concerning te
proposal, Malaysia noted first that proponents had clear ly said that they were unwilling to adopt any
narrow definition of the phrase "section heading" in Article 27.6.  As far as the proponents were
concerned, "section heading" in Article 27.6 of the Subsidies Agreement meant a group of chapters,
and that should be added.  Second, on page 3 under the second bullet point, it was stated that the
proposal had been discussed on the basis that it would be applicable only to Annex VII countries.  ForMalaysia, this did not appear clear in that context, as under the second bullet the discussion was
limited to the EC paper on "stop-the-clock", but Malaysia had categorically stated that any solution on
Article 27.6 should be applicable to all developing countries, as in Malaysia's view that Article was so
applicable.
53. The Chairman stated that his summary of the previous meeting did not refer to the issue of the
meaning of "section heading" as that issue had not been raised at that meeting.  His report to the
General Council of course would cover those issues because it would need to be comprehensive of all
of the discussions.  The Chairman also drew Members' attention to the first paragraph of the
summary, "General", which stated that his report to the General Council would need to be read in
conjunction with the proposals and all papers related to them.  It was implicit that those were theproponents' proposals and papers, and those of the other Members of the Committee, not just
Chairman's papers.
54. The delegate of the United States stated that his delegation United States did not recall that
there had been any kind of informal consensus on the trigger point for the eight-year phase out period,
mentioned in the Chairman's summary at page 2 under the first bullet point.G/SCM/M/31
Page 11
55. The Chairman noted that his report to the General Council would be under his own
responsibility, and his feeling was that the idea concerning the trigger point was broadly acceptable,
but he had refrained from using the word "consensus".
56. The delegate of Thailand thanked the Chairman for his summary.  Thailand was not
convinced that the export competitiveness proposal, if agreed by Members, would concern only
countries that were at that time included in Annex VII.
57. The Chairman thanked Members for their clear identification of the elements concerning
export competitiveness where they could show more flexibility and the elements that were
unacceptable to them.  The discussion had been fruitful, and he was encouraged that a number of
delegations had expressed a willingness to continue discussing the export competitiveness issue, with
some suggesting possibilities for a solution to be found.  Generally Members had been constructive
and open-minded on the issues, while noting the fundamental principles of importance to a number ofdelegations, including the integrity of certain rules as they were currently drafted.  That said, it
appeared that the export competitiveness issue poss ibly could move forward with some further work
in September.  He thus proposed that the Committee return to it in September, along with any other
issues that the General Council migh t forward to them in the meantime.
58. The Committee so agreed, and took note
 of the statements made.
59. Turning to the proposals on capital goods (footnote 61 of the Agreement), the Chairman
recalled that Colombia had submitted two proposals, the first of which sought an interpretation or
amendment of footnote 61 to include capital goods as an input consumed in the production process.
In response to a question that the Chairman had posed to India several meetings before, India had
indicated that it could associate itself with this original proposal by Colombia.  The second proposalby Colombia took another approach to the same issue, namely that Members would agree 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 outlined by Colombia, all Members could take advantage of that treatment, while
under the third scenario, only developing country Members could do so.  The Chairman noted that inthe summary of the previous week's meeting, he had omitted the fact that one Member, Thailand, had
indicated support for the principle in Colombia's amended proposal, as well as a preference for the
third scenario in that proposal.
60. The Chairman recapped the evolution of the Committee's discussion of the capital goods
proposals.  A number of Members had expressed various technical difficulties with Colombia's
original proposal.  In particular, those Member s generally did not agree with Colombia that
footnote 61, or items (h) and (i) of the Illustrative List of export subsidies, were ambiguous.  Forthem, the allowance permitted under those items for exemptions, deferrals and remission of prior
cumulative indirect taxes and import charges on inputs consumed in the production process
represented a clear carve-out from a general rule, and the cross-reference in that context to footnote 61
made clear that capital goods were not included.  Some Members also were concerned that under
Colombia's original proposal there could be excessive amounts of tax exemption or deferral onparticular exported goods.  Concerning footnote 61 itself, some Members had indicated that for them
the language defining its scope was clear, and the absence of a reference to capital goods was a
deliberate result of explicit negotiations on that subject, and not an oversight by negotiators.  In that
regard, Members had indicated in particular that the word "catalysts" in footnote 61 did not lend itself
to an interpretation that would include capital g oods.  Also in that respect, some Members had
indicated that while they could not agree to amendment of footnote 61 as an implementation issue,
they would be prepared to consider such a propos al in the broader context of a possible negotiation.G/SCM/M/31
Page 12
61. The Chairman recalled that on the basis of those reactions to its original proposal, Colombia
had submitted its revised proposal.  Colombia had made clear that in presenting its revised proposal it
was not departing from the original proposal.  Colombia maintained that both proposals addressed
what Colombia saw as a lack of legal clarity in the text of the Agreement, and simply approached that
problem from two different angles.
62. The Chairman also recalled that concerns that remained open in respect of Colombia's second
proposal included (1) whether accepting the proposal would require amendments to Members'
domestic legislation, which some saw 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 measures described in Colombia's revised proposal; and (3) whether
Colombia envisaged the stand-still that it proposed as being permanent or temporary.  In that regard,the view was expressed that as a permanent measure such a standstill would be difficult to accept,
while as a temporary measure, e.g., during a negotiation, the issue would need to be addressed
horizontally, rather than by the Committee.
63. The delegate of Colombia thanked the Chairman and the Secretariat for their efforts with the
view to fulfilling the mandate remitted to the Committee from the General Council, and emphasized
that the mandate pursuant to the decision of the General Council dated 15 December 2000 contained
two elements.  The first was to examine the treatmen t of inputs consumed and in general the question
of import levies, and the second was that the analysis be carried out in conformity with the specific
needs of the developing countries.  On the basis of that mandate the delegation of Colombia had
submitted the documents G/SCM/W/429, 442, 449, and 455.  Those documents in addition to analysispresented two types of proposals to resolve the implementation problem in question.  Those proposals
suggested interpretations on the basis that there was an absence of clarity in the provisions that had
been analysed.
64. Three elements of the debate needed to be borne in mind.  First, there was a consensus in the
Committee as to the need for developing countries to acquire capital goods under positive conditions,because this was indispensable for them in im proving their competitiveness.  Second, it was
concluded that there were a number of fiscal and other limitations in developing countries which
prevented them from making use of instruments which were used by developed countries to address
that situation.  Third, after technical debate the conclusion was reached that as regards capital goods,
the Agreement stipulated a series of treatments in the light of the customs levy which included
customs charges and direct taxes, and, thus, set forth different alternatives under the Agreement for
achieving fiscal neutrality.  It was important to bear in mind the statements made by developingcountries to the effect that the implementation proposal tried to resolve an important problem.
Colombia noted the concerns expressed by a number of Members regarding the possible implications
of its proposals, and also noted the constructive approach to its second proposal, namely that it could
be analysed in the General Council as a horizontal issue.  In conclusion, Colombia considered the
technical debate to have been exhausted and was fully confident that the Chairman's report wouldgive a thorough in-depth presentation of that debate.
65. The Chairman thanked Colombia for its contributions and constructive participation in the
debate, and emphasized that his report to the General Council would be comprehensive and would
take into account the various issues raised and the positions of Members and clarifications provided.
66. The delegate of the European Communities thanked the Chairman for his report and noted
regarding Colombia's statement that although Colombia had said that certain qualifications, reasons
and motivations had been agreed, his delegation did not think anything had been agreed or concluded
by the Committee, but rather that views had been expressed.  The delegate of the EC was not awareG/SCM/M/31
Page 13
with regard to footnote 61 that there was any co nsensus thus far on any conclusion or motivation or
reasoning.
67. The delegate of Colombia clarified that she had never used the word "consensus" in her
statement regarding either her proposal or the scope of the footnote 61.  She had referred to the fact
that that Committee had discussed the point remitted to it by the General Council and particularly thespecific needs of the developing countries, which was a basic part of the mandate.  In that regard,
within the Committee they had advanced the question of necessity.  As there were many difficulties of
a fiscal and other nature in making available to exporters capital goods under competitive conditions,
the Committee had had an in-depth discussion of that matter which had led to the conclusion that the
specific need existed, and that developing countries had limitations in that regard.
68. The Chairman thanked Colombia and did not think that anyone could deny that capital goods
were required and that they had had an exhaustive discussion and proposals on how to consider them
as consumed in the production process.  The form in which these issues had been put forward in the
various proposals seemed to have attracted a great deal of comment and debate, which would be
reflected in his report as accurately as possible.
69. The Committee took note of the statements made.
70. Turning to India's proposal under footnote 61, th e Chairman again recalled India's indication
that it could associate itself with Colombia's orig inal proposal in respect of interpreting or amending
footnote 61 to include capital goods.  Thus, to a certain extent the comments and summary just
presented would cover India's position as well as Colo mbia's.  That said, India's proposal in respect of
capital goods remained on the table.  That propos al would be based on industry-wide average rates of
depreciation for capital goods used in the production of exported products.  In addition to thequestions of interpretation raised by that proposal, a number of technical concerns had been identified
in the Committee's discussions of it.  In the main, these had had to do with issues of transparency and
accuracy.  Members had questioned the ability of an industry-wide averaging system to accurately
capture the extent of depreciation of capital equipment associated with particular volumes of
particular exported goods.  In that regard, it was noted that accounting standards including fordepreciation might vary for tax and other purposes, and from one industry, or even one company, to
another.  Thus, it would be very difficult in practi ce to verify that excessive amounts of depreciation,
and thus excessive amounts of tax exemption, were not being attributed to exported goods.  Concern
also was expressed that any multilateral approach to capital goods would need to be able to be applied
by all WTO Members, and in that regard Members doubted whether the system proposed by India
could be implemented, in practice, by all Members.  The Chairman asked whether India wished to
modify its original proposal by associating itself fully with Colombia's original capital goodsproposal.
71. The delegate of India stated that India had made a proposal to amend footnote 61 on inputs
consumed in the production process to take into consideration the imperatives of revenue generation
for many developing countries.  While India had submitted a separate proposal on inclusion of capital
goods in the definition of inputs consumed in footnote 61, it also had indicated its association with theproposal by Colombia as it felt that that issue arose out of a lack of legal clarity in the Agreement.
India would have liked Members to appreciate that  given the narrow tax base prevalent in certain
developing countries, and on the grounds of equity, it might perhaps not be feasible to immediately
choose the alternative of lowering import duties on capital goods.  In India's view, there would be no
level playing field for exports originating in such developing countries if their export prices bore anelement of import charges paid on capital goods used for the manufacture of exported products.  India
was disappointed to note the highly restrictive interpretation given by some Members which in India's
view failed to address their general implementation concerns.G/SCM/M/31
Page 14
72. The Chairman stated that whether the Committee had three capital goods proposals on the
table or just two, the concerns identified with resp ect to Colombia's original proposal also applied to
that of India.  Noting the statements made by both Colombia and India in respect of those issues and
the importance they attached to them, the Chairman would of course ensure that his report to the
General Council was comprehensive and reflected all sides of the debate.  The Chairman thankedMembers for participating constructively in the discussion on that issue.
73. The Committee took note of the statements made.
74. Turning to the last proposal before the Committee, India's proposal on duty drawback, the
Chairman recalled that India proposed a system whereby individual companies claiming drawback
would not have to maintain or produce record s showing the amounts of imported inputs used in
producing the goods that they exported and the amounts of duties paid thereon.  Rather, under the
proposed system, industry-wide average rates of ut ilisation of imported inputs, and the respective duty
incidence, would be established for each exported product.  Those averages would then form the basis
of duty drawback payments to companies in each industry.
75. The Chairman noted that Members had raised a number of technical questions and issues
concerning that proposal, including many questions as to the accuracy, transparency and verifiability
of the proposed system.  In particular, Members pointed out that efficiency varied from company tocompany, and with it the actual utilisation of imported inputs.  Moreover, in a given industry
producing for export, there might be some companies that used no imported inputs at all but those
companies nevertheless would be eligible for drawback payments under the proposed system.  In
addition, it was noted that the question of drawback primarily arose in the context of countervailing
duty investigations, where the exact specification of the product definition was established in thepetition, meaning that it would not be possible to calculate averages, in advance, for every potential
product specification that might be the subject of a countervailing 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 countervailing investigation.
76. The Chairman noted that a number of Members had indicated that any 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,
only company-specific calculations were deemed by those Members to be acceptable in terms of the
rules of the SCM Agreement.
77. The Chairman recalled that Members had indicated a considerable willingness to discuss
simplified approaches to duty drawback that could be  applied by individual companies, i.e., averaging
or aggregation methods for individual companies, so that those companies would not have to provethat a given individual imported part or component had been physically incorporated into a given unit
of an exported product.  In that regard, the Chairman had felt that it would be of benefit to all
Members to share summarized information about their individual duty drawback schemes, and in
particular, about the kind of record-keeping that was necessary in order for a company to claim duty
drawback, including in particular summarizing or averaging that was permitted.  The Chairmanthanked those Members that had provided such summaries, which he believed that they had helped to
increase all Members' understanding of that very technical area, and might have generated some
useful ideas for India.
78. The Chairman noted that at a previous meeting, India had indicated that it might be able to
pursue the question of the treatment of duty drawback in countervailing duty investigations bilaterallywith interested Members.  At the previous meeting,  India and the EC had indicated that they had had
some bilateral contacts in that regard, and that due to the nature of the issues, the involvement ofG/SCM/M/31
Page 15
technical experts was needed.  In view of those ongoing discussions, India had requested that the
Committee put its duty drawback proposal to the side fo r the time being, and return to it in September.
79. The delegate of India thanked all delegations who had shared information on duty drawback
systems.  He noted that India's proposal had been made to take into consideration the problems faced
by small production units which in many developing countries faced difficulties in maintainingdetailed costing records to account for the exac t quantity of inputs consumed in the production
process and which were, therefore, not able to make use of their rights under the SCM Agreement.
80. India had proposed the system of aggregate and generalised rates of remission of duties based
on a rather rigorous system of devising statistical norms for calculating the inputs consumed in the
production process.  India believed that it had satisfactorily replied to the questions raised by
Members relating to the sample on which the average amount of input consumed would be calculated,
how the proposed system of remission of duties would work, what adjustments would be made, how
variations in product characteristics would be taken into consideration, the nature of on-site
verification etc.  As those replies were on record of the Committee it was not necessary to repeat
them.
81. While India was disappointed that no consensus had been achieved in this matter, in the spirit
of constructive engagement it had already indicated its acceptance of the offer of the EC to discuss ingreater detail the problems faced by their exporters, especially the practice of countervailing in full
any benefit which their duty drawback and remission  schemes might confer.  India welcomed similar
detailed discussions with other Members, if they so desired, to find some solution to the problem
before the next meeting of the SCM Committee.  I ndia, however, did not consider this implementation
concern to have been resolved merely by the fact that it had agreed to engage in further discussionswith interested Members.
82. The Chairman thanked all Members for their input on the duty drawback issue over the course
of the meetings.  It was very encouraging that interested Members were pursuing the questions that
motivated the proposal in an effort to find solu tions, and he looked forward to hearing back from
India in September.  The Chairman informed th at his forthcoming report to the General Council on
the duty drawback proposal would indicate the current status, and his final report at the end of
September would provide an update based on what India reported to the Committee in September.
83. The Committee took note of the statements made.
84. The Chairman thanked Members for their participation and for their clear statements of
position on the various issues that remained before the Committee.  The discussion had been of
enormous benefit to him, and would ensure that his report to the General Council was as complete and
informative as possible.  He believed that the discussion also had helped the Committee to identify
areas where there seemed to be scope for further progress and hopefully solutions after some
additional work in September.
85. The Chairman noted that he would be transmitting his report to the General Council
Chairman on 31 July, and would at the same time circulate it to the Committee for the information of
Members.
86. The Committee took note of the Chairman's statement.
87. The meeting was adjourned.G/SCM/M/31
Page 16
ANNEX
Chairman's Summary of the Discussion at the 20 July 2001
Informal Meeting of the SCM Committee
Revised
General:
In respect of the need under the agreed procedures to provide a Chair's report to the General
Council by the end of this month, I indicated my intention to provide on my own responsibility a
factual report of the Committee's discussions, along the lines of the statement made to the General
Council on 8 May 2001 (reproduced in Job(01)/68), describing proposals received, ideas explored in
respect of possible solutions, any agreement that might have been reached concerning solutions, and,
for any of the issues for which no solution had been identified, a description of all of the issues raised
and the positions expressed.  The report would of course need to be read in conjunction with the
proposals and all papers related to them, summaries and non-papers that I have provided, and any
formal records of Committee discussions.  In my view, the report needs to be complete andinformative, to enable the General Council to have a clear and full understanding of the work done in
respect of the issues that it had referred to the Committee, for its own ongoing work on
implementation issues.
Export Competiveness:
Following the 22 June meeting, I had sent to Members by fax a written version of the
summary that I had made at the meeting concerning the quite lengthy and interactive discussion that
had taken place of the four proposals before the Committee.  That summary had addressed one-by-one
the bullet points in the my 11 June non-paper concerning export competitiveness, and had addressed
as well the points raised in the questions at the end of that non-paper, including the EC's "stop-the-
clock" idea raised at that meeting.  The EC had brought this idea into the discussion in response to
questions raised at the end of the non-paper concerning what would happen if a country lost export
competitiveness either during, or after the end of, its eight-year phase-out period, i.e., for how long
and how many times would the country in question have the possibility of re-introducing export
subsidies following a loss of export competitiveness?  At the meeting, most delegations had
welcomed this suggestion from the EC and had indicated that they were willing to use it as the basis
for further consultations, once it was received in wr iting.  After the meeting, the EC had submitted a
paper describing in more detail how the st op-the-clock idea might operate (G/SCM/W/457).
I noted that the Committee's recent consideration of the export competitiveness issue had
consisted of quite detailed discussions of the framework for a possible solution.  Firstly, the
Committee started from the Swiss proposal which had suggested several conditions and parametersthat the Swiss delegation wanted the Committee to take into account in trying to address the concerns
raised by the proponents.  Secondly, the Committee continued on the basis of my 11 June non-paper,
which compiled elements from the Swiss proposal as well as additional elements and considerations
that had been put forward subsequently by some delegations.  Thirdly and finally, the Committee had
considered the EC's stop-the-clock idea.
In spite of the detailed nature of the most recent discussions, I suggested, given points
expressed during his recent informal consultations, that Members step back from the details and recall
two main points.  First, although discussion had increasingly focused on the details of a potential
solution, it needed to be recalled that a number of delegations had emphasized that their participation
in such detailed discussions was without prejudice to their final positions in respect of the exportcompetitiveness issue and any solution thereto.  Second, I noted that some delegations had recalled
that there were and always had been two distinct elements to the export competitiveness proposalG/SCM/M/31
Page 17
originally tabled by the group of 10 delegations in document G/SCM/W/431/Rev.1: (1) the basis for
determining export competitiveness, on the one hand, and (2) the question of what happens to a
country that loses export competitiveness after having reached it, on the other hand.  While these
elements had become increasingly intertwined in the detailed formulations of possible solutions
discussed, it was clear that for some delegations they remained both separate and separable.  Inparticular, some delegations had indicated that they might ultimately have more flexibility in respect
of one of these elements than in respect of the other.
Main points discussed at the 20 July meetin g on the basic proposal in G/SCM/W/431/Rev.1
• General: Several Members expressed concerns about weakening the principles of the SCM
Agreement, and worried about transforming a system of phasing out export subsidies into one in
which they were treated as a tool with which to gain export competitiveness. Certain Members
expressed the concern that the combination of lengthening the two-year period for determining
export competitiveness and introducing flexibility concerning the phase-out of export subsidieswould effectively write out of the Agreement th e obligation for Annex VII developing countries
to remove their export subsidies.  Finally, some Members suggested that, as the issue of allowing
reintroduction of export subsidies seemed 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.
• Period for determining export competitiveness – The proponents continue to propose a change
from two to five years.  Other Members have indicated that they may have some flexibility in
respect of this element, but perhaps for an extension to something less than five years.
• Possibility to resume export subsidization after loss of export competitiveness – 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.  Some argue that this second point would effectively freecountries from an export subsidy phase-out obligation, and some 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 – Th ere seems to be general agreement that if there
were to be the possibility to resume export s ubsidization, there would need to be a minimum
period of consecutive years below the export competitiveness threshold (share of world trade inthe product) for the country to be deemed to have lost export competitiveness.  In this regard,
most delegations have suggested a minimum of tw o years.  Some Members argue that there would
need to be symmetry with the period for establis hing export competitiveness; if a two year period
was decided on 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 there was anagreement 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, noting that export comp etiveness can be lost much more rapidly than
gained, and have suggested five years for establishing export competiveness, and two years for
establishing its loss.
• What threshold?  Most recent discussions have assumed that the 3.25% threshold would apply for
both reaching and losing export competitiveness.
• Automatic recalculation two years after loss of export competitiveness – There seems to be no
disagreement with the suggestion that the Secret ariat would automatically recalculate the share of
world trade in the product two years afte r the loss of export competitiveness.G/SCM/M/31
Page 18
• Trigger for eight-year phase out period – It was suggested that the eight-year phase out period
would only begin upon an initial determination/calculation that export competitiveness had been
reached, regardless of whether export competitiveness had in fact been reached before the period
on which the calculation was based.  This seemed broadly acceptable to a number of delegations
as an element in the framework being discussed.
Main points discussed at the 20 July meeting concerning the EC stop-the-clock paper:
• Approach to the discussion  - A number of  Members reiterated that they wished to be
constructive, and thus were prepared to discuss the stop-the-clock idea in detail, but that their
participation in the discussion was without prejudice to their position in respect of the export
competitiveness proposal or any of the elemen ts thereof that the Committee was considering.
• Countries covered by the framework under discussion – Proponents disagreed with the view
expressed in the EC paper that the framework under discussion would apply only to Annex VII
countries, but otherwise could discuss on the basis of the paper.  A number of other Membersindicated that for them, the limitation to only Annex VII countries was a necessary condition of
any eventual agreement to a framework on expor t competitiveness.  Some delegations also
indicated that any decision that might be taken in respect of export competitiveness would need to
be revisited if any changes to either Article 27 or Annex VII were agreed in other fora.
• Possible duration of export subsidization - Certain Members 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 andlosing export competitiveness.  It was noted in th is 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 thatsymmetry 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, during the
longer period under consideration for establishment of export competitiveness, Members could
continue to discuss methods to prevent such ad infinitum entry and exit from export subsidies.
• Level of subsidy: Several members requested clarifications of the idea that resumed levels of
export subsidies should not be "excessive," and were unclear on how, and by whom, this
appropriate level of subsidy could be determined. The proponents on export competitiveness
disagreed that there should be any such limitations, noting that the Agreement does not establish
such limits.  The view was expressed that the reference to a non-excessive level of subsidization
in the EC's stop-the-clock paper seemed to be premised on the assumption that developing
country Members subject to the eight-year phase-out period would be phasing out their subsidiesin a progressive manner over that 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 that the
latter scenario might be more probable than the former, especially as the Agreement does not
require developing countries to progressively phase out their export subsidies.  Thus, some
Members noted such a cap would operate as an incentive to maintain maximum levels of exportsubsidies throughout the phase-out period.  The EC, as originator of the stop-the-clock idea,
expressed flexibility regarding the level of subsidization, and could probably accept simply a
reference to the level of subsidization just prior to  the loss of export competitiveness, rather than
trying to identify an appropriate or non-excessive level.G/SCM/M/31
Page 19
• Transparency/Monitoring: Some Members 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, there
was at present a lack of basic transparency concerning Members' subsidies, given the poor
compliance with the Article 25.2 subsidy notification requirement.  The question was 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 had reached exportcompetitiveness 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 were recalled, and in
particular Article 25.8 which provides for requests for information concerning subsidies.  The
question was raised whether these provisions would be adequate for monitoring any export
competitiveness system that might be established.  In addition, the idea of a statistical
measurement of market volatility was suggested, as a possible means to respond to the basic
concern underlying the original proposal, namely that countries might erroneously be identified ashaving reached export competitiveness, purely on the basis of relatively short-term market
volatility.
Capital Goods Proposals
I recalled that at the 22 June meeting, the discussion of Colombia's revised proposal
(G/SCM/W/455), had been very preliminary as the paper had only just been received.  I also recalled
that Colombia was proposing that Members agree to refrain from taking dispute settlement and
countervailing action under three alternative scenarios.  The first scenario covered tax and duty
exemptions, remissions and deferrals by any Member on capital goods used in the production of
export goods.  The second scenario covered only such tax and duty exemptions and deferrals, and notremissions, also for all Members.  The third scen ario covered such tax and duty exemptions and
deferrals, and not remissions, for developing country Members only.  I further recalled that Colombia
had submitted this proposal because Members had found Colombia's original proposal, which would
have involved either an interpretation or an amendment of footnote 61 to include capital goods, to be
difficult to accept.  For some Members, no interpretation that would include capital goods would bepossible, while it might be possible to consider an amendment, but only in a broad negotiating round,
and not outside such a context.
I also recalled that India had made a proposal to treat capital goods as an input consumed in
the production process, that I had previously asked Colombia and India whether they could rationalizeor coordinate their proposals, and that India's initial reaction was that the approach taken in
Colombia's proposal might not address all of India' s concerns.  At the 22 June meeting, India had
indicated that it was continuing to reflect on the views that had been expressed by other Members in
respect of its proposal.
Main points discussed a the 20 July meeting:
Colombia's reformulated proposal
• One Member expressed its support for this proposal by Colombia, and its preference for the third
scenario outlined therein.
• Some Members emphasized that footnote 61 uses clear and negotiated language to describe a
limited exception to a general rule.  As such, for them the issue could not be dealt with by
interpretation or other agreement, but should be tackled in the context of a broader round of
negotiations.
• Some Members indicated, as they had noted at the 22 June meeting, that they would have
difficulties with the reformulated proposal because of its implications for their domesticG/SCM/M/31
Page 20
legislation, with some indicating that it would require actual amendment of their domestic
legislation.
• Some Members expressed discomfort concerning the approach described in the reformulated
proposal, as it would prevent them from even initiating dispute settlement consultations on themeasures covered by the proposal.  Certain Members indicated that they were more comfortable
discussing on the basis of Colombia's original proposal than the reformulated one.
• Disagreement remained as to whether this issue could be addressed as an implementation
question.  For Colombia, the issue was based on lack of legal clarity in the Agreement, and thusshould be treated as an implementation issue. In this regard, Colombia explained that its
reformulated proposal did not represent a departure from the viewpoint of its original proposal.
• For certain Members, Colombia's proposal of a standstill on countervailing investigations and
dispute settlement would be difficult to mainta in as a permanent measure.  If some sort of
standstill were envisioned during broad negotiations, these Members considered that this wouldbe a horizontal issue, and as such could not be tackled by Committees, but would need to be
considered by the General Council.
India's proposal
• In response to my question from an earlier meeting as to whether it would be possible for India
and Colombia to rationalize their capital goods proposals, India indicated that it could associate
itself with Colombia's original proposal on capital goods.
Duty Drawback
Concerning the proposal from India for a system of aggregate and generalized rates of duty
remission, based on industry-wide averages, rather than company-specific data, I recalled my request
at recent meetings that Members briefly describe their own duty drawback systems, in order to see
what sort of simplified or aggregated data they might use.  The delegate from Thailand read a
statement concerning Thailand's system, a copy of which is attached for the information of Members.
I also noted that at the 22 June meeting, when this proposal was discussed, India had
indicated that it would be prepared to discuss with interested Members the treatment of duty drawback
in countervailing duty investigations.  At the 20 July meeting, India indicated that discussions among
interested Members were ongoing, and that in view of the technical nature of the problem, India andsome other Members were of the view that experts with countervail experience would need to be
involved.  India noted, however, that it was not  abandoning its implementation proposal concerning
duty drawback, but asked the Committee to put that pr oposal aside for the time being, in view of the
ongoing discussions among interested Members, and to return to it in September.
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