WORLD TRADE
ORGANIZATIONG/SCM/36
2 October 2001
(01-4698)
Committee on Subsidies
and Countervailing Measures
CHAIRMAN’S REPORT ON THE IMPLEMENTATION-RELATED
ISSUES REFERRED TO THE COMMITTEE AT THE REQUEST OF THE CHAIRMAN OF
THE GENERAL COUNCIL ON 2 AUGUST 2001 AND IN THE 15 DECEMBER 2000
DECISION OF THE GENERAL COUNCIL
Mr. Chairman, I am presenting this report to the General Council on my own responsibility,
as Chairman of the Committee on Subsidies and Countervailing Measures ("SCM Committee"),
pursuant to your 2 August 2001 request that the Committee take up two new implementation issues,
and report back to the General Council by 30 September 2001.  The two new issues were
(1) consideration of the implementation of Article 27 of the Agreement on Subsidies and
Countervailing Measures ("SCM Agreement") as it rela tes to particular issues concerning developing
country Members with a small percentage share of exports in import markets and in global trade; and
(2) review of the provisions of the Agreement on Subsidies and Countervailing Measures regarding
countervailing duty investigations.
Mr. Chairman, you will recall that in the report that I submitted to the General Council on
31 July 2001 in respect of the three implementation-related issues referred to the Committee in theGeneral Council's decision of 15 December 2000, I indicated inter alia  that I believed that there was
potential for a possible solution in respect of one issue – export competitiveness – with additional
time and effort by the Committee.  I therefore indicated that Members would have the opportunity in
September to continue addressing this and the other two issues referred on 15 December.
The Committee has had a very active programme of meetings and consultations during
September, in the course of which all relevant matters have been addressed.  All Members have
engaged seriously and constructively in this work, and I believe that we have made considerableprogress in clarifying some of the many technical aspects involved, and in working toward identifying
the bases of possible solutions on at least some of these issues.  This said, there is much more work to
be done before fully-elaborated proposals can be formulated.
In view of both the progress that we have made so far, and the amount of work that remains to
be done, the Committee has agreed to keep working in the time remaining until the MinisterialConference in Doha.  The Committee has, moreover, taken note of the draft implementation decision
in the text that you circulated on 27 September 2001 which, if adopted by the General Council, will
instruct the Committee to continue to work on the countervailing duty investigation issue between
now and Doha.  With these considerations in mind, the Committee has agreed on a work plan of
meetings and consultations that it would pursue between now and 26 October, in the event that theGeneral Council decides to extend the Committee's mandate in respect of these issues.
Mr. Chairman, I would therefore recommend that the General Council extend the mandate of
the Committee until 26 October.
During the time of that extension, in respect of issues concerning the implementation of SCM
Article 27, the Committee would:G/SCM/36
Page 2
• Continue to work with a view to reaching a solution for developing country Members with a small
percentage share of exports in import markets and in global trade, within the framework ofArticle 27.4 of the SCM Agreement for extensions of the transition period for export subsidies.  In
this connection, the Committee would seek to identify criteria for eligible countries and
programmes, transparency elements, timeframes, and any other relevant elements and operational
aspects.
• Continue to work with a view to reaching a solution on the export competitiveness issue.  In this
connection, work on a possible solution on the determination of export competitiveness wouldfocus on elaboration of an approach based on moving averages to determine shares of world trade
in a product.  Work on the possibility to resume export subsidization following a loss of export
competitiveness would continue on the basis of ideas previously advanced, including the "stop-
the-clock" approach described in detail in my first report.
In respect of the review of countervailing duty investigation procedures, the Committee would
continue to discuss the proposals received, and report to the General Council.
* * *
Mr. Chairman, I would like to conclude this report by again expressing my gratitude to all
Committee Members and the Secretariat for their very hard work.  It would not have been possible to
progress in our discussions if not for the flexibility shown by all Members in evaluating various ideas
and possibilities for solutions to these important issues.  The Committee is prepared to continue towork intensively in the weeks to come, and I remain optimistic that on that basis we may be able to
produce some concrete suggestions for consideration at Doha.  I look forward to the results of the
General Council's deliberations in this respect.
____________________________________________
Remo MORETTA
Chairman
Committee on Subsidies and Countervailing Measures
30 September 2001G/SCM/36
Page 3
Technical summary
1. Procedure
1. This is my second report in connection with th e implementation-related issues referred to the
Committee from the General Council.  The first report (G/SCM/34, dated 31 July 2001) covered theCommittee's discussions on the issues that had been referred to it from the General Council up to that
point, namely the issues of export competitiveness (SCM Articles 27.5 and 27.6); and aggregate and
generalised rates of remission of import duties, and the definition of "inputs consumed in the
production process", taking into account the particular needs of developing countries.
2. At the 31 July 2001 informal meeting of the General Council, the General Council Chairman
indicated his intention to request that the SCM Committee take up two more issues, and report back to
the General Council by 30 September 2001.  This request was conveyed to me in a letter dated2 August 2001.  The two issues were (i) a review of  the provisions of the SCM Agreement regarding
countervailing duty investigations; and (ii) the implementation of Article 27 of the SCM Agreement
as it relates to particular issues concerning developing country Members with a small percentage
share of exports in import markets and in global trade.
3. The Committee had agreed at its meeting of 27 July 2001 that any new referrals that it might
receive from the General Council would be considered using the same basic procedures as had been
followed for the referrals of December 2000.  In this regard, specifically, the Committee agreed that
Members wishing to raise particular issues under the new referrals should make brief written
submissions, identifying the relevant provisions of  the Agreement, outlining the problems or issues of
concern, and suggesting any solutions.  Such papers were to be submitted to the Secretariat by27 August 2001.  New proposals were received from El  Salvador and Jamaica in respect of the issue
of developing country Members with a small share of trade, and from India and Brazil in respect of
countervailing duty investigation procedures.  India and Brazil each submitted an additional document
in response to a request for some categorisation of the issues that they raised.  The Dominican
Republic submitted a document, also on behalf of Bolivia, Ecuador, El Salvador, Guatemala andHonduras, containing a declaration adopted at the Fifth Latin American Conference on Free Zones,
held recently in Panama.
1
4. The Committee met on 11, 18, and 28 September 2001 in informal session, and on
28 September 2001 in formal session, to discuss the substance of the two new referred issues, and to
continue work on the referrals of December 2000.  In between the meetings of the Committee, a series
of informal consultations were also held.  These discussions were based on the written proposals and
papers submitted by delegations, as well as documents that I prepared, including non-paperssummarising the discussions at the Committee meetings.
5. At its formal meeting of 28 September 2001, the Committee agreed that it would continue to
work, on the assumption that its mandate would be extended.  With this in mind, the following work
plan was adopted:  the Committee would meet in informal and/or formal session on 12 and
26 October 2001, and I would hold informal consultations on 4 and 9 October 2001, and other datesas appropriate, with a view to advancing discussion of the referrals on the basis of the elements
outlined.
6. In the following sections, the main points rais ed in the discussions are summarised.  In giving
due consideration to the issues, these summaries should be read in conjunction with the papers
exchanged by Members, the records of the Committee's meetings on these issues, and the otherdocuments referred to herein.
                                                     
1 G/SCM/W/467.G/SCM/36
Page 4
2. Developing country Members with a small share of trade
7. In his request of 2 August 2001, the Chairman of the General Council indicated that an
understanding had been reached to refer the following proposal to the SCM Committee:
"Members request the Committee on Subsidies and Countervailing Measures to
consider the implementation of Article 27 of the Agreement on Subsidies andCountervailing Measures as it relates to particular issues concerning developing
country Members with a small percentage share of exports in import markets and in
global trade."
8. Pursuant to the procedures agreed by the Committee, El Salvador and Jamaica submitted
proposals in respect of this issue.
(a) Proposal of El Salvador
2
9. El Salvador's proposal targets "free zones", established for development and employment
purposes and located outside its national customs territory, which provide exemptions from internal
taxes, including taxes on profits, and import duties.  Goods produced or processed in the zones are
temporary importations, with internal taxes and import duties being paid on the goods exported from
these zones in the countries into which the goods are re-exported upon production or processing.  El
Salvador proposes an interpretation under which such exemptions from internal taxes and importduties would not be considered export subsidies.
10. The following points were made in respect of El Salvador's proposal on this issue:
• Scope of proposal – Some Members sought details of the different incentives provided in
free zones.  In this regard, they raised the question of whether any action or interpretation
would be necessary in respect of duty drawback or other incentives not contingent upon
export performance.
• Basis of proposed exemption – On the othe r hand, some Members questioned the basis on
which an exemption from taxes on profits derived from exportation could be deemed not
to be an export subsidy.
(b) Proposal of Jamaica3
11. Jamaica proposes an exemption for certain developing country Members from the prohibition
on export subsidies.  Beneficiaries of this proposal would be defined according to their share of globalmerchandise trade.  Further, where such a Member had no greater than a 3.25 per cent share of world
trade in a particular product, the prohibition on export subsidies would not apply to that Member in
respect of that product.
12. The following points were made in respect of Jamaica's proposal on this issue:
• Definition of eligible Members – Some Members questioned the appropriateness of the
0.05% threshold share of world trade proposed by Jamaica, which they considered to be
arbitrary in the absence of any conc rete justification for that level.
• Operation of exemption – A number of Memb ers indicated an unwillingness to consider
an indefinite exemption from the prohibition on export subsidies as proposed by Jamaica.
                                                     
2 G/SCM/W/461.
3 G/SCM/W/463.G/SCM/36
Page 5
They suggested as an alternative that they could consider finding a solution for
developing country Members with a small share of trade within the framework of the
mechanism in SCM Article 27.4 for extension of the transition period for developing
country Members' export subsidies.  Under this suggested approach, any Member seeking
an extension of the transition period under Article 27.4 would have to present anapplication to the Committee.  Such an application would need to be detailed and could
identify, for instance, the type of programm e, the main beneficiaries thereof, and the
volume/scope or coverage of the subsidies involved.  Extensions would be subject to
annual monitoring, as foreseen in Article 27.4.  To ensure certainty, quantifiable criteria
would need to be established and those suggested by Jamaica were useful in this regard as
a basis for further development or work.  Any extensions would need to be time-limited
and there would be no change to an extension once granted, subject to monitoring.
• Standstill – Several Members suggested that any extensions would be limited to existing
programmes and that the levels/scope of benefits could not be increased.
• Jamaica indicated its willingness to continue to seek solutions on the basis of the elements
outlined.
(c) Possible alternative framework
13. Following discussion of the two proposals on this issue, I suggested in a round of informal
consultations that a solution might be possible combining elements from both El Salvador's andJamaica's proposals, as well as elements suggested in the Committee’s discussion.  Under this
approach, the question of the export subsidy prohibition as it applies to developing country Members
with a small share of trade would be addressed through the framework of the extension mechanism in
Article 27.4.  In this context, extensions of the transition period for such Members would be limited to
existing import duty and internal tax exemptions provided in the context of economic and socialdevelopment programmes geared toward attracting investment, to be notified in the application for an
extension.
14. For a measure to qualify, it would need to have been in existence as of a set date in the recent
past.  The scope and coverage of the notified measures, and of the intensity of subsidisation
thereunder, could not be increased during the period of extension.  Developing countries would bedeemed to have a small share of world trade, and thus be eligible, if their share of world merchandise
export trade was not greater than a set percentage.  Further, an extension would be granted upon
application to the Committee, to be made by 31 December 2001.  Any extensions would be subject to
annual review, and extensions would be continued on the condition that transparency and standstill
requirements were met.  The extension would be te rminated in respect of any individual product in
which the beneficiary reached at least a 3.25 per cent  share of world trade.  This framework would be
without prejudice to Articles 27.5 and 27.6 or to any proposals related to them, and to any requests for
extensions under Article 27.4 not made pursuant to this framework.
15. Following my consultations, the Committee agreed to pursue work in respect of the issue of
developing country Members with a small trade share on the basis of the Article 27.4-based approach
that I had outlined, with the details as to eligibility and operation to be negotiated by Members.  This
further work would be without prejudice to Members' final positions and to any other proposals.
16. Concerning the details of the approach outlined, the following are the main points that have
been raised:
• Systemic concerns – Some Members have expressed concerns over the increasing
categorisation of Members, including within th e category of developing countries.  Views
were also expressed that this framewor k would weaken subsidy disciplines and, inG/SCM/36
Page 6
particular, would allow for continued export subsidization, which was a matter of serious
concern to some.
• Eligibility for extensions – Several Members have suggested that additional elements –
besides percentage share of world merchandise export trade – be considered as possible
criteria for determining a Member’s eligib ility for an extension under this framework.
Such criteria might include, inter alia , population, GDP/GNP (as a total or on a per capita
basis), export subsidies as a percentage share of total exports, and/or other relevant
factors.  In this regard, the Secretariat has been requested to provide additional statistical
information which may assist Members in determining the most relevant criteria to be
applied.  One Member has emphasised that the eligibility criteria must seek to identify
countries that are vulnerable in the multilateral trading system.  Suggestions were also
made that the framework should involve an agreed list of criteria, or an agreed list of
Members that meet an agreed list of criteria.  Some Members have expressed a preferencefor a positive list of programmes, and some for identification of particular sectors.  One
Member suggested that a pragmatic approach be adopted, involving a combined
country/programme perspective with respect to eligibility, which would provide a precise
idea of the scope of this framework.  Others have commented on the difficulties in
defining a category of eligible countries.  Concerns have also been expressed in respect oftransparency with regard to eligibility criteria.
• Definition of "existing programmes" – Some Members have suggested, on the basis of the
requirement in Article 27.4 not to increase the level of export subsidization, that only
programmes in existence as of 1 January 1995 should be eligible for extensions.  Another
Member has suggested that only programmes in existence as of 31 July 2001 should be
eligible for extensions.  A third suggested cut-off date, which I put forward forconsideration, was 1 September 2001.
• Notification of beneficiary programmes – Several Members have indicated that
notification of the beneficiary programmes should be a necessary pre-condition of any
extension.  In this respect, it has been su ggested that the format for notifications under
Article 25 would be appropriate.
• Period of extension – Most Members have stat ed that the period of extension would need
to be limited, with one Member specifically proposing that the period be three years.
• Continuation of extension – Some Members have suggested that the annual reviews be
conducted on a pro forma basis, with extensions continued ex ante on the condition that
standstill and transparency requirements are respected.  One Member has indicated that
this possibility would only be appropriate if the agreed period of extension is a short one,
but that a long period of extension would require a phase-out or staging provision.
• Annex VII countries – The question of Annex VII countries was raised, with some
pointing out that any countries that graduate out of Annex VII after 31 December 2001
would not be able to take advantage of this  framework, and thus would be worse off than
those who have already graduated as of that date.  Accordingly, it was suggested that
"late" graduates be considered eligible fo r an extension equal to the remaining time-
period at the time of their graduation from Annex VII.
• Possibility of safeguard measures – One Member has suggested that importing
developing country Members adversely affected by an extension granted to another
Member under the proposed framework should be allowed the possibility of adopting
safeguard measures in respect of their domestic industries.  It was not clear whether suchG/SCM/36
Page 7
safeguards would be applied within or outside of the context of the Safeguards
Agreement.
3. Export competitiveness
17. As suggested in my 31 July report, the Committee continued its discussion of export
competitiveness in the course of its September 2001 activities.  As noted in that report, the proposalon this topic (G/SCM/W/431/Rev.1) contains two el ements:  (i) the proponents seek a change from
2 years to 5 years for the period over which export competitiveness is to be established under
Article 27.6; and (ii) the proponents seek a mechanism to allow developing countries that have
achieved export competitiveness in a product to resume export subsidization on that product if exports
thereof fall below the export competitiveness threshold.
18. Concerning the first element  of the proposal (i. e., on the establishment of export
competitiveness), the following are the main points  that have been raised during the September 2001
discussions:
• Suggestion of a moving average for determining export competitiveness – Concerning the
proposal to change the period for establishing export competitiveness from two
consecutive years as set forth in Article 27.6 to five consecutive years, some Members
have noted that this proposal seeks to address the problem that the period of two
consecutive years might not be a sufficient period of time to reflect stable conditions.  Ithas been suggested that an alternative means of addressing this problem, which would not
require an amendment to the Agreement, would be to calculate the shares of trade for
each year in a two-consecutive-year period on the basis of two-, three-, or four-year
moving averages.  That is, the data for each year of the two-year period would consist of a
multi-year average of the data for that year and some number of immediately precedingyears.  Such an approach would smooth abnormal fluctuations that might occur
sporadically, and thus should help to prevent countries from crossing the 3.25 per cent
threshold on the basis of transitory conditions, and then dropping back below that
threshold once those conditions had passed.
4  To ensure that no Member is made worse
off under this approach than under an approach based on two consecutive individual yearsof data, the moving average would be applied only in cases where the trade shares in the
product were at least 3.25 per cent during each of the two individual consecutive years in
question.  That is, if a country in two consecutive years had at least a 3.25 per cent share
of trade in a product, then the moving-average calculation would be performed to
determine whether, on that basis as well, the 3.25 per cent threshold had been reached intwo consecutive years.
• Basis for further discussion – The proponents have indicated that their original proposal
on export competitiveness was intended to address more than the question of volatility.
That said, they have indicated that they would be willing to work on the basis of the
moving-average idea as a possible means of addressing the first element of their proposal,
without prejudice to the second element of their proposal (resumption of export
subsidisation after a loss of export competitiveness).  The Committee has agreed to
pursue this element of the export competitiveness proposal on this basis, withoutprejudice to Members’ final positions or to any other proposals.
• Trigger for/starting-point of the phase-out period – Some Members have expressed
reservations over the pending suggestion that the phase-out period after reaching export
competitiveness would only start as of the time that a determination was made that
                                                     
4 Japan has submitted a useful simulation illustrating how the concept of moving averages would
operate.G/SCM/36
Page 8
export competitiveness had been reached.  In the view of these Members, the language of
the Agreement is clear that the phase-out period begins when, on the basis of historical
data, a country first reaches export competitiveness.
• Relationship of the first and second elements of the export competitiveness proposal –
The proponents have indicated that the first and second elements of their proposal should
continue to be discussed, and should be resolved, together.  While all Members are
willing to continue to work on both elements, some remain of the view that the two
elements are mutually exclusive.  In addition, certain delegations have recalled that any
solution in respect of export competitiveness would be subject to their previously-
expressed reservations concerning Annex VII.
19. Concerning the second element  of the proposal (i. e., the possibility of allowing developing
countries to resume export subsidisation once competitiveness was lost), the Committee has agreed
that further work should continue on the basis of the elements currently under discussion, including in
particular, the "stop-the-clock" idea:
• EC "stop-the-clock" proposal – Under the EC's proposed "stop-the-clock" approach5, if a
developing country Member that had reached export competitiveness then lost it during the
ensuing eight-year phase-out period, that phase-out period would be stopped until exportcompetitiveness was reached again.  At that point, the Member would have the remainder of its
eight-year period to complete the phase-out of its export subsidies on that product.  If, however,
there were less than two years remaining of the eight-year period at the time that export
competitiveness was lost, the Member would have two years to complete the phase-out of the
export subsidies.  Similarly, if export competitiveness were lost after the end of the eight-yearphase-out period, under this approach the Member could re-introduce export subsidies on that
product, and then would have two years to phase them out once export competitiveness was again
reached.  The proponents have indicated their willingness to use this approach as the basis for
further discussion and elaboration in respect of the second element of their proposal.
• Possible duration of export subsidisation:  Certain Members have expressed concern that
under the stop-the-clock proposal there might be an endless loop of export subsidisation.
This would be particularly so if a country were to fluctuate above and below the export
competitiveness threshold even for extended periods, so long as those periods were less
than the minimum periods for reaching and losing export competitiveness.  Some
Members have indicated that they could not support any resumption of exportsubsidisation after the original eight-year period had run its course.
• Level of subsidisation: Some Members have indicated that there should be no increase in
the level of subsidisation during any period in which the clock was stopped.
• Transparency/Monitoring: Some Members have noted that a system such as the one
outlined in the stop-the-clock paper would require detailed monitoring to function
properly.  The proponents have indicated a preparedness to establish a monitoring
mechanism.  However, the impact of such a mechanism, in view of the resource
constraints of small delegations, would need to be assessed.
                                                     
5 G/SCM/W/457.G/SCM/36
Page 9
4. Countervailing duty investigation procedures
20. In his request of 2 August 2001, the Chairman of the General Council indicated that Members
were agreeable to the terms of the following referral to the Committee:
"That the Chairman of the General Council request the Committee on Subsidies and
Countervailing Measures to review the prov isions of the Agreement on Subsidies and
Countervailing Measures regarding countervailing duty investigations, and to report
to the General Council by 30 September."
21. Pursuant to the procedures agreed by the Committee, India and Brazil submitted proposals6 in
respect of this issue.  Following discussion of these proposals, both Members submitted further
papers7.
22. The following general points  have been made concerning the two proposals:
• Relationship between proposals – Some Members have raised the question of whether
India's and Brazil's papers can be substantively rationalised in some way.  Brazil has
indicated that, to the extent possible, it is in favour of this proposition, but that difficulties
might arise in such an exercise, due to different perspectives taken in the two proposals.
India has indicated that, while it considers the two proposals complementary, there are
sufficient differences in points of emphasis to warrant separate consideration of eachproposal.
• Nature of issues raised – Some Members have also raised the question of a distinction
between those issues which arise due to silence or ambiguity in the text of the Agreement
and those which would require amendment of existing provisions of the Agreement.
India has indicated that additional disciplines are required in respect of the following
elements of its proposal: (i) deductions and adjustment on account of expenses which theexporter has to incur to obtain the alleged subsidy; (ii) review of countervailing duty on
submission of positive information regarding procedural mistakes or manifest errors of
apprehension and withdrawal of subsidy schemes considered to confer a benefit; and
(iii) review of benefit conferred by subsidy schemes which have been subsequently
terminated.  The other elements of its proposal would require only clarification of therelevant provisions of the Agreement.  Brazil has indicated that its proposals for the
inclusion of additional guidelines to Article 14 and provisions related to sampling might
be considered to require some sort of amendment to the Agreement, whereas the other
points could probably be solved by means of interpretation of lacunae in the text of the
Agreement.
• Possibility to draw on elements in the Anti-Dumping Agreement – With regard to its
suggestion to introduce into the SCM Agreement rules on sampling and facts available
such as those contained in the Anti-Dumping Agreement, Brazil has indicated that the
anti-dumping rules might be a good starting point, but that some other elements might
also be introduced.
5. Definition of "inputs consumed in the production process"
23. No further substantive issues have been raised in respect of this issue since my 31 July report.
                                                     
6 The proposals can be found in documents G/SCM/W/462 and G/SCM/W/464.
7 G/SCM/W/465-466.G/SCM/36
Page 10
6. Aggregate and generalised rates of duty remission
24. No further substantive issues have been raised in respect of this issue since my 31 July
report.8
________________
                                                     
8 A factual background note was submitted with no substantive discussion (G/SCM/W/460).