WORLD TRADE  
ORGANIZATION  TN/RL/GEN/94 
16 January 2006 
 
 (06-0196) 
Negotiating Group on Rules Original:   English 
  
 
EXPANDING THE PROHIBITED 
"RED LIGHT" SUBSIDY CATEGORY 
 
Paper from the United States
 
 
 
 The following communication, dated 13 January 2 006, is being circulated at the request of the 
Delegation of the United States.   The submitting delegation has requested that th is paper, which was submitted to the Rules 
Negotiating Group as an informal document (JOB(06)/3 ), also be circulated as a formal document. 
 
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ISSUE 
  As the United States noted in its Basic Concepts and Principles  paper
1, and subsequently in 
its Subsidies Disciplines  paper2, Members over the course of succes sive negotiating rounds have 
focused on improving subsidies disciplines by prioritizing the elimination of the most distortive categories of subsidies, while steadily strengtheni ng the disciplines for countering the adverse trade 
effects that other subsidies can cause.  Accordingly, in its Subsidies Disciplines  paper, the 
United States stated that an obvious next step in  the progressive deepening of subsidy disciplines is 
the expansion of the existing category of prohibi ted subsidies under Article 3 of the Subsidies 
Agreement to include those instan ces of government intervention that have a similarly distortive 
impact on competitiveness and trade as do export and import substitution subsidies.
3  Accompanying 
this suggestion, the United States also raised th e possibility of further transparency requirements 
related to certain types of government intervention.  With this paper, the United States seeks to initiate 
a discussion in the Rules Negotiating Group (the "Group") on what additional types of subsidies should be prohibited, how these subsidies should be defined according to clear and objective criteria, 
and what added transparency obligations should be considered.   DISCUSSION  
 It has long been accepted that subsidies con tingent on export performance or on the use of 
domestic over imported goods are particularly egregi ous because they have a direct and immediate 
impact on international trade.  Accordingly, th ey are prohibited under the Subsidies Agreement.  
However, serious market and trade distortions can result from other forms of subsidization as well.  
These subsidies distort normal market mechanisms a nd provide recipient firms with a considerable 
competitive advantage in their export markets as well  as their home markets.  While most subsidies 
                                                     
 
1 TN/RL/W/27 (22 October 2002) 
2 TN/RL/W/78 (19 March 2003) 
3 All subsidies in an expanded category of prohibited subsidies und er Article 3 of the Subsidies 
Agreement would be subject to the remedies in Article 4. TN/RL/GEN/94 
Page 2  
 
  have the potential for distorting trade, the Group s hould discuss the appropriate criteria that should be 
used for determining the types of subsidies that  should be included in an expanded category of 
prohibited subsidies.  In the view of the United States, the Group should focus its discussions on those 
additional types of actionable subsidies that represe nt the most intrusive government interference in 
the marketplace.  It is these subsidies that have the potential to create the most significant trade 
distortions.
4 
 
 Any newly prohibited subsidies should be de fined and identified according to clear and 
objective criteria.5  Certain types of subsidies have a greater  potential to have distortive effects.  For 
example, the Group’s discussion should address subsidies to cover a company’s losses, which 
represent an extreme intervention in the market.  Moreover, the Group should consider whether – 
from a policy perspective – certain subsidy "forms" may be less transparent and monitorable than 
others and, therefore, in the long-term, should be di scouraged in favour of more  transparent subsidies.  
The important point here is that there is a broa d array of possible normative criteria that potentially 
can be used in combination with quantitative criteria. 
 
 In evaluating possible normative criteria, the Group should consider, at the very least, those subsidies that most typically and directly have forestalled or impeded industry restructuring and 
rationalization, often resulting in inefficient excess ca pacity.  As has been evident in, for example, the 
steel sector, so-called "creation and maintenance subsidies" ( i.e., those which facilitate new capacity 
that would not otherwise be viable, or keep ex isting capacity online that competitive forces would 
otherwise force to close) can be especially disr uptive and can become a chronic source of trade 
friction.  Because these types of subsidies can directly  supplant or frustrate market forces and distort 
trade patterns, the Group should consider whether these types of subsidies should be subject to stricter 
disciplines.  
 With the above considerations in mind, in our Subsidies Disciplines  paper, the United States 
suggested that practices similar to those listed in the now-lapsed "dark amber" provisions of Article 6.1 of the Subsidies Agreement should be the first candidates for inclusion in an expanded 
prohibited category of subsidies.  In addition to the obvious candidates noted above, there are other subsidy categories which this Gr oup could consider for discussion.  These could possibly include 
other forms of egregious government intervention such as equity investment in, or lending to, 
companies with poor financial prospects unable to attract commercial financing or other funding of 
companies or projects that would not otherwise receive conventional commercial financing.
6, 7 
                                                      
4 This proposal is made without prejudice to any new subsidies rules developed in the agriculture 
negotiations.  In light of the ongoing agriculture negotiations, some of the proposed new disciplines discussed in this paper may not be applicable in the agricultural sector.  For example, in the agriculture negotiations, 
Members continue to discuss the level of allowable government support and agricultural export credit financing 
and the disciplines that will be applicable.  Any such new subsidies rules developed in the agriculture negotiations should prevail over the general subsidy rules as established, or as may be established, in the 
Subsidies Agreement. 
5 The United States is prepared to consider specifi city as one of the criteria for any newly prohibited 
categories.  However, any such specificity requirements should not disturb the existing specificity provisions, 
including the deeming provision under Article 2.3 with respect to the prohibited subsidies currently listed in 
Article 3.1(a) and 3.1(b). 
6 To the extent that a subsidy, as defined by  the Subsidies Agreement, is provided, special 
consideration could be given to: (1) government support for small business;  (2) government financing of public 
utilities, given the role such utilities normally play in market economies; and, (3) passive investments and other government investment not driven by government industr ial development policies.  The consistency of any new 
rules with the export credit rules might also need to be considered.  As noted above, the Group could consider 
whether specificity should be one of the criteria for any newly prohibited category. 
7 We also note that other Members have called for the reinstatement of the "dark amber" category of 
subsidies under the lapsed provisions of Article 6.1.  TN/RL/GEN/94 
 Page 3 
 
 
   
 This Group could also consider measures complementary to the disciplines noted above.  For 
example, with regard to government equity infusions, as stated in its Subsidies Disciplines  paper, the 
United States questions the justification for government investment at all in the private sector in 
countries with well-developed capital markets.  Government  investment decisions that run counter to 
the private sector’s assessment that a company is no t likely to generate a market return should be 
transparent, closely scrutinized and, as appropria te, curtailed.  Accordin gly, the United States 
suggested that there be a requirement that Memb ers notify the Subsidies Committee of any intended 
provision of equity capital, including debt-to-equity conversions.  Such notifications should describe:  
(1) the terms of the transaction;  (2) how such an in vestment is consistent with the usual practice of 
private investors; and, (3) potential adverse trade effects.  
 The United States believes that such additiona l notification requirements are appropriate in 
the case of equity infusions given their unique charact er.  In particular, unlike other types of financial 
contributions, equity infusions entail the government taking a direct ownership stake in and, in many 
cases, control over the recipient company.  In such  circumstances, the government is positioned to 
ignore the normal private sector profit-maximization imperative and to manipulate the 
decision-making of the company to pursue the gove rnment’s own priorities irrespective of market 
signals and incentives.  Additional transparen cy measures should be considered for all 
government-controlled companies as well, such that  Members can be assured of a consistently 
commercial, arm’s-length relationship between the gove rnment-owner and the state-owned enterprise.  
 
CONCLUSION  
 
 The United States believes that past negotia tions on subsidies have  led to genuine and 
important improvements in international trade.  However, it is necessary to build on those past 
successes with stronger and more comprehensive rules that address the issues, concerns, and areas of 
dispute with which WTO Members are faced today and can anticipate in the future.  Prohibition 
clearly can be a more effective and timely discipline for addressing unfair subsidization than other 
post-hoc, remedial approaches which, though useful, have  their limitations.  It is hoped that this paper 
will initiate a productive conversation as to how the rules can be improved such that the most blatant 
and distortive government interventions in the mark et can be effectively disciplined and that the 
market is the primary determinant of resour ce allocation and international trade flows.  
 
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