WORLD TRADE  
ORGANIZATION  TN/RL/GEN/146 
5 June 2007 
 (07-2305) 
Negotiating Group on Rules Original:   English 
  
 
EXPANDING THE PROHIBITED "RED LIGHT" SUBSIDY CATEGORY 
DRAFT TEXT 
 
Proposal from the United States
 
 
 
 The following communication, dated 1 June 2007, is being circulated at the request of the 
Delegation of the United States.  
_______________ 
 
  Pursuant to the US proposal (TN/RL/GEN/94, 16 January 2006) discussed at the February 2006 meeting of the Rules Negotiating Group,  this submission consists of proposed revised 
text for Article 3 and Article 25 of the Ag reement on Subsidies a nd Countervailing Measures 
(Subsidies Agreement).  This submission is made w ithout prejudice to subsidies rules developed in 
the agriculture negotiations.  In light of the ongoing agriculture negotiations, the proposed new 
disciplines discussed in this paper are not in tended to apply to the agricultural sector. 
 The proposed text essentially moves  all but one of the former "dark amber" subsidies of the 
now-lapsed Article 6.1 to an expanded prohibited cate gory under a new Article 3.2.  In response to the 
comments from other Members on the United St ates' January 2006 paper and comments on the 
proposals to reinstate the "dark amber" category, we have not included subsidies over five per cent ad 
valorem  in the new, expanded category of  prohibited subsidies.  In add ition to the former dark amber 
subsidies, the United States is also proposing that additional types of subsid ies, representing the most 
extreme forms of government economic intervention be  included in an expanded prohibited category.  
These additional subsidy types include:  loans to unc reditworthy companies; the provision of equity 
capital in a manner inconsistent with the usual inv estment practice of private investors; and other 
forms of financing that a company would be unlikel y to receive from commercial sources.  The first 
two of these subsidy types require guidance as to ho w the financial health of a company should be 
evaluated.  Proposed guidance in this regard is provided in footnotes seven and eight.  The 
United States recognizes that these footnotes ra ise complex issues worthy of discussion. 
 
 There are two other significant provisions in the pr oposed text that were not foreshadowed in 
the approach outlined in the Unite d States' January 2006 paper.  The first is a requirement that the 
product that benefits from the new class of prohibite d subsidies be exported or competes with imports 
(see Article 3.2).  Secondly, if the subsidizing Member can demonstrate that the subsidy provided 
does not have a positive effect on the capacity and sales of the subsidy benefit recipient, the 
prohibition will not apply (see Article 3.3).  The cumu lative effect of these two provisions is to ensure 
that subsidies that have no trade-distorting effect will not be subject to the new prohibition.  These 
provisions were added in response to Members' co mments on the United States' January 2006 paper.  
 The proposed notification requirement, described in the United States' January 2006 paper, of 
providing information with respect to the adverse ef fects of a government equity investment has also TN/RL/GEN/146 
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  been eliminated in response to comments received.   The remainder of the draft text follows the 
original proposal in a relatively straightforward manner. 
 The United States welcomes further discussion of its proposal to expand the prohibited 
category of subsidies and, in particular, how the prop osed text might be improved.  In anticipation of 
such suggestions, the text found below does not  necessarily represent the final position of the 
United States.  
 
Article 2:  Specificity 
 2.3 Any subsidy falling under the provisions of Article 3
 paragraph 1 of Article 3  shall be deemed 
to be specific. 
 
Article 3:  Prohibition  
 
3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within the 
 meaning of Article 1 above, shall be prohibited:  
(a) subsidies contingent, in law or in fact
1, whether solely or as one of several other 
conditions, upon export performance, in cluding those illustrated in Annex I;2 
 
 (b) subsidies contingent, whether solely or  as one of several other conditions, upon the 
use of domestic over imported goods. 
 3.2
 Except as provided in the Agreement on Agricult ure, and provided that such subsidies are 
specific, and the subsidized product is expor ted or competes with imports, the following 
subsidies within the meaning of Ar ticle 1 above, shall be prohibited3, 4: 
 (a) the direct transfer of funds to cover operating losses sustained by an enterprise or 
 industry;  
 (b) forgiveness of debt
5, i.e., forgiveness of government-held loans or other instruments 
of indebtedness, and grants to cover re payment of government-held loans or other 
instruments of indebtedness;  
 
(c) loans and other instruments of indebtedn ess provided directly to enterprises that are 
uncreditworthy6,7; 
                                                      
 1 This standard is met when the facts demonstrate that the granting of a subsidy, without having been 
made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export 
earnings.  The mere fact that a subsidy is accorded to en terprises which export shall not for that reason alone be 
considered to be an export subsidy w ithin the meaning of this provision.  
 2 Measures referred to in Annex I as not constituting export subsidies shall not be prohibited under this 
or any other provision of this Agreement. 
 3 It is understood that a Member may take measures for prudential reasons pursuant to laws and 
regulations of general application, including for the prot ection of investors, depositors, policy holders or persons 
to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the 
financial system.  Such measures shall not be used as a means of avoiding a Member's obligations under this 
Agreement.  Where a panel considers a dispute involving a measure taken for prudential reasons, panel 
members shall have expertise w ith respect to such measures.    
 4  It is understood that this Agreement only applies to subsidies affecting trade in goods, and therefore, 
the only subsidies prohibited under this provision are those made to a goods-producing enterprise .  
 5 Actions taken pursuant to generally applicable bankruptcy laws or regulations or other insolvency 
proceeding s shall not be prohibited under Article 3.2.    TN/RL/GEN/146 
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(d) provision of equity capital where the inv estment decision is inconsistent with the 
usual investment practice (including for the provision of risk capital) of private 
investors in the territory of that Member;8 and 
 
(e) other financing ( i.e., "royalty-based" or "sales-contingent" financing or other similar 
financing) to an enterprise or project that otherwise would be unlikely to receive such 
financing from commercial sources.  
 
3.3 The subsidies in paragraph 3.2 shall not be prohibited if the subsidizing Member 
demonstrates that the subsidies have not had a positive effect on the capacity and sales of the 
subsidy benefit recipient.  
 3.4
 The following are not prohibited under paragraph 3.2:  
 
(a) subsidies provided pursuant to small business programs;9 
 
(b) subsidies to public utilities ( e.g., publicly-owned enterprises that supply electricity  
and water); and  
 (c) 
 subsidies necessary to ensure the provisi on of arms, ammunition or war materiel 
indispensable for national security or national defence purposes.  
  3.2
 3.5  Members shall not grant nor maintain  subsidies referred to in paragraphs  1 or 2 . 
 
Article 25:  Notifications  
 
25.x Members shall notify the Committee of the follo wing information regarding ownership of an 
enterprise by a government or public body :  
 
                                                                                                                                                                     
 6 In limited circumstances, the analysis under paragraphs 3.2(c), 3.2(d) and 3.2(e) may more 
appropriately focus on a partic ular investment project of an enterprise ra ther than the enterprise as a whole, for 
example, where the financing is provided for large investment projects for new products, processes, or capacity 
(e.g., a plant expansion or a new model or product line).      
 7 In examining whether an enterprise or project is uncreditworthy, the following factors, among others, 
shall be considered: (1) the receipt by the ente rprise of comparable, commercial, long-term ( i.e., longer than one 
year) loans; (2) the present and past financial health of the enterprise, as reflected in financial indicators 
calculated from the enterprise's financial statements and accounts; (3) the enterprise's recent past and present 
ability to meet its costs and fixed financial obligations with its cash flow; (4) evidence of the enterprise's future 
financial position, such as market studies, country and industry economic forecasts, and project and loan 
appraisals prepared prior to  the agreement between the lender and the ente rprise on the terms of the loan; and (5) 
the value of any collateral or guarantee provided on commercial terms to secure the loan.  
 8 In examining whether a government's provision of equity capital meets these conditions, the 
following factors, among others, shall be considered: (1) the price paid by private investors for the same (or 
similar form of) newly issued shares in the recipient en terprise where such private investor share purchases are 
significant and concurrent with those of the government; (2) objective analyses of the future financial prospects 
of the recipient enterprise or project as indicated by, inter alia , market studies, economic forecasts, and project 
or loan appraisals prepared prior to the government-provided equity infusion; (3) current and past indicators of 
the recipient enterprise's financial health calculated from the enterprise 's financial statements and accounts 
adjusted, as appropriate, to conform to generally accep ted accounting principles (GAAP), preferably the GAAP 
in the territory of the Member; (4) the enterprise's rates of return on equity in the three years prior to the 
government equity infusion; and (5) equity investment in the enterprise by private investors.  
 9 A "small business" is an enterprise with fewer than X employees.   TN/RL/GEN/146 
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  (a)
 with respect to  the provision of equity capital by any government or public body:  the 
date and terms of the transaction; and an  explanation of the consistency of the 
investment with the usual practice of private investors in the territory of that Member;  
 
(b) with respect to any government majo rity-owned, as well as government-controlled  
enterprises10: the percentage of direct and indirect ownership that the government or 
any public body holds in the enterprise a nd the terms and conditio ns of any financial 
contribution by any government or public body to the government majority-owned or 
controlled enterprise, excluding non-specifi c instances in which government revenue 
that was otherwise due was foregone or not collected . 
 
Members shall submit these notifications  biannually not later than 30 June.  
  
__________ 
 
 
                                                     
 
 10 This notification requirement does not apply to a publicly-owned utility or financial institution.