WORLD TRADE  
ORGANIZATION  TN/RL/GEN/135 
24 April 2006 
 (06-1901) 
Negotiating Group on Rules Original:   English 
  
 
SUBSIDIES 
 
Submission of the European Communities 
 
  
 The following communication, dated 20 April 2006,  is being circulated at the request of the 
Delegation of the European Commission.   The submitting delegation has requested that th is paper, which was submitted to the Rules 
Negotiating Group as an informal document (JOB(06)/ 118), also be circulated as a formal document. 
 
_______________ 
 
  In a recent submission
1 to the Group, the United States ha s proposed to expand the list of 
“prohibited” subsidies to cover additional subsidies having the pot ential to create significant trade 
distortions.  This submission raises in fact two separ ate but equally challenging issues. The first issue 
is whether the expansion of the sc ope of the prohibition is an avenue that the Group wishes to pursue 
as a matter of general policy. The second issue con cerns the identification of additional prohibited 
subsidies on the basis of objective criteria.  
 On the first issue, the EC sees merit in carefu lly revisiting the range of actions available to 
address the distorting effects of industrial subsidies. Clearly, a prohibition is an effective tool as it may help prevent the subsidy from being granted in the first place
2 though equally other forms of 
remedy available under ASCM could also be used .  This deserves a thorough discussion in the Group 
with a view to assessing the implications on the overall structure of the SCM  Agreement  as well as the 
balance of rights and obligations among Members.  
 
 It is also important to note that State involvement is not per se  indicative of subsidisation. 
Benefits cannot be presumed and the emphasis must be on the financial contribution being bestowed 
at below the relevant benchmark. Furthermore, there are a number of remedies available besides prohibition to address subsidies. And those remedies should also be examined to see whether they 
would not be appropriate for the trade distortion conc erned. In short, one needs to clearly distinguish 
between two issues, i.e. the nature (or form) of th e subsidy and its effects on trade when it comes to 
the remedy. In the EC’ view, it is the latter that should be decisive.   In this debate, the EC recalls its invita tion to developing countries to identify possible 
constructive remedies instead of the normal meas ures that are currently imposed when injurious 
subsidisation is found. The EC takes this aspect of  the negotiations very seriously and work on this 
should start as quickly as possible so that the needs of developing countries can be duly taken into account in the final outcome.  
                                                     
 
1 TN/RL/GEN/94. 
2 This is the system that the EC has been implementing internally for State aid across the board.  The 
EC would be pleased to share its experience with the Group TN/RL/GEN/135 
Page 2  
 
   
Discrimination in favour of domestic industries 
 
 The EC has long been concerned with th e multiplication of government practices which 
favour domestic industries and whic h make available to domestic users some important inputs at a 
price substantially lower than the international market  price.  Such practice confers an evident benefit 
to the domestic users as compared to their foreign competitors who have to purchase their supplies at 
the (higher) international price.     In the EC’s experience, the current ASCM  discipline does not permit these practices to be 
tackled effectively. In view of the intrusive nature of such practices and the distortions they create, the 
EC considers that the difficulties in tackling such  practices should be solved.  To that effect, a 
possible solution would be to introduce a specific prohi bition. However, other remedies could also be 
envisaged in certain circumstances.  
 The EC has also observed that other practices ca n also unfairly favour domestic operators as 
compared to their international counterparts. These actions impact on the availability of raw materials 
to the disadvantage of operators outside the country  taking such actions. Specific remedies should be 
envisaged to deal with this type of situation. 
 
 In the same vein, it would be worthwhile c onsidering the expansion of the coverage of 
Article 3.1(b) ASCM  to align it to the national treatment pr ovisions of GATT Article III, in order to 
prevent governments taking measures to favour the u se of domestic inputs over imported ones.   At 
the moment, Article 3.1(b) ASCM  appears to require a demonstration of an absolute obligation to use 
domestic over imported goods, not just an encouragement or incentive to do so.   This change would 
make it easier, for instance, to catch a local c ontent requirement expressed in percentage of value-
added, which may escape the current Article 3.1(b) provision. 
 
 
Below cost finance  
 
 Harmful subsidisation often results where financ e is available to econom ic operators at rates 
which do not cover the full cost of such finance.  Such practices may be particularly difficult to 
address under the current ASCM  rules for various reasons.  In order to address this type of situation, 
one possible solution would be the intr oduction of specific language in the ASCM  to the effect that the 
granting of loans below costs (or another suitable be nchmark) could be adequately tackled if such 
practice is found to be generalised and systematic.  Clearly, the new text would not cover isolated 
instances of lending below costs (or other relevant benc hmark).  Rather, it would be targeted solely at 
situations where the practice is generalised and syst ematic thanks to widespread State interference. 
  It is in the light of the above considerati ons that the EC is submitting the following textual 
proposal:  TN/RL/GEN/135 
 Page 3 
 
 
  Annex – proposed changes to Article 3 of the SCM  Agreement 
 
3.1 Except as provided in the Agreement on Agri culture, the following subsidies, within the 
meaning of Article 1, shall be prohibited:  
 (a) NO CHANGE 
  (b) subsidies contingent, whether solely or as one of several other conditions, upon the use 
of domestic over imported goods or subsidies inconsistent with Article III of the 
GATT 1994   
 
 (c) the provision, by virtue of  government action, of goods to domestic production on 
terms and conditions more favourable than  those generally available for such 
goods when destined for export; 
 
(d) the provision, by virtue of government action,  of finance to a wide range of 
industries on terms and conditions inadeq uate to cover the long term operating 
costs and losses of such finance where this benefits exported goods.  
  
3.2 A Member shall neither grant nor mainta in subsidies referred to in paragraph 1. 
 
 
__________