are virtually identical to those for other WTO dispute s ettlement proceedings. Onc e a member requests consultations regarding such a subsidy, the Agreem ent allots 180 days for completion of the panel proceedings and the issuance of a decisio n by the Dispute Settlement Body (DSB). The Agreem ent provides an additional 60 days for appeals of panel findings. The losing party cannot block adoption of an adverse panel or Appellate Body (AB) report and the DSB must authorize countermeasures where a signatory has not either withdrawn a subsidy found to be ca using serious prejudice or eliminated its adverse effects within six months.

# **III. The Economics of Subsidies and Countervailing Duties**

While the WTO SCM Agreement strengthens disciplines on trade distorting subsidies, there are still disputes on governm ent subsidies and countervailin g duties. The m ost difficulty issues still related to the probl em of distinguishing between “legitim ate” government activities and trade-distorting subsidies. The governm ents of the m ajor developed trading nations continue to m aintain divergent views o n the role of government involvement with industry, and ev en more disagreement is found when the policies of developing countries are considered. 4 This section review s the econom ic impact of subsidies and countervailing duties on trade and welfare, and what countervailing duties are appropriate.

# **A. Economics of Subsidies**

Three types of economic assets are crucia l for the long run grow th of an economy: physical capital, human capital, and natural capital. Physical capital has traditionally been the focus of attention since it directly contributes to growth, which in turn affects s ocial welfare. However, human capital, which includes knowledge accumulation, technological innovation, and health, along with natural capita l directly affect social welfare and growth. The three assets are subject to market failures in varying degrees, som e more, some less. Ideally, gov ernment should m itigate the effects of m arket imperfection by regulation and providing incentives to invest in assets that are under-provided especially public or semi-public goods. The optim al government policy would be im plemented to ensure that the social returns to the three assets a re equal.<sup>5</sup> However, this is not necessarily the case in reality.

In reality, we often see governm ent policies including subsidies that have caused overinvestment in certain sectors, and under-investment in sectors affected by market failures, such as education and health, rural infrastructure; and ove r-exploitation of the n atural resources. Trade subsidy is considered one of the subsidies that are distortionary, leading to inefficiencies and welfare loss. Now let’s review the details.

There are two types of subsid ies in the international trad e parlance: the export subsidy and domestic or production subsidy. The expor t subsidy is paid to an industry only on

> 4 Jackson, H. John, William J. Davey, and Alan O. Sykes, Jr. _Legal Problems of International Economic Relations: Cases, Materials and Text_ , Fourth Edition, West Group, St. Paul, Minnesota, 2002.

> 5 This framework is based on a World Bank Institute study on _The Quality of Growth_ , World Bank 2000.

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