Beyond Territorial Reach: Transnational Subsidies And The Evolving Landscape

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Lakshmikumaran & Sridharan

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Lakshmikumaran & Sridharan (LKS) is a premier full-service Indian law firm specializing in areas such as corporate & M&A/PE, dispute resolution, taxation and intellectual property. The firm, through its 14 offices across India works closely on litigation and commercial law matters, advising and representing clients both in India and abroad.
China's state-driven economic model and its extensive use of subsidies have raised concerns about its compliance with World Trade Organization (‘WTO')...
Worldwide International Law
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China's state-driven economic model and its extensive use of subsidies have raised concerns about its compliance with World Trade Organization ('WTO') rules. In recent times, trading partners like the United States of America ('US') and the European Union ('EU') have accused China of unfairly tilting the playing field through industrial subsidies and opaque support for Chinese companies operating abroad under the Belt and Road Initiative ('BRI'). This subsidization gives rise to a situation in which a government of one country subsidizes a firm outside of its territory. These situations raise the issue of whether transnational subsidies can be addressed under the current WTO framework, particularly, the Agreement on Subsidies and Countervailing Measures1 ('SCM Agreement').

This article will briefly discuss the nature of transnational subsidies, whether they can be acted upon under the SCM Agreement, and how certain countries such as the EU and the US have tackled these subsidies.

Transnational subsidies and the SCM Agreement

Traditionally, anti-subsidy investigations, conducted under the framework of SCM Agreement, have focused on subsidies given to companies within the exporting/producing country. However, a transnational subsidy refers to a subsidy provided by the government of one country to a company operating in the territory of another WTO member. This section explores the legal text of the SCM Agreement and endeavors to map the complexities concerning countervailability of transnational subsidies under its current framework.

Article 1.1.(a)(1) of the SCM Agreement defines a 'subsidy' as a financial contribution by a government or public body within the territory of a Member2. It can be seen that the Article 1.1 uses the phrase 'within the territory of a Member' and not 'the Member'. Hence, it can be argued that a financial contribution by a government of one member country to a company located in the territory of another WTO Member can qualify as a subsidy under Article 1.1(a)(1) because the text does not particularize the subsidies within the territory of 'the' Member being investigated but broad-bases it to the territory of 'a' or 'any' Member.

However, a look at some of the other provisions of the SCM Agreement gives a contrary interpretation. Some of the said provisions are referred to below.

Article 2 of the SCM Agreement introduces the concept of 'specificity'. It provides that to be actionable, a subsidy must be specific to a particular company or industry or region. Particularly, the text of the Article refers to 'an enterprise or industry or group of enterprises or industries within the jurisdiction of the granting authority.' The text suggests that the recipient of subsidy must be within the territorial jurisdiction of the granting authority in the member country.

Article 2.2 also states that 'A subsidy which is limited to certain enterprises located within a designated geographical region within the jurisdiction of the granting authority shall be specific.'. This provision again implies that the SCM Agreement contemplates the recipient to be within the territorial jurisdiction of the granting authority.

The SCM Agreement's focus on a single 'subsidizing member' (Footnote 63) and 'exporting Member' (Article 12) also suggests that the recipient firm must be located within the territorial jurisdiction of the government of the exporting country.

Yet again, Article 13 grants consultation opportunities solely to Members the products of which may be subject to investigation. Article 18 envisages termination of investigation upon an undertaking or limitation of the subsidy being offered by the government of the exporting Member.

In the context of transnational subsidies discussed in the opening part of this article, the situation becomes unusual if the government authority granting a transnational subsidy is different from the government of the exporting member. Hence, the SCM Agreement is generally not geared to address the concerns relating to transnational subsidies. This proposition is yet to be tested before a WTO panel or an Appellate Body.

Approach adopted by the EU & USA

European Union

The BRI had raised concerns in the EU about unfair competition due to its support for Chinese companies having transnational operations. The European Commission ('EC') had addressed this by imposing countervailing duties ('CVD') on subsidized goods produced by Chinese-owned firms in third countries which exported their goods to the EU.

In the case of certain glass fiber fabrics imported from Egypt (Commission Implementing Regulation (EU) 2020/870 of 24 June 2020), the EC imposed CVD on two Egyptian subsidiaries of Chinese state-owned enterprise by contending that even if the subsidies originated in China, the recipient country (Egypt) had effectively 'adopted' them, making them actionable under WTO rules. This approach targeted both direct Egyptian subsidies and indirect Chinese subsidies to Chinese enterprises in Egypt. The EC applied the same logic to filament glass fibers from Egypt (Commission Implementing Regulation (EU) 2020/870 of 24 June 2020), imposing CVD due to the presence of Chinese subsidies.

United States of America

The EU's use of CVD measures on transnational subsidies seems to have influenced the US to consider similar actions.

Till 24 April 2024, Federal Regulation 19 § 351.527 restricted the United States Department of Commerce ('USDOC') from investigating transnational subsidies. However, on 24 April 2024, the USDOC removed this regulation. Given that the US is one of the biggest users of trade remedial measures, it remains to be seen the extent to which the new regulations will be used by the US for investigating transnational subsidies and the WTO challenges which may come in view of the new regulations.

Conclusion

With the US and the EU taking steps to address transnational subsidies, it remains to be seen if the other countries will follow suit. The current text of the WTO's SCM Agreement offers certain challenges in investigating transnational subsidies and their countervailability. The limitations within the SCM regarding jurisdiction and territoriality are certain real challenges which face the countries targeting transnational subsidies under the SCM Agreement framework.

However, with no appointment of members to the WTO Appellate Body, particularly by the US, other countries may be enticed to follow suit in countering the transnational subsidies notwithstanding the legal challenges which may come up in justifying such measures under the present SCM Agreement framework.

Footnotes

1. See the text of the SCM Agreement here.

2. 'Member' here refers to a WTO member country which is party to the SCM Agreement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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