Export subsidies and the ‘peace clause’

[Somewhat technical: but you can safely ignore the jargon] The London “Times”:http://www.timesonline.co.uk/article/0,,630-774864,00.html has an editorial article today criticising EU and the USA for their approach to the resolution of the outstanding trade conflicts in the Doha round. In the course of its criticism it notes the strong suspicion on the part of many developing Members of WTO that the USA and the EU could agree at least on one thing: their mutual interest in maintaining the ‘Peace Clause’ sanction for the use of export subisidies. I think this is wrong: the USA has far more interest in discomforting the EU over the Peace Clause than in safeguarding its own much reduced export payments. The questions are: could a legal challenge to export subsidies succeed in WTO? And what would be the effect of ‘winning’ such a case?
Here’s what the Times has to say: bq. The EU has been unbelievably complacent since it “reformed” its Common Agricultural Policy last June — reforms that will shave not a cent off the €48 billion (£34 billion) annually spent on farm subsidies. The Brussels line is that Europe has done its bit and it’s up to America. The Commission has not even deigned to produce a WTO negotiating offer, but its approach is minimalist. The US, although justly in the doghouse for a Farm Bill increasing subsidies to $180 billion over the next decade, has publicly put bold offers on the table — provided that the EU matches them or comes close. Privately both sides are conspiring to extend the “peace clause”, obtained during the Uruguay Round and due to expire on December 31, that shields their agricultural market-rigging from legal challenge. That would blunt the only sharp spur to reform. What is the “Peace Clause”? The WTO provides an “explanation(link to WTO website article on the Peace Clause)”:http://www.wto.org/english/tratop_e/agric_e/negs_bkgrnd13_peace_e.htm. Briefly, Article 13 (“due restraint”) of the WTO’s Agriculture Agreement protects countries that use export subsidies only to the extent permitted by the Agreement from being challenged under other WTO agreements. Once the ‘Peace Clause’ expires at the end of 2003, the gloves come off, at least in principle. But there’s a problem: it’s notoriously difficult to challenge export subsidies on agriculture products under the WTO subsidy rules: that’s one reason the subsidies have spiralled out of control in the past 30 years. This sorry history—and an innovative proposal for getting around the difficulties using modern data sets and econometric techniques—can be found in an article in the Joural of International Economic Law by “Richard Steinberg and Tim Josling(download PDF file approx 250kb from OUP Journals website)”:http://www3.oup.co.uk/jielaw/current/060369.sgm.abs.html


*Josling argument _in brief_*

The legal standard for agricultural subsidies boils down to whether specific actionable subsidies have caused any “adverse effects” on trade resulting in “serious prejudice” (identified in SCM Article 6.3.a – c) to the interests of another WTO Member.

The difficulty faced by complainants in most GATT Article XVI:3 cases was showing causation; the articulated link between the subsidy and the prejudicial effect, allowin for all other possible factors.  The Uruguay Round negotiators tried to diminish that difficulty in SCM Agreement Articles 6.3(b) and 6.4, which—upon evidence of prima facie correlation between subsidization and displacement of sales/exports—appears to shift the burden to the subsidizing Member to persuade a panel that factors other than subsidization caused the displacement.

The SCM provisions do not, however, directly address—and so do not fully solve—the problem of demonstrating at least prima facie causation.  The best solution to the problem of causation is methodological: using models and regression analysis in applying SCM Agreement Articles 6.3 and 6.4

I have some reservations about whether the Steinberg/Josling approach is likely in fact to overcome the difficulty of showing ‘causation’. A clever advocate can punch a lot of holes in regression analyses that are being used to ‘fish’ for data as opposed to supporting an hypothesis. If they are correct in their argument that the SCM Agreement reverses the ‘burden of proof’ on provision of at least some evidence of causation, then the USA and others may be able to cause the EU considerable discomfort. But it’s another question altogether what remedies the EU might be required to offer if found to be in breach of the SCM and whether any such finding, following an adversarial ‘legal’ process, would in fact advance the reforms that need to be agreed in the WTO.

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