International Law and Globalization - Essay Example

?International Law 216 (a). Globalization has enabled countries to transcend national barriers and become one unifying market. Despite the innumerable advantages, globalization poses serious threats to developing economies; thus, governments are often induced to practice protectionism. The principal objective of international laws of economics is to transact and regulate global businesses. Depending on the number of countries, it can be categorised into bilateral or multilateral economic regulation. International economic law is exercised through soft and hard instruments, the former being optional but the latter obligatory. World Trade Organization (WTO) Agreement of Subsidies and Countervailing Measures (ASCM) is a practical example of hard instrument model of international laws directed at regulation of subsides. A subsidy has been defined concretely to include financial support as well as price support extended by a government that creates an advantageous situation for certain industries. Alturai and Benares are neighbouring countries and currently both hold membership in World Trade Organisation. Alturai is facing recession in its steel industry so consequently, the government has formulated new economic policies. For instance, the government has extended and assured constant supply of iron that is the primary raw material for manufacturing steel. The stable and consistent supply of raw material will enable the steel industry to boost production. Additionally, the implementation of price ceiling is a significant incentive as suppliers will be able to reap the maximum possible profits. The element of increased profit will induce new suppliers to join the industry, prevent the steel industry from crashing, and ensue in more employment opportunities. The policies will also accelerate exports as the government has sanctioned to give credit equivalent to payment of custom duty for exports of steel. Lastly, the government being well aware of the need for innovation and cost competitiveness in the globalized market, has granted monetary assistance equivalent to 1% of sales value to be invested in research and development. Investment in research and development is imperative to ensure survival in today’s volatile, consumer oriented and globalised markets. Firms no longer have to only deal with domestic competition but also take on international competitors. Therefore, it is integral to explore technological opportunities. Foreign exchange earnings from exports are one of the fundamental macro-economic aims of a country. Hence, escalating exportation is not only fruitful for domestic industry but for foreign exchange reserves as well. According to WTO SCM agreement, a subsidy encompasses three basic elements: a monetary contribution, by a government or public organization and provides a benefit. All of the stated criteria must be met for any financial contribution to be deemed as subsidy (International Trade Centre, 2009 b). Although various kinds of government incentives that do not actually involve financial contributions being made, however these can be thought as subsidies as they undermine competition. The US-Softwood Lumber IV case clearly states in its judgement that subsidies can be direct as well as passed indirectly in order to benefit certain parties. However, the SCM agreement demands that a financial contribution is a prerequisite for subsidy such as grants, loans, guarantees, fiscal incentives. Secondly, the contribution has to be made by or at the order of the government or a public entity within the country. Obviously, a subsidy must prove beneficial for the interest of the recipient; sometimes the benefit is easily identifiable whereas in other instances, it can be complicated (Macrory, Appleton, & Plummer, 2005). The EC-DRAMs Chips case is a clear reminder that a subsidy passed to only 6 out of 200 firms is enough to be labelled as a subsidy established under specificity. Article 1 of ASCM lays down the definition of a subsidy, clause1.1 states (WTO, 1995): “(a) (1) There is a financial contribution by a government or any public body within the territory of a Member where: (i) A government practice involves a direct transfer of funds (e.g. grants, loans and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees); (iii) A government provides goods or services other than general infrastructure, or purchase goods; Or (a) (2) there is any form of income price support in the sense of Article XVI of GATT 1994; and (b) a benefit is thereby conferred.” In this scenario, the Department of Trade of Alturia has directly endowed 10 large steel manufacturers with funds worth 1% of sales value and the exporters have been granted export credit. Similarly, the government has pledged a constant supply of iron and set maximum price that falls under price support mechanism. All these measures have been undertaken for the benefit of the steel industry; hence, it can be inferred that these policies comprise subsidies. The SCM agreement does not communicate comprehensive guidance on this subject but the case between Brazil and Canada concerning aircrafts decided by the Appellate Body offers great insight. A dispute ensued between the two countries because of Canada’s accelerating financial assistance to its civil aircraft industry. The Appellate Authority ruled out that an amount would constitute a subsidy if a receipt is provided financial contribution for his benefit, on terms more favourable than prevailing in the market. Therefore, the worth of a benefit should be assessed in accordance with the market conditions. It was stated that when expected export earnings are conditional on a subsidy, then contingency exists. Although no explicit statement regarding export subsidies existed; however, it was upheld that TPC assistance was conditional on exportation (WTO, 2003). Article 14 of SCM agreement provides a further elaboration on what constitutes a benefit. Additionally, the US-FSC case provides that revenue injections and grants also form subsidies. Also, the Korea-Commercial Vessels case provides a clear guideline that in the case of a dispute, the AB is the only deciding authority as per the application of the SCM Agreement. The endowment of credit to exporters to set off customs duties in recipient countries is evidently an export subsidy. Although the Department of Trade introduced the policy of providing a fund of 1% of sales value for investment in research and development purposes but unfortunately most companies have allocated it to extra production. This is not surprising considering the fact that Alturai’s share of the world market for steel is boosting; thus, domestic companies are diverting resources to make the best out of the opportunity. These policies are providing financial assistance to the steel industry in various forms. In addition, export earnings have indicated a boost after the endowment of funds, reflecting contingency. The government of Alturai might not have explicitly declared the new economic policies as subsidies yet in the light of the above case law, we can conclude that in reality these policies comprise subsidies under the Agreement on Subsidies and Countervailing Measures. This is also confirmed by Articles 5 to 7 of the SCM Agreement that provides that any grants that affect the domestic industry of a member state constitute a subsidy and ought to be dealt with using countervailing measures. (b). The steel industry in Benares caters to 80% of domestic demand and carries out exportation of steel on a small-scale. Unfortunately, as a consequence of various economic and trade policies implemented by the government of Alturai, the domestic producers of steel in Benares are encountering a drastic fall in profits and market share. As Alturai is in a position to supply steel on lower prices so their market share is escalating worldwide including inside Benares. Both countries hold seats in the World Trade Organization (WTO). The Agreement on Subsidies and Countervailing Measures (ASCM) acts as a check on subsidies, regulating the actions of member countries. Any country can counter the impact of unfavourable and excessive international subsidies by seeking dispute settlement of the World Trade Organisation. It will assist in countering the adverse consequences or removing the subsidy. If that course of action fails, the country has an option to initiate investigation and eventually levy additional duty known as countervailing duty on subsidized imports, which are endangering domestic production (WTO, 2011). Article 3 titled Prohibition of the agreement declares: “Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1 are prohibited: 3.1(a) subsidies contingent, in law or in fact, whether solely or as one of the several other conditions upon export performance, including those illustrated in Annex1; (b) subsidies, contingent, whether solely or as one of several conditions, upon the use of domestic over imported goods. Subsidies can be categorised into actionable, non-actionable, and prohibited. The above paragraph proscribes those subsidies that have a contingent relationship with exports or local content subsidies. (European Commission, 2002) We evidenced earlier that Alturias economic policies are concealed subsidies, attempting to accelerate production and exportation. Both of the above subsidies are outlawed as they negatively influence trade and thus prove detrimental in the interests of other Members’. Furthermore, Article 5 about adverse effects and Article 6 based on serious prejudice state that: “No Member should cause, through the use of any subsidy referred to in paragraph 1 and 2 of Article 1,adverse effect to the interests of other Members , i.e.: (a) injury to the domestic industry of another member (b) nullification or impairment of benefits accruing directly or indirectly to other Members under GATT1994 in particular the benefits of concessions bound under Article II of GATT1994; (c) serious prejudice to the interests of another Member.” 6.1 Serious prejudice in the sense of paragraph(c) of Article 5 shall be deemed to exist in the case of: (a) the total ad valorem subsidization of a product exceeding 5 percent” It can be deduced from the above, that injury has been caused to the steel industry in Benares because of subsidized imports. This can be countered by countervailing, whereby a higher duty is imposed on imports entering the domestic market. Mostly, nullification or impairment follow when a subsidy undermines the effect of tariff like the credit offered to exporters by Alturai to offset custom duties in recipient countries. Moreover, the aggregate of all subsidies offered in Alturai would have necessarily crossed the limit of 5%, signifying a serious prejudice. It has disastrous implications for trade of other members in the global market and normally a complaint is lodged. If, based on factual analysis a Member believes that another Member has given a prohibited subsidy, then it can demand for consultations with the other country (cluase4.1) (Fukunaga, 2006). The victimized Member should present evidences related to the existence and character of the subsidy(clause 4.2).the objective of such consultations is to attempt to resolve the matter through mutual co-operation, thus Member granting subsidies are required to respond swiftly to such consultations,(clause 4.3). If Benares and Alturai fail to find common grounds within 30 days then any member can forward the complaint to Dispute Settlement Body (DSB) for constituting a panel (clause 4.4) (Petersmann, 1997). The panel may seek the help of Permanent Group of Experts and is required to submit their report within 90 days from its constitution. ASMC emphasizes on assigning time limits for all safeguard actions, the grey are measures of GATT have been removed (Mcguire, 2002). Benares can lead investigations but must follow the requirements of World Trade Organization. They can impose quotas; however, Alturai should be permitted to export an amount at least equal to the annual average quantities during the three preceding years. ASMC provides a guideline concerning allocation of quotas amongst supplying countries, especially when imports escalate suddenly during a year. The US – Subsidies on Upland Cotton case clearly shows that financial aid programs could be considered in their entirety instead of individual concerns. Nevertheless, it should be remembered that while imposing such terms, Alturai would become entitled to compensation through consultation. Otherwise, they can even impose or increase tariffs on exports from Benares. (c). Annex VII states the following: “Developing Country Members Referred To In Paragraph 2(A) of Article 27 The developing country Members not subject to the provisions of paragraph1 (a) of Article 3 under the term of paragraph2 (a) of Article 27 are: (a) Least-developed countries designated as such by the United Nations, which are Members of the WTO (b) Each of the following developing countries which are Members of the WTO shall be subject to the provisions applicable to other developing country Members according to 2(b) of Article 27 when GNP per capita has reached $1000 per annum: Bolivia, Cameron, Congo, Cote d’Ivoire, Dominican Republic, Egypt, Ghana, Guatemala, Guyana, India, Indonesia, Kenya, Morocco, Nicaragua, Nigeria, Pakistan, Philippines, Senegal, Sri Lanka and Zimbabwe.” For determination of export subsidies, the above Members are not considered. In addition, a period of eight years is allocated to least developed nations and five years to other developing nations to deal with import replacement subsidies. Even in the case of actionable subsidies, they enjoy preference. For instance, financial contributions for privatization schemes in developing country Members are not subject to multilateral action. Similarly, exporters in developing country Members are favoured in connection with countervailing policies. When subsidies or the quantity of imports is insignificant, then investigations relating to such exporters may be terminated. This preferential treatment concerning exports is termed as ‘de minimis provision’ (International Trade Centre, 2009 a). Article 27.1 states “any countervailing duty investigation of a product originating in a developing country member shall be terminated as soon as the authorities concerned determine that: (a) The overall level of subsidies granted upon the product in question does not exceed 2% of its value calculated on a per unit basis; (b) The volume of the subsidized imports represents less than 4% of the total imports of the like product in the importing member, unless imports from the developing country members, whose individual shares of total imports represent less than 4% collectively, account for more 9% of the total imports of the like product in the importing member.” Therefore, the government of Benares should statistically evaluate figures and bear the above clauses in mind before proceeding against Alturai. Several developed country Members advocate that regulations of multilateral subsidy should apply uniformly to all Member Countries without exceptions. The underlying reason behind this stance is the anticipated increase in efficiency. Abolition of protectionism policies against international competition would prove productive; since businesses would be pushed to perform at their best to survive. Nonetheless, the importance of subsidies to developing countries is undeniable. Trade liberalisation has undoubtedly accelerated global trade volume as statistics show the ratio of global export to global output increased by 10 percent during 1990 to 2005, in contrast to only 5.5 percent during the previous two decades. It is worth noting that developing countries played an integral role in achieving this growth. The newly industrialized nations in East Asia contributed about 75 percent of produced good in exportation. Trade liberalization and free market forces helped these countries in accomplishing economic growth at such a fast pace. An analysis revealed that developing country Members, especially those with a low per capita such as India have significantly profited from Article 27 of the Agreement. After the removal of Article 8, the right of developing nations for termination of countervailing duty in opposition to territorial and environmental subsidies of developing nations was gone. Article 27.11 directs that if the subsidy provided in other developing nations is less than two percent, countervailing should be terminated (Hoda & Ahuja, 2003). Due to several provisions, the agreement seems prejudiced against developing nations. The high cost of motivating developed country Members to invest in developing countries is itself an actionable subsidy and this cost is negligible in the context of incentives given to less developing countries. Developing countries should request for extension in time to eradicate proscribed incentives, high per capita before subsidies are restricted. More non-actionable subsidies should be granted. Countries should struggle to change rules of specificity, for instance the establishment of industrial and economic zones, which would adhere to regulations regarding specificity. Annex VII does not mention Alturai; therefore, it falls under the category of other developing country Members. The classification of economic policies as subsidies under ASCM will not change merely because Alturai is a developing nation. However, this will greatly affect the remedies available to Benares for countering subsidization in Alturai. There is a strict guideline concerning dispute settlement where a developing country grants subsidies (articles 27.7-27.9).as developing countries are entitled to a preferential treatment, hence Benares cannot complain against prohibition of export subsidies (article 4 and 27). They can only dispute by following the process contained in Article 7 regarding actionable claims. Moreover, the reason of serious prejudice by Alturai shall not apply, unless substantiated by positive evidence (Article 6.1). Benares cannot act according to Article 7 except for subsidies provided in Article 6.1. To seek a remedy, nullification or impairment of relief in tariff or other requirements as provided by GATT 1994 should exist. Furthermore, only if the subsidy hampers import of a similar product into a third country market or the import is harmful for the domestic market. References European Commission. (2002). EC submission in DDA negotiations: Agreement on Subsidies and Countervailing Measures. EUROPEAN COMMISSION. Fukunaga, Y. (2006). Securing Compliance Through the WTO Dispute Settlement System: Implementation of DSB Recommendations. Journal of Economic Law Volume no. 9. Hoda, A., & Ahuja, R. (2003). AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES: NEED FOR CLARIFICATION AND IMPROVEMENT. New Dehli: INDIAN COUNCIL FOR RESEARCH ON INTERNATIONAL ECONOMIC RELATIONS. International Trade Centre. (2009 a). EXPORT PROMOTION AND THE WTO. Geneva: United Nations. International Trade Centre. (2009 b). Export Promotion and the WTO. Geneva: United Nations. Macrory, P. F., Appleton, A. E., & Plummer, M. G. (2005). The World Trade Organization: Legal, Economic and Political Analysis. World Trade Organization. Mcguire, S. (2002). BETWEEN PRAGMATISM AND PRINCIPLE: Legalization, Political Economy, and the WTO's Subsidy Agreement. The International Trade Journal , 319-343. Petersmann, E.-U. (1997). The GATT/WTO Dispute Settlement System:International Law, International Organizations, and Dispute Settlement. Martinus Nijhoff Publishers. WTO. (1995). AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES. United Nations. WTO. (2003). Dispute settlement:3.7 Subsidies and Countervailing Measures. Geneva: United Nations. WTO. (2011). Subsidies and countervailing measures. 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