the subsidy regulations and vietnam’s position as a member of the wto

Joint Swedish-Vietnamese Master’s Programme MASTER’S THESIS The Subsidy Regulations and Vietnam’s position as a Member of the WTO SUPERVISORS: Pr. Christina Moell Dr. Vu Thi Hong Minh 1 Statutory Declaration I hereby declare that the thesis has been written by myself. The thesis has been neither presented to any institution for evaluation nor previously published in its entirety or in part. Any tables and figures which are quoted from other sources have been acknowledged. Acknowledgements This thesis has been completed with the help of my supervisors: Professor Christina Moell and Doctor Vu Thi Hong Minh and of the Drafting Evaluation Council members of the Law Faculty of the University of Lund and Hanoi Law University. I would like to express my special thank to all for their supervision and help. 2 Table of Contents Statutory Declaration 2 Acknowledgements 2 Table of Contents 3 Abstract 4 Abbreviations 5 Executive Summary 6 1. 2. 3. 4. 5. Introduction 7 The basic understanding of the subsidy in international trade 8 The subsidy regulations and coutervailing measures of the WTO and Vietnam 16 Recommendations and resolutions to improve the subsidy regulations in Vietnam 42 Conclusion 51 Table of Statutes and other Legal Instruments 55 Table of Cases 56 Bibliography 57 3 Abstract There are two major aspects of the subsidy issue in international trade which are usually both considered by Governments. They are the subsidy on exported commodities and the anti-subsidy which may be applied to imported commodities by the countervailing measures. Vietnam, as a new Member of the WTO, needs to study the law on subsidy and this thesis will concentrate on studying issues relating to subsidy and anti-subsidy. To assess the subsidy and anti-subsidy regulations of Vietnam and study them in connection with the subsidy and anti-subsidy regulations of the WTO seems a necessary task. The thesis consists of the three following parts: The first part covers the basic understanding of subsidies in international trade. The concept of subsidy is considered in terms of other fields, such as, linguistic, economic and political. It also considered in the light of the GATT 1994, the Subsidy Code 1979, the SCM Agreement and the AoA. Anti-subsidy in international trade is is also considered. In the second part covers the subsidy regulations and anti-subsidy of the WTO and of Vietnam. The SCM Agreement and the AoA of the WTO were used in analysing the WTO subsidy regulations and anti-subsidy; the Ordinance was used to analyse the Vietnamese regulations. In the third part we give recommendations for improving the subsidy regime of Vietnam. Based on general research on the adaptation of subsidy policies elsewhere in the World and in China in particular, suggestions for the improvement of Vietnamese policies and laws and for strengthening its implementing mechanisms are proposed. 4 Abbreviations AoA AMS ASPI CVM GATT 1994 Ordinance SCM WTO US Agreement on Agriculture Aggregate Measuremant of Support (in Agreement on Agriculture) Against Subsidy Products Imported into Vietnam Countervailing Measures General Agreement on Tariffs and Trade 1994 Ordinance on measures against subsidized products imported into Vietnam, Ordinance on ASPI 2004 Subsidy Countervailing Measure(s) World Trade Organization United State 5 Executive Summary Supporting subsidies and fighting against subsidies in international trade are usually argued for at the same time. This is because they affect international trade both positively and negatively. This thesis thus focuses on the subsidy regulations applying to both imported and exported commodities activities. It limits itself to the subsidy regulations of the WTO and of Vietnam. In addition, the thesis will make some recommendations to Vietnam in its capacity as a Member of the WTO. Certain basic research methods will be used in the thesis. They are the comparative, logical, analytical and legal research methods: The comparative method will be used in the process of research. The thesis will compare the subsidy regulations of the WTO and of Vietnam. In addition, the logical and analytical methods will be used to identify legal issues that should be taken into account. Furthermore, the legal research method will look for lessons applicable to the regulations in Vietnam. The above methods will also focus on certain issues. For example, the subsidy regulations of the WTO; the subsidy regulations and policy of Vietnam before and after its accession to the WTO. In particular,, they will be used to analyze certain subsidy disputes brought before the WTO and to make further recommendations to Vietnam. 6 Fel! Använd fliken Start om du vill tillämpa Heading 1 för texten som ska visas här. 1. Introduction It would be very difficult to evaluate fully the effects of subsidies on international trade, as well as those of all the direct and indirect benefits that flow from subsidy policies. The majority of subsidies come from Governments and public authorities since they are used as instruments of economic and social policies. Thus, a subsidy can serve various purposes, such as, encouraging advanced technologies, assisting underdeveloped areas or protecting the environment. As an example, the operation of the steel industry and its factories may damage the environment. So, on the one hand the Governments have to control pollution and on the other hand they have to help companies purchase and install pollution abatement equipment. Developing countries tend to rationalize subsidization by linking it to the promotion of their industrial development. However, subsidies may damage international trade as they distort free competition. In international context, a subsidy gives an unfair competitive opportunity to subsidized products over the like products that have not been subsidized. The business receiving the subsidy will have advantages in competition with other businesses in the market since the price of subsidized products may be lower than the cost of non-subsidized products. In addition, a subsidy can undermine market access as it can be seen as an instrument to limit the movement of commodities in the international markets. Consequently, government subsidies lead to unfair competition in an otherwise free economic market. Nevertheless, to maintain subsidies in some situations may be necessary for the stabilization of national and international trade. In practice, international trade institutions such as the WTO allow their Members to apply subsidy measures in some certain cases, especially, subsidies may apply to sectors. For example, the subsidies would be applied to agricultural sector. 7 Fel! Använd fliken Start om du vill tillämpa Heading 1 för texten som ska visas här. 2. 2.1 2.1.1 The basic understanding of the subsidy in international trade The concept of the subsidy and the evolution of the subsidy regulations in international trade The concept of the subsidy in international trade The subsidy in international trade may be studied in terms of many different aspects, such as the linguistic, economic, political … From a linguistic point of view, the meaning of “subsidy” is a grant or contribution of money.1 In economic theory, based on its form and function, subsidies and taxes are opposite and equivalent: a subsidy can be considered as a negative tax and vice versa.2 According to Samuelson and Nordhaus “if taxes are used to discourage consumption of commodities, subsidies are used to encourage production…”3 The researcher Thalassorama used three criteria for defining a subsidy. They are modification of market failures, reduction of cost and enhancement of revenue. He defined a subsidy as any government program that potentially permits a business to increase its profits that would not exist without the government program. According to the experts studying subsidies to Aquaculture, a subsidy is a transfer of funds by a government in order to reduce the cost of production and increase revenue for the producer.4 The WTO defines a subsidy by way of the two criteria of “financial contribution” and “benefit”. By Article 1:1 of the Agreement on subsidies and countervailing measures of the WTO, a subsidy is deemed to exist if: “(a) (1) there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as “government”), i.e. where: 1 Oxford Advanced learner’s Dictionary of current English, 6th Edition, Oxford, (2000). 2 Alberto Gabriel, Subsides to service sectors: A neo – protectionist distortion or a useful development tool, (2005), p.7. 3 Samuelson and Nordhaus, economics, (2001), p.78. 4 Fisheries and Aquaculture Department, The state of world fisheries and Aquaculture, (2002), part 3. 8 Fel! Använd fliken Start om du vill tillämpa Heading 1 för texten som ska visas här. (i) (ii) (iii) (iv) (a)(2) (b) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfer of funds or liabilities (e.g. loan guarantees); Government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits); a government provides goods or services other than general infrastructure, or purchases goods; a government make payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments; or there is any form of income or price support in the sense of Article XVI of GATT 1994; a benefit is thereby conferred.5 Thus, the definition of a subsidy in Article 1.1 has two elements: (1) a financial contribution by the government (Article 1.1(a)) and (2) a benefit (Article 1.1(b)). However, regrettably, the Agreement does not define the term “benefit”. This means that the “action” of the government is the core of the concept of “subsidy”. The point of views above show that there are many different ways to define the term. However, the form and function criteria are considered basic. In short, a subsidy has the following characteristics: - The subsidy is a trade policy tool encourage production; - There is financial contribution by the government or other public body. - The contribution confers a benefit; - The subsidy may indirectly impact the market. 5 SCM Agreement Art.1.1 (a),(b). 9 Fel! Använd fliken Start om du vill tillämpa Heading 1 för texten som ska visas här. 2.1.2 2.1.2.1 The evolution of the regulation of subsidies in International trade GATT and the Charter of international trade Organisation (ITO) The first subsidy regulations were introduced at the suggestion of the ITO, and they were prepared and submitted by the United States. The document proposed to introduce distinct regimes for export subsidies and for domestic subsidies. The export subsidies were sub-divided into those applicable to primary commodities and non-primary products. While domestic subsidies were permitted, export subsidies depended on additional conditions as the resulting bi-level pricing was generally prohibited. In the agricultural sector, the latter were exceptionally permitted if not applied in a way that might lead to acquiring more than an equitable share of world trade. 6 However, the ITO Charter has not entered into force. It was only the General Agreement on Tariffs and Trade (GATT) which provided a uniform regime for all forms of subsidies. It permitted all kinds of subsidies without distinction but it was soon realized that: this regime could not survive the first amendment of the GATT. A 1955 review session did nothing but resuscitated the old two-tier classification provided in the Havana Charter (1946) between domestic subsidies and export subsidies, as well as between export subsidies on primary commodities and non- primary products7. A separate paragraph in the form of Article XVI: 3 was devoted to the regulation of export subsidies on primary products – the category containing agricultural products. In addition, the ambiguous and controversial concepts relating to issues like “equitable share”, “representative period”, “special factors” remained, and these provisions provided a source of tension and uncertainty throughout the history of the GATT. 6 Desta, M.G, the law of International trade in agriculture products, (2002), pp. 100-104. Ibid, p. 131 10 [...]... trade The WTO also ensures that the subsidy regulations and countervailing measures help society to develop in a stable and equal way 3.3 The subsidy regulations and Vietnam’s opposition to subsidies after becoming a Member of the WTO 3.3.1 WTO commitments of Vietnam and Vietnam subsidy regulations after becoming a Member of the WTO Vietnam joined the WTO as its 150th Member on 7/11/2006 and became an... in cases For example, in the case “Canada – Measures Affecting the Export of Civilian Aircraft”, the Appellate body of the WTO affirmed that the term “benefit” was determined by a comparison of the financial contribution and market conditions Naturally, the comparison was used for the determination of what a business can get from the government financial contribution and from the market The Appellate... the regulation, 20but, if the list is illustrative, that may widen the meaning of the term to allow payments to be classed as financial contributions even though they are not within the strict meaning of the term.21 In a debate of Canada over two dispute cases, Canada – Dairy and Canada – Aircraft it was considered that the use of the term in Article 1.1 (a) was comprehensive rather than illustrative.22... subsidy Therefore, the subsidizing Members have to compensate the injured Members whose domestic industry suffers difficulties 3 The subsidy regulations and coutervailing measures of the WTO and Vietnam 3.1 The subsidy regulations of the WTO There are two basic multilateral agreements providing for subsidies under the WTO They are the agreement on Subsidy and Countervailing Measures (SCM) and the Agreement... rights to make direct a request consultation In addition, Article 4.3 and 7.3 of the SCM provide that the purpose of the consultation That is the consultation shall be to clarify the facts of the situation and to arrive at a mutually agreed solution It may be said that the application of countervailing measures by the unilateral-institution may bring to the Member a positive results The application of countervailing... the amount of the subsidy found to ".39 Based on my research on the control of subsidies and countervailing measures of the WTO, I have the following comments to make: First, the approach of the WTO on subsidies and countervailing measures manifests a balanced stand between the freedom on trade and the interests of the Member countries Secondly, the approach on subsidies and countervailing measures represents... However, the application of the countervailing measures has to comply with the principles of the WTO on the determination of the subsidies, the principles for the application of countervailing measures, and their actual application 3.2.1 The principles governing the application of countervailing measures The SCM clearly provides that countervailing measures may only be applied if the performance of imported... International Trade in Agriculture, 2003, P160-165 22 The Canada – Dairy, report of the Panel, supra n 19, para 4.310 and Canada – Aircraff, report of the Panel, supra n 36, para 5.27 18 Fel! Använd fliken Start om du vill tillämpa Heading 1 för texten som ska visas här off” that it would otherwise have been, absent that contribution in our view, the marketplace provides an appropriate basis for comparison... supports a determination regarding subsidy forms that go beyond those mentioned above There is a big difference between the laws of Vietnam and the WTO on the form of a subsidy According to the law of Vietnam the form of the subsidy is created regardless of the degree of trade distortion Under the law of Vietnam the classification on subsidies base on the form of transferring the subsidies However, under the. .. interest rate which the organizations and individuals actually pay - If the subsidy is provided as a loan, the value of the subsidy in this situation must be based on the difference between the interest in normal trade conditions and the interest that must actually be paid for the loan; - If the subsidy is a borrowing guaranty, the subsidy value would be base on the difference between the rate of interest . regulations and anti -subsidy of the WTO and of Vietnam. The SCM Agreement and the AoA of the WTO were used in analysing the WTO subsidy regulations and anti -subsidy; the Ordinance was used to analyse the Vietnamese. classed as financial contributions even though they are not within the strict meaning of the term.21 In a debate of Canada over two dispute cases, Canada – Dairy and Canada – Aircraft it was. coutervailing measures of the WTO and Vietnam The subsidy regulations of the WTO There are two basic multilateral agreements providing for subsidies under the WTO. They are the agreement on Subsidy and Countervailing