Export Subsidies – UPSC Economy Notes

Export subsidies, particularly in the agricultural sector, have been a matter of concern within the WTO, with efforts to address imbalances and support developing countries. Here are key points regarding export subsidies:

1. Limiting Agricultural Export Subsidies:
   • Developed countries are expected to limit agricultural export subsidies in terms of value or volume. The goal is to prevent international prices from dropping significantly, which could negatively impact the exports and domestic markets of developing countries.
   • The Nairobi Ministerial in 2015 called for the immediate cessation of agricultural export subsidies by developed countries, allowing developing nations additional time for compliance.
2. India’s Perspective:
   • India has expressed dissatisfaction with the progress, stating that the expected gains for developing countries from genuinely free international trade in agricultural goods have not materialized.
   • The issue of reducing export subsidies to statutory levels is considered an “implementational concern” discussed within the Doha round of WTO negotiations.
3. Market Access:
   • Market access involves opening domestic markets to agricultural imports by reducing tariffs and eliminating non-tariff barriers.
   • Countries are encouraged to undergo “tariffication,” converting non-tariff barriers like quotas into tariffs, and to bind their tariffs by agreeing to limits, known as “bounded rates.”
4. Special Products (SP) and Special Safeguard Mechanisms (SSM):
   • Special Products (SPs):
     • SPs are agricultural products crucial for food security, livelihood, and rural development in developing countries.
     • Developing countries are allowed higher tariffs on SPs under the Doha Development Round, addressing the specific needs of their farming communities.
   • Special Safeguard Mechanisms (SSMs):
     • SSMs are provisions that enable developing countries to impose temporary, higher-than-bound tariff rates on specific agricultural products in the event of a sudden surge in imports.
     • SSMs act as a safeguard against rapid declines in international prices that could harm domestic production, allowing developing countries to address import surges.

These measures aim to strike a balance in international agricultural trade, considering the unique challenges faced by developing nations. The negotiations on export subsidies, market access, SPs, and SSMs reflect ongoing efforts within the WTO to address the concerns of diverse member countries.

G33 (Friends of Special Products):

Key Points:

1. Composition:
   • The G33 is a coalition of 48 developing countries, including major players like India and China.
   • The group is known as the “Friends of Special Products” in agriculture, indicating a shared interest in addressing issues related to agricultural trade within the WTO framework.
2. Common Concerns and Demands:
   • The G33 countries share common concerns in the agricultural sector.
   • Specific demands include:
     • Treatment of MSP Programs: Programs like Minimum Support Price (MSP) designed to assist farmers during times of distress should not be considered trade-distorting.
     • Calculation of Food Subsidies: The method of calculating the quantum of food subsidies based on market prices prevailing in 1986-1988 is viewed as flawed and unjust, and the G33 advocates for its elimination.
3. WTO and Safeguard Measures:
   • Definition of Safeguard Measures: Safeguard measures are defined as “emergency” actions taken concerning increased imports of specific products that have caused or threatened serious injury to the importing member’s domestic industry.
   • Purpose: These measures are imposed in response to a surge in imports of a particular commodity, and they can take the form of quantitative import restrictions or duty increases beyond bound rates.
4. Features of Safeguard Measures:
   • Temporary Nature: Safeguard measures must be temporary in nature.
   • Criteria for Imposition: They can only be imposed when imports are found to cause or threaten serious injury to the domestic industry.
   • Compensation: The member imposing safeguard measures must compensate other members whose trade is affected by these measures.
   • MFN Basis: Safeguard measures must be applied on a Most Favored Nation (MFN) basis, treating all trading partners equally.
5. Perception of Safeguards:
   • Safeguard measures are considered responses to fair trade behavior, allowing countries to protect their domestic industries in situations of genuine economic threat posed by increased imports.

The G33’s active engagement reflects the importance of addressing agricultural concerns and ensuring that trade policies do not undermine the interests of developing countries, particularly in the realm of food security and farmer support programs.

Safeguard Duty in India:

1. Background:
   • India imposed safeguard duty on steel imports in 2015 in response to the influx of cheap steel imports flooding the domestic market.
   • The move aimed to protect the domestic steel sector from being undercut by countries like China, South Korea, and Japan.
2. Objective:
   • The primary goal of safeguard duty was to deter foreign countries from undermining local producers through the dumping of inexpensive steel products.
3. Temporal Nature:
   • Safeguard duties are designed to be temporary measures, providing protection to domestic industries during periods of economic threat.
   • Critics argue that such measures can promote inefficiency, but proponents emphasize their temporary and emergency nature.
4. WTO Challenge:
   • Japan challenged India’s imposition of safeguard duty on steel imports in the World Trade Organization (WTO).
   • The WTO ruled that India’s imposition of safeguard duty violated WTO norms.

Countervailing Duties (CVDs):

1. Purpose:
   • Countervailing duties (CVDs) are imposed by importing countries when they believe that foreign countries are subsidizing their products, making them cheaper for export.
   • The aim of CVDs is to neutralize the adverse effects of subsidies on domestic industries in the importing country.
2. Initiation:
   • CVDs are typically imposed after a domestic investigation confirms that a foreign country has subsidized its exports, causing harm to domestic producers.

Anti-Dumping Duty:

1. Definition of Dumping:
   • Dumping occurs in international trade when goods are exported at a price below one of the following: the domestic market price, the cost of production, or the fair/normal value (price in the domestic market of a third country).
2. WTO Rules:
   • Dumping is prohibited under WTO rules only if it causes or threatens to cause material injury to a domestic industry in the importing country.
3. Objectives of Dumping:
   • Dumping is often viewed as a form of predatory pricing with objectives such as capturing foreign markets, utilizing full industry capacity, disposing of excess stock, eliminating competition, and dictating product prices.
4. Legal Framework in India:
   • India’s anti-dumping laws are enshrined in the Customs and Tariffs Act, 1975 (Amended 1995), along with specific anti-dumping rules.

These trade remedies, including safeguard duty, countervailing duties, and anti-dumping duties, are essential tools for governments to safeguard domestic industries from unfair trade practices and to ensure fair competition in international trade. However, their application is subject to scrutiny and compliance with international trade rules, as seen in WTO challenges.

China’s Status as a Market Economy:

1. WTO Membership:
   • China became a member of the World Trade Organization (WTO) in 2001 during the Doha Round negotiations.
2. Market Economy Status:
   • The status of a ‘market economy’ was expected to be granted to China in 2015, 15 years after its WTO accession.
3. Challenges to Market Economy Status:
   • Other WTO member countries have been hesitant to grant China market economy status, citing concerns that China manipulates its currency and does not operate as a free market.
4. Impact on Trade Measures:
   • A country without market economy status may face anti-dumping duties, as prices quoted by non-market economies are considered less reliable.
5. WTO Ruling:
   • China appealed to the WTO to obtain market economy status, but the WTO ruled that the conferment of this status is not automatic after 15 years. Instead, the country must demonstrate the features of a free-market economy.

FAQs

1. What are export subsidies?

Export subsidies are financial incentives provided by governments to domestic companies to encourage them to export goods and services to other countries. These subsidies can take various forms, such as direct cash payments, tax breaks, or discounted loans.

2. Why do governments offer export subsidies?

Governments offer export subsidies to boost their country’s exports, which can stimulate economic growth and create jobs. By making exports more competitive in international markets, subsidies help domestic companies sell more goods and services abroad.

3. How do export subsidies affect international trade?

Export subsidies can distort international trade by giving subsidized companies an unfair advantage over competitors from other countries. This can lead to trade disputes and protectionist measures, such as tariffs or quotas, imposed by other countries to counteract the advantage gained by subsidized exports.

4. Are there any drawbacks to export subsidies?

Yes, there are drawbacks to export subsidies. They can lead to overproduction of certain goods, distort resource allocation within the economy, and create dependency on government support among export-oriented industries. Additionally, they may strain international relations and lead to retaliatory measures from trading partners.

5. Are export subsidies allowed under international trade rules?

Export subsidies are generally discouraged under international trade rules established by organizations such as the World Trade Organization (WTO). Many countries have agreed to limit or eliminate export subsidies as part of trade agreements to promote fair and open competition in global markets. However, some countries still use subsidies to support specific industries despite international pressure to reduce or eliminate them.

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