Under the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement), subsidies are sorted into three categories, often called the "traffic light" approach: prohibited (red), actionable (amber), and—until its lapse in 2000—non-actionable (green). Prohibited subsidies are defined in Article 3 of the SCM Agreement and fall into two types:
- Export subsidies: financial contributions contingent, in law or in fact, on export performance. An illustrative list appears in Annex I of the agreement (e.g., currency retention schemes favoring exporters, export-contingent tax exemptions, preferential transport charges for export shipments).
- Local-content subsidies (sometimes called "import substitution subsidies"): support contingent on the use of domestic over imported goods.
These subsidies are banned because they distort trade most directly, and a complaining WTO member does not need to prove adverse effects—only the existence of the measure and its contingency. Disputes follow an expedited timetable under Article 4 of the SCM Agreement. If a panel finds a violation, it must recommend withdrawal of the subsidy "without delay," and the Dispute Settlement Body can authorize countermeasures if the respondent fails to comply.
Special and differential treatment exists for developing countries under Article 27, and least-developed countries listed in Annex VII enjoy broader exemptions from the export-subsidy prohibition, though local-content subsidies are prohibited for them as well after transition periods.
Prohibited subsidies are distinct from actionable subsidies (Article 5), which are lawful unless they cause adverse effects such as injury to a domestic industry, nullification of benefits, or serious prejudice. Agricultural export subsidies were long governed separately under the Agreement on Agriculture; WTO members agreed at the 2015 Nairobi Ministerial Conference to eliminate agricultural export subsidies, with developed countries doing so immediately and developing countries on a longer schedule.
Example
In *US – FSC* (DS108), the WTO Appellate Body in 2000 ruled that the United States' Foreign Sales Corporation tax scheme constituted a prohibited export subsidy, prompting the EU to seek authorization for over $4 billion in annual countermeasures.
Frequently asked questions
Prohibited subsidies are banned per se under Article 3 of the SCM Agreement; complainants need not show adverse effects. Actionable subsidies under Article 5 are legal unless a complainant proves injury, nullification, or serious prejudice.
Keep learning