Some simple criteria for examining WTO compatibility of certain policies and measures

The US proposal on imposing a border tax on its imports whilst exempting its exports from corporate tax has led to increased interest on whether certain measures being considered by the US or other countries are compatible with the rules of the World Trade Organization.  In this article, an expert on the WTO agreements Mr. B.L. Das gives a simple explanation of criteria that can be used to determine if a policy or a measure is in violation of three relevant WTO rules — on national treatment, domestic subsidy and export subsidy.

By Bhagirath Lal Das 

National Treatment

If a country gives some benefit to a domestic product and does not give such benefit to a like imported product, it violates the provision of national treatment contained in Article III of the GATT 1994.

[An exception is that a country may give subsidy to a domestic product without giving it to a like imported product. But subsidy has its own discipline as given later.]

Thus if a manufacturing firm gets a tax benefit for using a domestic intermediate product in the manufacture and such benefit is denied when the manufacturer uses a similar imported intermediate product, such measure/policy will violate the national treatment principle. For example, if the taxable income of the firm is reduced by deducting the cost of a domestic intermediate product and such deduction is not done when a similar imported intermediate product is used, the national treatment principle will be violated.

A country can impose import duty on an imported product up to the level of its commitment of bound duty.

A country cannot impose any other charge on the imported product if it does not impose such charge on a similar domestic product.

Domestic Subsidy

If a manufacturing firm or a specific manufacturing sector gets direct transfer of funds from the government or if the government forgoes some tax which would have been normally imposed on it, such measure/policy will be treated as domestic subsidy.

A domestic subsidy, by itself, does not violate WTO Subsidy rules. Violation occurs when another country is able to prove that:

the subsidy causes injury to its domestic production (by the import of such product from the subsidizing country), or

the subsidy prejudices this country’s  export interest in a third country (for example, by competition in the third country market).

If a country gives a subsidy to industry in general (i.e., not limiting it to a specific unit or to a specific industrial sector), such subsidy is not actionable and thus it does not violate WTO Subsidy rules. For example, a country may prescribe that it will exempt a part of income from tax in the case of all industrial firms with a maximum annual turn over of US$ 50,000 or those employing at least 10 physically handicapped persons . It will not violate WTO Subsidy rules.

Subsidy is also permissible for some specific reasons and purposes, e.g., those for research and development, for development of disadvantaged regions, for adaptation to environmental standards etc. Specific criteria and limits have been prescribed for such subsidy.

Export Subsidy

If a benefit is given by a country to a firm or for a product, making it conditional on export, such benefit is treated as export subsidy. Export subsidy is prohibited under WTO Subsidy rules.

Thus if a country exempts the export income of a firm from taxation, it violates the WTO Subsidy rules.

Refund of (or exemption from) taxes and other charges imposed in the production process of the export product (including such taxes and charges applicable to the prior stage production) is not export subsidy. Also, refund of import duty imposed on the intermediate products used in the manufacture of the export product is not export subsidy. (The basic idea is that internal taxes and charges are meant for the people who reside in this country and not for the residents of other countries.)