Subsidy:

Elaborate provisions have been made  in  the ~greement  on Subsidies and Countervailing  Measures  in the WTO for dealing with subsidy  in industry.' There are separate  rules for subsidy  in agriculture, as will be explained later. If a government provides benefits on production or  export in  the form of financial  contribution  or  income support or price  support, it is  said  to be providing  a  subsidy.  Certain  subsidies are  prohibited, while others are permitted, either fully or within some  limitations and disciplines. Prohibited subsidies are: (i) subsidies for export and (ii) subsidies for the use of  domestic products in preference to  the  like imported products (i.e., for import substitution). The  Least  Developed  Countries  (LDC)  and  other developing  countries having gross national product (GNP) per capita  less than US$ 1000  per mum  are exempted from the prohibition of export subsidy.

While export subsidy is prohibted,  domestic  subsidy, i.e., subsidy for production is permitted within certain limits as explained  below. The category  of  domestic subsidy permitted entirely  is  what  is called non-specific or general subsidy, i.e., the subsidy given for production  across the board to all industrial sectors based on some generally applied criteria, For example, subsidy without any  restriction can be given to small firms, based on the criterion of the maximum number of employees or maximum annual value of output etc. applicable to all industrial sectors.

The factors for determining injury are: decline in output, sale, price, profit, return on investment, capacity utilisation,  employment, wages etc. The factors for  determining  serious prejudice are somewhat  less stringent. These are: displacing or  impeding the  import in  the subsidising country, displacing or impeding the export in a third country market, price undercutting, etc. Detailed procedures have been provided for relief  against  subsidy causing material injury or serious prejudice. In case of existence of material injury or its threat, a country may impose countervailing  duty on the subsidised  product to compensate for the effect of subsidy. Or a country may take to the dispute settlement  route  (to be  explained later) and have the subsidy removed. A country proposing to impose countervailing duty has to conduct an objective and transparent  investigation to determine the existence of subsidy and of material injury  as well as  a direct  causal linkage between  injury and  the subsidised import.

Though there are two alternative courses for relief against material injury, generally a country  prefers to follow  the countervailing duty route, as it is more direct and effective. Another motivating factor is that, in this case,  the process of  investigation is carried  out inside the country, whereas  the dispute settlement process involves  a multilateral  panel procedure.