Reopening Pandora's Box in Search of a WTO-Compatible Industrial Policy? TheBrazil–TaxationDispute

Abstract

We critically assess the Appellate Body (AB) report on the Brazil–Taxation dispute, taken to the World Trade Organisation by the European Union and Japan, and encompassing seven different Brazilian industrial programmes granting tax benefits to different firms and products. The trigger of the dispute was most likely the automotive sector programme, instituted under pressure from the local industry and without much attention to effects on consumers or imports. The resulting WTO case underscores some salient issues related to the WTO compatibility of subsidy programmes, in particular the application of the National Treatment rules to subsidies provided exclusively to domestic producers, and the identification of local content requirements, prohibited under the Agreement on Subsidies and Countervailing Measures (SCM). The AB diverged from the Panel report and its jurisprudence on those issues. The AB tried to reconcile the existence of legitimate eligibility criteria in subsidy programmes and their discriminatory features with WTO rules under the General Agreement on Tariffs and Trade and the SCM. However, the legal test, developed by the AB in this dispute to distinguish prohibited local content requirements from legitimate eligibility criteria, may facilitate circumvention of the SCM prohibition of local content requirements and have important impacts on trade flows.

China's Race to the Top: Regional and Global Implications of China's Industrial Policy

“…Developing suppliers and creating industrial clusters are key foundations for sectoral growth, cost reduction, and industrial upgrading, given that a typical automobile contains about 2,000 functional components, 30,000 parts, and 100 million lines of software code. While the WTO has strongly attacked local content requirements for constituting non-tariff barriers of infant industry protection and control over foreign companies, policy makers in developing countries employ such policies extensively to facilitate technology transfer from foreign partners and the growth of indigenous suppliers (Hestermeyer and Nielsen, 2014;Sauvé, 2016;Ornelas and Puccio, 2020).…”

Nihil novi sub sole. The need for rethinking WTO and green subsidies in light of United States – Renewable Energy

“…LCRs condition the grant of a subsidy on producing a certain value added locally, on the use of local inputs, on the use of equipment produced locally or on achieving a certain investment threshold in local production or research facilities (see, e.g. : Hufbauer et al 2013;Hestermeyer and Nielsen 2014;Batra and Bafna 2018;Ornelas and Puccio 2020).…”

“…Indeed the prohibition under Article 3(1)(b) SCM would allow for rules that legitimately define what a domestic product is, so that the subsidy can be granted to products that are of domestic origin only. The limits between legitimate requirements to define the origin of subsidized products and the prohibition of subsidies contingent on domestic content are not necessarily well-defined in the jurisprudence and would certainly merit some clarifications (Ornelas and Puccio 2020).…”

“…The Appellate Body Canada-Periodicals relied on the understanding that the term 'payment' under Article III:8(b) GATT completely excludes subsidies given in the form of foregone revenues (as in the case of tax rebates and tax reliefs such as those challenged in the US-Energy Robert Schuman Centre for Advanced Studies Working Papers Renewable case). 12 In Ornelas and Puccio (2020), it was argued that what was excluded from Article III:8(b) GATT were only subsidies based on discriminatory taxation in violation of the requirements of Article III:2 GATT. Indeed, Article III:8(b) GATT requires that payments to domestic producers are made 'consistently with the provisions of [Article III GATT]', which is fundamental in order to avoid circumvention of the rule prohibiting discriminatory taxation under Article III:2 GATT.…”

“…So, the issue is first whether there is a need to enlarge the interpretation of the exception under Article III:8(b) GATT in order to ensure a more coherent treatment of different subsidies schemes under WTO rules. There is also a need to better clarify the scope of the prohibition of LCRs under the SCM agreement as mentioned in Ornelas and Puccio (2020). The Appellate Body in Brazil-Taxation distinguishes between, on the one hand, legitimate requirements to define domestic goods in subsidies, and, on the other hand, the prohibited LCRs.…”