 WORLD TRADE  
ORGANIZATION  TN/RL/GEN/14 
15 September 2004 
 (04-3854) 
Negotiating Group on Rules Original:   English 
   
SERIOUS PREJUDICE 
 
Communication from Canada
 
  
 
 The following communication, dated 13 September 2004, is being circulated at the request of 
the Delegation of Canada.   The submitting delegation has requested that th is paper, which was submitted to the Rules 
Negotiating Group as an informal document (JOB(04)/ 120), also be circulated as a formal document. 
 
_______________ 
 
  As Canada noted in TN/RL/W/112, the WTO Agreement on Subsidies and Countervailing 
Measures  (the “ASCM”), requires an effective remedy to respond to the import/export displacing and 
impeding effects of subsidies.  In this regard, th e “serious prejudice” provisions and related remedies 
in the ASCM were intended to fill a void in  previous GATT rules and to complement WTO 
rules/disciplines in respect of prohibited subsidi es and countervailing duties.  However, while the 
ASCM clarified the circumstances that could give rise to a finding of serious prejudice and the action Members could take in response to such measures, the lack of recourse to these provisions, together 
with the lapsing of certain serious prejudice provisions on 31 December 1999, suggest a need to 
revisit this part of the ASCM with a view to iden tifying and correcting current deficiencies.  In this 
regard, Canada notes Korea’s observation in TN/R L/W/17 that the difficulty of seeking a remedy 
under Part III is due to a structural problem in the ASCM itself.  
I. ISSUES  
 The following are among the factors that have contributed to the current state of the serious 
prejudice provisions of the ASCM.  The list does not purport to be exhaustive:   1. The lapsing of the deeming clause in paragr aph 6.1 on 31 December 1999, deprived Members 
of an important evidentiary advantage in r espect of the specific measures therein described
1, 
                                                      
1 Once it had been established that a subsidy was one described in Article 6.1, there was a rebuttable 
presumption of serious prejudice, which relieved the comp lainant of the initial burden of having to demonstrate 
adverse effects. TN/RL/GEN/14 
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2. The cost-to-government approach prescribed  in Annex IV for the calculation of total 
ad valorem  subsidization under subparagraph 6.1(a) of  the ASCM, is inherently difficult to 
administer
2;   
 3. The requirements for establishing displacement and impedance causation under 
subparagraph 6.3(a) are unclear;  
 4. It is not entirely clear whether the percenta ge threshold prescribed in paragraph 4 of Annex 
IV of the ASCM is strictly in respect of subsid ies attributed to (i.e., expensed in) the start-up 
period or includes subsidies allocated over a mu lti-year period.  Moreover, paragraph 4 of 
Annex IV seems anomalously situated in that, unlike the other provisions of the Annex that 
relate directly to the calculation of the amount of subsidization for the purposes of subparagraph 6.1(a), it deems serious prejudice in its  own right for certain start-up subsidies;  
 5. The remedy prescribed in current paragraph 7. 8 of the ASCM (i.e., removal of adverse effects 
or withdrawal of the subsidy), arguably does not  extend to a subsidy (e.g., a lump-sum grant) 
that was fully disbursed prior to the expiration of the period for compliance with an adopted panel or Appellate Body report, notwithstanding th e fact that the subsidy also benefits future 
production of subject products;  and  
 6. WTO panels, which for the most part are ch arged with addressing specific legal questions 
regarding the consistency of a particular measu re with WTO rules/disciplines, might not be 
particularly well suited to conducting “fact-intensi ve” serious prejudice investigations.  In this 
regard, Annex V to the ASCM, which establishes procedures for the gathering of information 
to be considered by panels, does not provide much in the way of guidance on the detailed 
economic analysis that would be required to work through such cases.  
 
 
  
                                                     
 
2 The deficiency in practical guidance on the app lication of paragraph 6.1(a) is acknowledged in 
footnote 62 to the ASCM in relation to Annex IV: 
62.  An understanding among Members should be developed, as necessary, on 
matters which are not specified in this Annex or which need further clarification for the 
purposes of paragraph 1(a) of Article 6.   
In this regard, the Report by  the Informal Group of Experts to the Committee on Subsidies and Countervailing 
Measures  (G/SCM/W/415/Rev.2 of May 15, 1998) on Annex IV  to the ASCM notes the difficulties inherent in 
trying to measure the cost of funds to government, e.g. (at paragraphs 17-22):   
 It was recognized that the cost to government approach mandated in paragraph 1 of Annex IV raises 
the question, affecting all types of subsidies, of how a government's cost of funds should be measured. 
That is, governments raise funds in two ways, taxation and borrowing, each of which carries some 
cost. Some Group members viewed these costs as limited to the observabl e ("monetary") costs 
associated with raising the funds.  Others believed that these costs also include certain non-observable 
costs, in particular the opportunity cost to the government associated with using such funds, and 
potential indirect costs of taxation...The Group noted that to calculate a weighted average monetary 
cost in a relatively precise way, detailed data would be needed on the government's monetary costs 
incurred in raising tax revenue, as well as on the different rates of interest paid by the government on its various outstanding debt inst ruments.  Also necessary would be information on the relative 
proportions of total go vernment revenues accounted for by  borrowed funds and tax revenues, 
respectively…the Group concluded that trying to apply [a weighted average monetary cost] in Article 6.1(a)/Annex IV calculations might prove not to be feasible. Of particular concern in this 
regard would be data availability (especially where several levels of government might be involved), as 
well as practical difficulties of collecting and analysing the data.   
 TN/RL/GEN/14 
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II. PROPOSED AMENDMENTS 
 
  In order to render the serious-prejudice and related remedial provisions in Part III of the 
ASCM more effective, it is proposed: 
 1. That lapsed subparagraph 6.1 be reinstated;  2. That the cost-to-government approach prescrib ed in (lapsed) Annex IV for the calculation of 
total ad valorem  subsidization under subpara graph 6.1(a) of the ASCM, be replaced with a 
benefit-to-recipient methodology
3;  
 3. That consideration be given to extending, mutatis mutandis , the market-share analysis in 
paragraph 6.4 of the ASCM to causation assessme nt under paragraph 6.3(a), with an increase 
in the subsidized product’s market share giving rise to a prima facie  case of displacement or 
impedance;   
 4. That it be made explicit that any percentage threshold prescribed in paragraph 4 of Annex IV 
to the ASCM extends beyond subsidies expensed in the start-up period to include subsidies 
allocated over a multi-year period, including any subsidies that have been formally committed 
but not yet disbursed.  Moreover, given the i nherently trade-distorting nature of large 
investment incentives, should consideration be given, for example, to expanding the 
prohibited subsidy category to capture start- up subsidies exceeding a prescribed percentage 
threshold?;  
 
5. That, in order not to frustrate the intent of the serious prejudice provisions of the ASCM by 
depriving Article 7.8 of remedial effect, it be made explicit that, in determining appropriate 
steps to remove adverse effects, the benefit of subsidies that were fully disbursed prior to the 
expiration of the period for compliance with an adopted panel or Appella te Body report, shall 
be allocated over the total production of the pr oducts to which the subsidy is properly 
attributable under GAAP
4;  and   
 
6. That Article 7 of the ASCM be amended to require:   
                                                     
 
3 Canada notes Australia’s observation in TN/RL/W/135, that Article 6.1 of the ASCM has been 
ineffective due to lack of clarity and complexities involved in the calculation of the ad valorem  subsidization 
deeming level.  In this regard, Australia also questions whether the calculation of amount of subsidy for this 
purpose should be done in terms of cost to the grantin g government (as required by paragraph 1 of Annex IV), 
given that the definition of “subsidy” is based on benefit to recipient. 
4 Canada is aware that the panel in the yet to be adopted report in United States-Subsidies on Upland 
Cotton  (WT/DS267/R) found at paragraph 7.1171 that, unlike in countervail, “the focus of a ‘serious prejudice’ 
analysis does not call for any precise quantification of the subsidy at issue”  and further found (at footnote 1305) 
that “there is no textual analogue in Part III to the countervailing duty provisions in Part V of the 
Agreement…requiring any precise allocation of subsidies” .  However, because the withdrawal of a subsidy 
programme would not, in and of itself, be a sufficient remedy in those cases where subsidies fully disbursed 
under a withdrawn programme clearly benefited future production, allocation become s necessary in order to 
ensure that the adverse effects of the measure are remove d.  This proposal is consistent with paragraph 7 of 
Annex IV, which made it clear that subsidies granted prior to the date of entry into force of the WTO 
Agreement, the benefits of which are a llocated to future production, are to be included in the overall rate of 
subsidization for the purposes of the threshol d calculation in Article 6.1(a) of the ASCM. TN/RL/GEN/14 
Page 4  
 
 (i) that a Member, in its determination of whether there is “reason to believe”  under 
paragraph 7.1, duly examine all evidence re asonably available to it on the existence, 
nature and amount
5 of the subsidy and its trade effects6;  
  (ii) that a Member, in its “statement of available evidence”  under paragraph 7.2, also 
provide a detailed assessment of such evidence in arriving at the “reason to believe”  
referred to in paragraph 7.1; and 
  (iii) that, in the event consultations failed to  resolve a matter, the information referred to 
in subparagraph (ii) above, would fo rm part of the panel record.    
 
 Canada reserves the right to make fu rther submissions on this subject.   
 
__________ 
  
                                                     
 
5 In United States-Subsidies on Upland Cotton  the panel, while holding that the focus of paragraph 7.2 
of the ASCM is largely on a qualitative assessment of the existence and nature of a subsidy and the serious 
prejudice caused, acknowledges (at paragraph 7.1173) that the provision may not necessarily preclude consideration of the magnitude of a subsidy where th is information is relevant and readily available. 
6 Refer, in this regard, to the existing obligati on of Members under Article 25.8 of the ASCM, to 
provide requested information on the nature and ex tent of “any” subsidies granted or maintained. 