Under the SCM Agreement, there is no need to demonstrate "adverse effects" for subsidies in the prohibited category and there are shorter than normal time-frames for compliance where these subsidies have been found in violation. As a result, complaints under the prohibited category are much more attractive to complainants than those in the actionable category.
Right now only subsidies that are contingent on export or on the use of local goods fall into this category. However, the U.S. wants to tighten up the WTO's subsidy disciplines by expanding the "prohibited" category to cover the following:
The U.S. proposal would prohibit the following five types of subsidies if they are “specific” (i.e., are only given to a particular company or industry) and benefit a product that is exported or competes with imports: (1) coverage of operating losses; (2) forgiveness of government-held debt; (3) lending to “uncreditworthy” companies; (4) equity investments in “unequityworthy” companies; and (5) other financing, such as “royalty-based” financing, that is not commercially available.
According to USTR, the reason for the expansion is the following:
The subsidies we want to prohibit maintain inefficient production capacity in industries ranging from steel to semiconductors. Stronger rules for these types of subsidies would address significant trade-distorting practices of many of our trading partners that often lead to unfair trade.
Based on the above only (I think that additional details will be released soon), this strikes me as a potentially very significant expansion of the rules. There are some limits, as the subsidies must benefit products that are exported or compete with imports. However, in practice this limitation would likely exclude only a few products, and certainly most major industrial products would be covered by such a provision.
What seems odd to me is that these five types of subsidies have been singled out. Why these but not others (such as direct payments to producers)? I can understand the distinctions drawn in the current rules, with the existing prohibited subsidies having such a clear effect on trade. But it seems to me that the types of subsidies listed above do not necessarily have a more significant impact on trade than many other subsidies. Furthermore, it would not be too difficult for countries to revise their subsidy programs so as to shift their classification to some other type.
ADDED: There are a lot more details in the full submission, which is now available here. There are some exceptions for small business subsidies, subsidies to public utilities, and subsidies for arms, ammunition or war materials. I still don't fully understand why these particular subsidies but not others are covered, but the submission refers to some of these subsidies as "the most extreme forms of government economic intervention." I guess part of the reasoning is that these subsidies prop up companies that might otherwise not even be in business, and in this way maintain capacity that distorts the market. Also, the U.S. submission makes clear something I had overlooked earlier, which is that the listed subsidies are mostly taken from the now lapsed Article 6.1 of the SCM Agreement.
