INSIGHT

What are the trade implications of COVID-related government subsidies?

By Jaime McKenzie, Alister Lloyd, Oliver Lloyd, Madeline White
Food & Beverage Global International Business Obligations Risk & Compliance

In brief 6 min read

In response to the COVID-19 pandemic, governments around the world have sought to support their vulnerable local industries, including in the form of direct grants or subsidies.

Where a subsidy is applied to goods that are exported from their country of origin and the application of that subsidy distorts international trade, it may trigger trade remedies under WTO law. Members of Australian industry, importers and exporters should consider the impact of these subsidies on their business operations and related anti-dumping and countervailing duty measures or risk.

Key takeaways

  • The Australian Government and local industry have expressed concerns about the potential impact on Australia's key industries of COVID-19 related agricultural subsidies introduced by some of our global trading partners. Meanwhile, China has recently taken action to address what it claims is a government subsidy on Australian barley exported to China.
  • Australia and other World Trade Organisation (WTO) members can impose import duties on goods that benefit from a subsidy received in the country of export to assist a specific enterprise or industry, including emergency tariffs where there is a foreseeable and imminent threat of material injury to the local industry.
  • Local industries, importers and exporters alike should be aware of the potential impacts of subsidies on the market price for their goods and the potential for any reduction in the export price of goods to fall foul of international trade laws.

Cheap as chips: government subsidies introduced during COVID-19

In response to the pandemic, governments around the world have sought to support their vulnerable local industries, including in the form of direct grants or subsidies. Domestically, subsidies to agricultural or manufacturing enterprises may be regarded by the public as fair and necessary policies to protect the long-term health of these key industries. However, from the perspective of an international trading partner, subsidies may have the effect of flooding the global market with cheap products that undercut the local prices of the importing country.

An example of this can be seen in recent reports that Australian potato farmers have highlighted to the Australian Government the risk of a potential glut of European frozen potato chips resulting from potato farming subsidies granted in the Netherlands and Belgium. The total combined value of these subsidies is alleged to be approximately €60 million.

It has been reported that the Australian Manufacturing Workers' Union has written to the Prime Minister to demand that the Government take action to prevent European products flooding the Australian market at prices up to 80% below Australian market price. The rationale for the European subsidies is that the pandemic has caused restaurants in the Netherlands and Belgium to close and has therefore caused the demand for frozen potatoes to fall sharply. However, the Dutch and Belgian peak industry bodies have responded that the subsidised products cannot be exported to Australia because the subsidies are conditional on the potatoes being used for alternative domestic programs (eg animal feed and bio-gas).

More broadly, on 18 June the Australian Government expressed its concern with the Trump Administration's US$19 billion farming support packages, such as the Coronavirus Food Assistance Program. The Cairns Group, a coalition of 19 agricultural exporting countries including Australia, also launched an initiative aimed at tracking COVID-related farm subsidies and export restrictions to ensure they are consistent with WTO law and do not outlast the pandemic. Australian officials have currently identified 50 countries which have introduced new domestic subsidies to the agricultural sector in response to the pandemic.

What action may be taken in response to subsidies?

Under WTO law, subsidies granted by governments as industry assistance may be prohibited or they may be 'actionable', which means that other WTO members are permitted to impose duties/tariffs on subsidised imports to negate the effect of the subsidy.

In general, 'prohibited subsidies' are those which are contingent on actual or anticipated export performance (that is, the subsidy is designed to encourage export of the goods) or the use of domestic goods over imported goods as inputs into manufacturing the goods. Subsidies are 'actionable' where they are 'specific', in the sense that they are targeted at an individual company or industry. For example, a R&D tax concession that applies equally and automatically to all businesses in a country is a non-specific subsidy, and therefore not actionable.

Countries can only impose duties on imports that benefit from these 'actionable subsidies' after conducting an investigation to establish that the subsidy in question is:

  1. a 'financial contribution by a government or any public body' that –
  2. confers a benefit on –
  3. a 'specific' recipient, whether a specific enterprise, industry or group of enterprises or industries.

If a domestic producer suffers material injury (or the threat of material injury) because of imports of the subsidised goods, a 'countervailing duty' may be imposed on the goods at the point of import to reverse the effect of the subsidy.

In addition, countries often simultaneously conduct an investigation to determine whether the subsidised goods are being exported at 'dumped' prices (ie where the export price is lower than the price at which the goods are sold domestically in the country of export). If that is the case, the country may also impose an 'anti-dumping duty' on the goods. A topical example of this has been the Chinese Ministry of Commerce's recent investigation into Australian barley exports into China, following which an anti-dumping duty of 73.6% and a countervailing duty of 6.9% has been imposed on future Australian exports. These duties were based on an allegation that the Australian Government had subsidised Australian barley farmers under its Murray-Darling River drought assistance scheme.

Can duties be imposed before the goods are exported to Australia?

Ordinarily, an Australian Anti-Dumping Commission (ADC) dumping or subsidy investigation commences only after importation has commenced and it can be demonstrated that the Australian industry has suffered injury as a result. However, pre-emptive duties can also be imposed on the basis of a 'threat of material injury' to the Australian industry.

pre-emptive duties can also be imposed on the basis of a 'threat of material injury' to the Australian industry.

This is the basis upon which the Australian Manufacturing Workers' Union's has reportedly applied pressure to the Australian Government to introduce anti-dumping duties on imported frozen potato chips. Such a threat must be based on facts and not merely on allegation, conjecture or remote possibility (eg evidence there will be substantially increased importation in the near future). Moreover, the ADC can only be satisfied that there is a 'threat of material injury' if that injury is 'foreseeable and imminent'. In practice, applications based solely on the 'threat of material injury' are rare in Australia.

Other relevant WTO measures

As an alternative to a dumping or subsidy investigation (which generally takes at least six months to conduct before a final decision is made – and sometimes, much longer), countries are also able to impose emergency tariffs on goods (known as 'safeguards') where there is a sudden increase of imports of a particular product causing serious injury to a domestic industry (or the threat of serious injury).

It is also possible that the extraordinary context of COVID-19 may bring into play a general exception under WTO law for measures that are 'necessary to protect human life … or health'. For example, a subsidy for potato producers for the purposes of preventing a famine in a country may fall under that exception.

Actions you can take now

  • Consider the nature of any government subsidies received by your business, your suppliers or foreign competitors, and review them against the relevant WTO laws.
  • Monitor changes of circumstances in the global market that may cause a sharp increase in imports to Australia and, therefore, create a threat to Australian industry.