Economy and global agreements involving India and affecting India's interests

Date: January 21, 2015

WTO Subsidy Green box

Question- what are the issues involved in providing subsidy? and what is the role of World Trade Organization in subsidy mechanism?(150 words)

Answer-

A subsidy is a form of financial/other supports extended to any sector of economy usually by the government.  There are three basic elements of subsidy:-

(i) a financial contribution

(ii) by a government or any public body within the territory of a Member

(iii) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist.

The governments provide subsidies for social and economic benefit of its people. Subsidies distort the concept of free market mechanism.In international trade, the subsidies in the exporting country or the destination country determine the price of the produce. If the governments in exporting countries provide subsidies, then they can sell their produce at a cheaper price than producers in the destination country thus harming the producers in the destination country.

World Trade Organization (WTO) thus tries to ensure removal of subsidies given by member countries so that free market mechanism can operate among its member countries. In this context, WTO categorizes subsidies in three categories . The three categories, also called boxes are –

Amber box - These are subsidies to be reduced and removed. It contains all domestic support measures considered to be distorting trade. It includes measures to support prices, subsidies directly related to production quantities, export subsidies, cheap loans etc. For eg:  when European Union buys up cereals and dairy products at guaranteed prices from its producers, it is amber box aid.

Blue box- These  include any support payments that are not subject to the amber box reduction agreement. There are some exceptions to the amber box rules and these are put under Blue Box. It includes subsidies that are linked to one product, but that do not increase according to production levels. For example, the blue box contains aid to livestock or land not linked to prices but to fixed figures for surface and yield.

Green box- Only these type of subsidies are allowed.  To qualify for the green box, WTO says a subsidy must not distort trade, or at most cause minimal distortion.E.g. Research and training services provided to farmers by the state.