Research on the provisions on the concept of separateness of the WTO Agreement on Subsidies and Countervailing Measures

Article 2 of the WTO Agreement on Subsidies and Countervailing Measures (SCM) provides for the “specificity” of a subsidy. Accordingly:

According to the provisions of Article 2.1, a subsidy is considered to be specific if it is applied exclusively to an enterprise or a group of enterprises or production sectors (“certain enterprises”) within the jurisdiction of the competent authority granting the subsidy.

Article 2.1 also provides details on 3 cases of signs to consider a subsidy as specific: (a) clearly limiting the scope of enterprises entitled to the subsidy; (b) not considered to be specific if the ability to receive the subsidy is applied automatically and the relevant standards and conditions are strictly complied with (clearly expressed in the regulations); (c) specificity in practice.

- According to Article 2.2, subsidies applied to specific enterprises operating in a defined geographical area under the jurisdiction of the competent authority granting the subsidy must be considered as specific. Regulations or changes in the general applicable tax rates by governments at all levels are not considered as specific subsidies.

- According to Article 2.3, any subsidy falling within the scope of Article 3 shall be considered as specific subsidies.

- According to Article 2.4, the determination of the specificity of a subsidy under the provisions of this Article must be clearly demonstrated on the basis of factual evidence.

The following study will focus on analyzing the concept of "specificity" and some related concepts under the provisions of Articles 2.1, 2.2, 2.3 of the SCM Agreement based on the conclusions of the WTO Dispute Settlement Body.

I. Some general analysis

"The purpose of Article 2 of the SCM Agreement is not to determine the elements of a subsidy as provided for in Article 1.1, but rather to determine whether the availability of a subsidy is limited by the eligibility of the recipient (Article 2.1(a)) or by the geographical location of the beneficiary (Article 2.2)".[1]

II. Article 2.1

2.1. Some general analysis

"The purpose of an investigation under this Article is to determine whether a subsidy is specific", that is, "whether access to the subsidy is limited to a particular group of recipients".[2]

The general guidance on the interpretation of Article 2, its subparagraphs and the relationship between them is as follows: "The cap provision of Article 2.1 provides an interpretation with respect to the scope and meaning of the subsequent subparagraphs. This cap provision frames the purpose of the investigation as determining whether a subsidy is specific to 'certain enterprises' within the jurisdiction of the granting authority and provides that, in examining whether this is the case, the 'principles' set out in subparagraphs (a) - (c) 'shall apply'. The use of the term 'principles' — rather than a term such as 'rules' — suggests that subparagraphs (a) - (c) must be considered within an analytical framework that recognises and gives appropriate weight to each principle. Therefore, the application of one of the subparagraphs of Article 2.1 is not by itself decisive in concluding whether a subsidy is specific or not." no.[3]

Article 2.1(a) provides that a subsidy is specific if the granting authority, or by regulations it implements, explicitly limits access to the subsidy to eligible enterprises or industries. Article 2.1(b) provides that specificity ‘shall not exist’ if the granting authority, or by regulations, prescribes objective criteria or conditions governing eligibility and the amount of the subsidy, provided that eligibility is automatic, that the criteria or conditions are strictly complied with, and that they are clearly set out in an official document capable of being verified. These provisions therefore provide clear indicators of whether the granting authority’s conduct or instruments are discriminatory: Article 2.1(a) describes eligibility restrictions that favour certain enterprises, while Article 2.1(b) describes criteria or conditions that prevent selective eligibility. Article 2.1(c) provides that, although no specificity exists under the principles set out in subparagraphs (a) and (b), other factors may be taken into account if there is reason to believe that a subsidy may, in fact, be specific in a particular case.[4]

Articles 2.1(a) and (b) identify certain common elements in the analysis of subsidy specificity. For example, these principles direct scrutiny to eligibility requirements imposed by ‘competent authorities or regulations’. This is an important feature of both provisions because it sets the analytical basis for assessing any eligibility restrictions in a particular legal instrument or government action that cause such restrictions. Both provisions highlight indicators of subsidy eligibility. Article 2.1(a) therefore focuses not on whether a subsidy has been granted to certain enterprises, but on whether access to that subsidy has been explicitly restricted. This suggests that the focus of the investigation is on whether certain enterprises are eligible for the subsidy, not whether they actually receive the subsidy. Similarly, Article 2.1(b) directs the investigation to ‘the objective criteria or conditions governing eligibility and the amount of the subsidy’. Article 2.1(b) also points to other legal and practical considerations relevant to the analysis, all of which focus on the way in which the criteria or conditions for eligibility are specified and complied with.

Despite the fact that the principles under subparagraphs (a) and (b) may lead to contradictory results, there may be situations in which the assessment of eligibility for a subsidy will give rise to separate and non-separate indications as a result of the application of Articles 2.1(a) and (b). This is because Article 2.1(a) defines cases of subsidy as separate, whereas Article 2.1(b) defines cases in which a subsidy is considered to be non-separate. For example, it is conceivable that situations where a prima facie indication of specificity under Article 2.1(a) may need to be further examined if additional evidence demonstrates that the subsidy in question is available on the basis of objective criteria or conditions within the meaning of Article 2.1(b). This suggests that, where the eligibility requirements of a measure provide some indications referring to point (a) and some indications referring to point (b), the analysis of specificity must take account of both principles.

Furthermore, the opening sentence of Article 2.1(c) provides that ‘although it may not appear to be specific’ as a result of the application of Articles 2.1(a) and (b), a subsidy may still be considered to be ‘in fact’ specific. The reference in Article 2.1(c) to ‘formally non-distinct’ as a result of the application of Articles 2.1(a) and (b) supports the view that the conduct or instrument of the granting authority may not clearly satisfy the eligibility requirements of Article 2.1(a) or (b), but may in fact give rise to separateness. In such cases, the application of the factors under Article 2.1(c) to the actual characteristics of the subsidy in question is warranted. Since ‘formally non-distinct’ under Articles 2.1(a) and (b) may still give rise to separateness in practice under Article 2.1(c) of the SCM Agreement, this reinforces the view that the principles in Article 2.1 must be interpreted together.

A proper understanding of specificity under Article 2.1 must therefore allow for the simultaneous application of these principles to different legal and factual aspects of the subsidy in any particular case. However, there may be cases where the evidence under consideration clearly indicates specificity or non-specificity on grounds of law, or on grounds of fact, under one of the subparagraphs, and in such cases further consideration under the other subparagraphs of Article 2.1 may not be necessary. For example, Article 2.1(c) applies only where ‘on face value’ there is no specificity. Similarly, the competent authority or the regulations it implements may explicitly restrict access to a subsidy for certain enterprises within the meaning of Article 2.1(a), but do not set out objective criteria or conditions that could be scrutinised under Article 2.1(b). However, caution should be exercised in examining the specificity of a particular paragraph of Article 2.1 when the applicability of other paragraphs is warranted by the nature and content of the measures at issue in a particular case.”[5]

“An inquiry into specificity under Article 2 involves an examination of whether there is a limitation on the availability of the relevant subsidy” and, although not formally specific under Article 2.1(a) and (b), the investigating authority may consider whether the subsidy is in fact specific.[6]

2.2. The order of analysis

The Appellate Body has stated in various disputes that the “starting point” of the specificity analysis is the measure that has been determined to constitute a subsidy under Article 1.1.

In United States – Countervailing Measures (China), the Appellate Body disagreed with China’s argument that Article 2.1 requires a strict sequential analysis of the three subparagraphs in each case. The Appellate Body describes the sequence of the analysis of separateness as follows: "Despite the fact that the analysis of separateness under paragraphs (a)–(c) will normally proceed sequentially, 'there may be cases where the evidence considered clearly indicates separateness or non-separability for reasons of law, or for reasons of fact, under one of the subparagraphs, and in such cases further examination under the other subparagraphs of Article 2.1 may not be necessary. 'In certain situations, the investigating authorities are not required to examine the separateness of the subsidy in question under all three subparagraphs. Instead, depending on the type of evidence available in a particular case, the investigating authority may limit the analysis of specificity to the regulatory factors under subparagraphs (a) and (b) or to the factual factors under subparagraph (c)."

2.3. The “cap” provision of Article 2.1

The cap provision of Article 2.1 “frames the focus of the investigation as determining whether the subsidy is exclusive to ‘certain enterprises’ within the jurisdiction of the granting authority.”[7]

2.3.1. “Certain enterprises”

An “industry” or “industry group”, as defined in Article 2, may be understood to refer generally to producers of particular types of products, although the scope of the concept of “industry” may depend on a number of factors in a given context. The specificity of a subsidy can therefore only be assessed on a case-by-case basis[8]: “In the words of Article 2 of the SCM Agreement, a subsidy is ‘specific’ if it is directed exclusively to an enterprise or industry or group of enterprises or industries (referred to in the SCM Agreement as ‘certain enterprises’) within the jurisdiction of the granting authority. This is one way in which the SCM Agreement defines the requirements for the ‘recipients’ of the benefit conferred by the subsidy. Apart from setting out this rather general principle, Article 2 of the SCM Agreement does not address the precise point at which it can be concluded that ‘specificity’ exists.

Looking more closely at the terminology used in the Article 2 cap provision, the term ‘industry’ can be defined as ‘a particular type or branch of productive labour; a trade; a manufacturing industry’. ‘Specificity’ extends to a group of industries because the words ‘certain enterprise’ is defined broadly in the introductory clause of Article 2.1, as an enterprise or industry or group of enterprises or industries. However, an industry, or group of ‘industries’, may be referred to collectively by the type of product it produces. Accordingly, the concept of ‘industry’ refers to producers of certain products. The breadth of this concept of ‘industry’ may depend on a number of factors in a given case. At some point not precisely set out in the text of the agreement and subject to adjustment according to the particular circumstances of a particular case, a subsidy will cease to be specific because it is sufficiently widespread throughout the economy not to benefit a particular limited group of producers of certain products. The wording of Article 2.1 indicates that specificity is a general concept, and the breadth or narrowness of specificity is not easily affected by a rigid quantitative definition. Whether a subsidy is specific can only be assessed on a case-by-case basis.

The concept of “specificity” in Article 2 of the SCM Agreement is intended to recognise that some subsidies are widely provided and widely used throughout the economy and are therefore not subject to the subsidy principles of the Agreement. The footnote to Article 2.1 identifies the nature of ‘objective criteria or conditions’ which, if used to determine eligibility for a subsidy, would preclude an affirmative conclusion of specificity. Such criteria are ‘neutral, do not favour certain enterprises over others, and are economically significant and apply horizontally, such as the number of employees or the size of the enterprise.’"

Meaning of "certain enterprises" in Article 2[9]: "A subsidy is specific for the purposes of Article 2.1(a) of the SCM Agreement when the explicit limitation reserves access to the subsidy to 'certain enterprises'. The cap provision of Article 2.1 provides that the term 'certain enterprises' refers to 'an enterprise or industry or group of enterprises or industries'. The word 'certain' is defined as 'known and particular but not clearly identified: (with a singular noun) particular, (with a plural noun) some are particular, some are determined'. The word 'group' is generally defined as 'a number of persons or things regarded as united or whole on the basis of some common relationship or purpose or classified together because of a degree of resemblance". With respect to the adjectives 'certain' and 'group', it can be seen that 'enterprise' can be defined as 'a business firm, a company', while 'industry' denotes 'a particular form or branch of productive labour; a trade, manufacture'. The Panel in United States - Highland Cotton held that 'an industry, or a group of 'industries', may be referred to collectively according to the kind of products they produce'; that 'the concept of an 'industry' refers to those who produce certain products'; and that 'the depth of the concept of 'industry' may depend on a number of factors in a given case'. This suggests that the term 'certain enterprise' refers to a known and specific enterprise or industry or to a class of enterprises or industries. However, the Appellate Body agreed with the Panel in United States - Highland Cotton that any Any determination as to whether certain businesses or industries constitute 'certain businesses' can only be made on a case-by-case basis."

In EC v. Certain Member States – Large Civil Aircraft, the Appellate Body considered a subsidy scheme in which separate groups of entities had access to separate pools of funding: “The Appellate Body does not consider that explicit restrictions on access to subsidies for entities operating in one sector of the economy would produce a different result under Article 2.1(a) due to the fact that distinct groups of entities have access to different pools of funding under that scheme. If access to the same subsidy is restricted to certain groups of enterprises or industries, the investigating authority or the Panel would be required to assess whether the eligible recipients can be defined collectively as ‘certain enterprises’. When access to certain funding under a subsidy scheme is explicitly restricted to a group of enterprises or industries that qualify as ‘certain enterprises’, this gives rise to a provisional indication of specificity discriminatory within the meaning of Article 2.1(a), regardless of how other funding under that programme is allocated. The European Union does not dispute the Panel's conclusion that the entities eligible for R&TD grants in the aviation sector can be considered to constitute 'certain enterprises'. On the basis of the evidence available, the Panel could reasonably conclude that those eligible for grants allocated for research in the aviation sector qualify as 'certain enterprises'. For these reasons, there is no basis to alter the Panel's conclusion that the evidence before it 'indicates that subsidies have been explicitly earmarked under each relevant Framework Programme for the research efforts of 'certain enterprises'."

The Appellate Body in the United States-Large Civil Aircraft (Second Appeal) case (Article 21.5-EU) disagreed with the view that an enterprise owned by a public entity cannot be considered an enterprise within the meaning of Article 2.1 and argued that the ownership of an enterprise is irrelevant to the analysis of specificity under this provision: “The cap provision of Article 2.1 explicitly instructs panels to assess whether a subsidy is ‘specific to an enterprise or industry or group of enterprises or industries’. The concept of specificity within the meaning of the SCM Agreement therefore includes entities constituting ‘certain enterprises’, as determined based on the principles in paragraphs (a) to (c) of Article 2.1.

If a subsidy is considered specific ‘to an enterprise or industry or group of enterprises or industries’, then the The fact that the subsidy was also granted to a number of other entities that do not fall within the definition of 'enterprises' would not be relevant to the conclusion of specificity that must be made with respect to the group of 'enterprises'. In this regard, the Appellate Body's statement in the context of Article 2.1(a) that 'when access to some sources of funding under a subsidy scheme is expressly limited to a group of enterprises or sectors that qualify as 'certain enterprises', this gives rise to a provisional indication of specificity ... regardless of how other funding under that scheme is distributed.' Similarly, if funding under the same subsidy scheme is provided to certain enterprises, as well as to other entities that are not ‘enterprises’ within the meaning of Article 2, the separateness of the subsidy scheme should be assessed only by reference to the entities that constitute the ‘enterprises’.”

2.3.2. “Jurisdiction of the granting authority”

Determining the jurisdiction of the granting authority is a “preliminary step that provides a framework for conducting a separateness analysis”[10]. A clear determination of the jurisdiction of the granting authority requires an analysis of both the “granting authority” and its “jurisdiction” in conjunction. This determination involves a “total analysis” of the relevant facts and evidence in each case: “Provided that the investigating authority fully justifies any conclusion it reaches as to whether jurisdiction extends to the entire territory of the WTO Member concerned or limited to a designated geographical area within that territory, the overall assessment will normally also identify the granting authority.”

An “essential part” of the separateness analysis is to properly determine “whether the relevant authority is central or local or regional, and whether the granting authority therefore operates at the central, regional or local level”. The importance of this determination lies in the question of separateness: “‘If the granting authority is a regional government, a subsidy to enterprises throughout the territory over which the regional government has jurisdiction will not be considered to be separate.’ Conversely, if the granting authority is a central government, a subsidy to those enterprises will be separate.”[11]

The determination of the granting authority's competence will be informed when the investigating authority determines a subsidy under Article 1.1: "The cap provision of Article 2.1 defines the investigation of specificity as seeking to 'determine whether a subsidy, as defined in Article 1.1, is specific' to certain enterprises within the jurisdiction of the granting authority. By explicitly linking this provision with Article 1.1 of the SCM Agreement, the cap provision of Article 2.1 indicates that the investigating authority's determination under Article 1.1 on the existence of a subsidy will inform its assessment of whether the subsidy is specific to certain enterprises 'within the jurisdiction of the granting authority'. In determining whether a financial contribution exists, the investigating authority must investigate the nature of the financial contribution in question and determine whether it is provided by 'the government', by 'any public authority within the territory of the granting authority', or by 'any other public authority within the territory of the granting authority'. territory of a Member', or by a 'private body' mandated or directed by the government."

This step in Article 2.1 does not require the investigating authority to "define the authority's competence explicitly or in any particular form, so long as it is discernible from the decision."

III. Article 2.2: regional specificity

The Appellate Body in United States - Washing Machines noted that Article 2.2 concerns "restrictions on the geographical area(s) in which eligible enterprises are located." The panel in that dispute stated that the rationale for Article 2.2 is to cover subsidy programs under which "governments and public bodies encourage particular enterprises to direct their resources to certain geographical areas, thereby interfering with the allocation of market resources in the territory of a Member."

In United States – Countervailing Measures (Article 21.5 – China), the Panel noted that “the USDOC is required to establish that the land supply conditions within an economic zone are different and more favorable than those outside the economic zone in order to conclude on regional specificity” under Article 2.2. The Panel acknowledged that the USDOC’s regional specificity analysis relied on the geographical limitation of the subsidy concerned, “insofar as it focused on ‘whether the prices or terms of sale, including other incentives associated with the purchase of land, within the geographical area in question differed from those outside the geographical area’”. The Panel therefore concluded that it had “not considered that the legal standard applied by the USDOC in the context of the Section 129 procedure was inconsistent with Article 2.2 of the SCM Agreement, nor that the questions raised by the USDOC during the investigation were relevant to the demonstration of specificity.”

The Appellate Body in United States – Large Civil Aircraft (2nd Complaint) (Article 21.5 – EU) noted that “the term ‘limited’ in the text of Article 2.2 is not qualified by the word ‘clear’. This shows that, in principle, Article 2.2 covers both explicit and implicit restrictions on the access to subsidies”. The Appellate Body also observed that “Article 2.2 does not specify the manner in which the restriction on access to subsidies must apply. Unlike Article 2.1(a), the text of Article 2.2 does not require that the restriction must necessarily be found in ‘the law under which the subsidizing authority operates’, or that it must be imposed by the granting authority itself”.

3.1 “certain enterprises”

The term “certain enterprises” is a key element of the first sentence of Article 2.2: “A conclusion on regional specificity depends on whether the subsidy is limited to ‘enterprises’ located within a designated geographical area within the jurisdiction of the subsidizing Member.”[12]

In EC v. Certain Member States – Large Civil Aircraft, the Panel addressed the question of whether a subsidy granted by a regional authority, which must be specific within the meaning of Article 2.2, must not be limited to a designated area within the territory of the granting authority, but must in addition be limited to only a small group of enterprises within that area. The Panel concluded that Article 2.2 is properly construed to provide that a subsidy available in a designated area within the territory of the granting authority is specific, even if it is available to all enterprises in that designated area: “Article 2.2 is not drafted particularly clearly. Based on the text alone, it can be interpreted as establishing specificity on the basis of a geographical limitation to the recipient (‘in a designated area’), as the United States has argued. It can also be interpreted as establishing specificity on the dual basis set by the European Community – ‘certain’, i.e., not all, enterprises, ‘in a designated area’. While the text, taken alone, is unclear in this respect, when the text is considered in its context and its object and purpose, it is clear that Article 2.2 is properly construed to provide that a subsidy available in a designated area in The licensing authority's territory is separate, even if it is available to all businesses within that designated area. "

Similarly, the Panel in United States — Antidumping and Countervailing Duties (China) also considered the question of whether the term “certain enterprises” in Article 2.2 covers all enterprises located within the designated geographical area within the jurisdiction of the subsidizing authority, or is limited to some subset; the Panel reached the same conclusion as the Panel in EC and Certain Member States — Large Civil Aircraft. The Panel stated that the term “certain enterprises” in Article 2.2 “refers to enterprises located within, as opposed to outside, the designated geographical area in question, with no other limitation being required within that area”.

The term “certain enterprises” is not limited to legal entities: “Rather, an ‘enterprise’ may be located in a given area for the purposes of Article 2.2 if the enterprise that enterprise effectively demonstrates its commercial presence in that area, including by establishing a subsidiary, such as a branch office or manufacturing facility, which may or may not have a separate legal personality."[13]

3.2 “designation”

The Panel in United States — Antidumping and Countervailing Duties (China) also addressed the question of whether a “designated geographical area” within the meaning of Article 2.2 necessarily has some kind of formal administrative or economic identity, or whether any area identified within the territory of an issuing authority can be a “designated geographical area” for the purposes of a finding of separateness under Article 2.2. The Panel concluded that a “designated geographical area” within the meaning of Article 2.2 “may include any land area identified within the jurisdiction of the issuing authority”.

In United States – Washing Machines, the Appellate Body agreed with the Panel's view that the designation of an area for the purposes of Article 2.2 “may be explicit or implicit, provided that the relevant area is clearly discernible from the wording, design, structure and operation of the subsidy in question”. The Panel reached this conclusion after interpreting the term “designate” as follows: “the verb ‘designate’ means ‘to point out, designate, specify … to call by a distinct name or term; to designate, identify, describe, characterize”. Some aspects of this definition – such as ‘to designate’ and ‘to call by name’ – refer to an explicit or affirmative identification, while others – such as ‘to indicate’ and ‘to describe’ – suggest that identification may also be made by indirect means. "

The Appellate Body added that the inclusion of the term "designation" in Article 2.2 "is intended to ensure that the relevant area is adequately delimited and that its borders and territorial extent are clear".

In United States - Washing Machines, the Appellate Body dealt with a provision that limited the eligibility of investments by using negative terms - that is, excluding investments made in the densely populated Seoul area from being eligible for subsidies. For Korea, the provision could not be considered to positively designate a geographical area, as it merely excluded certain investments. The Appellate Body concluded that the use of negative or exclusionary terms was inappropriate: "Limitations on access to subsidies may be expressed in 'various ways'". One way in which access to subsidies may be limited on geographical grounds is to exclude parts of the territory under the jurisdiction of the Member State. to create the formal distinction proposed by Korea could allow Members to circumvent the provisions of Article 2.2 by framing their regionally focused subsidy programmes in negative or exclusionary terms. "

3.3 "geographical region"

In United States - Antidumping and Countervailing Duties (China), the Panel held that "any defined area within the jurisdiction of the granting authority" may qualify as a "geographical region".

In United States - Washing Machines, the Appellate Body addressed the issue of whether the concept of "geographical region" depends on the territorial size of the subsidized area. The Appellate Body found that the term "geographical region" in Article 2.2 was not qualified and that therefore the territorial size of a region did not constitute a criterion relevant to the applicability of Article 2.2: "This is consistent with the function of the present provision, which is to address subsidy programmes whereby Members direct resources to certain geographical areas within their jurisdiction, thereby interfering with the allocation of resources in the market. In fact, a subsidy program that excludes from its scope an area that, although small in territorial terms, is important from an economic point of view, may in fact significantly limit eligibility."

3.4 “subsidies”

In United States — Antidumping and Countervailing Duties (China), the Appellate Body considered China’s complaint regarding the interpretation of the term “subsidies” in Article 2.2. The Appellate Body stated: “The purpose of Article 2 of the SCM Agreement is not to determine the elements of a subsidy as set out in Article 1.1, but rather to determine whether the availability of a subsidy is limited by the number of eligible recipients (Article 2.1(a)) or by the geographical location of the beneficiary (Article 2.2). Limitations on access to a subsidy can be established in a variety of ways, and whichever approach the investigating authority or panel adopts, it must ensure that the necessary limitation on access is clearly demonstrated on the basis of the evidence. Under Article 2.2, as well as Article 2.1(a), a limitation on access to a financial contribution would also limit access to any benefit, since only those who receive the financial contribution can benefit from the benefit.”

IV. Article 2.3: Article 3 Subsidies Considered Specific

The Panel in Indonesia - Automotive was called upon to decide whether Indonesian subsidies contingent on the use of domestic goods in place of imported goods were specific: “As with any analysis of the SCM Agreement, the first issue to be addressed is whether the measures in question are subsidies within the meaning of Article 1 that are specific to an enterprise or industry or group of enterprises or industries within the meaning of Article 2 … In this case, the European Communities, the United States and Indonesia agree that these measures are subsidies of a specific nature within the meaning of those provisions … Furthermore, the European Communities, the United States and Indonesia agree that these subsidies are contingent on the use of domestic goods in place of imported goods within the meaning of Article 3.1(b) and therefore are considered specific within the meaning of Article 2.3 of the Agreement. The Panel concluded that the measures at issue are distinct subsidies within the meaning of Articles 1 and 2 of the SCM Agreement"

The Panel in Canada – Automobiles cited Article 2.3 of the SCM Agreement and stated that "since the central issue of the SCM Agreement claims in this dispute is whether the exemption from import duties falls within the provisions of Article 3, we do not and do not need to address the question of distinctness separately.

In the United States-FSC case, the Panel concluded that the measure at issue was a subsidy within the meaning of Article 1, and then explained that: “A subsidy is subject to the provisions of the SCM Agreement only if it is specific within the meaning of Article 2. However, Article 2.3 provides that ‘any subsidy falling within the provisions of Article 3 shall be treated as specific’. The Panel therefore proceeded directly to the analysis of whether the Act is dependent on export performance and the use of domestic products in place of imported products within the meaning of Article 3 of the SCM Agreement.”

The Panel in the United States - Upland Cotton applied Article 2.3 after concluding that certain payments are prohibited subsidies under Articles 3.1(a) and 3.1(b): "User marketing payments (Step 2) to domestic users and exporters under section 1207(a) of the FSRI Act of 2002 are prohibited subsidies under Articles 3.1(a) and (b) of the SCM Agreement. User marketing payments (Step 2) to domestic users and exporters under section 1207(a) of the FSRI Act of 2002 'fall within the provisions of Article 3', and therefore the Panel concluded that they are 'distinct' subsidies within the meaning of Article 2.3 of the SCM Agreement. Furthermore, given the significant similarities between user marketing payments (Step 2) to domestic users and exporters under section 1207(a) of the FSRI Act of 2002 and under section 136 of the FAIR Act of 1996, the Panel concluded that section 136 of the FAIR Act is also distinct within the meaning of Article 2.3 of the SCM Agreement."

The Panel in Korea — Commercial Vessels concluded that the effect of Article 2.3 is not limited to prohibited export subsidy claims and that Article 2.3 applies to the entire SCM Agreement. Thus, "a subsidy that is distinct under Article 2.3 (due to export deterrence) is distinct for the purposes of both Part II (prohibited export subsidies) and Part III (actionable subsidies) claims."

V. Relation to Other Provisions - Article 1.1(b) of the SCM Agreement

In United States - Washing Machines, the Appellate Body drew attention to the difference between the analyses under Article 1.1(b) and Article 2 of the SCM Agreement: “The text of Articles 1 and 2 of the SCM Agreement does not suggest that the identification of the recipient of a subsidy will influence the assessment of whether the subsidy is regionally specific. The analysis of specificity under Article 2 ‘presupposes that a subsidy has been found to exist’. Thus, the concepts of financial contribution, benefit and specificity are distinct and independent concepts, which must be assessed separately in determining the applicability of the relevant principles of the SCM Agreement. An inquiry under Article 1.1(b) is essentially focused on whether a financial contribution makes the recipient better off than it would have been in the absence of the subsidy. Accordingly, the fact that a recipient can be ‘a natural or legal person’ suggests that a grant can be awarded to a wide range of economic actors, including individuals, groups of people or companies. In contrast, the question under Article 2 revolves around restrictions on ‘eligibility for a grant’ for certain recipients. Eligibility can be limited in ‘various ways’, for example based on the type of activities carried out by the recipient or the area in which the recipient operates those activities.