Searching for Governing Dynamics In the Real World: Market Benchmark Jurisprudence in the SCM Agreement

Abstract

Over the last 20 years, 107 cases out of 491 filed before World Trade Organization (“WTO”) have concerned subsidy issues. These statistics show that subsidy disputes take the center stage of trade disputes. Subsidy disputes occurring in the course of trade in goods between states are highly fact-specific and involve complex issues. In the recent dispute between China and the United States, the arbitrary manipulation of the currency exchange rate was dealt with as one of the key subsidy issues. The European Union and the United States also had been involved in a high profile subsidy dispute concerning large civilian aircrafts for more than eight years. In both disputes, the parties accused each other of illegal subsidization for their major industries.

Subsidy disputes are basically regulated by the subsidy rules set forth by the Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) under the WTO regime. The SCM Agreement provides three elements of a subsidy: the financial contribution by the government, the benefit, and the specificity. Amongst these subsidy disputes, however, they have so far been mainly about the financial contribution by the government and specificity. Discussions on the concept of benefit have been relatively lukewarm. This issue has not received sufficient attention when subsidy disputes have come about.

In fact, the concept of benefit is quite a complex issue because this concept requires us to look into the real market and at how the decision makers make their decisions in the real market. In other words, it asks us to evaluate the situation of the market in the relevant industries; the situation that the recipient was in before the alleged subsidization; the situation that the recipient was in after the alleged subsidization; and the situation that the recipient would be in without such subsidization. This legal principle of benefit analysis is called as the market benchmark rule which is one of the key subsidy rules. This jurisprudence conceptually requires a two-tier sequential approach: (i) the definition of relevant market and (ii) the identification of the appropriate benchmark in such relevant market. Thus, the implementation of market benchmark jurisprudence begins with the definition of relevant market, which establishes an outer limit to facilitate the identification of the appropriate benchmark. However, the SCM Agreement is too skeletal to adequately deal with the current subsidy disputes; it does not set forth basic rules for the definition of ‘relevant market’. This fact puts market benchmark jurisprudence at the high risk of its unavailability and invalidity in the actual setting. This crucial problem of market benchmark jurisprudence stokes the necessity of developing and fine-tuning the concept of relevant market. However, few precedent studies on the definition of the relevant market have been undertaken so far. The reviewing panels and the Appellate Body only skimmed the surface of this issue in the recent subsidy disputes.

With this in mind, this article mainly aims to provide pragmatic guidelines for an effective “benefit” analysis for the administration of the subsidy rules in the international trade agreements. For attaining such an aim, this article, first and foremost, will explore the concept of benefit within the meaning of the SCM Agreement and the key rules of benefit analysis. Second, amongst those issues, this article will provide an in-depth analysis on, in particular, the market benchmark rule. In this chapter, this article will not only discuss how the market benchmark jurisprudence should be properly embodied in the SCM Agreement, but also present the key consideration factors for the identification of the market benchmark. Third, this article will touch on a problematic issue arising from this jurisprudence, that is, the conceptual ambiguity of relevant market, and provide pragmatic guidelines for the proper definition of ‘relevant market’. Finally, the forgoing key discussions will be briefly summed up in the conclusion.

Keywords: World Trade Organization, Benefit Analysis, Relevant Market, Subsidy Agreement, Market Distortion, Market Correction, Market Benchmark, Normative Benchmark, Recipient-Perspective Rule, Proxy Market Rule