A tale of two rules: The intersection between WTO and OECD disciplines on export credit support

Dominic Coppens and Todd Friedbacher's column represents the fourth chapter for Global Policy’s e-book, 'The Future of Foreign Trade Support – Setting Global Standards for Export Credit and Political Risk Insurance'. Contributions from academics and practitioners will be serialised on Global Policy until the e-book’s release in the second quarter of 2015. Find out more here.

Policy implications

• To Participants to the OECD Arrangement: Be aware that your export credit support might not be WTO-consistent, even where it conforms to the OECD Arrangement.
• To non-Participants to the OECD Arrangement: Be aware that your export credit support will not be WTO-consistent unless, at a minimum, it conforms to the interest rate provisions of the OECD Arrangement.
• To all countries: work to develop a consolidated, comprehensive set of multilateral disciplines on export credits under the WTO, with input from the OECD.

With which international rules must export credit agencies (ECAs) comply when they provide export credit support to their exporters of industrial products? In considerable part, the answer depends on where the question is asked. If you are en promenade in Paris, ideally close to the OECD building, you may be referred to the OECD Arrangement on Officially Supported Export Credits (OECD Arrangement). The OECD Arrangement is a gentlemen’s agreement among nine high-income member governments (including the EU, with its 28 member states) (OECD Participants). But if you travel 553 km southeast to Geneva, where the World Trade Organization (WTO) is based on the shores of Lac Léman, you may instead be referred to the WTO treaty and, specifically, the Agreement on Subsidies and Countervailing Measures (SCM Agreement), one of the multilateral trade agreements that disciplines trade between the WTO’s 160 Members, and that is enforceable through binding WTO dispute settlement.

To be fair, outside Geneva circles or the multilateral trade community, not everyone seems to know the reach of the WTO rules on export credits. When extending export credit support, ECAs of OECD Participants seem primarily concerned about adhering to the OECD Arrangement. They seem to assume that if the support conforms to the OECD Arrangement, it will therefore also be WTO-consistent. Conversely, ECAs of non-OECD Participants might think that no international rules apply to their export credit support because their countries are not signatories to the OECD Arrangement. Each misunderstands the situation.

In this short commentary, we seek to correct both misunderstandings by discussing the intersection between the OECD and WTO disciplines on export credit support. After tracing the historical origins of both sets of disciplines, we discuss the reach of the WTO rules and explain the role played by the OECD Arrangement within this framework. In the closing section, we briefly explore how this interplay between WTO and OECD rules could evolve in the coming years.

Looking back: A tale of two tracks

After the end of World War II, an increased focus on tapping into world markets and tipping trade deficits to trade surpluses led developed countries to more actively extend export credit support to boost their exports. Shortly thereafter, those same countries came to understand that it was in their mutual interest to agree on international disciplines restricting the terms on which they provided such support. Otherwise, they risked ending up in a subsidy war, with each cancelling out the utility of the other’s support, and all plunging headlong into deficits and increasingly severe constraints on their treasuries.

From the very beginning, discussions on export credit disciplines have taken place in two different forums: one track at the Organisation for European Economic Co-operation (OEEC), the predecessor of the OECD, and the other at the General Agreement on Tariffs and Trade (GATT), the predecessor to the WTO. Around 1960, the members of the GATT succeeded in adopting an enumerated list of export subsidies that developed countries were prohibited from providing (Export Subsidy List). More specifically, the Export Subsidy List – which itself had its genesis at the OEEC – prohibited export credit support extended on terms resulting in a cost to the government; for pure cover support, for example, the prohibition was triggered where premiums were manifestly inadequate to cover the long term costs of the program.

To make a long story short, the prohibition was more honoured in the breach than the observance. Concerns over ‘glass houses’, as well as an ineffective GATT dispute settlement system that allowed the losing party to block adoption of a judgment not to its liking, left the obligation ignored.

Therefore, the OECD soon resumed negotiations on export credit support. Negotiations were only successful when the United States, as a result of balance-of-payment concerns flowing from the oil crisis in the 1970s, turned from an opponent into the main proponent of such disciplines. In 1978, the United States and a number of other developed countries adopted the first version of the OECD Arrangement, which is formally not a treaty but a gentlemen’s agreement. Enforcement is not achieved through a formal dispute settlement mechanism, but rather based on the notice and match principle. Under this principle, a Participant notifies fellow Participants of the terms of support it intends to provide, and if those terms deviate from the disciplines of the OECD Arrangement, the other Participants are permitted to match that support, providing it on the same, OECD-inconsistent terms. In place of a dispute settlement system, the threat that other Participants will match OECD-inconsistent support is intended to deter deviation from, and instead drive adherence to, the OECD Arrangement.

Because the terms of the OECD Arrangement were more flexible than the GATT disciplines, an exception for expert credit support conforming to OECD terms had to be inscribed in the GATT’s Export Subsidy List. This was accomplished in 1980, in the GATT’s Tokyo Round Subsidy Code, which was a plurilateral agreement further confining policy space on subsidies, mainly for developed countries.

This two-track approach, with the main role played de facto by the OECD Arrangement, was workable as long as OECD Participants were (i) the only countries subject to GATT rules on export credit support, and (ii) the main providers of such support. The mutually-reinforcing application of both sets of rules encouraged a level playing field on export credit support among these countries, with the rules gradually strengthening over time through modifications to the OECD Arrangement.

With the birth of the WTO and the SCM Agreement in 1995, this marriage of convenience was fundamentally altered, mainly as a result of three factors. First, WTO export subsidy disciplines, including on export credit support, were extended to larger developing countries, which had become more active (and thus more threatening) in this domain. Second, the Export Subsidy List, now annexed to the SCM Agreement, was supplemented by a general prohibition of subsidies contingent on export performance. Third, the WTO adopted a binding dispute settlement system.

As explained below, the first factor made larger developing countries – who were also non-OECD Participants – vulnerable to WTO complaints against their export credit regimes, whereas the second factor made OECD Participants vulnerable to counterclaims. The third factor ensured that rulings in WTO disputes would have binding force.

Indeed, long-percolating trade frictions erupted in a WTO dispute between Canada (an OECD Participant) and Brazil (a non-OECD Participant) regarding export credit support for their respective stakeholders in the regional aircraft industry – Bombardier and Embraer. The resulting case law clarified the existing WTO rules on export credit support, to which we now turn.

Looking at the present: The reach of WTO rules

In principle, under the SCM Agreement, most WTO Members (including larger developing countries such as Brazil and China) are prohibited from providing export credit support on terms better than could be secured by their exporters on the private market. This rule results from the general definition of the term subsidy provided in the SCM Agreement, and the prohibition, also in the SCM Agreement, against the provision of any subsidy that is contingent upon export performance.

WTO disciplines make one limited exception for some export credit support conforming to the OECD Arrangement: the safe haven inscribed in item k to the Export Subsidy List, which exempts from the SCM Agreement’s general prohibition on export subsidies those export credits issued in conformity with the interest rates provisions of the OECD Arrangement. The case law confirmed that this safe haven can be invoked in WTO dispute settlement not only by OECD Participants, but also by non-OECD Participants such as Brazil.

That said, the safe haven has been interpreted narrowly, out of concern that, left unchecked, it would permit a subset of (developed) WTO Members (i.e., OECD Participants) to dictate the scope and reach of exceptions to multilateral WTO rules for all WTO Members. As a result, the safe haven and the exception it provides is available only for those forms of export credit support to which the interest rates provisions of the OECD Arrangement are applicable – that is, direct credits. Without any relief from the safe haven, WTO disciplines prohibit the most significant form of export credit support – pure cover – when provided to exporters on terms better than could be secured at market, even if such support conforms fully to the minimum premium and other disciplines in the OECD Arrangement. Similarly, matching is no defence to export subsidy claims in a WTO dispute, even though it is an essential feature – and indeed provides the entire deterring force – of the OECD Arrangement. Moreover, even export credit support benefiting from the safe haven remains, in theory, vulnerable (i) to WTO challenge if it causes certain enumerated forms of economic harm to other WTO Members’ interests (so-called adverse effects); and (ii) to unilateral countervailing duty action if injury to another country’s domestic industry is shown.

The concern for the position of developing countries has inspired WTO panels to foreclose a second potential exception to the general prohibition on export subsidies. Specifically, WTO adjudicators have held that the Export Subsidy List’s prohibition of export credit support involving a “cost to government” does not, a contrario, permit export credit support that do not involve a cost to government. Instead, the case law reinforces the primacy of the SCM Agreement’s general prohibition of export-contingent government support, including export credit support, provided on terms better than available to an exporter at market, even if those terms ensure that the government breaks even. The rationale offered by WTO adjudicators is that exempting from WTO disciplines those export credit programs that break even advantages the countries for which the costs of such programs are lowest. Because developed countries tend to enjoy lower costs of funds than developing countries, developed countries are able to operate programs at lower cost than can developing countries. Interpreting WTO rules without regard to this fact would entrench structural disadvantages for developing countries.

Currently, these stringent WTO rules on export credit do not apply to a limited group of developing WTO Members (e.g. India, and the least-developed amongst developing countries). In theory, their export credit support could be vulnerable for a WTO complaint (and for unilateral countervailing duty action) if it is shown that such support causes adverse trade effects to other WTO Members. More importantly, their special treatment will end for a given sector once that sector becomes export competitive, and for the country as a whole if it reaches a certain development level. Therefore, over time, the stringent WTO rules will come to apply to export credit support provided by some of these Members as well.

Looking forward: Merging both tracks?

Today, we still have two fundamentally different sets of disciplines. On the one hand, we have one multilateral set of binding WTO disciplines that are: formulated in general terms; linked to a binding and effective dispute settlement system; plagued by ineffective disciplines on the notification of subsidies; very hard to change, because consensus amongst WTO Members is required to modify the treaty. On the other hand, we have a separate set of plurilateral OECD disciplines that are: set out in detail; subject to the deterrent force of the “notice and match” principle but without formal enforceability through dispute settlement; recorded in a gentlemen’s agreement that is easily and thus frequently modified, since no formal process of treaty amendment is required.

Frictions between both tracks started to emerge in 1995, when the plurilateral OECD rules were essentially “multilateralized” through the launch of the WTO and SCM Agreement. Subsequently, WTO adjudicators have provided some clarification about the interplay between the two tracks, preserving limited space for the OECD safe haven. The ultimate result has proven unsatisfactory to both non-OECD Participants (who have, in the Doha Round, suggested limiting the safe haven further), as well as to OECD Participants (who took the opposite position in the Doha Round, and also tried to widen the scope of the safe haven by modifying the OECD Arrangement).

In an ideal scenario, both tracks would be consolidated into a comprehensive set of disciplines. To make the consolidated rules multilateral and multi-disciplinary, they would be developed with input from the OECD, but housed within the WTO framework, with its broader membership and binding dispute settlement system.

Appreciating that the perfect can indeed be the enemy of the good, alternatives are envisigable. One alternative and possibly more palatable scenario would involve OECD Participants continuing to use the multilateral WTO track to require discipline in export credit support provided by non-OECD Participants. This could ultimately encourage non-OECD Participants to go so far as to seek greater influence on the scope of the safe haven by joining the OECD Arrangement, or parts thereof. As an example, Brazil ultimately joined the OECD sector agreement on export credit support for civil aircraft. OECD Participants will continue to have an Achilles’ heel that could reduce their appetite to pursue this strategy aggressively: some forms of their own export credit support (e.g. pure cover) would remain vulnerable to WTO challenge, even if it conforms to the terms of the OECD Arrangement.

Dominic Coppens, an associate with Sidley Austin LLP’s Brussels office and a member of the Firm’s WTO litigation practice, is also an Associate Fellow of the Leuven Centre for Global Governance Studies at the University of Leuven.

Todd Friedbacher, a partner with Sidley’s WTO litigation practice, founded the Firm’s Geneva office.

The views expressed in this piece are personal, and do not reflect the views of Sidley Austin LLP or its clients.