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INTRODUCTION
Subsidies may play an important role in developing countries and in the transformation of
centrally-planned economies to market economies. Least-developed countries and developing
countries with less than $1,000 per capita GNP are exempted from disciplines on prohibited
export subsidies. Other developing countries are given until 2003 to get rid of their export
subsidies. Least-developed countries must eliminate import-substitution subsidies (i.e.
subsidies designed to help domestic production and avoid importing) by 2003 — for other
developing countries the deadline was 2000. Developing countries also receive preferential
treatment if their exports are subject to countervailing duty investigations. For transition
economies, prohibited subsidies had to be phased out by 2002.
The Government of a country from time to time has to give bail out packages to companies
so that the company, which would otherwise go bankrupt, can survive in the market. The
reason why this is done is because the adverse effect of the company going bankrupt is too
much for the economy. Usually the impact of the company going down is not only felt in that
industry but in all other industries as well and might be across countries as well. For instance,
the US government had to give bailout packages to multiple banks in the 2008-2009
Subprime Mortgage Crisis. If this hadn’t been done then the impact would have been way
worse. The only major bank which had to completely shut down was Lehman Brothers and
even then the impact was severe.
Another example is how the Indian Government is attempting to bailout Jet Airways as they
are on the brink of bankruptcy. If the bailout is not successful then millions of people will be
out of jobs and the economy will take a massive hit. Therefore, bailouts become a necessity at
times.
There are however, people who have argued whether bailout would come under the definition
of subsidy as per the WTO Agreements and if so, then are they to be allowed. This project
aims to answer this very question by first seeing what bailout packages are, what is subsidy
and what all is relevant under the Agreement on Subsidies and Countervailing Measures to
answer this question.
2
BAILOUT PACKAGES
A bailout is the act of a business, an individual or a government providing money and

resources to a failing company. These actions help to prevent the consequences of that
business's potential downfall which may include bankruptcy and default on its financial
obligations.1
Bailouts are typically only for companies or industries whose bankruptcies may have a severe
adverse impact on the economy, not just a particular market sector. For example, a company
that has a considerable workforce may receive a bailout because the economy could not
sustain the substantial jump in unemployment that would occur if the business failed. Often,
other companies will step in and acquire the failing business, known as a bailout takeover.2
A bailout could be done for profit motives, such as when a new investor resurrects a
floundering company by buying its shares at fire sale prices, or for social objectives, such as
when, hypothetically speaking, a wealthy philanthropist reinvents an unprofitable fast food
company into a non-profit food distribution network. However, the common use of the phrase
occurs where government resources are used to support a failing company typically to
prevent a greater problem or financial contagion to other parts of the economy. For example,
the US government assumes transportation to be critical to the country's general economic
prosperity.3
The government or the financing body places strict requirements such as restructuring of
organisation, no dividend payment to shareholders, change of management and in some cases
a cap on salaries of executives till a stipulated time period or the repayment of dues. This may
also be followed by a temporary relaxation of rules that may impact the accounts of the
rescued entity.4
Advantages of Bailout
Bailouts have several advantages. First, they ensure continued survival of the entity being
rescued under difficult economic circumstances. Secondly, a complete collapse of the
financial system can be avoided, when industries too big to fail start to crumble. The
government in these cases steps in to avoid the insolvency of institutions that are needed for
the smooth functioning of the overall markets.5
Disadvantages of Bailout
Bailouts also have their disadvantages. Anticipated bailouts encourage a moral hazard by
allowing not only promoters but also other stakeholders (customers, lenders, suppliers) to
1
Alexandra Irwin, Bailout, https://www.investopedia.com/terms/b/bailout.asp, (last visited
April 04, 2019).
2
April 04, 2019).
3
Noam Chomsky, Failed States: The Abuse Of Power And The Assault On Democracy,
2006, pg. 176.
4
Definition of ‘Bailout’, https://economictimes.indiatimes.com/definition/bailout, (last
visited April 05, 2019).
5
3
take higher-than-recommended risks in financial transactions. This happens because they
start counting on a bailout when things go wrong.6
Real World Examples
Financial Industry Bailout
The U.S. government offered one of the most massive bailouts in history in 2008 in the wake
of the global financial crisis. The rescue targeted the largest financial institutions in the world
who experienced severe losses from the collapse of the subprime mortgage market and the
resulting credit crisis. Banks, which had been providing an increasing number of mortgages
to borrowers with low credit scores, experienced massive loan losses as many people
defaulted on their mortgages.7
Financial institutions such as Countrywide, Lehman Brothers and Bear Stearns failed, and the
government responded with a massive assistance package. On October 3, 2008, President
George W. Bush signed into law the Emergency Economic Stabilization Act of 2008, which
led to the creation of the Troubled Asset Relief Program (TARP). TARP allowed for the
United States Department of the Treasury to spend up to $700 billion to purchase toxic assets
from the balance sheets of dozens of financial institutions. Ultimately, TARP disbursed
US$439 billion to financial institutions, according to ProPublica, an independent non-profit
newsroom. This figure represented the biggest bailout in financial history to that date.8
Auto Industry Bailout
Automakers such as Chrysler and General Motors (GM) were also knocked down during the
2008 financial crisis. The automakers sought a taxpayer bailout as well, arguing that, without
one, they would not be able to stay solvent.9
Automakers were under pressure as slumping sales plunged amid the dual impacts of surging
gas prices and an inability for many consumers to get auto loans. More specifically, the high
prices at the pump caused sales of the manufacturers' SUVs and larger vehicles to plummet.
Simultaneously, the public found it difficult to get financing, including auto loans, during the
financial crisis as banks tightened their lending requirements, further hampering auto sales.10
While intended for financial companies, the two automakers ended up drawing roughly $17
billion from TARP to stay afloat. In June 2009, Chrysler, now Fiat-Chrysler (FCAU), and
GM emerged from bankruptcy and remain among the larger auto producers today.11
6
7
April 04, 2019).
8
April 04, 2019).
9
April 04, 2019).
10
11
April 04, 2019).
4
ProPublica states that as of April 2018, the U.S. Treasury has recouped $390 billion of the
$439.6 billion it dispersed, and GM and Chrysler paid back their TARP loans years ahead of
schedule. The U.S. Treasury ultimately recovered the remainder of what it had disbursed, as
it made a profit of $66.2 billion by buying shares of the banks when prices were low and
selling them as the stock rebounded.
5
SUBSIDY
A subsidy is a benefit given to an individual, business or institution, usually by the

government. It is usually in the form of a cash payment or a tax reduction. The subsidy is
typically given to remove some type of burden, and it is often considered to be in the overall
interest of the public, given to promote a social good or an economic policy.12
A subsidy takes the form of a payment, provided directly or indirectly, which provides a
concession to the receiving individual or business entity. Subsidies are generally seen as a
privileged type of financial aid, as they lessen an associated burden that was previously
levied against the receiver, or promote a particular action by providing financial support.13
A subsidy typically supports particular sectors of a nation’s economy. It can assist struggling
industries by lowering the burdens placed on them, or encourage new developments by
providing financial support for the endeavours. Often, these areas are not being effectively
supported through the actions of the general economy, or may be undercut by activities in
rival economies.14
Direct subsidies are those that involve an actual payment of funds toward a particular
individual, group or industry. On the other hand, indirect subsidies are those that do not hold
a predetermined monetary value or involve actual cash outlays. They can include activities
such as price reductions for required goods or services that can be government-supported.
This allows the needed items to be purchased below the current market rate, resulting in a
savings for those the subsidy is designed to help.15
There are many forms of subsidies given out by the government. Two of the most common
types of individual subsidies are welfare payments and unemployment benefits. The
objective of these types of subsidies is to help people who are temporarily suffering
economically. Other subsidies, such as student loans, are given to encourage people to
further their education.16
Subsidies to businesses are given to support an industry that is struggling against

international competition that has lowered prices, such that the domestic business is not
profitable without the subsidy.17
12
Will Kenton, Subsidy, https://www.investopedia.com/terms/s/subsidy.asp, (Last visited
April 06, 2019).
13
Subsidies and countervailing measures,
https://www.wto.org/english/tratop_e/scm_e/scm_e.htm, (Last visited April 01, 2019).
14
April 06, 2019).
15
April 06, 2019).
16
17
April 06, 2019).
6
Agreement on Subsidies and Countervailing Measures
The WTO Agreement on Subsidies and Countervailing Measures disciplines the use of
subsidies, and it regulates the actions countries can take to counter the effects of subsidies.
Under the agreement, a country can use the WTO’s dispute-settlement procedure to seek the
withdrawal of the subsidy or the removal of its adverse effects. Or the country can launch its
own investigation and ultimately charge extra duty (“countervailing duty”) on subsidized
imports that are found to be hurting domestic producers.18
What is a subsidy
As per Article 1 of the agreement,19 a subsidy shall be deemed to exist if:
“(a)(1) there is a financial contribution by a government or any public body within

the territory of a Member (referred to in this Agreement as "government"), i.e. where:
(i) a government practice involves a direct transfer of funds (e.g. grants,

loans, and equity infusion), potential direct transfers of funds or liabilities
(e.g. loan guarantees);
(ii) government revenue that is otherwise due is foregone or not collected (e.g.
fiscal incentives such as tax credits);
(iii) a government provides goods or services other than general

infrastructure, or purchases goods;
(iv) a government makes payments to a funding mechanism, or entrusts or

directs a private body to carry out one or more of the type of functions
illustrated in (i) to (iii) above which would normally be vested in the
government and the practice, in no real sense, differs from practices normally
followed by governments;
or
(a) (2) there is any form of income or price support in the sense of Article XVI of
GATT 1994; and
(b) a benefit is thereby conferred.”
In US – Carbon Steel (India), the Appellate Body noted that “Article 1.1 of the SCM
Agreement stipulates that a 'subsidy' shall be deemed to exist if there is a 'financial
contribution by a government or any public body' and 'a benefit is thereby conferred’”.20
Furthermore, the concept of subsidy defined in Article 1 of the SCM Agreement captures
situations in which something of economic value is transferred by a government to the
advantage of a recipient. A subsidy is deemed to exist where two distinct elements are
18
19
Article 1, Agreement on Subsidies and Countervailing Measures.
20
Appellate Body Report, US – Carbon Steel (India) ; WTO Analytical Index, SCM
Agreement – Article 1 (Jurisprudence).
7
present. First, there must be a financial contribution by a government, or income or price
support. Secondly, any financial contribution, or income or price support, must confer a
benefit.21
What is ‘government’
In US – Countervailing Measures (China), the Appellate Body stated that there is “a single
legal standard that defines the term 'government' under the SCM Agreement”. It also pointed
out that this term, as defined in Article 1.1(a)(1) of the SCM Agreement, “encompasses both
the government in the 'narrow sense' and 'any public body within the territory of a
Member’”.22
What does ‘benefit’ mean
In US – Large Civil Aircraft (2nd complaint), the Appellate Body summarized that a
determination of “benefit" under Article 1.1(b) of the SCM Agreement seeks to identify
whether the financial contribution has made “the recipient 'better off' than it would otherwise
have been, absent that contribution”.23
In Canada – Renewable Energy, the Appellate Body noted the implications of the
characterization of a transaction under Article 1.1(a) of the SCM Agreement for the
determination of whether a benefit has been conferred: "[T]he characterization of a
transaction under Article 1.1(a) of the SCM Agreement may have implications for the manner
in which the assessment of whether a benefit is conferred is to be conducted. For instance, the
context provided by Article 14 of the SCM Agreement presents different methods for
calculating the amount of a subsidy in terms of benefit to the recipient depending on the type
of financial contribution at issue. However, although different characterizations of a measure
may lead to different methods for determining whether a benefit has been conferred, the issue
to be resolved under Article 1.1(b) remains to ascertain whether a 'financial contribution' or
'any form of income or price support' has conferred a benefit to the recipient.”24
The Panel in Canada – Aircraft found that "the only logical basis" for determining whether
the financial contribution places the recipient in a more advantageous position than it
otherwise would have been "is the market". According to the Panel: "[A] financial
contribution will only confer a 'benefit', i.e., an advantage, if it is provided on terms that are
more advantageous than those that would have been available to the recipient on the
market."25
In Canada – Renewable Energy, the Appellate Body stated that a panel tasked with a benefit
determination should begin its analysis by defining the relevant market. It further stated that
21
Appellate Body Report, US – Softwood Lumber IV ; WTO Analytical Index, SCM
22
Appellate Body Report, US – Countervailing Measures (China) ; WTO Analytical Index,
SCM Agreement – Article 1 (Jurisprudence).
23
Appellate Body Report, US – Large Civil Aircraft (2nd complaint) ; WTO Analytical
Index, SCM Agreement – Article 1 (Jurisprudence).
24
Appellate Body Report, Canada – Renewable Energy ; WTO Analytical Index, SCM
25
Panel Report, Canada – Aircraft ; WTO Analytical Index, SCM Agreement – Article 1
(Jurisprudence).
8
the "definition of the relevant market is central to, and a prerequisite for, a benefit analysis
under Article 1.1(b) the SCM Agreement".26
The Appellate Body upheld the Panel's finding that "benefit" must be established by
determining whether the financial contribution makes the recipient better off vis-à-vis the
market than it would have been absent that financial contribution: "We also believe that the
word 'benefit', as used in Article 1.1(b), implies some kind of comparison. This must be so,
for there can be no 'benefit' to the recipient unless the 'financial contribution' makes the
recipient 'better off' than it would otherwise have been, absent that contribution. In our view,
the marketplace provides an appropriate basis for comparison in determining whether a
'benefit' has been 'conferred', because the trade-distorting potential of a 'financial
contribution' can be identified by determining whether the recipient has received a 'financial
contribution' on terms more favourable than those available to the recipient in the market.
Article 14, which we have said is relevant context in interpreting Article 1.1(b), supports our
view that the marketplace is an appropriate basis for comparison”.27
Along the same lines, the Appellate Body in EC and certain member States - Large Civil
Aircraft approached the assessment of benefit as "one that is financial in nature and in which
the behaviour of the grantor and recipient of the alleged subsidy at issue are assessed against
the behaviour of commercial actors in the market"; and one that requires an examination of
"the terms and conditions that would have been offered in the market at that time”.28
The Appellate Body in EC and certain member States – Large Civil Aircraft further stated
that "[t]he comparison is to be performed as though the [actual and benchmark] loans were
obtained at the same time" and noted that "the assessment focuses on the moment in time
when the lender and borrower commit to the transaction”.29
Benefit of the recipient v. Cost to the government
In Canada – Aircraft, Canada argued that a financial contribution only conferred a "benefit"
to the extent that it resulted in a net cost to the government. The Panel rejected Canada's
argument, finding that the ordinary meaning of “benefit” does not include any notion of net
“cost to the government". According to the Panel, the ordinary meaning of "benefit" instead
“clearly encompasses some form of advantage.” To establish the existence of that advantage,
the Panel found that “it is necessary to determine whether the financial contribution places
the recipient in a more advantageous position than would have been the case but for the
financial contribution.”30 The Panel's finding that benefit is determined by reference to the
situation of the recipient, rather than any cost to the government, was upheld by the Appellate
Body:
26
27
Appellate Body Report, Canada – Aircraft ; WTO Analytical Index, SCM Agreement –
Article 1 (Jurisprudence).
28
Appellate Body Report, US – Large Civil Aircraft (2nd complaint) ; WTO Analytical
Index, SCM Agreement – Article 1 (Jurisprudence).
29
Appellate Body Report, EC and certain member States – Large Civil Aircraft ; WTO
Analytical Index, SCM Agreement – Article 1 (Jurisprudence).
30
Panel Report, Canada – Aircraft ; WTO Analytical Index, SCM Agreement – Article 1
(Jurisprudence).
9
“A 'benefit' does not exist in the abstract, but must be received and enjoyed by a beneficiary
or a recipient. Logically, a 'benefit' can be said to arise only if a person, natural or legal, or
a group of persons, has in fact received something. The term 'benefit', therefore, implies that
there must be a recipient. This provides textual support for the view that the focus of the
inquiry under Article 1.1(b) of the SCM Agreement should be on the recipient and not on the
granting authority. The ordinary meaning of the word 'confer', as used in Article 1.1(b),
bears this out. 'Confer' means, inter alia, 'give', 'grant' or 'bestow'. The use of the past
participle 'conferred' in the passive form, in conjunction with the word 'thereby', naturally
calls for an inquiry into what was conferred on the recipient. Accordingly, we believe that
Canada's argument that 'cost to government' is one way of conceiving of 'benefit' is at odds
with the ordinary meaning of Article 1.1(b), which focuses on the recipient and not on the
government providing the 'financial contribution'.”31
What the Agreement does
This agreement does two things: it disciplines the use of subsidies, and it regulates the actions
countries can take to counter the effects of subsidies. It says a country can use the WTO’s
dispute settlement procedure to seek the withdrawal of the subsidy or the removal of its
adverse effects. Or the country can launch its own investigation and ultimately charge extra
duty (known as “countervailing duty”) on subsidized imports that are found to be hurting
domestic producers.32
The agreement contains a definition of subsidy. It also introduces the concept of a “specific”
subsidy — i.e. a subsidy available only to an enterprise, industry, group of enterprises, or
group of industries in the country (or state, etc) that gives the subsidy. The disciplines set out
in the agreement only apply to specific subsidies. They can be domestic or export subsidies.33
The agreement defines two categories of subsidies: prohibited and actionable. It originally
contained a third category: non-actionable subsidies. This category existed for five years,
ending on 31 December 1999, and was not extended. The agreement applies to agricultural
goods as well as industrial products, except when the subsidies are exempt under the
Agriculture Agreement’s “peace clause”, due to expire at the end of 2003.34
Some of the disciplines are similar to those of the Anti-Dumping Agreement. Countervailing
duty (the parallel of anti-dumping duty) can only be charged after the importing country has
conducted a detailed investigation similar to that required for anti-dumping action. There are
detailed rules for deciding whether a product is being subsidized (not always an easy
calculation), criteria for determining whether imports of subsidized products are hurting
(“causing injury to”) domestic industry, procedures for initiating and conducting
investigations, and rules on the implementation and duration (normally five years) of
31
Appellate Body Report, Canada – Aircraft ; WTO Analytical Index, SCM Agreement –
Article 1 (Jurisprudence).
32
Anti-dumping, subsidies, safeguards: contingencies, etc,
https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm8_e.htm#subsidies, (Last visited
April 05, 2016).
33
April 05, 2016).
34
Wolfgang Müller, WTO Agreement on Subsidies & Countervailing Measures: A
Commentary, 2017, pg. 201.
10
countervailing measures. The subsidized exporter can also agree to raise its export prices as
an alternative to its exports being charged countervailing duty.35
Does the Agreement help or hurt
From the perspective of an importing state, a subsidy paid by a foreign state is no different
from a technological advance that reduces the cost of production. In both cases, the foreign
producer gains a competitive advantage over its domestic rivals and as a result is able to offer
consumers a lower price. This is obviously bad for the domestic rivals, but it is not harmful to
the importing state as a whole. Lower-priced imports are good for the local economy – the
gain to consumers outweighs the loss to producers. According to this logic, there is no reason
for states to object to the subsidization of production by foreign governments.36
It is certainly true that subsidies can be harmful if they divert resources away from more
productive uses. On the other hand, subsidies cam, at times, compensate for other market
imperfections, meaning that they may increase efficiency. The task of determining when
subsidies are harmful and when they are not is complicated and difficult. At a minimum,
there is no strong reason to believe that the Agreement does a good job of distinguishing the
two categories.37
Types of Subsidies
Prohibited Subsidies
Article 3 defines what subsidies are prohibited, i.e., export subsidies and import substitution
subsidies. Article 3.1(a), in conjunction with Article 3.2 , contains a general prohibition of
granting or maintaining export subsidies. The Agreement defines export subsidies as
subsidies contingent upon export performance. Under Part II of the Agreement, the
prohibition does not depend on the amount of the subsidy,38 or on its impact on competitors in
third countries. In other words, it is not necessary to demonstrate export contingency of a
subsidy.39
The prohibition of export subsidies in Article 3.1(a) is not without exceptions. First,
exceptions can be found in the Agreement on Agriculture. Second, Part VIII of the
Agreement, or Article 27, in conjunction with Annex VII contains the special and differential
treatment provisions for developing countries. The prohibition of granting or maintaining
export subsidies pursuant to Article 3 only applies under certain circumstances to developing
countries.40
Article 3.1(b), in conjunction with Article 3.2, contains a general prohibition of import
substitution subsidies, i.e., subsidies that are contingent upon the use of domestic over
imported goods. The Panel in US-Upland Cotton considered this provision a fundamental
35
WTO Analytical Index, SCM Agreement – Article 1 (Jurisprudence)
36
Andrew T. Guzman & Joost H.B. Pauwelyn, International Trade Law, pg. 429.
37
Andrew T. Guzman & Joost H.B. Pauwelyn, International Trade Law, pg. 430.
38
Appellate Body Report, United States – Countervailing Duties on Certain Corrosion-
Resistant Carbon Steel Flat Products from Germany.
39
40
11
prohibition and a cornerstone of the subsidy disciplines imposed by the Agreement.
According to the Panel, this prohibition relates to the basic national treatment provision in
Article III:4 of GATT 1994, which in turn is a cornerstone of the WTO multilateral trading
system.41 However, it is clear that a subsidy measure which is in breach of Article III:4 of
GATT 1994 is not necessarily prohibited under Article 3.1(b). Article 27.3 contained a
special and differential treatment for developing country Members that has, however, expired
in the meantime.42
In order for a subsidy to be prohibited, it not only has to fall within the description of either
Article 3.1(a) or 3.1(b) but it also has to meet the definition provided by Article 1 of the
Agreement.43 Prohibited subsidies are also actionable under Parts III and V of the
Agreement.44
Actionable Subsidies
In this category the complaining country has to show that the subsidy has an adverse effect on
its interests. Otherwise the subsidy is permitted. The agreement defines three types of damage
they can cause. One country’s subsidies can hurt a domestic industry in an importing country.
They can hurt rival exporters from another country when the two compete in third markets.
And domestic subsidies in one country can hurt exporters trying to compete in the subsidizing
country’s domestic market. If the Dispute Settlement Body rules that the subsidy does have
an adverse effect, the subsidy must be withdrawn or its adverse effect must be removed.
Again, if domestic producers are hurt by imports of subsidized products, countervailing duty
can be imposed.45
The three types of adverse effects identified in Article 5 are quite distinct. First, they can be
distinguished in terms of how the effects of a subsidy are to be assessed. If the adverse effects
consist of ‘injury to the domestic industry of another Member’, it has to be demonstrated that
the subsidized exports (and not the subsidy as such) have caused injury of the domestic
industry in the importing country. By contrast, in a claim concerning serious prejudice, the
subsidy(ies) as such have to cause the effects that are considered a serious prejudice, e.g., the
effect of the subsidy is to displace or impede exports of a like product of another Member
into the third country market of the subsidizing member. Second, the geographical area where
the adverse effects occur differs depending on which subparagraph is examined. In case of
injury to the domestic industry of another Member, it is obviously the domestic market of that
other Member for which injury should be found. By contrast, in a serious prejudice claim the
adverse effects can occur on the market of the subsidizing member, on the market of the
competing member or on a third country market. Finally, if the adverse effects claim is based
on nullification and impairment, the adverse effects should typically be felt in the market of
the subsidizing WTO Member.46
41
Panel Report, United States-Subsidies on Upland Cotton.
42
43
Panel Report, United States – Conditional Tax Incentives for large Civil Aircraft.
44
Appellate Body Report, Australia – Subsidies Provided to Producers and Exporters of
Automotive Leather.
45
April 05, 2016).
12
Non-Actionable Subsidies
According to Article 8, certain types of subsidies, essentially R&D subsidies, subsidies for
disadvantages regions and subsidies for environmental purposes, were non-actionable.
However, Article 8 has expired by virtue of Article 31.47
46
Commentary, 2017, pg. 261-262.
47
13
BAILOUT AS SUBSIDY
In Canada – Renewable Energy, the Appellate Body indicated that a distinction should be
drawn between government interventions that create markets that would otherwise not exist
and, other types of government interventions in support of certain players in markets that
already exist, or to correct market distortions therein. The Appellate Body distinguished the
two by noting: "Where a government creates a market, it cannot be said that the government
intervention distorts the market, as there would not be a market if the government had not
created it. While the creation of markets by a government does not in and of itself give rise to
subsidies within the meaning of the SCM Agreement, government interventions in existing
markets may amount to subsidies when they take the form of a financial contribution, or
income or price support, and confer a benefit to specific enterprises or industries."48
Financial Contribution by a Government or Public Body
For a financial contribution to be a subsidy within the meaning of Article 1.1 of the
Agreement, the financial contribution must be made by a government or a public body,
including regional and local authorities as well as State-owned companies.49
The Appellate Body has noted that the term ‘government’ is used twice in the chapeau of
Article 1.1(a)(1). It appears, first, within the phrase ‘a government or any public body’, and,
secondly, it appears within a parenthetical phrase specifying that, for the purposes of the
Agreement, this word refers collectively to a ‘a government or any public body’, i.e.,
government in the collective sense.50
In a bailout package offered to any failing company, financial contribution is by the

government or on the direction of the government. This is because there is either direct
transfer of funds by the government, or government lets go of revenue which was due to it by
the company, or services such as restructuring, etc is provided by the government, or goods
which are not of the ordinary nature are provided, or the government entrusts the
abovementioned power to a public body. These fulfil the definition of Article 1.1 of the
Agreement.
Furthermore, the bailout package which is given does confer a benefit on the recipient as the
recipient is in a better position than before as the company now has funds to survive. This
also means that they are in a different position in the market as they would have been if they
didn’t receive the bailout. In all probability, if they didn’t receive the bailout, they would
have been bankrupt. For example, Jet Airways received a bailout whereas Kingfisher Airlines
was not given one. Subsequently, Kingfisher Airlines went bankrupt while Jet Airways
managed to survive.
Thus, bailout packages fall under the definition of subsidy as per the agreement.
48
49
Peter Van den Bossche and Werner Zdouc, The Law and Policy of the World Trade
Organization: Text, Cases and Materials, 4th Ed., pg. 783.
50
Appellate Body Report, US-Anti-Dumping and Countervailing Duties.
14
15
CONCLUSION AND ANALYSIS
Bailouts as mentioned above, fits perfectly within the definition of subsidies as per Article 1
of the Agreement on Subsidies and Countervailing Measures. It is financial aid being given to
particular members in the market for their benefit.
It cannot be argued that bailouts are not subsidies. They are quite clearly subsidies. However,
they are not harmful as such. In fact, they are necessary to keep the economy from going
down in an uncontrolled manner. Thus, it can be said that bailouts are non-actionable
subsidies.
There has not been any case in front of the Dispute Settlement Body of the WTO where one
country has alleged the bailout package given by another and has the case ruled in its favour.
The reason is simple. Every country at one point or the other has given or might have to give
a bailout package to one of its domestic country.
However, what can be argued is that giving bailout goes against the national treatment
principle as the domestic company is given benefit. However, since it is a necessity and
important for the nation as otherwise, the market would collapse, it will be classified as an
exception and cannot be challenged.
16
LITERATURE REVIEW
 Andrew T. Guzman & Joost H.B. Pauwelyn, International Trade Law, 2009.
In this book, the authors have talked about trade and economic policy, the making and impact
of trade agreements in national legal systems, the history and structure of the WTO, the
dispute settlement mechanism under the WTO, tariffs, subsidies, etc. It goes into detail to
cover the various agreements under the WTO.
 Noam Chomsky, Failed States: The Abuse Of Power And The Assault On
Democracy, 2006.
In this book, the author mainly talks about how certain powerful states take advantage of
failed states, especially in the middle east. He talks in detail about how USA has invaded and
countries like Iraq, etc. He does talk about bailouts but on a very restricted level.
 Peter Van den Bossche and Werner Zdouc, The Law and Policy of the World
Trade Organization: Text, Cases and Materials, 4th Ed.
The authors are authorities on international trade law and in this book they talk about in detail
about the law and the policies of the WTO. They cover all the agreements of the WTO and
talk about the landmark cases under WTO and those cases which have helped shaped
international trade law.
 Wolfgang Müller, WTO Agreement on Subsidies & Countervailing Measures: A

Commentary, 2017.
The author is one of the leading figures of international trade law as he is the head of the
trade unit of the European Commission. In this commentary, the author has focused on the
Agreement of Subsidies and Countervailing Measures solely. He has gone into depth to talk
about subsidies and countermeasures for the same.
 Alexandra Irwin, Bailout, https://www.investopedia.com/terms/b/bailout.asp.
In this article, the author has gone in depth to write about what constitutes a bailout, what is
the difference between bailout and bail in, why bailouts are given, etc. The website in general
talks about investment and explains terms associated with the same and in general market
economics and practices.
 Will Kenton, Subsidy, https://www.investopedia.com/terms/s/subsidy.asp.
In this article, the author has gone into detail about subsidies. He talks about the different
types of subsidies, what effect subsidies have, etc. The website in general talks about
investment and explains terms associated with the same and in general market economics and
practices.
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INTRODUCTION

A bailout is the act of a business, an individual or a government providing money and

Real World Examples

Financial Industry Bailout

Auto Industry Bailout

A subsidy is a benefit given to an individual, business or institution, usually by the

Subsidies to businesses are given to support an industry that is struggling against

As per Article 1 of the agreement,19 a subsidy shall be deemed to exist if:

“(a)(1) there is a financial contribution by a government or any public body within

(i) a government practice involves a direct transfer of funds (e.g. grants,

(iii) a government provides goods or services other than general

(iv) a government makes payments to a funding mechanism, or entrusts or

(b) a benefit is thereby conferred.”

What does ‘benefit’ mean

Benefit of the recipient v. Cost to the government

What the Agreement does

Does the Agreement help or hurt

Financial Contribution by a Government or Public Body

In a bailout package offered to any failing company, financial contribution is by the

 Wolfgang Müller, WTO Agreement on Subsidies & Countervailing Measures: A

 Alexandra Irwin, Bailout, https://www.investopedia.com/terms/b/bailout.asp.

 Will Kenton, Subsidy, https://www.investopedia.com/terms/s/subsidy.asp.

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