How to Pass a Pass-Through Test: The Case of Input Subsidies

Abstract

The pass-through principle evolved from countervailing duty cases means that where a producer of a downstream product obtains a subsidized input from an upstream producer at arm’s length, the investigating authority cannot presume, but rather must establish whether and to what extent the benefit of the input subsidy has actually been passed through downstream. The positive pass-through determination enables the importing country to impose a countervailing duty on the downstream product found to be indirectly subsidized. In this article, we show that the legal basis for the input subsidy pass-through goes beyond the scope of Part V of the SCM Agreement. We also argue that what necessitates the pass-through test is a market price paid by the downstream producer to the upstream producer, rather than the fact of corporate non-affiliation. Furthermore, the pass-through determination for all elements of the input subsidy should, in our opinion, be made at the levels of both direct and indirect subsidization. Finally, in the light of our observations, we suggest a few amendments to a proposed Doha Round text on the subsidy pass-through.