If biofuels are considered industrial goods, their trade is governed by the rules of GATT and domestic support from the Agreement on Subsidies and Countervailing Measures (SCM).
The SCM monitors the use of subsidies in order to reduce or eliminate their trade distorting effect. The Agreement provides a definition of the term “subsidy”, which contains three basic elements: (i) a financial contribution (ii) by a government or any public body within the territory of a Member (iii) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist.
There are three subsidy categories: prohibited, actionable and non-actionable. Prohibited subsidies relate to two practices: (1)the use of export subsidies – which are currently used in the biofuel industry and; (2)having receipt of the subsidy contingent upon using domestic inputs over imports. This reduces expected market access benefits for foreign suppliers of competing inputs and, hence, is considered trade distorting. Several programmes of this nature are already in place and more could develop as the industry expands output. For example, the US Department of Agriculture has established a subsidy for refiners to use soya oil as a feedstock for biodiesel. As this subsidy is only available if soya oil is used as the input, firms negatively affected by this subsidy, either petroleum producers or competing input producers, could argue that the subsidy nullifies or impairs benefits accruing to them under the WTO. If the issue was brought to the WTO and argued successfully, the US would have to withdraw this subsidy.
Non-actionable subsidies and actionable subsidies are non-trade distorting and trade distorting subsidies, respectively. According to Loppacher (2005) almost every subsidy that exists in the biofuel industry today would fulfil the conditions necessary to be considered an actionable subsidy under the SCM Agreement. If a subsidy exceeds 5 per cent of a product’s value and is administered in such a way as to be trade distorting, it is an actionable subsidy. Subsidies in both the biodiesel and ethanol markets are significantly higher than the suggested 5 per cent of the value of the product – reaching over 100 per cent of the selling price in the case of US biodiesel.