Navigating the SCM Agreement: A Legal Framework for Value-Added Manufacturing

By Yanuar Eka Saputra January 18, 2026

Understanding Value-Added Manufacturing under the WTO SCM Agreement

In the world of international trade, Value-Added Manufacturing (VAM) is the engine of economic growth. It represents the transition from exporting raw materials to processing those materials into finished, high-value goods. However, when governments provide financial support to boost these industries, they often run into the complex legal framework of the World Trade Organization (WTO), specifically the Agreement on Subsidies and Countervailing Measures (SCM Agreement).

What is the SCM Agreement?

The SCM Agreement regulates two distinct but related areas: the use of subsidies by governments and the actions countries can take to counter the effects of those subsidies. For a government measure to be considered a "subsidy" under this agreement, it must meet three specific criteria:

Financial Contribution: A government must provide a grant, loan, equity infusion, or forgo revenue (like tax credits).
Conferred Benefit: The recipient must receive an advantage they could not get on the open market.
Specificity: The subsidy must be targeted toward a specific enterprise, industry, or group of industries.

The Traffic Light System of Subsidies

The SCM Agreement categorizes subsidies using a "traffic light" logic, which dictates how value-added manufacturing can be legally supported.

1. Prohibited Subsidies (Red Light)

These are considered so distortive to trade that they are forbidden. There are two main types:

Export Subsidies: Support contingent upon export performance (e.g., "We will give you $1M if you export 80% of your production").
Import Substitution Subsidies: Support contingent upon the use of domestic goods over imported ones (e.g., "You only get this tax break if you use local steel").

2. Actionable Subsidies (Amber Light)

Most VAM support falls into this category. They are not prohibited, but they are "actionable" if they cause adverse effects to the interests of other WTO members. These effects include:

Injury to a domestic industry in the importing country.
Nullification or impairment of benefits expected under GATT.
Serious prejudice (e.g., the subsidy allows the manufacturer to undercut world prices and displace other exporters).

Value-Added Manufacturing: The Conflict

Many developing nations use VAM strategies to "climb the value chain." For example, a country rich in lithium might subsidize a local factory to produce EV batteries rather than just exporting raw ore.

While this is a sound economic development strategy, it often creates friction with the SCM Agreement in two ways:

Local Content Requirements (LCRs): To build a local ecosystem, governments often mandate that manufacturers use a certain percentage of local components. Under Article 3.1(b) of the SCM Agreement, these are strictly prohibited.
Benefit Benchmarking: If a government provides land or electricity at below-market rates to a "Value-Added" industrial park, it may be viewed as a specific subsidy that allows those products to be sold unfairly cheap on the global market, leading to Countervailing Duties (CVDs) from trading partners.

Navigating the Rules: Best Practices for Policy

To support value-added manufacturing without triggering WTO disputes, governments often shift their focus from direct financial incentives to "Green Box" styled support (borrowing a term from agriculture) that is generally non-specific:

Horizontal Support: Providing benefits to all manufacturing sectors equally (e.g., a general corporate tax cut or infrastructure spending) is usually not considered "specific."
R&D and Environmental Grants: While the specific "non-actionable" category for R&D expired years ago, well-structured support for innovation or "green" transitions is often less likely to face successful legal challenges if it doesn't directly target export performance.
Infrastructure Investment: Building specialized ports or high-speed internet that benefits an entire region rather than one specific company is a safer way to add value to the manufacturing sector.

Summary Table: SCM Compliance for VAM

Policy Tool	SCM Status	Risk Level
Export Bonuses	Prohibited	High
Domestic Content Mandates	Prohibited	High
Targeted Low-Interest Loans	Actionable	Medium
General Infrastructure (Roads/Power)	Non-Specific	Low
Worker Training Programs	Non-Specific	Low

The Red Light: Export Bonuses and the SCM Agreement

In the context of the WTO SCM Agreement, "Export Bonuses" (often referred to as export subsidies or incentives) are among the most strictly regulated tools in international trade. While they are designed to give domestic manufacturers a competitive edge in global markets, they are almost always classified as Prohibited Subsidies.

1. Legal Definition and "Red Light" Status

Under Article 3.1(a) of the SCM Agreement, a subsidy is prohibited if it is contingent upon export performance. This means if the "bonus" or financial benefit is only given because a company sells its goods abroad rather than domestically, it is illegal under WTO law.

De Jure Contingency: The law explicitly states the bonus is for exporters (e.g., "Exporters receive a 5% cash rebate on all foreign sales").
De Facto Contingency: The law doesn't explicitly say "for exports," but the facts show the subsidy is tied to actual or anticipated export earnings.

2. Common Forms of Export Bonuses in VAM

Value-Added Manufacturing (VAM) often involves high capital expenditure. Governments use various "bonuses" to help firms recover these costs through exports:

Direct Cash Grants: Payments based on the volume or value of exports.
Currency Retention Schemes: Allowing exporters to keep a portion of foreign exchange earnings that would otherwise go to the central bank.
Internal Transport Subsidies: Preferential freight rates for export shipments provided or mandated by the government (often seen in heavy manufacturing like steel).
Duty Drawbacks (Excessive): While refunding duties on imported inputs used in an export product is generally legal, a "bonus" occurs if the government refunds more than the actual duties paid.

3. The Impact on Value-Added Manufacturing

While export bonuses can provide a short-term boost, they carry significant risks for long-term VAM strategies:

Vulnerability to Countervailing Duties (CVD): Because export bonuses are prohibited, trading partners can impose "anti-subsidy" tariffs (CVDs) without having to prove the subsidy caused "serious prejudice"—the mere existence of the export contingency is often enough to trigger legal action.
Distorted Investment: Firms may focus on low-margin, high-volume exports just to capture the bonus, rather than investing in true innovation or "value-add" quality that would make the product competitive on its own merits.

4. Recent Case Examples

China – Auto Parts: The U.S. successfully challenged China's "export bases" program, where manufacturers in certain regions received cash grants and bonuses for meeting export performance requirements.
India – Export Related Schemes: In recent years, several of India’s export incentive programs (like MEIS) were successfully challenged by the U.S. at the WTO because they were found to be prohibited export subsidies.

Summary: Compliance Checklist

Feature	Prohibited "Export Bonus"	WTO-Compliant Alternative
Trigger	Tied to selling goods abroad	Tied to R&D, green tech, or job creation
Audience	Only exporters	All manufacturers (regardless of where they sell)
Tax Treatment	Forgiving income tax on export profits	Refund of indirect taxes (VAT/GST) on inputs

The Forbidden Clause: Domestic Content Mandates

In the framework of the WTO SCM Agreement, Domestic Content Mandates (often called Local Content Requirements or LCRs) are the second type of "Red Light" or Prohibited Subsidy. While "Export Bonuses" focus on where a product is sold, Domestic Content Mandates focus on what a product is made of.

1. Legal Definition under Article 3.1(b)

Under Article 3.1(b) of the SCM Agreement, subsidies are strictly prohibited if they are contingent upon the use of domestic over imported goods.

Unlike other types of government support that might only be "actionable" (challenged if they cause harm), LCRs are considered so inherently distortive to international trade that they are banned outright. If a government provides a financial benefit—such as a tax break, a grant, or low-interest land—on the condition that the manufacturer buys local steel, local labor, or local components, it has violated this article.

2. Why Governments Use Them (The VAM Logic)

From a national development perspective, Domestic Content Mandates are a primary tool for Value-Added Manufacturing (VAM). The goal is to:

Deepen the Supply Chain: Instead of just assembling imported kits, the government forces the development of local component industries (e.g., forcing an EV factory to buy locally-made batteries).
Create Jobs: Moving from "screwdriver assembly" to "full-scale manufacturing" requires more local labor.
Technology Transfer: Forcing foreign investors to source locally often leads to the sharing of technical expertise with local suppliers.

3. The "TRIMs" Connection

It is important to note that Domestic Content Mandates are often "double-illegal." In addition to violating the SCM Agreement, they typically violate the Agreement on Trade-Related Investment Measures (TRIMs).

TRIMs Article 2.1 prohibits investment measures that are inconsistent with the "National Treatment" principle of GATT.
An LCR is a classic example: it treats imported components less favorably than domestic ones.

4. High-Profile Disputes

Because LCRs are popular in the "Green Energy" and "High-Tech" sectors, they are frequently the subject of WTO litigation:

Canada – Renewable Energy (DS412): The Province of Ontario created a "Feed-in Tariff" (FIT) program for wind and solar power. To get the high guaranteed price for electricity, power producers had to use equipment with a minimum level of Ontario-sourced components. The WTO ruled this was a violation of both GATT and TRIMs.
India – Solar Cells (DS456): India required solar power developers to use domestically manufactured solar cells and modules to qualify for certain long-term power purchase agreements. The WTO ruled against India, stating this unfairly discriminated against imported solar equipment.

5. Summary: Compliance Risks for VAM

Policy Strategy	Compliance Status	Why?
Direct Cash for Local Sourcing	Prohibited	Directly contingent on using domestic goods (Art 3.1b).
Tax Credit for using "National" Parts	Prohibited	Fiscal incentive tied to local content.
Research & Development Grants	Generally Compliant	Usually "non-specific" and not tied to sourcing specific goods.
Workforce Training Subsidies	Generally Compliant	Targets labor skills rather than discriminating against imported goods.

The "Smarter" Alternative

To avoid these legal traps while still boosting VAM, modern industrial policies often shift toward Supply-Side Support. Instead of forcing a company to buy local parts (the "Stick"), the government provides general support to the local component manufacturers—such as infrastructure, specialized industrial zones, or R&D credits—making them naturally more competitive (the "Carrot") without creating a prohibited legal contingency.

Financing Value-Add: Targeted Low-Interest Loans

In the "traffic light" system of the WTO SCM Agreement, targeted low-interest loans are generally classified as Amber Light or Actionable Subsidies. Unlike export bonuses or local content mandates, these loans are not automatically prohibited, but they are highly vulnerable to legal challenges if they disadvantage foreign competitors.

1. The Legal Anatomy of a "Subsidized Loan"

For a loan to be disciplined under the SCM Agreement, it must meet three specific legal tests:

Financial Contribution (Art 1.1a): A direct transfer of funds. This includes not just the loan itself, but also loan guarantees (where the government promises to pay if the company defaults).
Benefit Conferred (Art 1.1b): This is measured against a market benchmark. If a private bank would charge 8% interest, but the government charges 3%, the 5% difference is the "benefit."
Specificity (Art 2): This is the "Targeted" part. If the loan is available to everyone in the economy, it’s usually fine. If it is limited to "certain enterprises" (e.g., only semiconductor manufacturers or only firms in a specific province), it becomes "specific" and thus subject to WTO rules.

2. Why VAM Depends on Targeted Financing

Value-Added Manufacturing (VAM) often requires "patient capital." Because moving from raw materials to complex manufacturing (like aerospace or biotech) involves high risk and long timelines, private banks may be unwilling to lend. Governments step in to:

Bridge the "Innovation Gap": Providing capital for R&D-heavy factories that haven't yet reached profitability.
Lower the Cost of Entry: Reducing the interest burden allows domestic firms to invest in more advanced machinery.
Strategic Industrial Policy: Steering the economy toward specific high-value sectors (e.g., "Industry 4.0" initiatives).

3. The Risk: When Loans Become "Actionable"

A targeted loan becomes a problem for a government when it causes Adverse Effects to another WTO member. This typically happens through:

Serious Prejudice: The subsidized loan allows the company to lower its prices so much that it gains significant global market share, displacing exporters from other countries.
Countervailing Duties (CVD): If a country (e.g., the US) determines that imported subsidized goods (e.g., subsidized steel from Country X) are injuring its own domestic industry, it can impose a "countervailing" tariff to negate the interest-rate benefit.

4. Case Study: The Aerospace Battles

The most famous example of "targeted financing" disputes is the Boeing-Airbus saga.

Airbus (EU): Was found to have received "Launch Aid"—low-interest loans that only had to be repaid if the aircraft was commercially successful. The WTO ruled these were specific subsidies that caused serious prejudice to Boeing.
Boeing (US): Was found to have received targeted tax breaks and R&D contracts through NASA and the DoD that acted as a financial benefit, disadvantaging Airbus.

5. Summary: Compliance for VAM Financing

Practice	WTO Status	Risk Mitigation
Industry-Specific Loans	Actionable	Ensure interest rates are near commercial "benchmark" levels.
Loan Guarantees	Actionable	Charge the company a market-based premium for the guarantee.
Credit for Disadvantaged Regions	Actionable	Keep the criteria objective and neutral within that region.
General Small Business Loans	Non-Specific	Make the program available to all SMEs across all sectors.

The Policy Shift

To support VAM while remaining "WTO-proof," many countries are moving away from direct lending to Equity Infusions (where the government becomes a shareholder) or Infrastructure Support. While equity infusions can still be subsidies, they are often harder for competing nations to "benchmark" than a simple interest rate.

The Safe Harbor: General Infrastructure

In the world of the WTO SCM Agreement, providing "General Infrastructure" is the "Green Light" that governments use to fuel Value-Added Manufacturing (VAM). While most forms of government support are scrutinized as potential subsidies, general infrastructure is explicitly excluded from the definition of a "financial contribution," making it one of the safest ways to support industry.

1. The Legal Definition: Article 1.1(a)(1)(iii)

Under the SCM Agreement, a subsidy exists if a government provides goods or services other than general infrastructure.

This means that if a government builds a road, a bridge, or a power grid that is available to the entire public or all businesses in a region, it is not a subsidy. Because it does not count as a "financial contribution," it cannot be challenged as a prohibited or actionable subsidy.

2. General vs. Specific Infrastructure

The legal safety of infrastructure depends entirely on its accessibility. The WTO distinguishes between two types:

General Infrastructure: Physical installations that are enjoyed by the public at large or a broad, non-specific group of industries (e.g., a national highway, a municipal water system, or a public port).
Specific (Bespoke) Infrastructure: Installations built for the exclusive or primary use of a single company or a tiny group of firms (e.g., a private rail spur built solely to connect one specific factory to the main line).

The Litmus Test: If the government builds a road that only leads to the gates of one factory, it is likely a specific subsidy. If that road serves an entire city or a multi-industry industrial park, it is likely general infrastructure.

3. VAM Strategy: Using Infrastructure as a "Carrot"

Because direct "Export Bonuses" and "Domestic Content Mandates" are illegal, savvy governments use general infrastructure to make their territory attractive for high-value manufacturing without breaking the rules:

Special Economic Zones (SEZs): Governments often build world-class power, fiber-optic internet, and logistics hubs within a designated zone. As long as these zones are open to a wide variety of industries (e.g., any electronics or automotive firm), they are generally viewed as non-specific infrastructure support.
Energy Grids: Upgrading the national grid to provide stable, high-voltage power is essential for advanced manufacturing (like semiconductor fabrication). Since this benefits the whole economy, it is a "safe" way to lower the operational costs for VAM firms.
Education & Digital Infrastructure: High-speed 5G networks and technical universities are "soft" infrastructure. Providing these is a powerful way to add value to the manufacturing sector while remaining fully WTO-compliant.

4. Summary: The Compliance Boundary

Project Type	Status under SCM	Why?
National Highway System	Non-Subsidy	Open to all; no specific benefit to one firm.
Public Deep-Water Port	Non-Subsidy	Available for any shipping/manufacturing entity.
Private Power Substation	Specific Subsidy	Benefit is "specific" to a single factory/enterprise.
Industrial Park Utilities	Gray Area	Depends on how many/what types of companies use the park.

Conclusion for Policymakers

For a country looking to move up the value chain, the most "WTO-proof" industrial policy is to stop trying to pick winners with cash and start building the foundation for everyone. General Infrastructure provides the competitive advantage of lower costs and higher efficiency without the risk of international trade litigation.

The Human Capital Advantage: Worker Training Programs

In the context of the WTO SCM Agreement, worker training programs are widely considered the "smartest" tool for Value-Added Manufacturing (VAM). While direct cash injections into factories are often legally risky, investing in the skills of the workforce is generally a "Green Light" strategy that is difficult for trading partners to challenge.

1. Why They Are Generally "Safe"

Worker training programs typically avoid being classified as "actionable subsidies" because they often fail the Specificity Test under Article 2 of the SCM Agreement.

Horizontal Availability: If a government provides tax credits or grants for "advanced manufacturing training" that any company in any sector can use, the subsidy is not "specific" to a single industry.
Public Good Provision: Vocational training and technical education are often viewed as a government's duty to provide "human infrastructure." Much like roads, an educated workforce is a general benefit to society, not a targeted gift to a specific firm.

2. How Training Fuels Value-Added Manufacturing

To move from "low-value assembly" to "high-value innovation," a country must upgrade its labor force. Training programs solve the primary bottleneck in VAM: the Skills Gap.

Upskilling for Industry 4.0: Funding for workers to learn robotics, AI integration, and precision engineering allows factories to produce more complex, high-margin goods.
Quality Standards Compliance: Training programs that help workers master international quality certifications (like ISO or aerospace standards) directly increase the "Value-Add" of the final product.
Attracting FDI: Global manufacturers are more likely to build advanced factories in countries that provide a subsidized pipeline of pre-trained, high-skill technicians.

3. When Training Programs Become Risky

While generally safe, a training program can trigger a WTO dispute if it is designed too narrowly. It becomes "Specific" (and thus actionable) if:

Sector-Specific Exclusivity: The training is only available to employees of a single industry (e.g., "The National Semiconductor Training Grant").
Export Contingency: The government provides training bonuses only to firms that meet certain export targets (violating Article 3.1a).
Adverse Effects: If a training subsidy is so massive that it significantly lowers the production costs of a single firm, allowing them to undercut global prices, it could lead to a Serious Prejudice claim.

4. Summary: Strategic Implementation

Feature	Low-Risk (Safe)	High-Risk (Actionable)
Eligibility	Open to all manufacturing sectors.	Restricted to one industry (e.g., Steel only).
Criteria	Based on skill level (e.g., "Digital Literacy").	Based on export performance or local content.
Structure	General vocational school funding.	Direct cash to a specific company for its staff.
Goal	Increasing national productivity.	Offsetting specific production costs for a firm.

The Policy Verdict

For nations aiming for VAM, worker training is the ultimate "No-Regret" policy. It bypasses the prohibited "Red Light" categories of the SCM Agreement while building a long-term competitive advantage that cannot be easily "countervailed" by tariffs. It transforms the labor force from a cost to be minimized into an asset that adds value.