A subsidy is an incentive given by the government to specific industries or businesses with the aim of reducing the cost of doing business and thereby gives them an unfair advantage in trade – the eventual effect being undercutting and/or distorting foreign competition.

In order to be disciplined by WTO rules, a policy instrument must meet three criteria to be considered a subsidy;

1. it must be financial in nature
2. it must confer a benefit and
3. it must be specific to an enterprise, and industry, or a group of enterprises or industries. 

The WTO mentions five types of subsidies:

1. Cash subsidies, such as grants
2. Tax concessions, such as exemptions, credits, or deferrals.
3. Assumption of risk, such as loan guarantees.
4. Government procurement policies that pay more than the free-market price.
5. Stock purchases that keep a company’s stock price higher than market levels.

WTO rules differentiate between two types of subsidy: prohibited subsidies and actionable subsidies.

Prohibited subsidies are those that distort international trade by requiring recipients to meet certain export targets, or to use domestic goods instead of imported goods. These can be challenged through dispute settlement, and if found to exist, must be abolished by the offending country. Where there is not a timely repeal the complaining country can take countermeasures.

Actionable subsidies are not prohibited. Nevertheless, they are subject to challenge, through dispute settlement or countervailing action, where they can be proven to have caused “adverse effects” to the interests of another WTO member. For context, adverse effects can be categorised in three ways:

1. Injury to a Jamaican industry caused by subsidized imports.
2. Serious prejudice, such as export displacement of the Jamaican goods, in the market of the subsidizing foreign country or in a third country market.
3. Nullification or impairment of benefits accruing under the GATT 1994, which usually arises where the improved market access presumed to flow from a bound tariff reduction is undercut by subsidization.

Countervailing duties counteract and/or discipline the use of trade distorting subsidies. These are tariffs levied on imported goods to offset subsidies made to producers of these goods in the exporting country. Countervailing duties are intended to level the playing field between domestic producers of a product and foreign producers of the same product who can afford to sell it at a lower price because of the subsidy they receive from their government.