QUESTION 7 - Trade in Goods

Eager Ltd (Eager) in State K receives a wide variety of general subsidies from the State K government (including tax breaks, low interest financing, and technical assistance) that State K offers to all domestic enterprises within its territory. Eager manufactures mobile phones that it recently began to sell in State M. These mobile phones are being sold at below normal price. Fone Pty Ltd (Fone) in State M manufactures similar mobile phones and it has begun to lose a lot of its market share and profit to Eager as its mobile phones are not as functional or as cheap as the imported phones. State K and State M are both WTO member States. Fone would like State M to impose a countervailing duty against the mobile phones imported from State K, and Fone has asked the State M Customs Service (which is responsible for imposing such duties) to do so. After making an investigation the Customs Service refused to impose any duties. Fone has now appealed to a court in State M.

(a) Should the Court in State M overrule the decision of the State M Customs Service? (4 POINTS)

(b) Would it change your answer if the facts revealed that the real reason that the government of State K provided these subsidies was to win market share for its domestic businesses in State M? (1 POINT)