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Part I: General Provisions

I. Article 1     back to top

A. Text of Article 1

Members hereby agree as follows:

Article 1: Definition of a Subsidy

1.1     For the purpose of this Agreement, a subsidy shall be deemed to exist if:

1. Article 1

(a) General

(i) “mandatory/discretionary subsidization”

1.       As regards the relevance of the mandatory/ discretionary distinction(1) when challenging subsidy programmes as such, see paragraphs 56-64 below. As regards this distinction in general, see Section VI.B.3(c)(ii) of the Chapter on the DSU. Concerning the mandatory/discretionary distinction in the context of an affirmative defence under paragraph 2 of item (k) of the Illustrative List of Export Subsidies, see paragraphs 478-479 below.

2. Article 1.1

(a) General

(i) Object and purpose of Article 1.1

2.       In US — Softwood Lumber III, the Panel stated that “[t]he object and purpose of Article 1.1 SCM Agreement is to provide a definition of a subsidy for the purposes of the SCM Agreement”.(2)

(ii) Distinction between “financial contribution” and “benefit”

3.       In Brazil — Aircraft, the Appellate Body indicated that it considers “a ‘financial contribution’ and a ‘benefit’ as two separate legal elements in Article 1.1 of the SCM Agreement, which together determine whether a subsidy exists”.(3)

4.       In Brazil — Aircraft (Article 21.5 — Canada II) the Panel first examined whether the measure at stake constituted a “subsidy”, as defined in Article 1.1. To this effect, the Panel examined whether both elements in the definition of a subsidy can be found: (i) a “financial contribution” by a government; and (ii) a “benefit” is thereby conferred. The Panel examined each element in turn and stated:

“Article 1.1 of the SCM Agreement sets out a general definition of a subsidy. It provides that a subsidy is deemed to exist, inter alia, if there is ‘a financial contribution by a government’ and ‘a benefit is thereby conferred’.”(4)

5.       This approach was followed by the Panel on US — Export Restraints, where the Panel stated:

“Article 1.1 makes clear that the definition of a subsidy has two distinct elements (i) a financial contribution (or income or price support), (ii) which confers a benefit. The Appellate Body emphasised this point in Brazil — Aircraft, stating that financial contribution and benefit are ‘separate legal elements in Article 1.1 … which together determine whether a “subsidy” exists’,(5) which the panel in that case had erroneously blended together by importing the concept of benefit into the definition of financial contribution.”(6)

6.       This was further recalled in Canada — Aircraft Credits and Guarantee where the Panel considered that Article 1.1 of the SCM Agreement makes clear that the definition of a subsidy has two distinct elements: (i) a financial contribution, (ii) which confers a benefit. In this instance the Panel considered that the complainant must demonstrate that the measures under consideration mandate (i) a financial contribution, (ii) which confers a benefit, and a subsidy therefore exists, and (iii) that subsidy is contingent upon export performance. The Panel stated:

“[In] this case, Brazil would have to demonstrate that the legal instruments governing the establishment and operation of the programmes at issue are mandatory in respect of the alleged violation, i. e., the grant of prohibited export subsidies. In other words, Brazil would have to demonstrate that the legal instruments mandate (i) a financial contribution; (ii) which confers a benefit, and a subsidy therefore exists, and (iii) that subsidy is contingent upon export performance.”(7)

7.       The Panel on Canada — Aircraft Credits and Guarantees further distinguished the two elements and concluded that to demonstrate the existence of a “benefit”, a complaining party must do more than establish the existence of a “financial contribution.”(8)

3. Article 1.1(a)(1): “financial contribution”

(a) General

8.       In US — Export Restraints, the Panel considered the negotiating history of Article 1 and found that the inclusion of “financial contribution” in the text of the provision was meant to guarantee that not all government measures that confer benefits would be considered to be subsidies and to avoid the countervailing of benefits from government measures by restricting the kinds of such measures that would constitute subsidies if they conferred benefits:

“The negotiating history of Article 1 confirms our interpretation of the term ‘financial contribution’. This negotiating history demonstrates, in the first place, that the requirement of a financial contribution from the outset was intended by its proponents precisely to ensure that not all government measures that conferred benefits could be deemed to be subsidies. This point was extensively discussed during the negotiations, with many participants consistently maintaining that only government actions constituting financial contributions should be subject to the multilateral rules on subsidies and countervailing measures.

[T]he negotiating history confirms that the introduction of the two-part definition of subsidy, consisting of ‘financial contribution’ and ‘benefit’, was intended specifically to prevent the countervailing of benefits from any sort of (formal, enforceable) government measures, by restricting to a finite list the kinds of government measures that would, if they conferred benefits, constitute subsidies. The negotiating history confirms that items (i)-(iii) of that list limit these kinds of measures to the transfer of economic resources from a government to a private entity. Under subparagraphs (i)-(iii), the government acting on its own behalf is effecting that transfer by directly providing something of value — either money, goods, or services — to a private entity. Subparagraph (iv) ensures that the same kinds of government transfers of economic resources, when undertaken through explicit delegation of those functions to a private entity, do not thereby escape disciplines.”(9)

(b) Concept of “financial contribution”

9.       The Panel on US — Softwood Lumber III described the concept of “financial contribution” under Article 1.1(a)(1) of the SCM Agreement in general terms:

“Article 1.1(a)(1) SCM Agreement provides that the first element of a subsidy is a ‘financial contribution by the government’. Subparagraphs (i) through (iv) then explain that a financial contribution can exist in a wide variety of circumstances including, of course, the direct transfer of funds. But subparagraphs (ii) and (iii) show that a financial contribution will also exist if the government does not collect the revenue which it is entitled to or when it gives something or does something for an enterprise or purchases something from an enterprise or a group of enterprises. Subparagraph (iv) ensures that government directed transfers effected through a private entity do not thereby cease to be government transfers. In other words, Article 1.1(a)(1) SCM Agreement provides that a financial contribution can exist not only when there is an act or an omission involving the transfer of money, but also in case goods or certain services are provided by the government.”(10)

10.     The Panel on US — Export Restraints considered that the principal significance of the concept of financial contribution was foreclosing “the possibility of the treatment of any government action that resulted in a benefit as a subsidy”:

“[B]y introducing the notion of financial contribution, the drafters foreclosed the possibility of the treatment of any government action that resulted in a benefit as a subsidy. Indeed, this is arguably the principal significance of the concept of financial contribution, which can be characterised as one of the ‘gateways’ to the SCM Agreement, along with the concepts of benefit and specificity. To hold that the concept of financial contribution is about the effects, rather than the nature, of a government action would be effectively to write it out of the Agreement, leaving the concepts of benefit and specificity as the sole determinants of the scope of the Agreement.”(11)

4. Article 1.1(a)(1)(i): transfer of funds

(a) “Direct transfer of funds”

11.     In Canada — Aircraft Credits and Guarantees, the parties agreed that some of the programmes at issue were direct transfers of funds within the meaning of Article 1.1(a)(1)(i).(12)

12.     The Panel on Brazil — Aircraft (Article 21.5 — Canada II) considered that certain payments made in the form of bonds constituted direct transfers of funds under Article 1.1(a)(1)(i) of the SCM Agreement.(13)

13.     In Canada — Aircraft, the Panel concluded that TPC (Technology Partners Canada) contributions constituted direct transfers of funds by the Government of Canada in the sense of Article 1.1(a)(1)(i).(14)

14.     With regard to the granting of subsidies for the purpose of Article 27.4 of the SCM Agreement, see paragraphs 353-354 below.

(b) “Potential direct transfers of funds”

15.     In Brazil — Aircraft, the Panel had found that “a ‘potential direct transfer of funds’ exists only where the action in question gives rise to a benefit and thus confers a subsidy irrespective of whether any payment occurs”, and that “the existence of a ‘potential direct transfer of funds’ does not depend upon the probability that a payment will subsequently occur”.(15) The Appellate Body however considered that the Panel did not have to determine whether the export subsidies at issue constituted a “direct transfer of funds” or a “potential direct transfer of funds”, within the meaning of Article 1.1(a)(i), in order to determine when the subsidies are “granted” for the purposes of Article 27.4 and thus this analysis was not relevant.(16)

16.     In Canada — Aircraft Credits and Guarantees, the parties agreed that the so-called IQ equity guarantees were “potential direct transfers of funds” within the meaning of Article 1.1(a)(1)(i).(17)

(c) Timing of the transfer

17.     The Panel on Brazil — Aircraft, in a finding subsequently not addressed by the Appellate Body, rejected the argument that a subsidy exists only when the transfer of funds has actually been effectuated:

“[A]ccording to Article 1:1(i) a subsidy exists if a government practice involves a direct transfer of funds or a potential direct transfer of funds and not only when a government actually effectuates such a transfer or potential transfer (otherwise the text of (i) would read: ‘a government directly transfers funds … or engages in potential direct transfers of funds or liabilities’) … As soon as there is such a practice, a subsidy exists, and the question whether the practice involves a direct transfer of funds or a potential direct transfer of funds is not relevant to the existence of a subsidy. One or the other is sufficient. If subsidies were deemed to exist only once a direct or potential direct transfer of funds had actually been effectuated, the Agreement would be rendered totally ineffective and even the typical WTO remedy (i.e. the cessation of the violation) would not be possible.”(18)

5. Article 1.1(a)(1)(ii): “government revenue otherwise due is foregone or not collected”

(a) General

18.     The Appellate Body on US — FSC (Article 21.5 — EC), considered the legal standard for “foregoing revenue” that is “otherwise due” and emphasized certain principles based on the understanding that: (i) “a financial contribution” does not arise simply because a government does not raise revenue which it could have raised; and (ii) the term “otherwise due” implies a comparison with a “defined normative benchmark”:

“[U]nder Article 1.1(a)(1)(ii), a ‘financial contribution’ does not arise simply because a government does not raise revenue which it could have raised. It is true that, from a fiscal perspective, where a government chooses not to tax certain income, no revenue is ‘due’ on that income. However, although a government might, in a sense, be said to ‘forego’ revenue in this situation, this alone gives no indication as to whether the revenue foregone was ‘otherwise due’. In other words, the mere fact that revenues are not ‘due’ from a fiscal perspective does not determine that the revenues are or are not ‘otherwise due’ within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.”(19)

19.     The Panel on US — FSC (Article 21.5 — EC), in findings not reviewed by the Appellate Body, considered that the examination whether there is revenue foregone that is “otherwise due” must be based on actual substantive realities and not be restricted to a formalistic approach. Otherwise it would have the effect of reducing paragraph (ii) of Article 1.1(a)(1) of the SCM Agreement to “redundancy and inutility”:

“To give due meaning and effect to Article 1.1 of the SCM Agreement, our examination as to whether there is revenue foregone that is ‘otherwise due’ must be based on actual substantive realities and not be restricted to pure formalism.

…

[A] government could opt to bestow financial contributions in the form of fiscal incentives simply by modulating the ‘outer boundary’ of its ‘tax jurisdiction’ or by manipulating the definition of the tax base to accommodate any ‘exclusion’ or ‘exemption’ or ‘exception’ it desired, so that there could never be a foregoing of revenue ‘otherwise due’. This would have the effect of reducing paragraph (ii) of Article 1.1(a)(1) of the SCM Agreement to ‘redundancy and inutility’ and cannot be the appropriate implication to draw from the stipulation as to what constitutes one of the enumerated forms of ‘financial contribution’ under Article 1.1 of the SCM Agreement. Furthermore, the consequences of this reasoning would also entirely undermine Article 3.1(a) of the SCM Agreement, as there could never be, in this situation, a subsidy contingent upon export in the form of a financial contribution involving a foregoing of revenue that is otherwise due. As such, it is inherently contradictory to what may be viewed as the object and purpose of the SCM Agreement in terms of disciplining trade-distorting subsidies in a way that provides legally binding security of expectations to Members…. In short, such an approach would eviscerate the subsidies disciplines in the SCM Agreement.”(20)

(b) “Categories of revenue”

20.     The Appellate Body on US — FSC referred on several occasions to the concept of “categories of revenue” and indicated that a Member is free not to tax any particular category of revenues:

“A Member, in principle, has the sovereign authority to tax any particular categories of revenue it wishes. It is also free not to tax any particular categories of revenues. But, in both instances, the Member must respect its WTO obligations. What is ‘otherwise due’, therefore, depends on the rules of taxation that each Member, by its own choice, establishes for itself.

…

Members of the WTO are not obliged, by WTO rules, to tax any categories of income, whether foreign-or domestic-source income.”(21)

21.     Considering the operation of the arm’s length principle when a Member chooses whether to tax or not certain categories of revenues, the Appellate Body in US — FSC considered:

“[T]he arm’s length principle operates when a Member chooses not to tax, or to tax less, certain categories of foreign-source income. However, the operation of the arm’s length principle is unaffected by the choice a Member makes as to which categories of foreign-source income, if any, it will not tax, or will tax less. Likewise, the operation of the arm’s length principle is unaffected by the choice a Member might make to grant exemptions from the generally applicable rules of taxation of foreign-source income that it has selected for itself. In short, the requirement to use the arm’s length principle does not address the issue that arises here, nor does it authorize the type of export contingent tax exemption that we have just described. Thus, this sentence of footnote 59 does not mean that the FSC subsidies are not export subsidies within the meaning of Article 3.1(a) of the SCM Agreement.”(22)

22.     In findings not reviewed by the Appellate Body, the Panel on US — FSC (Article 21.5 — EC), noting that the concept of “categories of revenue” is not actual treaty language, followed the Appellate Body’s interpretation in US — FSC and rejected the argument that foreign-source income is a “category” of income that may be excluded from taxation consistently with the SCM Agreement:

“We turn now to whether utilization of the term ‘category’ would in any way alter the nature of our analysis to this point. However, before considering these issues, we first observe that the concept of ‘categories’ of revenue to which the Appellate Body referred is not actual treaty language. We further note that the Appellate Body also emphasized that, regardless of any ‘category’ of revenue that may be under consideration, a Member is bound at all times to respect its WTO obligations.

…

[E]ven if one applies the term of ‘category’ to the measure at issue, this linguistic or formal distinction in no way alters the underlying substance of the actual relationship between the measure at issue and the default tax regime as outlined above. Employment of the terminology in no way substantively modifies that relationship. Nor does it introduce any new elements or rationale to the measure at issue that change its essential character.”(23)

(c) Members’ tax rules as normative benchmark

23.     In US — FSC, the Appellate Body, interpreting the phrase “foregoing of revenue otherwise due”, partly agreed with the Panel’s interpretation that the term “otherwise” referred to a “normative benchmark” as established by the tax rules applied by the Member in question. The Appellate Body rejected the use of a benchmark other than the tax rules of the Member in question, holding that to do otherwise would be contrary to a Member’s sovereignty of taxation:

“In our view, the ‘foregoing’ of revenue ‘otherwise due’ implies that less revenue has been raised by the government than would have been raised in a different situation, or, that is, ‘otherwise’. Moreover, the word ‘foregone’ suggests that the government has given up an entitlement to raise revenue that it could ‘otherwise’ have raised. This cannot, however, be an entitlement in the abstract, because governments, in theory, could tax all revenues. There must, therefore, be some defined, normative benchmark against which a comparison can be made between the revenue actually raised and the revenue that would have been raised ‘otherwise’. We, therefore, agree with the Panel that the term ‘otherwise due’ implies some kind of comparison between the revenues due under the contested measure and revenues that would be due in some other situation. We also agree with the Panel that the basis of comparison must be the tax rules applied by the Member in question. To accept the argument of the United States that the comparator in determining what is ‘otherwise due’ should be something other than the prevailing domestic standard of the Member in question would be to imply that WTO obligations somehow compel Members to choose a particular kind of tax system; this is not so. A Member, in principle, has the sovereign authority to tax any particular categories of revenue it wishes. It is also free not to tax any particular categories of revenues. But, in both instances, the Member must respect its WTO obligations.(24) What is ‘otherwise due’, therefore, depends on the rules of taxation that each Member, by its own choice, establishes for itself.”(25)

24.     The Appellate Body on US — FSC (Article 21.5 — EC) stated that Article 1.1(a)(1)(ii) does not require panels to identify a “general” rule of taxation and “exceptions” to that “general” rule. Rather, they should compare the domestic fiscal treatment of “legitimately comparable income” to ascertain whether the measure under consideration involves the foregoing of revenue that is “otherwise due”. The Appellate Body further considered that the comparison ought to be made with respect to taxpayers in “comparable situations”:(26)

“[T]he treaty phrase ‘otherwise due’ implies a comparison with a ‘defined, normative benchmark’. The purpose of this comparison is to distinguish between situations where revenue foregone is ‘otherwise due’ and situations where such revenue is not ‘otherwise due’. As Members, in principle, have the sovereign authority to determine their own rules of taxation, the comparison under Article 1.1(a)(1)(ii) of the SCM Agreement must necessarily be between the rules of taxation contained in the contested measure and other rules of taxation of the Member in question. Such a comparison enables panels and the Appellate Body to reach an objective conclusion, on the basis of the rules of taxation established by a Member, by its own choice, as to whether the contested measure involves the foregoing of revenue that would be due in some other situation or, in the words of the SCM Agreement, ‘otherwise due’.

In our Report in US — FSC, we recognized that it may be difficult to identify the appropriate normative benchmark for comparison under Article 1.1(a)(1)(ii) because domestic rules of taxation are varied and complex. In identifying the appropriate benchmark for comparison, panels must obviously ensure that they identify and examine fiscal situations which it is legitimate to compare. In other words, there must be a rational basis for comparing the fiscal treatment of the income subject to the contested measure and the fiscal treatment of certain other income. In general terms, in this comparison, like will be compared with like. For instance, if the measure at issue involves income earned in sales transactions, it might not be appropriate to compare the treatment of this income with employment income.

As we said earlier, under Article 1.1(a)(1)(ii) of the SCM Agreement, the normative benchmark for determining whether revenue foregone is otherwise due must allow a comparison of the fiscal treatment of comparable income, in the hands of taxpayers in similar situations…. In other words, our inquiry under Article 1.1(a)(1)(ii) is not simply ended at this stage of analysis because the measure involves an allocation of income between domestic-and foreign-source income. Rather, we must compare the way the United States taxes the portion of the income covered by the measure, which it treats as foreign-source, with the way it taxes other foreign-source income under its own rules of taxation.”(27)

(d) “But for” test

25.     The Appellate Body on US — FSC expressed some reservations about the Panel’s “but for” test. The Panel had interpreted the term “otherwise due” as referring to the situation that would prevail “but for” the United States’ tax measures under consideration. The Panel held that it would determine whether, absent these measures, there would be a higher tax liability, meaning that it would examine the situation “that would exist but for the measure in question”.(28) The Appellate Body noted that this “but for” test established by the Panel was not actual treaty language and cautioned that the test may “not work in other cases”:(29)

“The Panel found that the term ‘otherwise due’ establishes a ‘but for’ test, in terms of which the appropriate basis of comparison for determining whether revenues are ‘otherwise due’ is ‘the situation that would prevail but for the measures in question’.(30) In the present case, this legal standard provides a sound basis for comparison because it is not difficult to establish in what way the foreign-source income of an FSC would be taxed ‘but for’ the contested measure. However, we have certain abiding reservations about applying any legal standard, such as this ‘but for’ test, in the place of the actual treaty language. Moreover, we would have particular misgivings about using a ‘but for’ test if its application were limited to situations where there actually existed an alternative measure, under which the revenues in question would be taxed, absent the contested measure. It would, we believe, not be difficult to circumvent such a test by designing a tax regime under which there would be no general rule that applied formally to the revenues in question, absent the contested measures. We observe, therefore, that, although the Panel’s ‘but for’ test works in this case, it may not work in other cases. We note, however, that, in this dispute, the European Communities does not contest either the Panel’s interpretation of the term ‘otherwise due’ or the Panel’s application of that term to the facts of this case. The United States also accepts the Panel’s interpretation of that term as a general proposition.”(31)

(e) Tax exclusion of extraterritorial income as revenue foregone

26.     The Panel on US — FSC (Article 21.5 — EC) considered, in a finding upheld by the Appellate Body,(32) whether the exclusion of extraterritorial income constitutes the foregoing of revenue. The Panel considered that income provided by the United States regulations at issue through the tax “exclusion” of the United States foregoes revenue that is otherwise due within the meaning of Article 1.1(a)(1)(ii), and therefore a “financial contribution” exists. The Panel indicated that in order to assess the nature of the relationship between the measure at issue and the party’s overall tax regime, it had looked at the “essential shape and the rationale that is exhibited”:

“For instance — and without prejudice to what the status of such a measure might be under the SCM Agreement — the Act manifestly does not represent a coherent approach to corporate earnings derived from offshore activities only. The conditionality is such that the eligibility is, in fact, circumscribed carefully to render it only effective, for example, with respect to goods, only with respect to certain goods — i.e. certain ‘qualifying foreign trade property’ — produced within or outside the United States, where those goods are for ‘use outside the United States’ and where those goods fulfill the foreign articles/labor limitation included in the definition of qualifying foreign trade property. In short, one is left with the perspective simply of certain carve-outs being provided for in relation to what would otherwise be the prevailing regime of revenue liability in respect of the income concerned.

We add that while, in our view, the terms of the SCM Agreement are clear enough, their application to the facts of the multiplicity of Members’ regimes will not necessarily be self-evident. Indeed, discerning what might be described as “the prevailing domestic standard” for a particular tax regime may be a particularly exacting exercise. In more common usage, it might be rather difficult to discern what is the exception, as it were, and what is the rule. But the terms of the SCM Agreement are clearly of general application: there is nothing which states that they are only to be applied when the results are self-evident. Be that as it may, we are not, in this dispute, presented with a situation of such complexity. This dispute does not involve a debatable call as to whether the glass is half-full or half-empty. As outlined above, we have looked at the essential shape and the rationale that is exhibited. In examining that, we have weighed such considerations as the degree of conditionality, the range of limitations and the manner in which the measure at issue relates to the overall regime. Taken together, they enable us to assess the nature of the relationship of the measure at issue and the overall regime. That is precisely how one is in a position to arrive at the judgment required by the terms of the SCM Agreement.

In light of these considerations, we are of the view that, through the tax ‘exclusion’ provided by the Act, the United States government foregoes revenue that is otherwise due within the meaning of Article 1.1(a)(1)(ii). In our view, a ‘financial contribution’ thereby arises within the meaning of Article 1.1 SCM Agreement.”(33)

(f) Footnote 1 to Article 1.1(a)(1)(ii)

27.     The measure at issue in Canada — Autos consisted of the exemption of import duties for motor vehicles imported into Canada by Canadian car manufacturers who fulfilled certain conditions. The Appellate Body rejected the argument that the Canadian measure was “‘analogous’ to the situation described in footnote 1”.(34) The Appellate Body stated: “Footnote 1 … deals with duty and tax exemptions or remissions for exported products. The measure at issue applies, in contrast, to imports…. For this reason, we do not consider that footnote 1 bears upon the import duty exemption at issue in this case.”(35)

6. Article 1.1(a)(1)(iii): government provision of goods or services

(a) General

28.     In US — Softwood Lumber IV, the Appellate Body, after noting that “[a]n evaluation of the existence of a financial contribution involves consideration of the nature of the transaction through which something of economic value is transferred by a government”,(36) explained that this provision foresees two types of transaction, and made the following general remarks on the scope of Article 1(a)(1)(iii) in this regard:

“As such, the Article contemplates two distinct types of transaction. The first is where a government provides goods or services other than general infrastructure. Such transactions have the potential to lower artificially the cost of producing a product by providing, to an enterprise, inputs having a financial value. The second type of transaction falling within Article 1.1(a)(1)(iii) is where a government purchases goods from an enterprise. This type of transaction has the potential to increase artificially the revenues gained from selling the product.”(37)

(b) “provides”

29.     In US — Softwood Lumber III, the Panel addressed the issue of whether a government that allows the exercise of harvesting rights to a company is actually providing goods within the meaning of Article 1.1(a)(1)(iii). The Panel considered that when a government does allow this, it is “providing” timber to the harvesting companies. For the Panel, “from the tenure holder’s point of view, there is no difference between receiving from the government the right to harvest standing timber and the actual supply by the government of standing timber through the tenure holder’s exercise of this right”.(38) The Panel stated:

“In sum, and in the context of Article 1.1(a) (1)(iii) SCM Agreement, we are of the view that where a government allows the exercise of harvesting rights, it is providing standing timber to the harvesting companies. From the perspective of the harvesting company the situation is clear: most forest land is Crown land, and if the company wants to cut the trees for processing or sale, it will need to enter into a stumpage contract with the provincial government, under which it will have to take on a number of obligations in addition to paying a stumpage fee for the trees actually harvested. We thus view the service and maintenance obligations, the obligations to undertake various forestry management, conservation and other measures, combined with the stumpage fees required by the stumpage agreements, as the price the tenure holder has to pay for obtaining and exercising its harvesting rights.”(39)

(c) “goods”

(i) Concept of “goods”

30.     The Panel on US — Softwood Lumber III, addressing the issue whether standing timber is a “good” in the sense of Article 1.1(a)(1)(iii), concluded that it was after considering the ordinary meaning of the term “goods” in its context and in the light of the object and purpose of the provision at issue. For this purpose, the Panel at the outset referred to several dictionary definitions and opined that “[t]he ordinary meaning of the word ‘goods’ is … very broad and in and of itself does not seem to place any limits on the kinds of ‘tangible or movable personal property, other than money’ that could be considered a ‘good’”.(40)

31.     The Panel on US — Softwood Lumber III drew further support for its conclusions from the context in which the term “goods” is used in Article 1.1(a)(1)(iii):

“In Article 1.1(a)(1)(iii) SCM Agreement, ‘goods’ is used in the context of ‘goods or services other than general infrastructure’. We consider that the context in which the term ‘goods’ is used in Article 1.1(a)(1)(iii) SCM Agreement confirms the broad ordinary meaning of ‘goods’ as tangible or movable personal property, other than money. In our view, the sentence ‘goods or services other than general infrastructure’ refers to a very broad spectrum of things a government may provide. The fact that the only exception provided for in subparagraph (iii) is general infrastructure reinforces our view concerning the unqualified meaning of the term goods as used in this provision.”(41)

32.     The Panel on US — Softwood Lumber III further considered that the word “goods” in the context of “goods or services” is intended to ensure that the term “financial contribution” is not interpreted to mean only a money-transferring action, but encompasses as well an in-kind transfer of resources, with the exception of general infrastructure.(42)

33.     In addition, the Panel on US — Softwood Lumber III rejected the argument that “goods” are limited to products with an actual or potential tariff line:

“[A]lthough in many cases the general word ‘good’ may indeed be used as an equivalent of the term ‘products’, this does not imply that this necessarily is always so, precisely because ‘goods’ is a term with a broad and general meaning … Although ‘goods’ in Article 1.1(a)(1)(iii) SCM Agreement certainly includes tradable products, there is no reason to limit its meaning to only such products, particularly where the immediate context in which the term is used does not suggest such a limitation. In particular, this provision states that when the government provides ‘goods or services’, this constitutes a financial contribution. The ‘goods’ in question are not imported or exported, simply provided by the government, and nothing suggests therefore that the goods in question need to be tradeable products with a potential or actual tariff line. Goods in this context are distinguished from services, and in our view the two cover the full spectrum of in-kind transfers the government may undertake by providing resources to an enterprise. Our view is reinforced by the fact that there is only one exception among all possible goods and services that could be provided by the government — general infrastructure — which is explicitly defined as not constituting a financial contribution. We thus find that there is no basis in the text of the SCM Agreement to conclude that ‘goods’ in Article 1.1 is limited to products with an actual or potential tariff line.”(43)

(ii) Exception

34.     Following a similar approach, the Panel and the Appellate Body on US — Softwood Lumber IV reached the same conclusion that standing timber is a “good” in the sense of Article 1.1(a)(1)(iii). In doing so, the Appellate Body agreed with the Panel that “the ordinary meaning of the term ‘goods’, as used in Article 1.1(a)(1)(iii), includes items that are tangible and capable of being possessed”, although it cautioned about the usage of dictionary definitions of a term:

“We note, however, as we have done on previous occasions, that dictionary definitions have their limitations in revealing the ordinary meaning of a term. This is especially true where the meanings of terms used in the different authentic texts of the WTO Agreement are susceptible to differences in scope…. As we have observed previously, in accordance with the customary rule of treaty interpretation reflected in Article 33(3) of the Vienna Convention on the Law of Treaties (the ‘Vienna Convention’), the terms of a treaty authenticated in more than one language — like the WTO Agreement — are presumed to have the same meaning in each authentic text. It follows that the treaty interpreter should seek the meaning that gives effect, simultaneously, to all the terms of the treaty, as they are used in each authentic language. With this in mind, we find that the ordinary meaning of the term “goods” in the English version of Article 1.1(a)(1)(iii) of the SCM Agreement should not be read so as to exclude tangible items of property, like trees, that are severable from land.”(44)

35.     In the same vein, the Panel on US — Softwood Lumber III, rejecting Canada’s argument, considered that the text of the SCM Agreement provides no exception for “harvesting rights” mentioned in a working paper from the Uruguay Round negotiations, which, in the Panel’s view, at any rate, “has little if any probative value”:(45)

“Canada argues that rights to exploit in situ natural resources are not covered by Article 1.1(a)(1)(iii) SCM Agreement. Canada can not point to any provision in particular in the Agreement in support of this view, but instead reaches this conclusion on the basis of a working paper from the time of the Uruguay Round negotiations which explicitly mentioned harvesting rights separately from goods or services.

We note that the text of the SCM Agreement does not in any way provide an exception for the right to exploit natural resources. The only exception from the term ‘goods or services’ provided for in Article 1.1(a)(1)(iii) SCM Agreement is general infrastructure, not natural resources.”(46)

36.     The Appellate Body on US — Softwood Lumber IV further agreed with the Panel that the context of the term “goods” supports this interpretation and emphasized that “[i]n the context of Article 1.1(a)(1)(iii), all goods that might be used by an enterprise to its benefit — including even goods that might be considered infrastructure — are to be considered “goods” within the meaning of the provision, unless they are infrastructure of a general nature”.(47)

7. Article 1.1(a)(1)(iv): funding mechanism, private bodies

(a) Purpose of Article 1.1(a)(1)(iv)

37.     The Panel on US — Export Restraints considered that the purpose of subparagraph (iv) of Article 1.1(a)(i) to the SCM Agreement is to avoid circumvention of subparagraphs (i)-(iii) of the same Article by a government operating through a private body:

“[W]e find no support in the text of the Agreement for the US reading of the word ‘type’. Rather, in our view, the phrase ‘type of functions’ refers to the physical functions identified in subparagraphs (i)-(iii). In this regard, we believe that the intention of subparagraph (iv) is to avoid circumvention of subparagraphs (i)-(iii) by a government simply by acting through a private body. Thus, ultimately, the scope of the actions (the physical functions) covered by subparagraph (iv) must be the same as those covered by subparagraphs (i)-(iii). That is, the difference between subparagraphs (i)-(iii) on the one hand, and subparagraph (iv) on the other, has to do with the identity of the actor, and not with the nature of the action. The phrase ‘type of functions’ ensures that this is the case, that is, that Article 1 covers the types of functions identified in subparagraphs (i)-(iii) whether those functions are performed by the government itself or are delegated to a private body by the government.”(48)

(b) Requirement for the existence of a financial contribution under Article 1.1(a)(1)(iv)

38.     In US — Export Restraints, the Panel examined the text and context of Article 1.1(a)(1)(iv) and noted that it contains five requirements in order for a financial contribution to exist:

“The definition of financial contribution in Article 1.1(a)(1)(iv) contains five requirements:

(i)     a government ‘entrusts or directs’

(ii)    ‘a private body’

(iii)   ‘to carry out one or more of the type of functions illustrated in’ subparagraphs (i)-(iii) of Article 1.1(a)(1) (in this case the provision of goods)

(iv)   ‘which would normally be vested in the government’ and

(v)    ‘the practice, in no real sense, differs from practices normally followed by governments’(49)

(i) Government-entrusted or government directed provision of goods

39.     The Panel on US — Export Restraints addressed the issue of whether an export restraint could constitute a financial contribution in the sense of Article 1.1(a)(1)(iv). In considering whether export restraints involve government “entrustment” or “direction”, the Panel stated that this requirement refers “to the situation in which the government executes a particular policy by operating through a private body”. Following dictionary definitions of these terms, the Panel stated that the action taken by the government must contemplate the concept of “delegation”, and must include three separate elements: (i) “an explicit and affirmative action, be it delegation or command”; (ii) “addressed to a particular party”; and (iii) “the objective of which is a particular task or duty”. The Panel concluded that “an export restraint as defined in this dispute cannot constitute government-entrusted or government-directed provision of goods in the sense of subparagraph (iv) and hence does not constitute a financial contribution in the sense of Article 1.1(a) of the SCM Agreement.”(50)

“In our view, the requirement of ‘entrustment’ or ‘direction’ in subparagraph (iv) refers to the situation in which the government executes a particular policy by operating through a private body.

It follows from the ordinary meanings of the two words ‘entrust’ and ‘direct’ that the action of the government must contain a notion of delegation (in the case of entrustment) or command (in the case of direction). To our minds, both the act of entrusting and that of directing therefore necessarily carry with them the following three elements: (i) an explicit and affirmative action, be it delegation or command; (ii) addressed to a particular party; and (iii) the object of which action is a particular task or duty. In other words, the ordinary meanings of the verbs ‘entrust’ and ‘direct’ comprise these elements — something is necessarily delegated, and it is necessarily delegated to someone; and, by the same token, someone is necessarily commanded, and he is necessarily commanded to do something. We therefore do not believe that either entrustment or direction could be said to have occurred until all of these three elements are present.

Having said that, it is clearly the first element — an explicit and affirmative action of delegation or command — that is determinative. The second and third elements — addressed to a particular party and of a particular task  are aspects of the first.”(51)

40.     The Panel on US — Export Restraints concluded that the meaning of the words “entrusts” and “directs” requires an “explicit and affirmative action of delegation or command”, and that an export restraint in the sense that the term is used in this dispute cannot fulfil the “entrusts or directs” standard of subparagraph (iv) of Article 1.1(a)(1) of the SCM Agreement. The Panel stated:

“[T]he ordinary meanings of the words ‘entrusts’ and ‘directs’ require an explicit and affirmative action of delegation or command. Moreover, we find that the ‘effects’ test (i.e., a proximate causal relationship) advanced by the United States as the definition of ‘entrusts or directs’ has implications which in our view would be contrary to the intended scope and coverage of the SCM Agreement, in that it would effectively read out of the text of Article 1 the financial contribution requirement. Thus, we find that an export restraint in the sense that the term is used in this dispute cannot satisfy the ‘entrusts or directs’ standard of subparagraph (iv).”(52)

(ii) “Private body”

41.     As to the requirement that there be a “private body” that is “entrusted or directed”, the Panel on US — Export Restraints stated that the term “private body” is used in Article 1.1(a)(1)(iv) as a counterpoint to the terms “government” or “any public body” as used in Article 1.1. The Panel concluded that the companies or other entities affected by or reacting to an export restraint could be “private bodies” in this sense. The Panel stated:

“We believe that the term ‘private body’ is used in Article 1.1(a)(1)(iv) as a counterpoint to ‘government’ or ‘any public body’ as the actor. That is, any entity that is neither a government nor a public body would be a private body. Under this reading of the term ‘private body’, there is no room for circumvention in subparagraph (iv). As it is a government or a public body that would have to entrust or direct under subparagraph (iv), any entity other than a government or a public body could receive the entrustment or direction and could constitute a ‘private body’.”(53)

(iii) “Type of functions”

42.     The Panel on US — Export Restraints took the view that the scope of the functions covered by subparagraph (iv) is the same as those in subparagraphs (i) to (iii). In the Panel’s view, the differences between subparagraphs (i) to (iii) and (iv) have to do with the identity of the actions:

“In this regard, we believe that the intention of subparagraph (iv) is to avoid circumvention of subparagraphs (i)-(iii) by a government simply by acting through a private body. Thus, ultimately, the scope of the actions (the physical functions) covered by subparagraph (iv) must be the same as those covered by subparagraphs (i)-(iii). That is, the difference between subparagraphs (i)-(iii) on the one hand, and subparagraph (iv) on the other, has to do with the identity of the actor, and not with the nature of the action. The phrase ‘type of functions’ ensures that this is the case, that is, that Article 1 covers the types of functions identified in subparagraphs (i)-(iii) whether those functions are performed by the government itself or are delegated to a private body by the government.”(54)

43.     With regard to the word “type”, the Panel on US — Export Restraints further clarified that this word refers to the fact that each subparagraph (i)-(iii) constitutes by itself a general “type of functions” encompassing one or more categories of behaviour:

“The subsequent phrase ‘illustrated in (i) to (iii) above’ confirms this. In particular, subparagraphs (i)-(iii) each refer to multiple government actions and provide examples thereof. Subparagraph (i), for instance, refers to three general categories (direct transfers of funds; potential direct transfers of funds; and potential direct transfers of liabilities) of the ‘type of function’ of transfers of funds and liabilities.

We therefore find that the phrase ‘type of functions’ refers to the physical functions encompassed by subparagraphs (i)-(iii), and does not expand the scope of subparagraph (iv) beyond these, to encompass other kinds of ‘government mechanisms’.”(55)

(c) Relationship with Article 1.1(b)

44.     With respect to the relationship with Article 1.1(b), see paragraph 15 above (“potential direct transfer of funds”) and paragraphs 46 and 72 below (“ordinary meaning of ‘benefit’”).

8. Article 1.1(b): “benefit is thereby conferred”

(a) “benefit”

45.     In Canada — Aircraft, the Appellate Body quoted approvingly the Panel’s focus on the recipient of the subsidy in its interpretation of the term “benefit” under Article 1.1(b):(56)

“[T]he ordinary meaning of ‘benefit’ clearly encompasses some form of advantage…. In order to determine whether a financial contribution (in the sense of Article 1.1(a)(i)) confers a ‘benefit’, i.e., an advantage, it is necessary to determine whether the financial contribution places the recipient in a more advantageous position than would have been the case but for the financial contribution. In our view, the only logical basis for determining the position the recipient would have been in absent the financial contribution is the market. Accordingly, a financial contribution will only confer a ‘benefit’, i.e., an advantage, if it is provided on terms that are more advantageous than those that would have been available to the recipient on the market.”(57)

46.     The Appellate Body on Canada — Aircraft agreed with the Panel’s findings rejecting an interpretation of benefit based on whether there was a “net cost” to the government and focusing rather on the recipient of the subsidy. The Panel added that interpreting the term “benefit” with a view to the granting government — rather than with a view to the recipient — was not consistent with the object and purpose of the SCM Agreement.(58) In so doing, it first considered the dictionary meaning of the term “benefit”:

“The dictionary meaning of ‘benefit’ is ‘advantage’, ‘good’, ‘gift’, ‘profit’, or, more generally, ‘a favourable or helpful factor or circumstance’. Each of these alternative words or phrases gives flavour to the term ‘benefit’ and helps to convey some of the essence of that term. These definitions also confirm that the Panel correctly stated that ‘the ordinary meaning of “benefit” clearly encompasses some form of advantage.’ Clearly, however, dictionary meanings leave many interpretive questions open.”(59)

47.     The Appellate Body on Canada — Aircraft then confirmed the Panel’s focus on the recipient of a subsidy in determining the existence of a benefit:

“A ‘benefit’ does not exist in the abstract, but must be received and enjoyed by a beneficiary or a recipient. Logically, a ‘benefit’ can be said to arise only if a person, natural or legal, or a group of persons, has in fact received something. The term ‘benefit’, therefore, implies that there must be a recipient. This provides textual support for the view that the focus of the inquiry under Article 1.1(b) of the SCM Agreement should be on the recipient and not on the granting authority. The ordinary meaning of the word ‘confer’, as used in Article 1.1(b), bears this out. ‘Confer’ means, inter alia, ‘give’, ‘grant’ or ‘bestow’. The use of the past participle ‘conferred’ in the passive form, in conjunction with the word ‘thereby’, naturally calls for an inquiry into what was conferred on the recipient. Accordingly, we believe that Canada’s argument that ‘cost to government’ is one way of conceiving of ‘benefit’ is at odds with the ordinary meaning of Article 1.1(b), which focuses on the recipient and not on the government providing the ‘financial contribution’.”(60)

48.     The Appellate Body on Canada — Aircraft finally held that a determination whether a benefit exists for the recipient of a subsidy implies a comparison with market conditions:

“We also believe that the word ‘benefit’, as used in Article 1.1(b), implies some kind of comparison. This must be so, for there can be no ‘benefit’ to the recipient unless the ‘financial contribution’ makes the recipient ‘better off’ than it would otherwise have been, absent that contribution. In our view, the marketplace provides an appropriate basis for comparison in determining whether a ‘benefit’ has been ‘conferred’, because the trade-distorting potential of a ‘financial contribution’ can be identified by determining whether the recipient has received a ‘financial contribution’ on terms more favourable than those available to the recipient in the market.”(61)

49.     The Panel on US — Lead and Bismuth II, in its interpretation of the term “benefit” — subsequently upheld by the Appellate Body(62) — considered that the existence or lack of benefits rests on whether the potential recipient or beneficiary has received a financial contribution on more favourable terms. The Panel further indicated that consideration should also be given to Articles VI:3 of the GATT 1994 and footnote 36 to Article 10 of the SCM Agreement:

“[T]he existence or non-existence of ‘benefit’ rests on whether the potential recipient or beneficiary, which ‘logically’ must be a legal or natural person, or group of persons, has received a ‘financial contribution’ on terms more favourable than those available to the potential recipient or beneficiary in the market. Moreover, in the particular context of countervailing duties, we believe that consideration should also be given to Article VI:3 of the GATT 1994, and footnote 36 to Article 10 of the SCM Agreement.

Article VI:3 of the GATT 1994 provides in relevant part:

‘The term “countervailing duty” shall be understood to mean a special duty levied for the purpose of offsetting any bounty or subsidy bestowed, directly, or indirectly, upon the manufacture, production or export of any merchandise.’

Footnote 36 to Article 10 of the SCM Agreement provides that:

‘The term “countervailing duty” shall be understood to mean a special duty levied for the purpose of offsetting any subsidy bestowed directly or indirectly upon the manufacture, production or export of any merchandise, as provided for in paragraph 3 of Article VI of GATT 1994.’

These provisions state that countervailing duties levied on imported products are intended to offset (countervailable) subsidies found to have been bestowed on inter alia the production of such imported products. The notion of ‘subsidy’ comprises two elements: (1) ‘financial contribution’, and (2) ‘benefit’. As noted above, ‘benefit’ is determined by reference to the terms on which a ‘financial contribution’ would have been made available to a particular legal or natural person, or group of persons, in the market. Full consideration of Article VI:3 of the GATT 1994 and footnote 36 to Article 10 of the SCM Agreement leads us to conclude that, in the context of countervailing duty investigations, the existence of a ‘benefit’ should be determined by reference to the market terms on which a ‘financial contribution’ bestowed directly or indirectly upon the production of any merchandise would have been made available to the producer of that merchandise.”(63)

50.     In Brazil — Aircraft (Article 21.5 — Canada II), the Panel noted that under the programme at issue the borrower is free to select the lender that offers the best terms, and that payments under the programme allow that lender to offer better export credit terms than it could otherwise provide. As a result, the Panel concluded that from a theoretical standpoint, such payments may be expected to enable purchasers to obtain export credits on terms more favourable than those available to them in the commercial market, and thus may confer a benefit:

“[T]hat the borrower is free to select the lender, whether Brazilian or otherwise, that offers him the best terms, and that PROEX III payments allow that lender to offer better export credit terms than he could otherwise provide …

…

We recognise the theoretical possibility that a particular purchaser of Brazilian regional aircraft might be able to obtain export credit financing at (or even below) CIRR rates in the commercial marketplace. Even if, as a result, PROEX III did not always confer a benefit on the buyer of Brazilian regional aircraft, it is important to bear in mind that this Panel’s task is to review the PROEX III programme as such (insofar as it relates to exports of regional aircraft), not just specific situations which may arise under it. We are concerned, in this case, with all situations in which PROEX III may reasonably be expected to be involved. Thus, to the extent that PROEX III required Brazil, in some situations, to make PROEX III payments that would result in a benefit being conferred in respect of regional aircraft, the PROEX III programme would be mandatory legislation (in respect of the conferral of a benefit) and thus a subsidy potentially inconsistent with the SCM Agreement.”(64)

51.     The Panel on Canada — Aircraft Credits and Guarantees considered whether the repayment terms and interest rate spread offered by the programme under consideration conferred a “benefit” and rejected Brazil’s argument that a repayment term of more than ten years is in itself positive evidence of a “benefit” within the meaning of Article 1.1(b) of the SCM Agreement. The Panel considered evidence demonstrating that repayment terms of up to 18.25 years were available in the market. Thus, for the Panel, the fact that a given repayment term may exceed the ten-year term provided for in the regulation under consideration does not mean ipso facto that financing is provided on terms more favourable than those available to the recipient on the market.(65)

(b) “recipient of a benefit”

52.     In Brazil — Aircraft (Article 21.5 — Canada II), the Panel considered that, although the text of Article 1.1(b) does not define which participant in a subsidized transaction is a recipient of a benefit, that in itself does not mean that a benefit can be found to be provided to any participant to a transaction that receives a financial contribution:(66)

“In considering whether PROEX III payments confer a benefit, the Panel notes that the financial contribution in this case is in the form of a (non-refundable) payment, rather than in the form of a loan. As a usual matter, of course, a non-refundable payment will confer a benefit. Thus, there would be no need for complex benefit analysis if PROEX III payments were made directly to producers or to purchasers of Brazilian regional aircraft. In this case, however, the payment is not provided to a producer of regional aircraft. Rather, PROEX III payments are provided to a lender in support of an export credit transaction relating to Brazilian regional aircraft. Thus, while there can be no doubt that PROEX III payments confer a benefit, we consider that the question remains whether PROEX III payments confer a benefit to producers of regional aircraft.

… whether the financial contribution has conferred a benefit to producers of regional aircraft — as opposed merely to a benefit to suppliers of financial services — depends upon the impact of PROEX III payments on the terms and conditions of the export credit financing available to purchasers of Brazilian regional aircraft.”(67)

53.     In Canada — Aircraft Credits and Guarantees, the Panel considered whether a “benefit” is conferred on a company by virtue of a “benefit” being conferred on the customer purchasing the product of such company:

“In examining Brazil’s claims in this case, we shall consider whether or not a ‘benefit’ is conferred on Bombardier by virtue of a ‘benefit’ being conferred on the airline customer purchasing Bombardier aircraft…. In our view, the fact that Bombardier may arrange financing in the form of government support does not necessarily confer a “benefit” simply because Bombardier is ‘reliev[ed] … of the necessity of providing or arranging its own financing’. If that were the case, a ‘benefit’ would be conferred whenever Bombardier arranged external financing — even through commercial banks — since any external financing would ‘reliev[e] it of the necessity of providing or arranging its own financing’. We find it difficult to accept that the existence of ‘benefit’ (in the context of financing) is determined on the basis of whether or not Bombardier provides internal or external financing. The existence of ‘benefit’ (in the context of financing) is determined by reference to the terms at which similar financing is available to the airline customer in the market.”(68)

(c) “is … conferred”

(i) General

54.     In US — Lead and Bismuth II, the United States argued that the present tense of the verb “is conferred” in Article 1.1 of the SCM Agreement shows that an investigating authority must demonstrate the existence of “benefit” only at the time the “financial contribution” was made.(69) The consequence of this argument was that an investigating authority would not be required to make a finding of benefit in a (subsequent) review of the countervailing measure. The Appellate Body on US — Lead and Bismuth II rejected this, holding that “Article 1.1 does not address the time at which the ‘financial contribution’ and/or the ‘benefit’ must be shown to exist.”(70)

55.     As regards the timing of the transfer of goods, see paragraph 17 above.

(ii) Mandatory/discretionary conferral of a benefit

Relevance of the mandatory/discretionary distinction

56.     In Canada — Aircraft Credits and Guarantees, Brazil claimed that certain Canadian programmes were “as such” prohibited export subsidies contrary to Article 3.1(a) of the SCM Agreement. The Panel considered that, as Brazil’s claims regarded programmes as such, the mandatory/discretionary distinction(71) “would traditionally apply”, i.e., that only legislation that requires a violation of GATT/WTO rules could be found to be inconsistent with those rules:

“We recall that Brazil claims that the EDC Canada and Corporate Accounts and IQ are ‘as such’ prohibited export subsidies contrary to Article 3.1(a) of the SCM Agreement. Given that Brazil’s claims are in respect of the programmes as such, the mandatory/discretionary distinction would traditionally apply. Under that distinction — employed in both GATT and WTO cases over the years(72) — only legislation that requires a violation of GATT/WTO rules could be found to be inconsistent with those rules.

In this regard, we recall that the panel in United States — Export Restraints stated:

There is a considerable body of dispute settlement practice under both GATT and WTO standing for the principle that only legislation that mandates a violation of GATT/WTO obligations can be found as such to be inconsistent with those obligations. This principle was recently noted and applied by the Appellate Body in United States — Anti-Dumping Act of 1916 (‘1916 Act’):

[T]he concept of mandatory as distinguished from discretionary legislation was developed by a number of GATT panels as a threshold consideration in determining when legislation as such — rather than a specific application of that legislation — was inconsistent with a Contracting Party’s GATT 1947 obligations.

…

[P]anels developed the concept that mandatory and discretionary legislation should be distinguished from each other, reasoning that only legislation that mandates a violation of GATT obligations can be found as such to be inconsistent with those obligations.(73)”(74)

Order of analysis when applying the mandatory/ discretionary distinction

57.     The Panel on Canada — Aircraft Credits and Guarantees further explained that it would examine each of the programmes at issue to see if they mandated a benefit within the meaning of Article 1, and, if so, it would then examine whether that subsidy was contingent upon export performance:(75)

“[W]e shall apply the mandatory/discretionary distinction in this dispute in determining whether the Canadian programmes at issue are as such inconsistent with WTO obligations, i. e., whether the legal texts governing the establishment and operation of these programmes are mandatory in respect of the violations alleged by Brazil. In other words, to assess Brazil’s claim against the EDC as such, we must determine whether the EDC programme mandates the grant of prohibited export subsidies in a manner inconsistent with Article 3.1(a) of the SCM Agreement.”(76)

“Substantive context” in the application of the mandatory/discretionary distinction

58.     In Canada — Aircraft Credits and Guarantees, Brazil argued that the mandatory/discretionary distinction should be applied in the “substantive context” of the Canadian programme at issue further to the Panel report in US — Export Restraints.(77) The Panel disagreed with Brazil’s interpretation of the Panel report in that case and considered that the relevant “substantive context” in applying the mandatory/discretionary distinction would be the obligations set forth in Article 3.1(a) of the SCM Agreement, and not the programmes under review:

“We note, …, that the Panel in [United States — Export Restraints] was primarily addressing the issue of whether the mandatory/discretionary distinction had to be addressed by a panel as a threshold matter as argued by the United States in that case, or whether a panel could address this distinction after considering the legal requirements of the applicable provisions of the WTO Agreement. In other words, the phrase ‘substantive context’ refers to Articles 1 and 3 of the SCM Agreement,(78) and not the measure under review. The point made by the panel in United States — Export Restraints is simply that it may be difficult to determine whether non-conforming conduct is mandated, without first determining what the obligations are against which conformity is measured. In the present case, the relevant ‘substantive context’ in applying the mandatory/discretionary distinction would be the obligations set forth in Article 3.1(a) of the SCM Agreement, and not the programmes under review.

We shall therefore apply the mandatory/discretionary distinction in light of Article 3.1(a) of the SCM Agreement. In other words, the question we must address is whether the EDC — the EDC Canada Account and the EDC Corporate Account — or IQ requires Canada to provide subsidies contingent upon export performance within the meaning of Article 3.1(a) of the SCM Agreement.”(79)

Extent of the complainant’s burden of proof

59.     The Panel on Canada — Aircraft Credits and Guarantees considered that, to prove that a given programme “as such” provides export subsidies, the complainant must establish, on the basis of the pertinent legal instruments, that the programmes at issue “mandate subsidisation, in particular, the conferral of a benefit”:

“Whatever the reason for the existence of export credit agencies, to prove that the EDC as such provides export subsidies, Brazil would have to establish that to be the case on the basis of the various legal texts regarding the establishment and operation of the EDC (i. e., both its Canada and its Corporate Accounts).

We consider that, despite the fact that Brazil has the burden of proof, it has not pointed to any specific provision in those legal texts that suggests that these programmes mandate subsidisation, in particular, the conferral of a benefit within the meaning of Article 1 of the SCM Agreement. We have nonetheless examined the various legal texts submitted by Brazil and found nothing that points to mandatory subsidisation on the part of the EDC.”(80)

60.     The Panel on Canada — Aircraft Credits and Guarantees clarified that “[t]o satisfy the ‘benefit’ element of Article 1.1 of the SCM Agreement for purposes of a challenge to [the programme at issue] as such, [the complainant] must show that the programme requires conferral of a benefit, not that it could be used to do so, or even that it is used to do so”.(81)

Fiscal advantages

61.     The Panel on Canada — Aircraft Credits and Guarantees clarified that the granting of fiscal advantages per se does not prove that the entity is required to pass on those advantages to its clients in the form of Article 1 subsidies and that even if the programme may have provided subsidies in the past, it does not then follow that the programme under consideration is required to provide such subsidies:

“Brazil submits that ECAs benefit from a competitive advantage over their private sector competitors (because ECAs do not pay taxes, for example), and this enables them to offer more favourable terms than those available in the private sector. According to Brazil, ‘not paying taxes is illustrative of, and an essential prerequisite to, an ECA’s capability to perform its normal mission — to provide export subsidies’.(82) Brazil also implies that there would be no need for the EDC if it did not provide support on terms more favourable than those available on the market.(83) Whether or not these arguments are factually correct, however, we do not see how they establish mandatory subsidization. That an entity enjoys certain fiscal advantages does not in and of itself prove that that entity is required to pass on those advantages to its clients in the form of subsidies within the meaning of Article 1 of the SCM Agreement.(84)

In our opinion, the fact that ECAs may have a competitive advantage that allows them to undercut private sector competitors does not mean that they are necessarily required to do so. Furthermore, although the EDC may have provided subsidies in the form of loan guarantees, financial services or debt financing in specific transactions,(85) it does not follow from this that the EDC is required to provide such subsidies.”(86)

Compliance with the OECD Arrangement

62.     The Panel on Canada — Aircraft Credits and Guarantees further considered that “[w]hile it may be true that even when a programme complies with the OECD Arrangement, it may — pursuant to the findings of the panel in Canada — Aircraft (Article 21.5 — Brazil) — involve the grant of prohibited export subsidies contrary to Article 3.1(a) of the SCM Agreement, that is not necessarily the case.”(87)

Provision of services not available in the market

63.     The Panel on Canada — Aircraft Credits and Guarantees rejected the complainant’s argument that the programme provided a subsidy by providing services that were not available on the market and clarified that, even if the particular programme had the potential to offer such other services, that fact did not necessarily mean that it was required to do so:

“Even assuming that the provision of services not available on the market necessarily confers a benefit, the fact that the EDC Corporate Account has the ‘ability’ to provide such services does not necessarily mean that it is required to do so. As noted above, to satisfy the ‘benefit’ element of Article 1.1 of the SCM Agreement for purposes of a challenge to the EDC Corporate Account as such, Brazil would have to show that the program requires conferral of a benefit, not that it could be used to do so, or even that it is used to do so.(88)”(89)

64.     The Panel on Canada — Aircraft Credits and Guarantees considered it inappropriate to make a finding on the subsidies programmes under consideration “as applied” because the complainant’s “as applied” claims were based on evidence from specific transactions, and these claims were not independent from claims regarding specific transactions for which the Panel did make findings. The Panel considered that “findings regarding a programme ‘as applied’ would undermine the utility of the mandatory/discretionary distinction”:

“In our view, there are a number of reasons why it would not be appropriate for us to make separate findings regarding the EDC and IQ programmes ‘as applied’. First, we do not consider that Brazil’s ‘as applied’ claims are independent of its claims regarding ‘specific transactions’. Indeed, Brazil itself acknowledges that ‘[i]n order for Brazil to prevail on its “as applied” claims, the Panel must find that the challenged programmes have been applied in specific transactions in a manner that is inconsistent with the SCM Agreement’. Since Brazil’s ‘as applied’ claims are not independent of its claims against ‘specific transactions’, and since we make findings regarding ‘specific transactions’, we see no practical purpose in making ‘as applied’ findings.

… [W]e recall our earlier remarks regarding the application of the mandatory / discretionary distinction. Further, we recall the statement of the panel in United States — Export Restraints that ‘the distinction between mandatory and discretionary legislation has a rational objective in ensuring predictability of conditions for trade. It allows parties to challenge measures that will necessarily result in action inconsistent with GATT/WTO obligations, before such action is actually taken.’(90) The conclusion by a panel that a programme is discretionary and therefore is not inconsistent with the WTO Agreement and a subsequent conclusion, by the same panel, that the programme ‘as applied’ (i.e., the manner in which the discretion inherent in that programme has been applied) is inconsistent with the WTO Agreement would be of little value. In our view, findings regarding a programme ‘as applied’ would undermine the utility of the mandatory / discretionary distinction.”(91)

(d) Passing the benefit through

65.     In US — Lead and Bismuth II, the European Communities challenged the administrative review of the imposition of countervailing duties by United States’ authorities. The United States’ investigating authorities had imposed countervailing duties on products of a company which had received subsidized equity infusions from the United Kingdom Government while still under state control, but for which a fair market value price had been paid in a subsequent privatization by the buyers. Both the equity infusion and the privatization had occurred prior to the initiation of the investigation of the United States’ authorities. The applicable United States’ statutory provisions contained an “‘irrebuttable presumption that nonrecurring subsidies benefit merchandise produced by the recipient over time’, without requiring any re-evaluation of those subsidies based on the use or effect of those subsidies or subsequent events in the marketplace”.(92) As a consequence, the competent United States’ authority examined whether “potentially allocable subsidies … could have travelled with the productive unit” following a change in ownership and concluded that a benefit indeed still existed, accruing to the new owners of the privatized corporation. In its report, the Panel first found that, in general, there could not be an irrebuttable presumption that a benefit “continues to flow from untied, non-recurring ‘financial contributions’, even after changes in ownership”.(93) The Panel then stated that it also failed to see how, in the specific case at hand, the new owners of the producing facility could be deemed to have obtained a benefit by previous subsidies bestowed upon the enterprise, if a fair market value had been paid for all productive assets in the course of the privatization.(94) Upon appeal, the Appellate Body held that it saw “no error in the Panel’s conclusion”.(95)

66.     Discussing the payment of value by owners of companies, rather than the companies themselves, the Panel on US — Lead and Bismuth II, in a statement not addressed by the Appellate Body, held that “[i]n the context of privatizations negotiated at arm’s length, for fair market value, and consistent with commercial principles, the distinction between a company and its owners is redundant for the purpose of establishing ‘benefit’”.(96)

67.     In US — Softwood Lumber III, the Panel, basing itself on the findings of the Appellate Body in US — Lead and Bismuth II ,(97) examined whether, considering the facts of this case, the Member conducting a countervailing duty investigation was required to examine if the alleged benefit to the tenure holders from the stumpage programmes were “passed through” to the softwood lumber producers.(98) In the Panel’s view, an authority “may not assume that a subsidy provided to producers of the ‘upstream’ input product automatically benefits unrelated producers of downstream products, especially if there is evidence on the record of arm’s-length transactions between the two”. For the Panel, in such circumstances the investigating authority should “examine whether and to what extent the subsidies bestowed on the upstream producers benefited the downstream producers”.(99)

68.     The Panel on US — Softwood Lumber III concluded that where there is “complete identity between the tenure holder/logger and the lumber producer, no pass-through analysis is required”. The Panel found that “where a downstream producer of subject merchandise is unrelated to the allegedly subsidized upstream producer of the input, an authority is not allowed to simply assume that a benefit has passed through”. The Panel concluded that by “not examining whether the independent lumber producers ‘paid arm’s-length prices’ for the logs that they purchased”, the Member defined the benefit to the producers of the subject merchandise inconsistently with the SCM Agreement.(100)

69.     The Appellate Body on US — Softwood Lumber IV explained that “pass-through” issues concern situations where the activities of harvesting standing timber, processing logs into softwood lumber, and further processing lumber into remanufactured lumber products “are not carried out by vertically integrated enterprises”. In other words, the appeal concerned “only arm’s length sales of logs and lumber by tenured common ownership or in any other way”.(101) Furthermore, the Appellate Body rejected the United States’ argument that no pass-through analysis was required, because the tenured harvester/sawmill processes some logs into softwood lumber in its own sawmill, and is thus a producer of the product subject to the investigation. In this regard, the Appellate Body did “not see why the mere fact that a tenured harvesters owns — or does not own — a sawmill, should affect whether a pass-through analysis is necessary with respect to logs sold at arm’s length”.

(e) Rebuttal of a prima facie case of benefit

70.     Considering whether a party has rebutted a prima facie case of subsidization established against it, the Panel on Canada — Aircraft stated:

“In order to rebut the prima facie case of ‘benefit’, we consider that Canada must do more than simply demonstrate that the amount of specific ‘benefit’ estimated by Brazil may be incorrect, or that TPC’s rate of return covers Canada’s cost of funds. Rather, Canada must demonstrate that no ‘benefit’ is conferred, in the sense that the terms of the contribution provide for a commercial rate of return.”(102)

71.     In Canada — Aircraft Credits and Guarantees, the Panel noted the statements made by a Member’s government official that the programme financing under consideration would be at a “better rate” than loans available commercially. For the Panel, these statements were an indication that the financing confers a “benefit”:

“We recall that a ‘benefit’ is conferred when a recipient receives a ‘financial contribution’ on terms more favourable than those available to the recipient in the market. In our view, Minister Tobin’s statements indicate that the Canada Account financing to Air Wisconsin, which will take the form of a loan, will confer a ‘benefit’ because it will be on terms more favourable than those available to the recipient in the market. This is confirmed by the fact that, in these proceedings, Canada itself initially considered the terms of the Canada Account financing to Air Wisconsin to be more favourable than those available in the market.”(103)

(f) Relationship with Article 1.1(a)(1)

72.     The Appellate Body on Canada — Aircraft found Article 1.1(a)(1) a relevant context for interpreting the term “benefit” in Article 1.1(b):

“The structure of Article 1.1 as a whole confirms our view that Article 1.1(b) is concerned with the ‘benefit’ to the recipient, and not with the ‘cost to government’. The definition of ‘subsidy’ in Article 1.1 has two discrete elements: ‘a financial contribution by a government or any public body’ and ‘a benefit is thereby conferred’. The first element of this definition is concerned with whether the government made a ‘financial contribution’, as that term is defined in Article 1.1(a). The focus of the first element is on the action of the government in making the ‘financial contribution’. That being so, it seems to us logical that the second element in Article 1.1 is concerned with the ‘benefit … conferred’ on the recipient by that governmental action. Thus, subparagraphs (a) and (b) of Article 1.1 define a ‘subsidy’ by reference, first, to the action of the granting authority and, second, to what was conferred on the recipient. Therefore, Canada’s argument that ‘cost to government’ is relevant to the question of whether there is a ‘benefit’ to the recipient under Article 1.1(b) disregards the overall structure of Article 1.1.”(104)

(g) Relationship with other Articles

(i) Article 14

73.     Both the Panel and the Appellate Body in Canada — Aircraft held that Article 14 was relevant context for interpretation of the term “benefit”. The Appellate Body considered the explicit reference to Article 1.1 contained in Article 14:

“Although the opening words of Article 14 state that the guidelines it establishes apply ‘[f]or the purposes of Part V’ of the SCM Agreement, which relates to ‘countervailing measures’, our view is that Article 14, nonetheless, constitutes relevant context for the interpretation of ‘benefit’ in Article 1.1(b). The guidelines set forth in Article 14 apply to the calculation of the ‘benefit to the recipient conferred pursuant to paragraph 1 of Article 1’. (emphasis added) This explicit textual reference to Article 1.1 in Article 14 indicates to us that ‘benefit’ is used in the same sense in Article 14 as it is in Article 1.1. Therefore, the reference to ‘benefit to the recipient’ in Article 14 also implies that the word ‘benefit’, as used in Article 1.1, is concerned with the ‘benefit to the recipient’ and not with the ‘cost to government’ ….

…

Article 14, which we have said is relevant context in interpreting Article 1.1(b), supports our view that the marketplace is an appropriate basis for comparison. The guidelines set forth in Article 14 relate to equity investments, loans, loan guarantees, the provision of goods or services by a government, and the purchase of goods by a government. A ‘benefit’ arises under each of the guidelines if the recipient has received a ‘financial contribution’ on terms more favourable than those available to the recipient in the market.”(105)

(ii) Article 14(c)

74.     With regard to establishing the existence of a benefit relating to equity guarantees in the framework of the SCM Agreement, the Panel on Canada — Aircraft Credits and Guarantees noted the relevance of Article 14(c). Accordingly, it considered that a “benefit” could arise if there is a difference between the cost of equity with and without an equity guarantee programme, provided that such difference is not topped by the fees charged by the programme for providing the equity guarantee.(106)

(iii) Article 14(d)

75.     With regard to the existence of a benefit in US — Softwood Lumber III, the Panel considered that the text of Article 14(d) clarifies that the prevailing market conditions to be used as a benchmark are those in the country of provision of the goods. The Panel therefore found that the ordinary meaning of this provision “excludes an analysis based on market conditions other than those in the country of provision of the goods”. Therefore, the Panel concluded that a Member’s stumpage prices cannot be considered to constitute “prevailing market conditions” in the other Member’s territory.(107) (See paragraphs 262-264 below.)

(iv) Annex I, item (k)

76.     The Panel on Canada — Aircraft rejected the use of item (k) in the interpretation of the term “benefit”. The Panel noted:

“[W]e are unable to accept … [the] argument that item (k) of the Illustrative List of Annex I of the SCM Agreement constitutes contextual guidance for determining the existence of ‘benefit’ in the specific context of government credit under Article 1. In our view, item (k) of the Illustrative List applies in determining whether or not a prohibited export subsidy exists. We do not consider … that item (k) determines whether or not a ‘subsidy’ exists within the meaning of Article 1 of the SCM Agreement.” (108)

77.     In Brazil — Aircraft, the Appellate Body rejected the Panel’s interpretation of the “material advantage” clause in item (k) of the Illustrative List of Export Subsidies as effectively the same interpretation of the term “benefit” in Article 1.1(b) adopted by the Panel on Canada — Aircraft.(109) (See paragraphs 443-444 below.)

(v) Annex IV

78.     The Appellate Body on Canada — Aircraft agreed with the Panel “that Annex IV is not useful context for interpreting Article 1.1(b)”,(110) stating:

“We fail to see the relevance of this provision to the interpretation of ‘benefit’ in Article 1.1(b) of the SCM Agreement. Annex IV provides a method for calculating the total ad valorem subsidization of a product under the ‘serious prejudice’ provisions of Article 6 of the SCM Agreement, with a view to determining whether a subsidy is used in such a manner as to have ‘adverse effects’. Annex IV, therefore, has nothing to do with whether a ‘benefit’ has been conferred, nor with whether a measure constitutes a subsidy within the meaning of Article 1.1.”(111)

9. Relationship of Article 1.1 with other Articles

(i) Article 14

79.     The Panel on US — Softwood Lumber III found that because the United States had included its own data in the examination of the claimant’s stumpage prices, it had acted inconsistently with Article 14 and 14(d) and “therefore also acted inconsistently with Article 1.1 of the SCM Agreement in determining the existence of a subsidy”.(112)

(ii) Footnote 1 and Footnote 59

80.     The Appellate Body on US — FSC rejected the argument that footnote 59 to the SCM Agreement, rather than Article 1.1, was the “controlling legal provision” for the definition of the term “subsidy”. In doing so, the Appellate Body distinguished between the general definition of the term “subsidy” under Article 1.1 and the specific regime which footnote 59 establishes with respect to a certain type of export subsidies:

“Article 1.1 sets forth the general definition of the term ‘subsidy’ which applies ‘for the purpose of this Agreement’. This definition, therefore, applies wherever the word ‘subsidy’ occurs throughout the SCM Agreement and conditions the application of the provisions of that Agreement regarding prohibited subsidies in Part II, actionable subsidies in Part III, non-actionable subsidies in Part IV and countervailing measures in Part V. By contrast, footnote 59 relates to one item in the Illustrative List of Export Subsidies. Even if footnote 59 means — as the United States also argues — that a measure, such as the FSC measure, is not a prohibited export subsidy, footnote 59 does not purport to establish an exception to the general definition of a ‘subsidy’ otherwise applicable throughout the entire SCM Agreement. Under footnote 5 of the SCM Agreement, where the Illustrative List indicates that a measure is not a prohibited export subsidy, that measure is not deemed, for that reason alone, not to be a ‘subsidy’. Rather, the measure is simply not prohibited under the Agreement. Other provisions of the SCM Agreement may, however, still apply to such a ‘subsidy’.”(113)

81.     After distinguishing between the general definition of a subsidy under Article 1.1 and the special regime applicable to a particular type of export subsidy pursuant to footnote 59, the Appellate Body in US — FSC opined that footnote 1 of the SCM Agreement was equally not relevant in the case at hand, given that the United States’ measure at issue provided for exemptions from corporate income taxes:

“We note, moreover, that, under footnote 1 of the SCM Agreement, ‘the exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption … shall not be deemed to be a subsidy’. (emphasis added) The tax measures identified in footnote 1 as not constituting a ‘subsidy’ involve the exemption of exported products from product-based consumption taxes. The tax exemptions under the FSC measure relate to the taxation of corporations and not products. Footnote 1, therefore, does not cover measures such as the FSC measure.”(114)

10. Relationship with other WTO Agreements

(a) Article XVI of the WTO Agreement

82.     The Appellate Body on US — FSC upheld the Panel’s finding on whether the term “otherwise due” must be interpreted in accordance with the 1981 Understanding adopted by the GATT Council in conjunction with four panel reports on tax legislation, but modified the reasoning.(115) First, the Appellate Body examined and confirmed the Panel’s finding that the 1981 Council action is not part of the GATT 1994; in so doing, the Appellate Body considered whether the Council action is “another decision” within the meaning of paragraph 1(b)(iv) of the language incorporating the GATT 1994 into the WTO Agreement. The Appellate Body rejected this claim, recalling its holding in Japan — Alcoholic Beverages that GATT Panel reports are only binding as between the parties to the dispute; nevertheless, in the specific case at hand, it noted a certain ambiguity in this regard:

“The opening clause of the 1981 Council action states: ‘The Council adopts these reports on the understanding that with respect to these cases, and in general …’. The 1981 Council action is, therefore, somewhat equivocal in tenor. On the one hand, it is clear from the text that the 1981 Council action relates specifically to the Tax Legislation Cases and is an integral part of the resolution of those disputes. This would suggest that, consistently with our Report in Japan — Alcoholic Beverages, the Council action is binding only on the parties to those disputes, and only for the purposes of those disputes.

On the other hand, we note that the opening clause of the 1981 Council action also prefaces the substance of the statement with the words ‘in general’. The United States argues that these words indicate that the 1981 Council action was an ‘authoritative interpretation’ of Article XVI:4 of the GATT 1947 that has ‘general’ application and that, therefore, bound all the contracting parties …

…

[However,] [w]hen the 1981 Council action was adopted, the Chairman of the GATT 1947 Council stated, inter alia, that ‘the adoption of these reports together with the understanding does not affect the rights and obligations of contracting parties under the General Agreement.’ In our view, if the contracting parties had intended to make an authoritative interpretation of Article XVI:4 of the GATT 1947, binding on all contracting parties, they would have said so in reasonably recognizable terms … Thus, we are of the view that the statement of the GATT 1947 Council Chairman is consistent with a reading of the 1981 Council action which views that action as an integral part of the resolution of the Tax Legislation Cases, binding only the parties to those disputes.”(116)

83.     After upholding the Panel’s finding that the 1981 Council action did not represent another decision within the meaning of Article 1(b)(iv) of the language incorporating GATT 1994 into the WTO Agreements, the Appellate Body in US — FSC proceeded to examine the status of the 1981 Council action as a “decision” within the meaning of Article XVI:1 of the WTO Agreement. In doing so, the Appellate Body addressed the relationship between Article XVI:4 of the GATT 1994 and Articles 1.1(a)(1) and 3.1(a) of the SCM Agreement:

“We recognize that, as ‘decisions’ within the meaning of Article XVI:1 of the WTO Agreement, the adopted panel reports in the Tax Legislation Cases, together with the 1981 Council action, could provide ‘guidance’ to the WTO….

…

[T]he provisions of the SCM Agreement do not provide explicit assistance as to the relationship between the export subsidy provisions of the SCM Agreement and Article XVI:4 of the GATT 1994. In the absence of any such specific textual guidance, we must determine the relationship between Articles 1.1(a)(1) and 3.1(a) of the SCM Agreement and Article XVI:4 of the GATT 1994 on the basis of the texts of the relevant provisions as a whole. It is clear from even a cursory examination of Article XVI:4 of the GATT 1994 that it differs very substantially from the subsidy provisions of the SCM Agreement, and, in particular, from the export subsidy provisions of both the SCM Agreement and the Agreement on Agriculture. First of all, the SCM Agreement contains an express definition of the term ‘subsidy’ which is not contained in Article XVI:4. In fact, as we have observed previously, the SCM Agreement contains a broad package of new export subsidy disciplines that ‘go well beyond merely applying and interpreting Articles VI, XVI and XXIII of the GATT 1947’.(117) Next, Article XVI:4 prohibits export subsidies only when they result in the export sale of a product at a price lower than the ‘comparable price charged for the like product to buyers in the domestic market.’ In contrast, the SCM Agreement establishes a much broader prohibition against any subsidy which is ‘contingent upon export performance’. To say the least, the rule contained in Article 3.1(a) of the SCM Agreement that all subsidies which are ‘contingent upon export performance’ are prohibited is significantly different from a rule that prohibits only those subsidies which result in a lower price for the exported product than the comparable price for that product when sold in the domestic market. Thus, whether or not a measure is an export subsidy under Article XVI:4 of the GATT 1947 provides no guidance in determining whether that measure is a prohibited export subsidy under Article 3.1(a) of the SCM Agreement. Also, and significantly, Article XVI:4 of the GATT 1994 does not apply to ‘primary products’, which include agricultural products. Unquestionably, the explicit export subsidy disciplines, relating to agricultural products, contained in Articles 3, 8, 9 and 10 of the Agreement on Agriculture must clearly take precedence over the exemption of primary products from export subsidy disciplines in Article XVI:4 of the GATT 1994.

Furthermore, as the Panel observed, the text of the 1981 Council action itself contains reference only to Article XVI:4, and the Chairman of the GATT 1947 Council stated expressly that the 1981 Council action did not affect the Tokyo Round Subsidies Code. We share the Panel’s view that, in these circumstances, it would be incongruous to extend the scope of the action, beyond that intended, to the SCM Agreement. If the 1981 Council action did not affect the Tokyo Round Subsidies Code, which existed in 1981, it is difficult to see how that action could be seen to affect the SCM Agreement, which did not.”(118)

II. Article 2     back to top

A. Text of Article 2

Article 2: Specificity

2.1     In order to determine whether a subsidy, as defined in paragraph 1 of Article 1, is specific to an enterprise or industry or group of enterprises or industries (referred to in this Agreement as “certain enterprises”) within the jurisdiction of the granting authority, the following principles shall apply:

(a)     Where the granting authority, or the legislation pursuant to which the granting authority operates, explicitly limits access to a subsidy to certain enterprises, such subsidy shall be specific.

(b)     Where the granting authority, or the legislation pursuant to which the granting authority operates, establishes objective criteria or conditions(2) governing the eligibility for, and the amount of, a subsidy, specificity shall not exist, provided that the eligibility is automatic and that such criteria and conditions are strictly adhered to. The criteria or conditions must be clearly spelled out in law, regulation, or other official document, so as to be capable of verification.

(footnote original) 2 Objective criteria or conditions, as used herein, mean criteria or conditions which are neutral, which do not favour certain enterprises over others, and which are economic in nature and horizontal in application, such as number of employees or size of enterprise.

(c)     If, notwithstanding any appearance of non-specificity resulting from the application of the principles laid down in subparagraphs (a) and (b), there are reasons to believe that the subsidy may in fact be specific, other factors may be considered. Such factors are: use of a subsidy programme by a limited number of certain enterprises, predominant use by certain enterprises, the granting of disproportionately large amounts of subsidy to certain enterprises, and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy.(3) In applying this subparagraph, account shall be taken of the extent of diversification of economic activities within the jurisdiction of the granting authority, as well as of the length of time during which the subsidy programme has been in operation.

(footnote original) 3 In this regard, in particular, information on the frequency with which applications for a subsidy are refused or approved and the reasons for such decisions shall be considered.

2.2     A subsidy which is limited to certain enterprises located within a designated geographical region within the jurisdiction of the granting authority shall be specific. It is understood that the setting or change of generally applicable tax rates by all levels of government entitled to do so shall not be deemed to be a specific subsidy for the purposes of this Agreement.

2.3     Any subsidy falling under the provisions of Article 3 shall be deemed to be specific.

2.4     Any determination of specificity under the provisions of this Article shall be clearly substantiated on the basis of positive evidence.

 
B. Interpretation and Application of Article 2

1. Article 2.1(c)

(a) General

84.     In US — Softwood Lumber IV, Canada argued that a subsidy is “specific” only when the government “deliberately limits” access to certain enterprises. This argument was rejected by the Panel on the grounds that Article 2 of the SCM Agreement is concerned with the distortion that is created by a subsidy which, either in law or in fact, is not broadly available. Furthermore, in the view of the Panel, there is:

“[N]o basis in the text of Article 2, and 2.1 (c) SCM Agreement in particular, for Canada’s argument that if the inherent characteristics of the good provided limit the possible use of the subsidy to a certain industry, the subsidy will not be specific unless access to this subsidy is limited to a sub-set of this industry, i.e. to certain enterprises within the potential users of the subsidy engaged in the manufacture of similar products.”(119)

(b) “other factors may be considered”

85.     On the argument by Canada that an investigating authority is required to examine all four factors mentioned in Article 2.1(c) in order to determine de facto specificity, the Panel on US — Softwood Lumber IV stated that Article 2.1(c) provides that if there are reasons to believe that the subsidy may in fact be specific, other factors “may” be considered. In the view of the Panel, the use of the verb “may”, rather than “shall” indicates that if there are reasons to believe that the subsidy may in fact be specific, an authority may want to look at any of the four factors or indicators of specificity.(120)

(c) “account be taken of”

86.     Finally, the Panel on US — Softwood Lumber IV found that the Department of Commerce had satisfied the requirement that “account be taken of” the extent of economic diversification by noting that the vast majority of companies and industries in Canada did not receive benefits under the programmes at issue. This indicated to the Panel that the Department of Commerce showed that it had taken account of the publicly known fact that the Canadian economy and the Canadian provincial economies in particular were diversified economies.(121)

2. Article 2.3: subsidies falling under Article 3 deemed to be specific

87.     The Panel on Indonesia — Autos was called upon to decide whether the Indonesian subsidies contingent upon the use of domestic over imported goods were specific:

“As with any analysis under the SCM Agreement, the first issue to be resolved is whether the measures in question are subsidies within the meaning of Article 1 that are specific to an enterprise or industry or group of enterprises or industries within the meaning of Article 2 … In this case, the European Communities, the United States and Indonesia agree that these measures are specific subsidies within the meaning of those articles … Further, the European Communities, the United States and Indonesia agree that these subsidies are contingent upon the use of domestic over imported goods within the meaning of Article 3.1(b), and that they are therefore deemed to be specific pursuant to Article 2.3 of the Agreement. In light of the views of the parties, and given that nothing in the record would compel a different conclusion, we find that the measures in question are specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement.”(122)

Part II: Prohibited Subsidies

III. Article 3     back to top

A. Text of Article 3

Article 3: Prohibition

3.1     Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited:

(a)     subsidies contingent, in law or in fact,(4) whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I;(5)

(footnote original) 4 This standard is met when the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings. The mere fact that a subsidy is granted to enterprises which export shall not for that reason alone be considered to be an export subsidy within the meaning of this provision.

(footnote original) 5 Measures referred to in Annex I as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement.

(b)     subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.

3.2     A Member shall neither grant nor maintain subsidies referred to in paragraph 1.

 
B. Interpretation and Application of Article 3

1. Article 3.1(a)

(a) General

88.     In Canada — Aircraft Credits and Guarantees, the Panel first recalled the text of Article 3.1(a) of the SCM Agreement and found that to “prove the existence of an export subsidy within the meaning of this provision, a Member must … establish (i) the existence of a subsidy within the meaning of Article 1 of the SCM and (ii) contingency of that subsidy upon export performance”.(123)

89.     The Appellate Body on US — FSC (Article 21.5 — EC) noted that Article 3.1(a) provides that “subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance” are prohibited. The Appellate Body referred also to its statement in Canada — Aircraft that “contingent” means “conditional” or “dependent for its existence on something else” and said that the grant of the subsidy must be conditional or dependent upon export performance.(124) The Appellate Body provided:

“We start with the text of Article 3.1(a) of the SCM Agreement, which provides that ‘subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance’ are prohibited. We have considered this provision in several previous appeals.(125) In Canada — Aircraft, we said that the key word in Article 3.1(a) is ‘contingent’, which means ‘conditional’ or ‘dependent for its existence on something else’.(126) The grant of the subsidy must be conditional or dependent upon export performance. Footnote 4 of the SCM Agreement, attached to Article 3.1(a), describes the relationship of contingency by stating that the grant of a subsidy must be ‘tied to’ export performance. Article 3.1(a) further provides that such export contingency may be the ‘sole []’ condition governing the grant of a prohibited subsidy or it may be ‘one of several other conditions’.”(127)

(b) “contingent in law … upon export performance”

90.     In Canada — Autos, the Appellate Body addressed the precise distinction between a de jure and a de facto subsidy with reference to the wording of a particular measure:

“In our view, a subsidy is contingent ‘in law’ upon export performance when the existence of that condition can be demonstrated on the basis of the very words of the relevant legislation, regulation or other legal instrument constituting the measure. The simplest, and hence, perhaps, the uncommon, case is one in which the condition of exportation is set out expressly, in so many words, on the face of the law, regulation or other legal instrument. We believe, however, that a subsidy is also properly held to be de jure export contingent where the condition to export is clearly, though implicitly, in the instrument comprising the measure. Thus, for a subsidy to be de jure export contingent, the underlying legal instrument does not always have to provide expressis verbis that the subsidy is available only upon fulfillment of the condition of export performance. Such conditionality can also be derived by necessary implication from the words actually used in the measure.”(128)

91.     The Appellate Body on Canada — Autos concluded that “as the import duty exemption is simply not available to a manufacturer unless it exports motor vehicles, the import duty exemption is clearly conditional, or dependent upon, exportation and, therefore, is contrary to Article 3.1(a) …”.(129)

92.     Before the Panel on Canada — Aircraft, Canada stated that the mandate of one of its agencies was “to offer a full range of risk management services and financing products ‘for the purpose of supporting and developing, directly or indirectly, Canada’s export trade’”.(130) Basing itself on this statement by Canada, the Panel held that “export credits granted ‘for the purpose of supporting and developing, directly or indirectly, Canada’s export trade’ are expressly contingent in law on export performance”.(131)

93.     In examining whether a subsidy is contingent “in law” upon export performance, the Appellate Body in Canada — Autos noted that “footnote 4 … uses the words ‘tied to’ as a synonym for ‘contingent’ or ‘conditional’. As the legal standard is the same for de facto and de jure export contingency, we believe that a ‘tie’, amounting to the relationship of contingency, between the granting of the subsidy and actual or anticipated exportation meets the legal standard of ‘contingent’ in Article 3.1(a) ….”(132)

(c) “contingent … in fact … upon export performance”

(i) De facto contingency

94.     Regarding the interpretation of the term “contingent … in fact”, the Panel on Australia — Automotive Leather II established a standard of “close connection” between the grant or maintenance of a subsidy and export performance. It added that a subsidy, in order to be export contingent in fact, must be “conditioned” upon export performance:

“An inquiry into the meaning of the term ‘contingent … in fact’ in Article 3.1(a) of the SCM Agreement must, therefore, begin with an examination of the ordinary meaning of the word ‘contingent’. The ordinary meaning of ‘contingent’ is ‘dependent for its existence on something else’, ‘conditional; dependent on, upon’. The text of Article 3.1(a) also includes footnote 4, which states that the standard of ‘in fact’ contingency is met if the facts demonstrate that the subsidy is ‘in fact tied to actual or anticipated exportation or export earnings’. The ordinary meaning of ‘tied to’ is ‘restrain or constrain to or from an action; limit or restrict as to behaviour, location, conditions, etc.’. Both of the terms used — ‘contingent … in fact’ and ‘in fact tied to’ — suggest an interpretation that requires a close connection between the grant or maintenance of a subsidy and export performance.”(133)

95.     In Canada — Aircraft, the Panel also considered the “tied to” language of footnote 4 to be equivalent to a relationship of “conditionality” between the grant of a subsidy and export performance.(134) The Appellate Body agreed with the term “conditioned” and linked it to the concept of contingency under Article 3.1(a):

“The ordinary meaning of ‘tied to’ confirms the linkage of ‘contingency’ with ‘conditionality’ in Article 3.1(a). Among the many meanings of the verb ‘tie’, we believe that, in this instance, because the word ‘tie’ is immediately followed by the word ‘to’ in footnote 4, the relevant ordinary meaning of ‘tie’ must be to ‘limit or restrict as to … conditions’. This element of the standard set forth in footnote 4, therefore, emphasizes that a relationship of conditionality or dependence must be demonstrated. The second substantive element is at the very heart of the legal standard in footnote 4 and cannot be overlooked. In any given case, the facts must ‘demonstrate’ that the granting of a subsidy is tied to or contingent upon actual or anticipated exports. It does not suffice to demonstrate solely that a government granting a subsidy anticipated that exports would result. The prohibition in Article 3.1(a) applies to subsidies that are contingent upon export performance.”(135)

96.     While the Appellate Body in Canada — Aircraft largely agreed with the findings of the Panel on the interpretation of the term “contingency”, it nevertheless criticized the “but for” test established by the Panel on the basis of the term “tied to”:

“We note that the Panel considered that the most effective means of demonstrating whether a subsidy is contingent in fact upon export performance is to examine whether the subsidy would have been granted but for the anticipated exportation or export earnings…. While we consider that the Panel did not err in its overall approach to de facto export contingency, we, and panels as well, must interpret and apply the language actually used in the treaty.”(136)

97.     The Appellate Body on Canada — Aircraft provided its own reasoning with respect to the ordinary meaning of the text “contingent … in fact … on export performance”. In doing so, it first emphasized the term “contingent” as a “key word”, held that the legal standard encapsulated by this term is the same for both de jure or de facto contingency and framed the distinction between these two types of contingency in terms of the evidence upon which such determination would rest:

“In our view, the key word in Article 3.1(a) is ‘contingent’. As the Panel observed, the ordinary connotation of ‘contingent’ is ‘conditional’ or ‘dependent for its existence on something else’. This common understanding of the word ‘contingent’ is borne out by the text of Article 3.1(a), which makes an explicit link between ‘contingency’ and ‘conditionality’ in stating that export contingency can be the sole or ‘one of several other conditions’.

… In our view, the legal standard expressed by the word ‘contingent’ is the same for both de jure or de facto contingency. There is a difference, however, in what evidence may be employed to prove that a subsidy is export contingent. De jure export contingency is demonstrated on the basis of the words of the relevant legislation, regulation or other legal instrument. Proving de facto export contingency is a much more difficult task. There is no single legal document which will demonstrate, on its face, that a subsidy is ‘contingent … in fact … upon export performance’. Instead, the existence of the relationship of contingency, between the subsidy and export performance, must be inferred from the total configuration of the facts constituting and surrounding the granting of the subsidy, none of which on its own is likely to be decisive in any given case.”(137)

98.     The Appellate Body on Canada — Aircraft examined footnote 4 more closely as “a standard … for determining when a subsidy is ‘contingent … in fact … upon export performance’”. It identified three elements, i.e. “granting of a subsidy”, “tied to” and “anticipated”:

“We note that satisfaction of the standard for determining de facto export contingency set out in footnote 4 requires proof of three different substantive elements: first, the ‘granting of a subsidy’; second, ‘is … tied to …’; and, third, ‘actual or anticipated exportation or export earnings’. (emphasis added) ….

The first element of the standard for determining de facto export contingency is the ‘granting of a subsidy’. In our view, the initial inquiry must be on whether the granting authority imposed a condition based on export performance in providing the subsidy. In the words of Article 3.2 and footnote 4, the prohibition is on the ‘granting of a subsidy’, and not on receiving it. The treaty obligation is imposed on the granting Member, and not on the recipient. Consequently, we do not agree … that an analysis of ‘contingent … in fact … upon export performance’ should focus on the reasonable knowledge of the recipient.(138)

The second substantive element in footnote 4 is ‘tied to’. The ordinary meaning of ‘tied to’ confirms the linkage of ‘contingency’ with ‘conditionality’ in Article 3.1(a). Among the many meanings of the verb ‘tie’, we believe that, in this instance, because the word ‘tie’ is immediately followed by the word ‘to’ in footnote 4, the relevant ordinary meaning of ‘tie’ must be to ‘limit or restrict as to … conditions’. This element of the standard set forth in footnote 4, therefore, emphasizes that a relationship of conditionality or dependence must be demonstrated. The second substantive element is at the very heart of the legal standard in footnote 4 and cannot be overlooked. In any given case, the facts must ‘demonstrate’ that the granting of a subsidy is tied to or contingent upon actual or anticipated exports. It does not suffice to demonstrate solely that a government granting a subsidy anticipated that exports would result. The prohibition in Article 3.1(a) applies to subsidies that are contingent upon export performance.

We turn now to the third substantive element provided in footnote 4. The dictionary meaning of the word ‘anticipated’ is ‘expected’. The use of this word, however, does not transform the standard for ‘contingent … in fact’ into a standard merely for ascertaining ‘expectations’ of exports on the part of the granting authority. Whether exports were anticipated or ‘expected’ is to be gleaned from an examination of objective evidence. This examination is quite separate from, and should not be confused with, the examination of whether a subsidy is ‘tied to’ actual or anticipated exports. A subsidy may well be granted in the knowledge, or with the anticipation, that exports will result. Yet, that alone is not sufficient, because that alone is not proof that the granting of the subsidy is tied to the anticipation of exportation.”(139)

99.     The Panel on Canada — Aircraft, in a statement not specifically addressed by the Appellate Body, also noted that “the nature of the required conditionality [is] that ‘one of the conditions for the grant of the subsidy is the expectation that exports will flow thereby’”.(140) In the case at hand, the Panel came to the conclusion that “the facts available demonstrate that one of the conditions of the grant of … contributions to the … industry is indeed such an expectation, in the form of projected export sales anticipated to ‘flow’ directly from these contributions”.(141)

100.   The Panel on Canada — Aircraft Credits and Guarantees considered that a Member’s awareness that its domestic market is too small to absorb its domestic production of a subsidized product “may indicate” that the subsidy is granted upon export performance (see paragraph 107 below). However, after referring to statements by the Appellate Body in Canada — Aircraft,(142) the Panel clarified that even if a Member was to anticipate that exports would result from the grant of a subsidy, such anticipation “alone is not proof that the granting of the subsidy is tied to the anticipation of exportation” within the meaning of the footnote 4 to Article 3.1(a).(143)

(ii) Treatment of facts in the determination of de facto export contingency

101.   The Panel on Australia — Automotive Leather II held that the language of footnote 4 of the SCM Agreement required it “to examine all the facts concerning the grant or maintenance of the challenged subsidy”, emphasizing that the Panel was not precluded from considering any particular fact. The Panel also held that the specific facts to be considered will vary on a case-by-case basis:

“In our view, the concept of ‘contingent … in fact … upon export performance’, and the language of footnote 4 of the SCM Agreement, require us to examine all of the facts that actually surround the granting or maintenance of the subsidy in question, including the terms and structure of the subsidy, and the circumstances under which it was granted or maintained. A determination whether a subsidy is in fact contingent upon export performance cannot, in our view, be limited to an examination of the terms of the legal instruments or the administrative arrangements providing for the granting or maintenance of the subsidy in question. Such a determination would leave wide open the possibility of evasion of the prohibition of Article 3.1(a), and render meaningless the distinction between ‘in fact’ and ‘in law’ contingency. Moreover, while the second sentence of footnote 4 makes clear that the mere fact that a subsidy is granted to enterprises which export cannot be the sole basis for concluding that a subsidy is ‘in fact’ contingent upon export performance, it does not preclude the consideration of that fact in a panel’s analysis. Nor does it preclude consideration of the level of a particular company’s exports. This suggests to us that factors other than the specific legal or administrative arrangements governing the granting or maintenance of the subsidy in question must be considered in determining whether a subsidy is ‘in fact’ contingent upon export performance.

Based on the explicit language of Article 3.1(a) and footnote 4 of the SCM Agreement, in our view the determination of whether a subsidy is ‘contingent … in fact’ upon export performance requires us to examine all the facts concerning the grant or maintenance of the challenged subsidy, including the nature of the subsidy, its structure and operation, and the circumstances in which it was provided. In this context, Article 11 of the DSU requires a panel to make an objective assessment of the facts of the case. Obviously, the facts to be considered will depend on the specific circumstances of the subsidy in question, and will vary from case to case. In our view, all facts surrounding the grant and/or maintenance of the subsidy in question may be taken into consideration in the analysis. However, taken together, the facts considered must demonstrate that the grant or maintenance of the subsidy is conditioned upon actual or anticipated exportation or export earnings. The outcome of this analysis will obviously turn on the specific facts relating to each subsidy examined.”(144)

102.   The Panel on Australia — Automotive Leather II drew a temporal limit to this broad standard of factual analysis. It opined that “the pertinent consideration is the facts at the time the conditions for the grant payments were established, and not possible subsequent developments”.(145)

103.   The Panel on Canada — Aircraft, in a finding expressly endorsed by the Appellate Body,(146) confirmed this broad and case-by-case approach to the factual analysis of the Panel on Australia — Automotive Leather II. While it also emphasized that no factual considerations should prevail over others, it pointed out that its finding that a broad range of facts should be considered as relevant did not mean that “the de facto export contingency standard is easily met”:

“In our view, no fact should automatically be rejected when considering whether the facts demonstrate that a subsidy would not have been granted but for anticipated exportation or export earnings. We note that footnote 4 provides that the ‘facts’ must demonstrate de facto export contingency. Footnote 4 therefore refers to ‘facts’ in general, without any suggestion that certain factual considerations should prevail over others. In our opinion, it is clear from the ordinary meaning of footnote 4 that any fact could be relevant, provided it ‘demonstrates’ (either individually or in conjunction with other facts) whether or not a subsidy would have been granted but for anticipated exportation or export earnings. We consider that this is true of the export-orientation of the recipient, or of the reason for the grant of the subsidy, just as it is true of a host of other facts potentially surrounding the grant of the subsidy in question. In any given case, the relative importance of each fact can only be determined in the context of that case, and not on the basis of generalities.

We would emphasise, however, that our finding that a broad range of facts could be relevant in this context does not mean that the de facto export contingency standard is easily met. On the contrary, footnote 4 of the SCM Agreement makes it clear that the facts must “demonstrate” de facto export contingency. That is, de facto export contingency must be demonstrable on the basis of the factual evidence adduced.(147)

104.   The Appellate Body on Canada — Aircraft approved and strengthened the finding of the Panel on the fact that a subsidy is granted to enterprises which export may be considered in a determination whether or not a subsidy is de facto export contingent, but that this “does not mean that export-orientation alone can necessarily be determinative”:(148)

“There is a logical relationship between the second sentence of footnote 4 and the ‘tied to’ requirement set forth in the first sentence of that footnote. The second sentence of footnote 4 precludes a panel from making a finding of de facto export contingency for the sole reason that the subsidy is ‘granted to enterprises which export’. In our view, merely knowing that a recipient’s sales are export-oriented does not demonstrate, without more, that the granting of a subsidy is tied to actual or anticipated exports. The second sentence of footnote 4 is, therefore, a specific expression of the requirement in the first sentence to demonstrate the ‘tied to’ requirement. We agree with the Panel that, under the second sentence of footnote 4, the export orientation of a recipient may be taken into account as a relevant fact, provided that it is one of several facts which are considered and is not the only fact supporting a finding.”(149)

105.   The Panel on Australia — Automotive Leather II held that “the fact of expectation cannot be the sole determinative fact on the evaluation”.(150) The Panel also considered the extent to which circumstances surrounding a loan contract can be facts on the basis of which the determination of an export contingent subsidy can be made:

“[T]he mere fact that one possible source of funds to pay off the loan is potential export earnings is insufficient to conclude that the loan was contingent in fact upon anticipated exportation or export earnings…. We recognize that other facts are relevant to our consideration of the nature of the loan contract. Included among these is the significance of exports in Howe’s business, and the fact that the loan was part of the overall ‘assistance package’ given to Howe, which Australia acknowledged would probably not have occurred if Howe had not been removed from eligibility under the … programmes…. Moreover, there is nothing in the terms of the loan contract itself which suggests a specific link to actual or anticipated exportation or export earnings … These factors persuade us that there is not a sufficiently close tie between the loan and anticipated exportation or export earnings.”(151)

106.   While the Panel on Canada — Aircraft found that no one factual consideration should prevail over others in the determination of de facto export contingency, it nevertheless held that “the closer a subsidy brings a product to sale on the export market, the greater the possibility that the facts may demonstrate that the subsidy would not have been granted but for anticipated exportation or export earnings”. In this respect, the Panel noted that subsidies for “pure research” or “for general purposes such as improving efficiency or adopting new technology” would be less likely to give rise to de facto export contingency than “subsidies that directly assist companies in bringing specific products to the (export) market”.(152) The Appellate Body did not object to the consideration of this factor by the Panel, but cautioned that “the mere presence … of this factor” will not create “a presumption that a subsidy is ‘de facto contingent upon export performance’:

“We recall that the Panel added that ‘the further removed a subsidy is from sales on the export market, the less the possibility that the facts may demonstrate that the subsidy is ‘contingent … in fact … upon export performance’. (emphasis added) By these statements, the Panel appears to us to apply what could be read to be a legal presumption. While we agree that this nearness-to-the-export-market factor may, in certain circumstances, be a relevant fact, we do not believe that it should be regarded as a legal presumption. It is, for instance, no ‘less … possible’ that the facts, taken together, may demonstrate that a pre-production subsidy for research and development is ‘contingent … in fact … upon export performance’. If a panel takes this factor into account, it should treat it with considerable caution. In our opinion, the mere presence or absence of this factor in any given case does not give rise to a presumption that a subsidy is or is not de facto contingent upon export performance. The legal standard to be applied remains the same: it is necessary to establish each of the three substantive elements in footnote 4.”(153)

107.   The Panel on Canada — Aircraft Credits and Guarantees referred to the findings of the Panel on Australia — Automotive Leather II(154) (see paragraphs 101 and 105) and noted that a Member’s awareness that its domestic market is too small to absorb the domestic production of a subsidized product may “indicate”, although not prove (see paragraph 100 above), that the subsidy is granted on the condition that it be exported:

“In addressing Brazil’s de facto export contingency claim, we shall be guided by note 4 to Article 3.1(a) of the SCM Agreement, whereby a subsidy is ‘contingent … in fact … upon export performance’ when

the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings. The mere fact that a subsidy is granted to enterprises which export shall not for that reason alone be considered to be an export subsidy within the meaning of this provision.

… a Member’s awareness that its domestic market is too small to absorb domestic production of a subsidised product may indicate that the subsidy is granted on the condition that it be exported.”(155)

(d) “Export performance”

(i) General

108.   The Panel on Canada — Aircraft (Article 21.5 — Brazil), in a finding not specifically addressed by the Appellate Body, drew a distinction between “general technological or economic benefits” on the one hand and “export performance” on the other:

“Thus, whereas TPC assistance is conditional on a project having certain technological or net economic benefits …, in our view this simply cannot be assumed to be synonymous with export performance, and therefore it does not mean ipso facto that such assistance is contingent on export performance. This remains true even though TPC administrators know that fulfilment of net economic benefits in certain cases may be likely to result in increased exports. The fact that they will have no concrete quantifiable information on exports in our view will act in practical terms to limit their discretion to select projects on the basis of export performance.”(156)

109.   The Panel on Canada — Aircraft rejected the argument that the subsidy programme at issue was not conditional on exports taking place on the grounds that “there are no penalties if export sales are not realised”.(157) The Panel supported its rejection with the following statement:

“While this argument may be relevant in determining whether a subsidy would not have been granted but for actual exportation or export earnings, we find this argument insufficient to rebut a prima facie case that a subsidy would not have been granted but for anticipated exportation or export earnings.”(158)

(ii) “produced within or outside the Member”

110.   The Appellate Body on US — FSC (Article 21.5 — EC), upholding the findings of the Panel, observed that there are two different factual situations, one involving property produced within the Member and the other involving property produced outside it, which are subject to distinct conditions for receipt of the subsidy. The Appellate Body considered it appropriate to examine these two situations separately:

“In respect of property produced within the United States, the taxpayer can obtain the subsidy only by satisfying the conditions in the measure relating to this property and, for this property, the measure provides only one set of conditions governing the grant of subsidy. The conditions for the grant of subsidy with respect to property produced outside the United States are distinct from those governing the grant of subsidy in respect of property produced within the United States.

In our view, it is hence appropriate, indeed necessary, under Article 3.1(a) of the SCM Agreement, to examine separately the conditions pertaining to the grant of the subsidy in the two different situations addressed by the measure.”(159)

111.   Examining the measure with respect to property produced within the Member, the Appellate Body in US — FSC (Article 21.5 — EC), noted that in order to obtain the subsidy, the goods must be sold, leased or rented for direct use, consumption or disposition “outside the United States”. Thus for the Appellate Body to be eligible for the subsidy, “the property must be exported”. In this way, the requirement of use outside the Member state makes the subsidy contingent upon export. Accordingly, the Appellate Body held that since property produced within the United States must be exported to satisfy this condition, “then, the requirement of use outside the United States makes the grant of the tax benefit contingent upon export”.(160)

112.   The Appellate Body on US — FSC (Article 21.5 — EC) noted that its conclusion was not affected by the fact that the subsidy could also be obtained through production abroad, and that there was no export contingency in this second situation.(161) The Appellate Body recalled:

“[T]he measure at issue in the original proceedings in US — FSC contained an almost identical condition relating to ‘direct use … outside the United States’ for property produced in the United States. In that appeal, we upheld the panel’s finding that the combination of the requirements to produce property in the United States and use it outside the United States gave rise to export contingency under Article 3.1(a) of the SCM Agreement. We see no reason, in this appeal, to reach a conclusion different from our conclusion in the original proceedings, namely that there is export contingency, under Article 3.1(a), where the grant of a subsidy is conditioned upon a requirement that property produced in the United States be used outside the United States.

We recall that the ETI measure grants a tax exemption in two different sets of circumstances: (a) where property is produced within the United States and held for use outside the United States; and (b) where property is produced outside the United States and held for use outside the United States. Our conclusion that the ETI measure grants subsidies that are export contingent in the first set of circumstances is not affected by the fact that the subsidy can also be obtained in the second set of circumstances. The fact that the subsidies granted in the second set of circumstances might not be export contingent does not dissolve the export contingency arising in the first set of circumstances. Conversely, the export contingency arising in these circumstances has no bearing on whether there is an export contingent subsidy in the second set of circumstances. Where a United States taxpayer is simultaneously producing property within and outside the United States, for direct use outside the United States, subsidies may be granted under the ETI measure in respect of both sets of property. The subsidy granted with respect to the property produced within the United States, and exported from there, is export contingent within the meaning of Article 3.1(a) of the SCM Agreement, irrespective of whether the subsidy given in respect of property produced outside the United States is also export contingent.”

(e) Relationship with other Articles

(i) Article 4.7

113.   In Canada — Dairy (Article 21.5 — New Zealand and US), the Panel noted that a finding of violation with respect to Article 3.1 of the SCM Agreement would affect the specificity of the recommendation to be made by the Panel, due to the more precise implementation requirements under Article 4.7 of the SCM Agreement, providing that an export subsidy be withdrawn without delay. However, the Panel observed that because of the context of the case, it would not be able to recommend that Canada “withdraw” measures constituting an export subsidy exclusively in respect of agricultural products. The Panel stated:

“Since the Panel, in case it would make an affirmative finding in respect of Article 3.1 of the SCM Agreement, would not be able to make the withdrawal recommendation provided for in the first sentence of Article 4.7 of the SCM Agreement, the Panel does not need to consider the first sentence of Article 4.7 to determine whether or not it should exercise judicial economy. Having found that it would not be able make a recommendation to withdraw the subsidy, in accordance with the first sentence of Article 4.7, the Panel considers that, a fortiori, it would not be able to specify a time-period for withdrawal, in accordance with the second sentence of Article 4.7.”(162)

(ii) Article 27

114.   The Panel on Brazil — Aircraft addressed the relationship between Articles 3.1(a), 27.2(b) and 27.4. More specifically, the Panel was called upon to determine the allocation of burden of proof applicable to the special provision of Article 27.2, which establishes that the prohibition contained in Article 3.1(a) shall not apply to developing country Members, provided that the requirements of Article 27.4 are met. The Panel in a finding upheld by the Appellate Body considered that “until non-compliance with the conditions set out in Article 27.4 is demonstrated, there is also, on the part of a developing country Member within the meaning of Article 27.2(b), no inconsistency with Article 3.1(a)”.(163)

115.   The Appellate Body on Brazil — Aircraft emphasized that “the conditions set forth in paragraph 4 are positive obligations for developing country Members, not affirmative defenses. If a developing country Member complies with the obligations in Article 27.4, the prohibition on export subsidies in Article 3.1(a) simply does not apply.”(164)

116.   The Appellate Body on Brazil — Aircraft agreed with the Panel “that the burden [of proof] is on the complaining party (in casu Canada) to demonstrate that the developing country Member (in casu Brazil) is not in compliance with at least one of the elements set forth in Article 27.4. If such non-compliance is demonstrated, then, and only then, does the prohibition of Article 3.1(a) apply to that developing country Member.”(165)

117.   As regards the extension of the Article 27.4 transition period for developing and least-developed countries of the export subsidy prohibition, see paragraphs 341 and 366-373 below. With regard to the graduation methodology from Annex VII(b), see paragraphs 491-495 below.

(iii) Footnote 59

118.   In US — FSC, the Appellate Body addressed the United States’ claim that footnote 59 exempts a measure from being an export subsidy within the meaning of Article 3.1(a) and that the 1981 Council Action serves as a confirmation for this exemption. In rejecting this argument, the Appellate Body proceeded to examine footnote 59 sentence by sentence:

“The first sentence of footnote 59 is specifically related to the statement in item (e) of the Illustrative List that the ‘full or partial exemption remission, or deferral specifically related to exports, of direct taxes’ is an export subsidy. The first sentence of footnote 59 qualifies this by stating that ‘deferral need not amount to an export subsidy where, for example, appropriate interest charges are collected.’ Since the FSC measure does not involve the deferral of direct taxes, we do not believe that this sentence of footnote 59 bears upon the characterization of the FSC measure as constituting, or not, an ‘export subsidy’.

The second sentence of footnote 59 ‘reaffirms’ that, in allocating export sales revenues, for tax purposes, between exporting enterprises and controlled foreign buyers, the price for the goods shall be determined according to the ‘arm’s length’ principle to which that sentence of the footnote refers. Like the Panel, we are willing to accept, for the sake of argument, the United States’ position that it is ‘implicit’ in the requirement to use the arm’s length principle that Members of the WTO are not obliged to tax foreign-source income, and also that Members may tax such income less than they tax domestic-source income. We would add that, even in the absence of footnote 59, Members of the WTO are not obliged, by WTO rules, to tax any categories of income, whether foreign-or domesticsource income. The United States argues that, since there is no requirement to tax export-related foreign-source income, a government cannot be said to have ‘foregone’ revenue if it elects not to tax that income. It seems to us that, taken to its logical conclusion, this argument by the United States would mean that there could never be a foregoing of revenue ‘otherwise due’ because, in principle, under WTO law generally, no revenues are ever due and no revenue would, in this view, ever be ‘foregone’. That cannot be the appropriate implication to draw from the requirement to use the arm’s length principle.”(166)

119.   The Appellate Body further found that the arm’s-length principle contained in the second sentence of footnote 59 could not shed light on the issue before the Panel, namely whether the United States’ tax measure was a prohibited export subsidy:

“Furthermore, we do not believe that the requirement to use the arm’s length principle resolves the issue that arises here. That issue is not, as the United States suggests, whether a Member is or is not obliged to tax a particular category of foreign-source income. As we have said, a Member is not, in general, under any such obligation. Rather, the issue in dispute is whether, having decided to tax a particular category of foreign-source income, namely foreign-source income that is ‘effectively connected with a trade or business within the United States’, the United States is permitted to carve out an export contingent exemption from the category of foreign-source income that is taxed under its other rules of taxation. Unlike the United States, we do not believe that the second sentence of footnote 59 addresses this question. It plainly does not do so expressly; neither, as far as we can see, does it do so by necessary implication. As the United States indicates, the arm’s length principle operates when a Member chooses not to tax, or to tax less, certain categories of foreign-source income. However, the operation of the arm’s length principle is unaffected by the choice a Member makes as to which categories of foreign-source income, if any, it will not tax, or will tax less. Likewise, the operation of the arm’s length principle is unaffected by the choice a Member might make to grant exemptions from the generally applicable rules of taxation of foreign-source income that it has selected for itself. In short, the requirement to use the arm’s length principle does not address the issue that arises here, nor does it authorize the type of export contingent tax exemption that we have just described. Thus, this sentence of footnote 59 does not mean that the FSC subsidies are not export subsidies within the meaning of Article 3.1(a) of the SCM Agreement.

The third and fourth sentences of footnote 59 set forth rules that relate to remedies. In our view, these rules have no bearing on the substantive obligations of Members under Articles 1.1 and 3.1 of the SCM Agreement.”(167)

120.   The Appellate Body on US — FSC then declined to examine the United States’ claim under the fifth sentence of footnote 59, namely that the United States’ measure was one taken to avoid double taxation of foreign-source income. The Appellate Body noted that the issue had not been properly litigated before the Panel and therefore declined to address the United States’ claim.(168)

(f) Annex VII(b)

121.   With regard to the graduation methodology from Annex VII(b), see paragraphs 491-495 below.

(g) Footnote 4

122.   With respect to the relationship between “tied to” in footnote 4 and “contingent … in law”, see paragraphs 93-95 above.

123.   With respect to the three substantive elements in footnote 4 as identified by the Appellate Body in Canada — Aircraft, see paragraph 98 above.

124.   With respect to the requirement to examine all facts concerning the grant or maintenance of a subsidy, see paragraph 101 above. As regards the significance of the phrase “enterprises which export” within the de facto export contingency analysis, see paragraphs 101, 104 and 107 above.

2. Relationship with other WTO Agreements

(a) GATT 1994

125.   In Canada — Autos, the Panel, after finding violations of Article III:4 of the GATT 1994 and Article XVII of the GATS, exercised judicial economy with respect to alternative claims under Article 3.1(a). The Appellate Body upheld this exercise of judicial economy:

“In our view, it was not necessary for the Panel to make a determination on the … alternative claim relating to the CVA requirements under Article 3.1(a) … in order ‘to secure a positive solution’ to this dispute. The Panel had already found that the CVA requirements violated both Article III:4 of the GATT 1994 and Article XVII of the GATS. Having made these findings, the Panel, in our view, exercising the discretion implicit in the principle of judicial economy, could properly decide not to examine the alternative claim … that the CVA requirements are inconsistent with Article 3.1(a) of the SCM Agreement.”(169)

(b) Agreement on Agriculture

126.   In Canada — Dairy (Article 21.5 — New Zealand and US), the Panel considered that Article 9.1 of the Agreement on Agriculture and Articles 1.1 and 3.1 of the SCM Agreement can be said to be “closely related” and “part of a logical continuum”. Thus, the Panel considered that its reasoning regarding the claims made under Article 10.1 of the Agreement on Agriculture was equally relevant for the claims made under Articles 1.1 and 3.1 of the SCM Agreement. The Panel noted that:

“[T]he facts underlying the Article 9.1(c) and Article 10.1 claims are, in this case, fully co-extensive. The Panel believes that this conclusion also applies to the facts underlying the claims made under the Agreement on Agriculture, on the one hand, and those made under Articles 1.1 and 3.1 of the SCM Agreement, on the other. In addition, the Panel considers that Article 9.1 of the Agreement on Agriculture and Articles 1.1 and 3.1 of the SCM Agreement can be said to be ‘closely related’ and ‘part of a logical continuum’. Thus, the Panel’s reasoning set forth supra regarding the claims made under Article 10.1 of the Agreement on Agriculture is equally relevant for the claims made under Articles 1.1 and 3.1 of the SCM Agreement.”(170)

127.   The Appellate Body on Canada — Dairy (Article 21.5 — New Zealand and US) noted that with regard to agricultural products, the WTO-consistency of an export subsidy has to be determined, in the first place, under the Agriculture Agreement. In this case, the Appellate Body recalled that it was unable to determine whether the measures at issue “conform[] fully” to Articles 9.1(c) or 10.1 of the Agreement on Agriculture. Therefore, the Appellate Body “decline[d] to examine” the claim under Article 3.1(a) of the SCM Agreement.(171) The Appellate Body held:

“The relationship between the Agreement on Agriculture and the SCM Agreement is defined, in part, by Article 3.1 of the SCM Agreement, which states that certain subsidies are ‘prohibited’ ‘[e]xcept as provided in the Agreement on Agriculture’. This clause, therefore, indicates that the WTO-consistency of an export subsidy for agricultural products has to be examined, in the first place, under the Agreement on Agriculture.

This is borne out by Article 13(c)(ii) of the Agreement on Agriculture, which provides that ‘export subsidies that conform fully to the [export subsidy] provisions of Part V’ of the Agreement on Agriculture, ‘as reflected in each Member’s Schedule, shall be … exempt from actions based on Article XVI of GATT 1994 or Articles 3, 5 and 6 of the Subsidies Agreement.’

In this appeal, we are unable to determine whether the measure at issue ‘conforms fully’ to Articles 9.1(c) or 10.1 of Part V of the Agreement on Agriculture. In these circumstances, we decline to examine the claim made by the United States that the measure is inconsistent with Article 3.1 of the SCM Agreement.”(172)

128.   In Canada — Dairy (Article 21.5 — New Zealand and US), the Panel considered that when a Member exceeded its quantity commitment levels, the Panel could only recommend that the Member bring its measures into conformity with its obligations under the Agreement on Agriculture, and it could not require “withdrawal”. Alternatively, assuming for the sake of argument, that it could make a recommendation to the Member to “withdraw” the export subsidy, the Panel considered that, pursuant to Article 21.1 of the Agreement on Agriculture and Article 3.1 of the SCM Agreement, the Panel could only do so with respect to that portion of the subsidized exports that exceeded the Member’s reduction commitment levels under the Agreement on Agriculture.(173)

3. Article 3.1(b)

(a) “subsidies contingent … upon the use of domestic over imported goods”

(i) Contingency

129.   Referring to its Report on Canada — Aircraft where it had held that “the ordinary connotation of ‘contingent’ is ‘conditional’ or ‘dependent for its existence on something else’”,(174) the Appellate Body in Canada — Autos opined that “this legal standard applies not only to ‘contingency’ under Article 3.1(a), but also to ‘contingency’ under Article 3.1(b)”.(175)

(ii) De facto contingency

130.   In Canada — Autos, the Panel had found that “contingency” under Article 3.1(b) extended only to de jure contingency and not also to de facto contingency. In making this finding, the Panel relied on the fact that Article 3.1(a) referred explicitly to both subsidies contingent “in law or in fact”, while Article 3.1(b) did not contain such an explicit reference.(176) The Appellate Body reversed this finding and held that “contingency” under Article 3.1(b) includes both contingency in law and contingency in fact. In its analysis, the Appellate Body first agreed with the Panel that an omission (of an express provision) must have some meaning, but emphasized that the significance of such omission can vary from one case to another:

“In examining this issue, the Panel appears to have taken the view that the terms of Article 3.1(b), on their own, do not answer the question, and, therefore, it turned to the context provided by Article 3.1(a). In this respect, the Panel relied on the fact that, in Article 3.1(a), there is explicit language applying to subsidies contingent ‘in law or in fact’ while in Article 3.1(b) there is not. In the view of the Panel, the absence of such an explicit reference in the adjacent and closely-related provision of Article 3.1(b) indicates that the drafters intended Article 3.1(b) to apply only to those subsidies which are contingent ‘in law’ upon the use of domestic over imported goods.

In our view, the Panel’s analysis was incomplete. As we have said, and as the Panel recalled, ‘omission must have some meaning.’ Yet omissions in different contexts may have different meanings, and omission, in and of itself, is not necessarily dispositive. Moreover, while the Panel rightly looked to Article 3.1(a) as relevant context in interpreting Article 3.1(b), the Panel failed to examine other contextual elements for Article 3.1(b) and to consider the object and purpose of the SCM Agreement.”(177)

131.   Having found that the omission of an explicit reference to de facto contingency in Article 3.1(b) was not dispositive of the question whether Article 3.1(b) actually extended to de facto contingency, the Appellate Body in Canada — Autos then considered the ordinary meaning and the context of this provision. While the Appellate Body agreed with the Panel that Article 3.1(a) was relevant context for Article 3.1(b), it held that “other contextual aspects should also be examined”:

“We look first to the text of Article 3.1(b). In doing so, we observe that the ordinary meaning of the phrase ‘contingent … upon the use of domestic over imported goods’ is not conclusive as to whether Article 3.1(b) covers both subsidies contingent ‘in law’ and subsidies contingent ‘in fact’ upon the use of domestic over imported goods. Just as there is nothing in the language of Article 3.1(b) that specifically includes subsidies contingent ‘in fact’, so, too, is there nothing in that language that specifically excludes subsidies contingent ‘in fact’ from the scope of coverage of this provision. As the text of the provision is not conclusive on this point, we must turn to additional means of interpretation. Accordingly, we look for guidance to the relevant context of the provision.

Although we agree with the Panel that Article 3.1(a) is relevant context, we believe that other contextual aspects should also be examined. First, we note that Article III:4 of the GATT 1994 also addresses measures that favour the use of domestic over imported goods, albeit with different legal terms and with a different scope. Nevertheless, both Article III:4 of the GATT 1994 and Article 3.1(b) of the SCM Agreement apply to measures that require the use of domestic goods over imports. Article III:4 of the GATT 1994 covers both de jure and de facto inconsistency. Thus, it would be most surprising if a similar provision in the SCM Agreement applied only to situations involving de jure inconsistency.

… The fact that Article 3.1(a) refers to ‘in law or in fact’, while those words are absent from Article 3.1(b), does not necessarily mean that Article 3.1(b) extends only to de jure contingency.

Finally, we believe that a finding that Article 3.1(b) extends only to contingency ‘in law’ upon the use of domestic over imported goods would be contrary to the object and purpose of the SCM Agreement because it would make circumvention of obligations by Members too easy.

…

For all these reasons, we believe that the Panel erred in finding that Article 3.1(b) does not extend to subsidies contingent ‘in fact’ upon the use of domestic over imported goods. We, therefore, reverse the Panel’s broad conclusion that ‘Article 3.1(b) extends only to contingency in law.’”(178)

(b) Relationship with other Articles

(i) Article 3.1(a)

132.   As regards the use of Article 3.1(a) as context for the interpretation of Article 3.1(b), see paragraphs 130-131 above.

(ii) Article 27

133.   As regards the transition period exemptions for developing and least developed countries, see paragraph 347 below.

4. Article 3.2

(a) “grant”

134.   As the Canada — Aircraft dispute illustrates, under the SCM Agreement a Member may challenge a subsidy programme of another Member “as such” or, alternatively, “as applied”. In addressing Brazil’s challenge of certain Canadian subsidies “as such”, the Panel on Canada — Aircraft recalled the distinction between mandatory and discretionary legislation. In so doing, the Panel invoked what it considered consistent GATT/WTO practice and emphasized that it “must first determine whether the … programme per se mandates the grant of prohibited export subsidies in a manner inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement”.(179) The Panel continued as follows:

“In this regard, we recall the distinction that GATT/WTO panels have consistently drawn between discretionary legislation and mandatory legislation. For example, in United States — Tobacco the panel ‘recalled that panels had consistently ruled that legislation which mandated action inconsistent with the General Agreement could be challenged as such, whereas legislation which merely gave the discretion to the executive authority … to act inconsistently with the General Agreement could not be challenged as such; only the actual application of such legislation inconsistent with the General Agreement could be subject to challenge’.”(180)

135.   In applying this standard to the facts of the case before it, the Panel on Canada — Aircraft concluded that “a mandate to support and develop Canada’s export trade does not amount to a mandate to grant subsidies, since such support and development could be provided in a broad variety of ways”.(181) As a consequence, the Panel on Canada — Aircraft held that it “may not make any findings on the EDC programme per se”.(182)

136.   The Panel on Brazil — Aircraft was called upon to decide whether Brazil had increased its level of export subsidies within the meaning of Article 27.4; because footnote 55 to Article 27.4 refers to the “grant” of export subsidies, the Panel addressed the question concerning at which particular point in time Brazil had actually been “granting” the disputed subsidies. Under the part of the Brazilian PROEX programme relating to interest equalization payments, the Brazilian Government would first approve a particular export transaction (between the Brazilian manufacturer and a foreign buyer) and issue a “letter of commitment” to the manufacturer; this letter would commit the Government to providing support, on the condition that the contract would indeed be concluded under the terms previously approved by the Government and entered into within a specific period of time. If these conditions were not fulfilled, the letter of commitment would expire. The actual interest equalization payments began after the aircraft had been exported and paid for under the relevant contract. The Brazilian Government, acting through the Brazilian National Treasury, would then issue bonds in the name of the bank financing the transaction; the bonds could be redeemed on a semi-annual basis for the duration of financing or sold for a discount in the securities market. In its analysis, the Panel began by comparing the term “grant” under Articles 3.2 and 27.4:

“We note that Article 3.2 and Article 27.4 are provisions of the same Agreement. Further, both provisions relate to the prohibition on export subsidies set out under that Agreement. We do not perceive any basis to attribute to the term ‘grant’ as used in Article 3.2 of the SCM Agreement a meaning different from that attributed to that term by this Panel and the Appellate Body as used in Article 27.4 of the SCM Agreement.”(183)

137.   The Panel on Brazil — Aircraft, in a finding subsequently upheld by the Appellate Body,(184) then found that the “granting” of the subsidy at issue occurred when the bonds were issued by the Brazilian National Treasury to the bank financing the export transaction:

“It is clear to us, however, that PROEX payments have not yet been ‘granted’ at the time a letter of commitment is issued. We note that the issuance of a letter of commitment, even if legally binding on the Government of Brazil in the event certain conditions are fulfilled, provides no assurance that PROEX payments will actually be made … [T]he right to receive the PROEX payments only arises after the conditions relating to receipt of PROEX payments, and specifically the condition that the product in question actually be exported, has been fulfilled …

The question remains whether PROEX payments are ‘granted’ when the bonds are issued or whether they are granted only when the bonds are redeemed on a semiannual basis. In our view, PROEX payments should be considered to be ‘granted’ when bonds are issued and title to those bonds is transferred to the lender financial institution … [W]e note that, while the bonds cannot be immediately redeemed, they are freely negotiable. The parties agree that lenders may exercise their right to sell these bonds — albeit at a discount as determined by the market — to other entities rather than waiting until maturity to redeem the bonds themselves. Thus, at the point that title to the bonds is passed to the lenders, those lenders are the holders of a property right with a market value which is immediately realisable. Accordingly, we conclude that PROEX payments are ‘granted’ at that point, and we will calculate Brazil’s PROEX expenditures on that basis.”(185)

138.   In Brazil — Aircraft, while agreeing with the Panel on when the subsidy in question was granted, the Appellate Body criticized the Panel for making findings on whether a subsidy existed. More specifically, the Appellate Body held that in the case at hand, the Panel, in its findings on Article 27.4, did not have to make findings on the existence of a subsidy within the meaning of Article 1 of the SCM Agreement, because the export subsidies in that case were already deemed to “exist”.(186)

139.   The Panel on Brazil — Aircraft (Article 21.5 — Canada II) built on this distinction made by the Appellate Body in Brazil — Aircraft between the question of the existence of a subsidy and the question of the precise moment of the “granting” of such subsidy and held that this distinction, drawn by the Appellate Body in the context of Article 27.4, applied equally with respect to Article 3.2 of the SCM Agreement:

“We recognize that the distinction made by the Appellate Body was between the existence of a subsidy and when a subsidy is granted related to when a subsidy is granted for the purposes of Article 27.4 of the SCM Agreement, and not when it was granted for the purposes of Article 3.2. As a matter of logic, however, we cannot perceive … any basis for us to conclude that, while the existence of a subsidy is a legally distinct issue from when it is granted for the purposes of Article 27.4, it is not a legally distinct issue from when it is granted for the purposes of Article 3.2. In other words, if the issue of when a subsidy is ‘granted’ for the purposes of Article 27.4 is legally distinct from when it ‘exists’ for the purposes of Article 1, then it follows that the issue of when a subsidy is granted for the purposes of Article 3.2 is also legally distinct from the issue when it exists for the purposes of Article 1.”(187)

(b) Relationship with other Articles

(i) Article 3.1

140.   In US — FSC (Article 21.5 — EC), the Panel concluded that by maintaining prohibited export subsidies, the defendant also acted inconsistently with Article 3.2 of the SCM Agreement. The Panel stated:

“We therefore view this claim as wholly dependent upon our resolution of the claims under Article 3.1 of the SCM Agreement. Recalling our finding that the Act involves prohibited export subsidies in breach of Article 3.1(a) of the SCM Agreement by reason of the requirement of ‘use outside the United States’, we find that by maintaining the subsidies under the Act, the United States has acted inconsistently with its obligation under Article 3.2 of the SCM Agreement not to maintain subsidies referred to in paragraph 1 of Article 3 of the SCM Agreement.”(188)

(ii) Article 27.4

141.   With respect to the relationship with Article 27.4, see paragraphs 136-138 above.

Footnotes:

1. For information on the latest jurisprudence departing from the mandatory/discretionary distinction, see Section VI.B.3(c)(ii) of the Chapter on the DSU. back to text
2. Panel Report on US — Softwood Lumber III, para. 7.24. Concerning the object and purpose of the SCM Agreement, see paras. 496-497 below. back to text
3. Appellate Body Report on Brazil — Aircraft, para. 157. back to text
4. Panel Report on Brazil — Aircraft (Article 21.5 — Canada II), para. 5.18. back to text
5. (footnote original) Appellate Body Report on Brazil — Aircraft, para. 157 (emphasis in original). back to text
6. Panel Report on US — Exports Restraints, para. 8.20. back to text
7. Panel Report on Canada — Aircraft Credits and Guarantees, para. 7.65. back to text
8. Panel Report on Canada — Aircraft Credits and Guarantees, para. 7.396. Also see paras. 7.64-7.65. back to text
9. Panel Report on US — Exports Restraints, paras. 8.65 and 8.73. back to text
10. Panel Report on US — Softwood Lumber III, para. 7.24. back to text
11. Panel Report on US — Exports Restraints, para. 8.38. back to text
12. Panel Report on Canada — Aircraft Credits and Guarantees, paras. 7.141-7.142, 7.187 and 7.393. back to text
13. Panel Report on Brazil — Aircraft (Article 21.5 — Canada II), para. 5.22. back to text
14. Panel Report on Canada — Aircraft, para. 9.306. back to text
15. Panel Report on Brazil — Aircraft, paras. 7.68 and 7.70. back to text
16. Appellate Body Report on Brazil — Aircraft, para. 157. back to text
17. Panel Report on Canada — Aircraft Credits and Guarantees, para. 7.320. back to text
18. Panel Report on Brazil — Aircraft, para. 7.13. back to text
19. Appellate Body Report on US — FSC (Article 21.5 — EC), para. 88. back to text
20. Panel Report on US — FSC (Article 21.5 — EC), paras. 8.37 and 8.39. back to text
21. Appellate Body Report on US — FSC, paras. 90 and 98. back to text
22. Appellate Body Report on US — FSC, para. 99. back to text
23. Panel Report on US — FSC (Article 21.5 — EC), paras. 8.32 and 8.41. back to text
24. (footnote original) See Appellate Body Reports on Japan — Alcoholic Beverages II, p. 16; and Chile — Alcoholic Beverages, paras. 59 and 60. back to text
25. Appellate Body Report on US — FSC, para. 90. In Canada — Autos, the Appellate Body applied these same principles to decide “whether government revenue that is otherwise due is foregone”. Appellate Body Report on Canada — Autos, para. 91. back to text
26. Bearing in mind the Appellate Body’s findings on the word “foregone”, the Panel in US — FSC (Article 21.5 — EC) found that the key to determine whether a revenue is otherwise due is to apply critical judgement to the facts of the matter, using the tax rules applied by the Member in question as the “basis”. See Panel Report on US — FSC (Article 21.5 — EC), paras. 8.17-8.19:
     “[O]ne cannot simply assert that revenue is otherwise due in the abstract. It cannot be presumed. The key is to apply critical judgment to the facts of the matter. In so doing, we follow the reasoning of the Appellate Body viz that the comparison to be made involves revenues due under the contested measure and those that would be due in some other situation and that the basis of the comparison must be the tax rules applied by the Member in question.
     In following this reasoning, we underline that while the inquiry cannot be inherently presumptive or speculative, neither can it be so exacting or confining that it is necessary to attain the level of establishing a mathematical deductive relationship between the contested measure and the default situation. To interpret the SCM Agreement in the latter manner would expose a panel to precisely the manifestly absurd consequence referred to in paragraph 8.15 above. The key point is that the tax rules applied by the Member in question are the basis for the comparison. Thus, any finding that revenue has been foregone must be securely grounded on that foundation.
     That, in our view, provides a sound basis for exercising reasonable judgment as to whether or not a defending Member’s assertion that no revenue was due in the first place is, in fact, valid or whether the contested measure in effect masks the substance of what is actually the foregoing of revenue that is otherwise due.” back to text
27. Appellate Body Report on US — FSC (Article 21.5 — EC), paras. 89-90 and 98. back to text
28. Panel Report on US — FSC, para. 7.45. back to text
29. The Appellate Body on US — FSC (Article 21.5 — EC) reiterated its reservations on the “but for test”. See Appellate Body Report on US — FSC (Article 21.5 — EC), paras. 91-92:
     “In identifying the normative benchmark, there may be situations where the measure at issue might be described as an ‘exception’ to a ‘general’ rule of taxation. In such situations, it may be possible to apply a ‘but for’ test to examine the fiscal treatment of income absent the contested measure. We do not, however, consider that Article 1.1(a)(1)(ii) always requires panels to identify, with respect to any particular income, the ‘general’ rule of taxation prevailing in a Member. Given the variety and complexity of domestic tax systems, it will usually be very difficult to isolate a ‘general’ rule of taxation and ‘exceptions’ to that ‘general’ rule. Instead, we believe that panels should seek to compare the fiscal treatment of legitimately comparable income to determine whether the contested measure involves the foregoing of revenue which is ‘otherwise due’, in relation to the income in question.
     In addition, it is important to ensure that the examination under Article 1.1(a)(1)(ii) involves a comparison of the fiscal treatment of the relevant income for taxpayers in comparable situations. For instance, if the measure at issue is concerned with the taxation of foreign-source income in the hands of a domestic corporation, it might not be appropriate to compare the measure with the fiscal treatment of such income in the hands of a foreign corporation.” back to text
30. (footnote original) Panel Report on US — FSC, para. 7.45. back to text
31. Appellate Body Report on US — FSC, para. 91. back to text
32. The Appellate Body upheld the Panel’ s findings at issue although under a different focus partly because, on appeal, the thrust of the United States’ arguments had been directed towards the role of the measure in allocating income as either domestic-or foreign-source. See Appellate Body Report on US — FSC (Article 21.5 — EC), para. 106. back to text
33. Panel Report on US — FSC (Article 21.5 — EC), paras. 8.28-8.30. back to text
34. Appellate Body Report on Canada — Autos, para. 92. back to text
35. Appellate Body Report on Canada — Autos, para. 92. back to text
36. Appellate Body Report on US — Softwood Lumber IV, para. 52. back to text
37. Appellate Body Report on US — Softwood Lumber IV, para. 53. back to text
38. Panel Report on US — Softwood Lumber III, para. 7.16. back to text
39. Panel Report on US — Softwood Lumber III, para. 7.18. back to text
40. Panel Report on US — Softwood Lumber III, para. 7.22. back to text
41. Panel Report on US — Softwood Lumber III, para. 7.23. back to text
42. Panel Report on US — Softwood Lumber III, para. 7.24. back to text
43. Panel Report on US — Softwood Lumber III, para. 7.28. back to text
44. Appellate Body Report on US — Softwood Lumber IV, para. 59. back to text
45. Panel Report on US — Softwood Lumber III, para. 7.26. back to text
46. Panel Report on US — Softwood Lumber III, paras. 7.25-7.26. back to text
47. Appellate Body Report on US — Softwood Lumber IV, para. 60. back to text
48. Panel Report on US — Exports Restraints, para. 8.53. back to text
49. Panel Report on US — Exports Restraints, para. 8.25. back to text
50. Panel Report on US — Exports Restraints, para. 8.75. back to text
51. Panel Report on US — Exports Restraints, paras. 8.28-8.30. back to text
52. Panel Report on US — Exports Restraints, para. 8.44. back to text
53. Panel Report on US — Exports Restraints, para. 8.49. back to text
54. Panel Report on US — Exports Restraints, para. 8.53. back to text
55. Panel Report on US — Exports Restraints, paras. 8.54-8.55. back to text
56. Appellate Body Report on Canada — Aircraft, para. 161. back to text
57. Appellate Body Report on Canada — Aircraft, para. 149. back to text
58. Panel Report on Canada — Aircraft, paras. 9.119 — (referring to Canada’s first submission) — and 9.120:
     “[W]e note that the SCM Agreement does not contain any express statement of its object and purpose. We therefore consider it unwise to attach undue importance to arguments concerning the object and purpose of the SCM Agreement. In our view, however, the avoidance of net cost to government is not the object and purpose of the multilateral disciplines contained in the SCM Agreement. Rather, … we consider that the object and purpose of the SCM Agreement could more appropriately be summarised as the establishment of multilateral disciplines ‘on the premise that some forms of government intervention distort international trade, [or] have the potential to distort [international trade]’.
     [L]eaving aside situations of alleged ‘income or price supports’ within the meaning of Article 1.1(a)(2), we consider that a ‘financial contribution’ by a government or public body confers a ‘benefit’, and therefore constitutes a ‘subsidy’ within the meaning of Article 1 of the SCM Agreement, when it confers an advantage on the recipient relative to applicable commercial benchmarks, i.e., when it is provided on terms that are more advantageous than those that would be available to the recipient on the market.” back to text
59. Appellate Body Report on Canada — Aircraft, para. 153. back to text
60. Appellate Body Report on Canada — Aircraft, para. 154. back to text
61. Appellate Body Report on Canada — Aircraft, para. 157. See also Panel Report on Canada — Aircraft Credits and Guarantees, para. 7.343; Panel Report on US — FSC (Article 21.5 — EC) paras. 7.278-7.296. back to text
62. Appellate Body Report on US — Lead and Bismuth II, paras. 53-60. back to text
63. Panel Report on US — Lead and Bismuth II, paras. 6.66-6.69. back to text
64. Panel Report on Brazil — Aircraft (Article 21.5 — Canada II), paras. 5.32 and 5.37. back to text
65. Panel Report on Canada — Aircraft Credits and Guarantees, paras. 7.234-7.236. back to text
66. Panel Report on Brazil — Aircraft (Article 21.5 — Canada II), para. 4.4. back to text
67. Panel Report on Brazil — Aircraft (Article 21.5 — Canada II), paras. 5.27-5.28. back to text
68. Panel Report on Canada — Aircraft Credits and Guarantees, para. 7.229. back to text
69. Appellate Body Report on US — Lead and Bismuth II, para. 12. back to text
70. Appellate Body Report on US — Lead and Bismuth II, para. 60. back to text
71. As regards the mandatory/discretionary distinction, see Section VI.B.3(c)(ii) of the Chapter on the DSU. As regards the mandatory/discretionary distinction in the context of an affirmative defence under paragraph 2 of item (K) of the Illustrative List of Export Subsidies, see paras. 478-479 below. back to text
72. (footnote original) See United States — Anti-Dumping Act of 1916, Report of the Panel, WT/DS136/R-WT/DS162/R, and Report of the Appellate Body, WT/DS136/AB/R-WT/DS162/AB/R, adopted 26 September 2000, United States — Measures Affecting the Importation, Internal Sale, and Use of Tobacco, Report of the Panel, BISD 41S/131, adopted 4 October 1994, Thailand — Restrictions on Importation of and Internal Taxes on Cigarettes, Report of the Panel, BISD 37S/200, adopted 7 November 1990, European Economic Community — Regulation on Imports of Parts and Components, Report of the Panel, BISD 37S/132, adopted 16-May 1990, United States — Taxes on Petroleum and Certain Imported Substances (Superfund), Report of the Panel, BISD 34S/136, adopted 17 June 1987.
     We also note the statement of the Appellate Body in US — Hot-Rolled Steel that “[t]he captive production provision does not, by itself, require an exclusive focus on the merchant market, nor does it compel a selective approach to the analysis of the merchant market that excludes an equivalent examination of the captive market. The provision also does not itself mandate that particular weight be accorded to data pertaining to the merchant market. Rather, as explained above, the provision allows the USITC to examine the merchant market and the captive market, with the same degree of care and attention, as part of a broader examination of the domestic industry as a whole … Accordingly, if and to the extent that it is interpreted in a manner consistent with our reasoning, as set forth in paragraphs 203 to 208 of this Report, we see no necessary inconsistency between the captive production provision, on its face, and the Anti-Dumping Agreement” (United States — Anti-Dumping Measures on Certain Hot-Rolled Steel Products from Japan (“United States — Hot-Rolled Steel”), Report of the Appellate Body, WT/DS184/AB/R, adopted 23 August 2001, para. 208) (footnote omitted, emphasis in original). back to text
73. (footnote original) United States — Measures Treating Export Restraints as Subsidies (“United States — Export Restraints”) Report of the Panel, WT/DS194/R, adopted 23 August 2001, para. 8.4 (footnotes omitted). back to text
74. Panel Report on Canada — Aircraft Credits and Guarantees, paras. 7.56-7.57. back to text
75. Panel Report on Canada — Aircraft Credits and Guarantees, paras. 7.56-7.59 and 7.68 back to text
76. Panel Report on Canada — Aircraft Credits and Guarantees, para. 7.59. back to text
77. Brazil cited paragraph 8.11 of the Panel Report on US — Export Restraints which reads:
     “We are not aware of any GATT/WTO precedent that would require a panel to consider whether legislation is mandatory or discretionary before examining the substance of the provisions at issue. To the contrary, we note that a number of panels, in disputes concerning the consistency of legislation, have not considered the mandatory/discretionary question in the abstract and as a necessarily threshold issue. Rather, the panels in those cases first resolved any controversy as to the requirements of the GATT/WTO obligations at issue, and only then considered in light of those findings whether the defending party had demonstrated adequately that it had sufficient discretion to conform with those rules. That is, the mandatory/discretionary distinction was applied in a given substantive context.” back to text
78. (footnote original) The Panel in United States — Export Restraints stated: “[I]dentifying and addressing the relevant WTO obligations first will facilitate our assessment of the manner in which the legislation addresses those obligations, and whether any violation is involved. That is, it is after we have considered both the substance of the claims in respect of WTO provisions and the relevant provisions of the legislation at issue that we will be in the best position to determine whether the legislation requires a treatment of export restraints that violates those provisions.”(United States — Export Restraints, para. 8.12). back to text
79. Panel Report on Canada — Aircraft Credits and Guarantees, paras. 7.61-7.62. back to text
80. Panel Report on Canada — Aircraft Credits and Guarantees, paras. 7.76-7.77. back to text
81. Panel Report on Canada — Aircraft Credits and Guarantees, para. 7.107. See also paras. 7.123-7.125 and Panel Report on Brazil — Aircraft (Article 21.5 — Canada II), paras. 5.43 and 5.50. back to text
82. (footnote original) Second Written Submission of Brazil, para. 47 (Annex A-10). back to text
83. (footnote original) See Exhibit BRA-54. back to text
84. (footnote original) Further, to the extent that Brazil might be implying that all ECAs grant prohibited export subsidies, we consider that such an argument blurs the distinction between financial contribution and benefit. That an ECA provides export credits demonstrates the existence of a financial contribution, not the conferral of a benefit thereby. back to text
85. (footnote original) We are making no findings, however, in this respect at this juncture. back to text
86. Panel Report on Canada — Aircraft Credits and Guarantees, paras. 7.80-7.81. back to text
87. Panel Report on Canada — Aircraft Credits and Guarantees, para. 7.93. back to text
88. (footnote original) This is not a case where EDC Corporate Account support necessarily confers a benefit, and where the only discretion available is that of not providing the support at all. We do not express a view as to whether our approach in this case would be equally applicable in such factual circumstances. Rather, this is a case where Canada has discretion to operate the EDC Corporate Account in such a manner that it does not confer a benefit. Further, we note that the facts before us are unlike those before the Appellate Body in Argentina — Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items. In that case, the Appellate Body was reviewing mandatory legislation. (See Argentina — Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items, Report of the Appellate Body, WT/DS56/AB/R, adopted 22 April 1998, paras. 49 and 54.) back to text
89. Panel Report on Canada — Aircraft Credits and Guarantees, para. 7.111. back to text
90. (footnote original) United States — Export Restraints, Report of the Panel, footnote, supra, para. 8.9 (emphasis in original). back to text
91. Panel Report on Canada — Aircraft Credits and Guarantees, paras. 7.130 and 7.132. back to text
92. Panel Report on US — Lead and Bismuth II, para. 6.59, quoting from the United States’ submission. back to text
93. Panel Report on US — Lead and Bismuth II, para. 6.71. back to text
94. Panel Report on US — Lead and Bismuth II, para. 6.81. back to text
95. Appellate Body on US — Lead and Bismuth II, para. 68. back to text
96. Panel Report on US — Lead and Bismuth II, para. 6.82. back to text
97. Appellate Body Report on US — Lead and Bismuth II, para. 68. back to text
98. Panel Report on US — Softwood Lumber III, paras. 7.68-7.69. back to text
99. Panel Report on US — Softwood Lumber III, para. 7.71. back to text
100. Panel Report on US — Softwood Lumber III, paras. 7.72 and 7.74. back to text
101. Appellate Body Report on US — Softwood Lumber IV, para. 124. back to text
102. Panel Report on Canada — Aircraft, para. 9.312. back to text
103. Panel Report on Canada — Aircraft Credits and Guarantees, para. 7.144. back to text
104. Appellate Body Report on Canada — Aircraft, para. 156. back to text
105. Appellate Body Report on Canada — Aircraft, paras. 155 and 158. back to text
106. Panel Report on Canada — Aircraft Credits and Guarantees, para. 7.345. back to text
107. Panel Report on US — Softwood Lumber III, para. 7.5. back to text
108. Panel Report on Canada — Aircraft, para. 9.117. back to text
109. Appellate Body Report on Brazil — Aircraft, para. 179. back to text
110. Appellate Body Report on Canada — Aircraft, para. 159. back to text
111. Appellate Body Report on Canada — Aircraft, para. 159. back to text
112. Panel Report on US — Softwood Lumber III, para. 7.59. back to text
113. Appellate Body Report on US — FSC, para. 93. back to text
114. Appellate Body Report on US — FSC, para. 93. back to text
115. Panel Report on US — FSC, para. 7.85. The Panel rejected the argument that the Understanding made clear that the exemption of foreign source income from taxation did not constitute the foregoing of revenue that is “otherwise due” and that the Understanding adopted by the GATT Council in conjunction with four panel reports on tax legislation had been incorporated into GATT 1994 or, in the alternative, constituted “subsequent practice” in the application of GATT 1947 within the meaning of the Vienna Convention. The Panel gave as their reason that although the 1981 Understanding was a “decision” within the meaning of Article XVI:1 of the WTO Agreement, it could not “provide guidance in understanding detailed provisions of the SCM Agreement which did not exist at the time the understanding was adopted”. back to text
116. Appellate Body Report on US — FSC, paras. 109-110 and 112. back to text
117. (footnote original) Appellate Body Report on Brazil — Desiccated Coconut, fn. 50. back to text
118. Appellate Body Report on US — FSC, paras. 115 and 117-118. back to text
119. Panel Report on US — Softwood Lumber IV, para. 7.116. back to text
120. Panel Report on US — Softwood Lumber IV, para. 7.123. back to text
121. Panel Report on US — Softwood Lumber IV, para. 7.124. back to text
122. Panel Report on Indonesia — Autos, para. 14.155. back to text
123. Panel Report on Canada — Aircraft Credits and Guarantees, para. 7.16. back to text
124. Panel Report on US — FSC (Article 21.5 — EC), paras. 8.54-8.55. On this issue, the Panel on US — FSC (Article 21.5 — EC) recalled that:
     “[T]he meaning of ‘contingent’ in that provision is conditional’ or ‘dependent for its existence upon’. We further recall that the legal standard expressed by the word ‘contingent’ is the same for both de jure or de facto contingency. There is a difference, however, in what evidence may be employed to establish that a subsidy is export-contingent.
     We recall the Appellate Body’s [Canada — Autos] statement that ‘de jure export contingency’ is demonstrated on the basis of the words of the relevant legislation, regulation or other legal instrument, as opposed to the ‘total configuration of the facts constituting and surrounding the grant of the subsidy.’ The Appellate Body [in Canada — Autos] has also recently stated, ‘that a subsidy is also properly held to be de jure export contingent where the condition to export is clearly, though implicitly, in the instrument comprising the measure. Thus, for a subsidy to be de jure export contingent, the underlying legal instrument does not always have to provide expressis verbis that the subsidy is available only upon fulfilment of the condition of export performance. Such conditionality can also be derived by necessary implication from the words actually used in the measure.’” [See Appellate Body Report on Canada — Autos, para. 118]. back to text
125. (footnote original) Appellate Body Report, Canada — Measures Affecting the Export of Civilian Aircraft (“Canada — Aircraft”), WT/DS70/AB/R, adopted 20 August 1999, paras. 162-180; Appellate Body Report, US — FSC, supra, footnote 3 paras. 96-121; Appellate Body Report, Canada — Autos, supra, footnote 56, paras. 95-117; Appellate Body Report, Canada — Aircraft (Article 21.5 — Brazil), supra, footnote 62, paras. 25-52. back to text
126. (footnote original) Appellate Body Report, supra, footnote 86, para. 166. back to text
127. Appellate Body Report on US — FSC (Article 21.5 — EC), para. 111. back to text
128. Appellate Body Report on Canada — Autos, para. 100. See also Panel Report on Canada — Aircraft Credits and Guarantees, para. 7.365 and Panel Report on US — FSC (Article 21.5 — EC), paras. 8.54-8.56. back to text
129. Appellate Body Report on Canada — Autos, para. 104. See also Appellate Body Report on Canada — Autos, para. 100. back to text
130. Panel Report on Canada — Aircraft, para. 6.52. back to text
131. Panel Report on Canada — Aircraft, para. 9.230. back to text
132. Appellate Body Report on Canada — Autos, para. 107. See also Panel Report on Canada — Aircraft Credits and Guarantees, paras. 7.365 and 7.367-7.368. back to text
133. Panel Report on Australia — Automotive Leather II, para. 9.55. back to text
134. Panel Report on Canada — Aircraft, para. 9.331. back to text
135. Appellate Body Report on Canada — Aircraft, para. 171. back to text
136. Appellate Body Report on Canada — Aircraft, para. 171, footnote 102. back to text
137. Appellate Body Report on Canada — Aircraft, paras. 166-167. back to text
138. (footnote original) In finding that the knowledge of the recipient is not part of the legal standard of de facto export contingency, we do not suggest that relevant objective evidence relating to the recipient can never be considered by a panel. back to text
139. Appellate Body Report on Canada — Aircraft, paras. 169-172. back to text
140. Panel Report on Canada — Aircraft, para. 9.326. back to text
141. Panel Report on Canada — Aircraft, para. 9.346. back to text
142. Appellate Body Report on Canada — Aircraft, paras. 169-173. See paragraph 96 above. back to text
143. Panel Report on Canada — Aircraft Credits and Guarantees, paras. 7.370-7.376. back to text
144. Panel Report on Australia — Automotive Leather II, paras. 9.56-9.57. back to text
145. Panel Report on Australia — Automotive Leather II, para. 9.70. back to text
146. Appellate Body Report on Canada — Aircraft, para. 169. back to text
147. Panel Report on Canada — Aircraft, paras. 9.337-9.338. back to text
148. Panel Report on Canada — Aircraft, para. 9.336. back to text
149. Appellate Body Report on Canada — Aircraft, para. 173. back to text
150. Panel Report on Australia — Automotive Leather II, para. 9.66. back to text
151. Panel Report on Australia — Automotive Leather II, para. 9.75. back to text
152. Panel Report on Canada — Aircraft, paras. 9.337-9.339. back to text
153. Appellate Body Report on Canada — Aircraft, para. 174. back to text
154. Panel Report on Australia — Leather II, para. 9.67. back to text
155. Panel Report on Canada — Aircraft Credits and Guarantees, paras. 7.370 and 7.372. back to text
156. Panel Report on Canada — Aircraft (Article 21.5 — Brazil), para. 5.33. back to text
157. Panel Report on Canada — Aircraft, para. 9.343. back to text
158. Panel Report on Canada — Aircraft, para. 9.343. back to text
159. Appellate Body Report on US — FSC (Article 21.5 — EC), paras. 114-115. back to text
160. Appellate Body Report on US — FSC (Article 21.5 — EC), para. 117. back to text
161. See also Panel Report on US — FSC (Article 21.5 — EC), paras. 8.64 and 8.72. Citing the Report of the Appellate Body in Canada — Aircraft, the Panel in US — FSC (Article 21.5 — EC) found that the fact that the measures at stake also involve subsidies with respect to goods produced outside the Member does not “vitiate” the export contingency with respect to Member-produced goods.
     “We do not believe that it is necessary that the Act involves exclusively subsidies that are export-dependent in order to make a finding that the Act involves a defined segment of subsidies.… The fact that the Act also involves subsidies with respect to goods produced outside the United States … does not, in our view, vitiate the export-contingency of the Act that we find in respect of US-produced goods. We find support for our view that export-contingent subsidies may exist in the context of a broader subsidies scheme in the reasoning of the Appellate Body in Canada — Aircraft. [para 179] and

…

[I]n our view, a way to cure export-contingency in this case would be to eliminate the conditionality on export by making the subsidy available irrespective of whether a product of national origin is sold in the domestic market or abroad. It is the differential treatment provided for in the Act — that is, if US-produced goods are exported, the subsidy is available, while if they are sold in the domestic market, it is not — that renders the Act contingent upon export performance within the meaning of Article 3.1(a). The addition of other circumstances or products in respect of which the subsidy may be available — i.e. foreign-produced goods — does not eliminate the conditionality of the subsidy upon export, and thus does not cure the inconsistency with Article 3.1(a) of the SCM Agreement.” back to text
162. Panel Report on Canada — Dairy (Article 21.5 — New Zealand and US), para. 6.100. back to text
163. Panel Report on Brazil — Aircraft, para. 7.56. back to text
164. Appellate Body Report on Brazil — Aircraft, para. 140. back to text
165. Appellate Body Report on Brazil — Aircraft, para. 141. back to text
166. Appellate Body Report on US — FSC, paras. 97-98. back to text
167. Appellate Body Report on US — FSC, paras. 99-100. back to text
168. Appellate Body Report on US — FSC, paras. 101 and 103. back to text
169. Appellate Body Report on Canada — Autos, para. 116. back to text
170. Panel Report on Canada — Dairy (Article 21.5 — New Zealand and US), para. 6.92. back to text
171. See also Panel Report on Canada — Dairy (Article 21.5 — New Zealand and US), para. 6.101. where the Panel exercised judicial economy on the claims made under Articles 1.1 and 3.1 of the SCM Agreement after having made an affirmative finding regarding the claim made under Article 9.1(c) of the Agreement on Agriculture. back to text
172. Appellate Body Report on Canada — Dairy (Article 21.5 — New Zealand and US), paras. 123-125. back to text
173. Panel Report on Canada — Dairy (Article 21.5 — New Zealand and US), para. 6.101. back to text
174. Appellate Body Report on Canada — Aircraft, para. 166. See para. 90 of this Chapter. back to text
175. Appellate Body Report on Canada — Autos, para. 123. back to text
176. Panel Report on Canada — Autos, paras. 10.220-10.222. back to text
177. Appellate Body Report on Canada — Autos, paras. 137-138. back to text
178. Appellate Body Report on Canada — Autos, paras. 139-143. back to text
179. Panel Report on Canada — Aircraft, para. 9.124. back to text
180. Panel Report on Canada — Aircraft, para. 9.124. back to text
181. Panel Report on Canada — Aircraft, para. 9.127. back to text
182. Panel Report on Canada — Aircraft, para. 9.129. back to text
183. Panel Report on Brazil — Aircraft (Article 21.5 — Canada), para. 6.11. back to text
184. Appellate Body Report on Brazil — Aircraft, para. 159. back to text
185. Panel Report on Brazil — Aircraft, paras. 7.71-7.72. back to text
186. Appellate Body Report on Brazil — Aircraft, paras. 156-157. back to text
187. Panel Report on Brazil — Aircraft (Article 21.5 — Canada), para. 6.14. back to text
188. Panel Report on US — FSC (Article 21.5 — EC), para. 8.110. back to text