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> Article 31
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> Annex I
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> Annex VI
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> Relationship with other WTO Agreements
> Declaration on Dispute Settlement Pursuant to the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade or Part V of the Agreement on Subsidies and Countervailing Measures
> Analytical Index main page
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I. General back to top
A. Object
and Purpose of the SCM Agreement
1. In Brazil — Aircraft, the Panel considered that the
object and purpose of the SCM Agreement is to impose multilateral
disciplines on subsidies that distort international trade:
“In our view, the object and purpose of the SCM Agreement is to
impose multilateral disciplines on subsidies which distort international
trade. It is for this reason that the SCM Agreement prohibits two
categories of subsidies — subsidies contingent upon exportation and
upon the use of domestic over imported goods — that are specifically
designed to affect trade.”(1)
2. In Canada — Aircraft, the Panel noted that the SCM
Agreement “does not contain any express statement of its object and
purpose”, and stated that “[w]e therefore consider it unwise to
attach undue importance to arguments concerning the object and purpose
of the SCM Agreement”. However, the Panel considered that the object
and purpose of the SCM Agreement could appropriately be summarized “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]’”.(2)
3. In US — Export Restraints, the Panel indicated its
agreement with the Panels in Brazil — Aircraft and Canada
— Aircraft with regard to their statements on the object and
purpose of the SCM Agreement.(3) The Panel concluded, however, that not
every government action or intervention is to be considered as a subsidy
that may distort trade and that, accordingly, the object and purpose of
the SCM Agreement can only be in respect of ‘subsidies’ as defined
in the Agreement:
“It does not follow from those statements, however, that every
government intervention that might in economic theory be deemed a
subsidy with the potential to distort trade is a subsidy within the
meaning of the SCM Agreement. Such an approach would mean that the ‘financial
contribution’ requirement would effectively be replaced by a
requirement that the government action in question be commonly
understood to be a subsidy that distorts trade… .
… [W]hile the object and purpose of the Agreement clearly is to
discipline subsidies that distort trade, this object and purpose can
only be in respect of ‘subsidies’ as defined in the
Agreement. This definition, which incorporates the notions of ‘financial
contribution’, ‘benefit’, and ‘specificity’, was drafted with
the express purpose of ensuring that not every government intervention
in the market would fall within the coverage of the Agreement”.(4)
4. In US — Carbon Steel, the Appellate Body offered the
following observations on the object and purpose of the SCM Agreement:
“[W]e turn to the object and purpose of the SCM Agreement.
We note, first, that the Agreement contains no preamble to guide us in
the task of ascertaining its object and purpose. In Brazil —
Desiccated Coconut, we observed that the ‘SCM Agreement contains
a set of rights and obligations that go well beyond merely applying and
interpreting Articles
VI, XVI and XXIII of the GATT
1947.’(5)
The SCM
Agreement defines the concept of ‘subsidy’, as well as the
conditions under which Members may not employ subsidies. It establishes
remedies when Members employ prohibited subsidies, and sets out
additional remedies available to Members whose trading interests are
harmed by another Member’s subsidization practices. Part V of the SCM
Agreement deals with one such remedy, permitting Members to levy countervailing
duties on imported products to offset the benefits of specific subsidies
bestowed on the manufacture, production or export of those goods.
However, Part V also conditions the right to apply such duties on the
demonstrated existence of three substantive conditions (subsidization,
injury, and a causal link between the two) and on compliance with its
procedural and substantive rules, notably the requirement that the
countervailing duty cannot exceed the amount of the subsidy. Taken as a
whole, the main object and purpose of the SCM Agreement is to
increase and improve GATT disciplines relating to the use of both
subsidies and countervailing measures.
We thus believe that the Panel properly identified, as among the
objectives of the SCM Agreement, the establishment of a framework
of rights and obligations relating to countervailing duties(6), and the
creation of a set of rules which WTO Members must respect in the use of
such duties.(7) Part V of the Agreement is aimed at striking a balance
between the right to impose countervailing duties to offset
subsidization that is causing injury, and the obligations that Members
must respect in order to do so.”(8)
5. The Panel in US — FSC (Article 21.5 — EC) rejected an
interpretation of Article 1.1(a)(1)(ii) on the grounds that this
interpretation would lead to a result that was “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”.(9)
The Panel stated that:
“In this regard, it is evident that the interpretation advanced by
the United States would be irreconcilable with that object and purpose,
given that it would offer governments ‘carte-blanche’ to
evade any effective disciplines, thereby creating fundamental
uncertainty and unpredictability. In short, such an approach would
eviscerate the subsidies disciplines in the SCM Agreement.”(10)
6. In US — Softwood Lumber IV, the Appellate Body upheld the
Panel’s finding and rejected a narrow interpretation of the term “goods”
in Article 1.1(a)(1)(iii). In the course of its analysis, the Appellate
Body stated that:
“[T]o accept Canada’s interpretation of the term ‘goods’
would, in our view, undermine the object and purpose of the SCM
Agreement, which is to strengthen and improve GATT disciplines
relating to the use of both subsidies and countervailing measures,
while, recognizing at the same time, the right of Members to impose such
measures under certain conditions. It is in furtherance of this
object and purpose that Article
1.1(a)(1)(iii) recognizes that subsidies
may be conferred, not only through monetary transfers, but also by the
provision of non-monetary inputs. Thus, to interpret the term ‘goods’
in Article 1.1(a)(1)(iii) narrowly, as Canada would have us do, would
permit the circumvention of subsidy disciplines in cases of financial
contributions granted in a form other than money, such as through the
provision of standing timber for the sole purpose of severing it from
land and processing it.”(11)
7. The Panel in Japan — DRAMs (Korea) observed that “one
of the purposes of the SCM Agreement is to interpret and clarify
concepts in Article VI of the GATT
1994,” and noted that:
“We note that the full title of the Tokyo Round Subsidies Code was
the “Agreement on Interpretation and Application of Articles
VI, XVI and XXIII of the General Agreement on Tariffs and Trade”.
The preamble to the Code clarified that the parties to the Code had
agreed to its terms desiring, inter alia, “to apply fully and
to interpret the provisions of Articles
VI, XVI and XXIII” of the
GATT, and to “elaborate rules for their application in order to
provide greater uniformity and certainty in their implementation”. The
full title of the SCM Agreement was shortened from the “Agreement
on Interpretation and Application of Articles
VI, XVI and
XXIII of the
General Agreement on Tariffs and Trade” to the “Agreement on
Subsidies and Countervailing Measures”. As the Appellate Body
explained in Brazil — Desiccated Coconut, the reason for the
change was that the SCM Agreement “contains a set of rights and
obligations that go well beyond merely applying and interpreting Articles
VI, XVI and XXIII of the GATT 1947” (Appellate Body Report, Brazil
— Desiccated Coconut, page 17). We note that Article 11.2 of the
SCM Agreement refers to injury “within the meaning of Article VI of
GATT 1994 as interpreted by this Agreement”, (emphasis
supplied) and that Article 32.1 of the SCM Agreement refers to
the provisions of GATT 1994 “as interpreted by this Agreement”.
(emphasis supplied)”(12)
8. In US — Anti-Dumping and Countervailing Duties (China),
the Appellate Body discussed the object and purpose of the SCM Agreement
in the context of interpreting the scope of the term “public body”
in Article 1.1(a)(1):
“We note, first, that the SCM Agreement does not contain a
preamble or an explicit indication of its object and purpose. However,
the Appellate Body has stated that the object and purpose of the SCM
Agreement is “to increase and improve GATT disciplines relating to
the use of both subsidies and countervailing measures”.(13) Furthermore,
in US — Softwood Lumber IV, the Appellate Body noted that the
object and purpose of the SCM Agreement is to “strengthen and
improve GATT disciplines relating to the use of both subsidies and
countervailing measures, while, recognizing at the same time, the right
of Members to impose such measures under certain conditions”.(14)
Finally, we note that, with respect to the object and purpose of the SCM
Agreement, the Appellate Body stated in US — Countervailing
Duty Investigation on DRAMS that the SCM Agreement “reflects
a delicate balance between the Members that sought to impose more
disciplines on the use of subsidies and those that sought to impose more
disciplines on the application of countervailing measures”.(15)
As we see it, considerations of object and purpose are of limited use
in delimiting the scope of the term “public body” in Article
1.1(a)(1). This is so because the question of whether an entity
constitutes a public body is not tantamount to the question of
whether measures taken by that entity fall within the ambit of the SCM
Agreement. A finding that a particular entity does not constitute a
public body does not, without more, exclude that entity’s conduct from
the scope of the SCM Agreement. Such measures may still be
attributed to a government and thus fall within the ambit of the SCM
Agreement pursuant to Article 1.1(a)(1)(iv) if the entity is a
private entity entrusted or directed by a government or by a public
body.(16)
We consider that the Panel’s object and purpose analysis did not
take full account of the SCM Agreement’s disciplines. It is
important to keep in mind that entities that are considered not to be
public bodies are not, thereby, immediately excluded from the SCM
Agreement’s disciplines or from the reach of investigating
authorities in a countervailing duty investigation. The Panel was
concerned with what it saw as the implications of too narrow an
interpretation. As we see it, however, too broad an interpretation of
the term “public body” could equally risk upsetting the delicate
balance embodied in the SCM Agreement because it could serve as a
license for investigating authorities to dispense with an analysis of
entrustment and direction and instead find entities with any connection
to government to be public bodies. Thus, in our view, considerations of
the object and purpose of the SCM Agreement do not favour either
a broad or a narrow interpretation of the term “public body”. We
therefore disagree with the Panel’s finding that interpreting “any
public body” to mean any entity that is controlled by the government
best serves the object and purpose of the SCM Agreement.”(17)
Part I: General Provisions
II. Article 1
back to top
A. Text of Article 1
Article 1: Definition of a Subsidy
1.1
For the purpose of this Agreement, a subsidy shall be deemed to
exist if:
(a)(1)
there is a financial contribution by a government or any
public body within the territory of a Member (referred to in this
Agreement as “government”), i.e. where:
(i)
a government practice involves a direct transfer of funds (e.g.
grants, loans, and equity infusion), potential direct transfers of funds
or liabilities (e.g. loan guarantees);
(ii)
government revenue that is otherwise due is foregone or not
collected (e.g. fiscal incentives such as tax credits)(1);
(footnote original)
1 In accordance with the provisions of
Article XVI of GATT 1994 (Note to Article
XVI) and the provisions of
Annexes I through III of this
Agreement, the exemption of an exported
product from duties or taxes borne by the like product when destined for
domestic consumption, or the remission of such duties or taxes in
amounts not in excess of those which have accrued, shall not be deemed
to be a subsidy.
(iii)
a government provides goods or services other than general
infrastructure, or purchases goods;
(iv)
a government makes payments to a funding mechanism, or entrusts
or directs a private body to carry out one or more of the type of
functions illustrated in (i) to (iii) above which would normally be
vested in the government and the practice, in no real sense, differs
from practices normally followed by governments;
or
(a) (2)
there is any form of income or price support in the sense of
Article XVI of GATT 1994;
and
(b)
a benefit is thereby conferred.
1.2
A subsidy as defined in paragraph 1 shall be subject to the
provisions of Part II or shall be subject to the provisions of
Part III
or V only if such a subsidy is specific in accordance with the
provisions of Article 2.
B. Interpretation and Application of Article 1
1. General
(a) Distinction between “financial contribution” and “benefit”
9. In Brazil — Aircraft, the Appellate Body emphasized that
“a ‘financial contribution’ and a ‘benefit’ [are] two separate
legal elements in Article 1.1 of the SCM Agreement, which together
determine whether a subsidy exists”.(18)
10. Along the same lines, the Panel in US — Export Restraints,
emphasized the distinction between “financial contribution” and “benefit”:
“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’(19),
which the panel in that case had erroneously blended together by
importing the concept of benefit into the definition of financial
contribution.”(20)
11. In US — Softwood Lumber IV, the Appellate Body referred
again to the two distinct elements:
“The concept of subsidy defined in
Article 1 of the SCM Agreement captures situations in which something of economic value
is transferred by a government to the advantage of a recipient. A
subsidy is deemed to exist where two distinct elements are present.(21)
First, there must be a financial contribution by a government, or income
or price support. Secondly, any financial contribution, or income or
price support, must confer a benefit.”(22)
2. Article 1.1(a)(1): “financial contribution”
(a) General
12. 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:
“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.”(23)
13. In US — Softwood Lumber IV, the Appellate Body stated
that:
“An 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. A wide range
of transactions falls within the meaning of “financial contribution”
in Article 1.1(a)(1). According to paragraphs
(i) and (ii) of Article 1.1(a)(1), a financial contribution may be made through a direct
transfer of funds by a government, or the foregoing of government
revenue that is otherwise due. Paragraph (iii) of Article
1.1(a)(1) recognizes that, in addition to such monetary contributions, a
contribution having financial value can also be made in kind through
governments providing goods or services, or through government
purchases. Paragraph (iv) of Article
1.1(a)(1) recognizes that
paragraphs (i)–(iii) could be circumvented by a government making
payments to a funding mechanism or through entrusting or directing a
private body to make a financial contribution. It accordingly specifies
that these kinds of actions are financial contributions as well. This
range of government measures capable of providing subsidies is broadened
still further by the concept of “income or price support” in
paragraph (2) of Article 1.1(a).”(24)
14. However, in US — Softwood Lumber IV the Appellate Body
also noted its agreement with the Panel in US — Export Restraints that:
“[N]ot all government measures capable of conferring benefits would
necessarily fall within Article 1.1(a). If that were the case, there
would be no need for Article 1.1(a), because all government measures
conferring benefits, per se, would be subsidies. In this regard,
we find informative the discussion of the negotiating history of the SCM
Agreement contained in the panel report in US — Export
Restraints.”(25)
15. In US — Large Civil Aircraft
(2nd complaint), the Panel
observed that “Article 1.1(a)(1) is a definitional provision that sets
forth an exhaustive, closed list (“… i.e. where …”) of the types
of transactions that constitute financial contributions under the SCM
Agreement.”(26)
(b) “by a government or any public body”
(i) “Public body”
16. In Korea — Commercial Vessels, the European Communities
argued that the Export-Import Bank of Korea (KEXIM) was a public body on
the grounds that, inter alia, it was created and operated on the
basis of a public statute giving the GOK control over its decisionmaking.
The Panel agreed with the EC that KEXIM was a public body because it was
controlled by government (or other public bodies), and that KAMCO, KDB
and IBK were public bodies also, because they were controlled by the
Korean government:
“[A]n entity will constitute a ‘public body’ if it is
controlled by the government (or other public bodies). If an entity is
controlled by the government (or other public bodies), then any action
by that entity is attributable to the government, and should therefore
fall within the scope of Article 1.1(a)(1) of the SCM Agreement.”(27)
17. In US — Anti-Dumping and Countervailing Duties (China),
the Appellate Body reversed the Panel’s finding that the term “public
body” in Article 1.1(a)(1) of the SCM Agreement means “any entity
controlled by a government”, and found instead that the term “public
body” in the context of Article 1.1.(a)(1) of the SCM Agreement covers
only those entities that possesses, exercise or are vested with
governmental authority:
“Having completed our analysis of the interpretative elements
prescribed by Article 31 of the Vienna Convention, we reach the
following conclusions. We see the concept of “public body” as
sharing certain attributes with the concept of “government”. A
public body within the meaning of Article 1.1.(a)(1) of the SCM
Agreement must be an entity that possesses, exercises or is vested
with governmental authority. Yet, just as no two governments are exactly
alike, the precise contours and characteristics of a public body are
bound to differ from entity to entity, State to State, and case to case.
Panels or investigating authorities confronted with the question of
whether conduct falling within the scope of Article 1.1.(a)(1) is that
of a public body will be in a position to answer that question only by
conducting a proper evaluation of the core features of the entity
concerned, and its relationship with government in the narrow sense.
In some cases, such as when a statute or other legal instrument
expressly vests authority in the entity concerned, determining that such
entity is a public body may be a straightforward exercise. In others,
the picture may be more mixed, and the challenge more complex. The same
entity may possess certain features suggesting it is a public body, and
others that suggest that it is a private body.(28)
We do not, for example,
consider that the absence of an express statutory delegation of
authority necessarily precludes a determination that a particular entity
is a public body. What matters is whether an entity is vested
with authority to exercise governmental functions, rather than how that
is achieved. There are many different ways in which government in the
narrow sense could provide entities with authority. Accordingly,
different types of evidence may be relevant to showing that such
authority has been bestowed on a particular entity. Evidence that an
entity is, in fact, exercising governmental functions may serve as
evidence that it possesses or has been vested with governmental
authority, particularly where such evidence points to a sustained and
systematic practice. It follows, in our view, that evidence that a
government exercises meaningful control over an entity and its conduct
may serve, in certain circumstances, as evidence that the relevant
entity possesses governmental authority and exercises such authority in
the performance of governmental functions. We stress, however, that,
apart from an express delegation of authority in a legal instrument, the
existence of mere formal links between an entity and government in the
narrow sense is unlikely to suffice to establish the necessary
possession of governmental authority. Thus, for example, the mere fact
that a government is the majority shareholder of an entity does not
demonstrate that the government exercises meaningful control over the
conduct of that entity, much less that the government has bestowed it
with governmental authority. In some instances, however, where the
evidence shows that the formal indicia of government control are
manifold, and there is also evidence that such control has been
exercised in a meaningful way, then such evidence may permit an
inference that the entity concerned is exercising governmental
authority.”(29)
(ii) Financial contribution “by” individual public
entities or private bodies
18. In Korea — Commercial Vessels, the Panel rejected Korea’s
argument that there were no financial contributions “by” individual
public bodies or private bodies in the restructuring of the Korean
shipyards because those restructurings were effected collectively,
either by the creditors’ councils, meetings of interested parties, or
court decisions. The Panel concluded that where a public body
participates in a loan agreed by a creditors’ council, the part of the
loan attributable to the public body constitutes an individual financial
contribution by that public body under Article 1.1(a) of the SCM
Agreement. The Panel considered that:
“[E]ntities participating in a financial contribution must assume
responsibility for that participation. Thus, to the extent that a public
body participates in a loan agreed by a creditors’ council, that part
of the loan attributable to the public body may be treated as an
individual financial contribution by that public body falling within the
scope of Article 1.1(a) of the SCM Agreement. Otherwise the
disciplines of the SCM Agreement could be easily circumvented by
groups of public bodies deciding collectively, or under court approval,
to provide financial contributions”.(30)
(c) Article 1.1(a)(1)(i): transfer of funds
(i) “a government practice”
19. The Panel in Korea — Commercial Vessels found that the
loans and loan guarantees at issue fell under Article 1.1
(a)(1)(i),
rejecting Korea’s argument that “financial contribution” exists
only if a public body is engaged in “government practice,” such as
regulation or taxation:
“Article
1.1(a)(1) states in relevant part that the term ‘government’
refers to both ‘government’ and ‘public body’. Since the phrase
‘government practice’ in Article 1.1(a)(1)(i) therefore refers to
the practice of both governments and public bodies, the practice at
issue need not necessarily be purely “governmental” in the narrow
sense advocated by Korea. In this regard, we consider that the concept
of ‘financial contribution’ is writ broadly to cover government and
public body actions that might involve subsidization. Whether the
government or public body action in fact gives rise to subsidization
will depend on whether it gives rise to a ‘benefit’. Since the
concept of ‘benefit’ acts as a screen to filter out commercial
conduct, it is not necessary to introduce such a screen into the concept
of ‘financial contribution’.”(31)
20. The Panel in Korea — Commercial Vessels concluded that
the phrase “government practice” is used to denote the author of the
action, rather than the nature of the action and that “‘[g]overnment
practice’ therefore covers all acts of governments or public bodies,
irrespective of whether or not they involve the exercise of regulatory
powers or taxation authority.”(32)
(ii) “direct transfer of funds”
21. In Korea — Commercial Vessels, Korea argued that
transactions involving debt-for-equity swaps and modifications of loan
repayment terms are not covered by Article 1.1(a)(1)(i) because they do
not involve any transfer of (new) funds. The Panel was not persuaded:
“We are not persuaded by Korea’s arguments that
debt-for-equity
swaps and interest reductions and deferrals are not financial
contributions. In the first place, we recall that there is a financial
contribution in the sense of Article 1.1(a)(1)(i) of the SCM
Agreement if there is a “direct transfer of funds”, and that
grants, loans and equity infusions are listed only as three possible
examples of such transfers. Thus, we view Article
1.1(a)(1) as
identifying in its respective subparagraphs the kinds of instruments or
transactions that could be considered to be “financial contributions”.
Of course these instruments would only be covered by the Agreement if
they were made “by a government or public body”, and they would only
be subsidies covered by the Agreement if they both conferred a benefit
and were specific. Thus, the concept of financial contribution is but
one in a set of cumulative, and independent, elements all of which must
be present for a measure to be regulated by the SCM Agreement.
We find the examples listed in Article 1.1(a)(1)(i) to be
illuminating in respect of the scope of the term “direct transfer of
funds”. Most importantly, considering the “medium of exchange” in
the listed examples, we note that all of the examples involve transfers
of money (“funds”), as opposed to in-kind transfers (of goods or
services, in the sense of Article
1.1(a)(1)(iii)). The fact that the
listed kinds of direct transfers of funds (grants, loans and equity
infusions) are identified as only examples clearly indicates that there
may well be other types of instruments that would equally constitute
direct transfers of funds in the sense of Article
1.1(a)(1)(i).
Turning to the particular cases of the transactions involved in the
restructuring, we find that all of them are of the same nature as those
explicitly listed in Article 1.1(a)(1)(i). First we note that interest
reductions and deferrals are similar to new loans, as they involve a
renegotiation / extension of the terms of the original loan. We see no
reason why loans would constitute financial contributions while interest
reductions and deferrals would not. Further, we consider that interest /
debt forgiveness is comparable to a cash grant, as funds that were
previously provided as a loan, against interest, are now provided for
free, given the removal of the repayment obligation. All of these
transactions therefore constitute direct transfers of funds in the sense
of Article 1.1(a)(1)(i) of the SCM Agreement. Regarding
debt-for-equity swaps, we note that equity infusions are explicitly
listed as a type of direct transfer of funds in Article
1.1(a)(1)(i).
Since we have also found that debt forgiveness constitutes a direct
transfer of funds, we see no reason why a combination of equity infusion
and debt forgiveness should fall outside the scope of that provision.
The reason why creditors agree to such transactions (i.e.,
whether or not it is in order to preserve going concern value) is not
relevant to the issue of whether or not the transactions constitute
financial contributions. Rather, it relates to the issue of benefit (in
the sense of whether or not creditors operating on market principles
would have undertaken such transactions on the same terms).
….
… Equity infusions and debt-for-equity swaps have the same effect,
in the sense that equity changes hands against consideration in both
cases (and subsidization arises if the amount of consideration is less
than the market would have provided). Also, a debt/equity swap comprises
an element of equity infusion.”(33)
22. Korea advanced a similar argument in Japan — DRAMs (Korea),
but that Panel was also not persuaded:
“We do not accept that the relinquishment or modification of claims
may not, in certain circumstances, be treated as the transfer of new
claims, giving rise to new rights and obligations. For example, once one
analyses what actually occurs in the transaction, the modification of an
existing loan may properly be treated as the transfer of new rights to
the recipient of the modified loan. The borrower’s old rights no
longer exist. They have been replaced by new rights. In this sense, the
modified loan may properly be treated as a new loan. Thus, the
modification of a loan through debt forgiveness involves the transfer of
new rights to the borrower, who is now liberated of the obligation to
repay the debt, and instead has the right to use the money for free.
Similarly, the modification of a loan through an extension of the loan
maturity involves the transfer of new rights to the borrower, who is now
entitled to borrow the money for a longer period of time. Since the new
rights that are transferred in such transactions have monetary value,
and may be counted in a (legal or natural) person’s capital, we
consider that such transactions may properly be treated as “direct
transfers of funds” in the meaning of Article 1.1 (a)(1)(i) of the SCM
Agreement. We apply the same analysis to debt-to-equity swaps, for
the relinquishment and modification of claims inherent in such
transactions similarly results in new rights, or claims, being
transferred to the former debtor.”(34)
23. The Panel continued:
“Furthermore, we note that in Korea-Commercial Vessels,
Korea advanced essentially the same argument that it advances here. In
that case, Korea argued that the debt-to-equity swaps, interest rate
reductions, interest forgiveness and interest deferral at issue did not
constitute “financial contributions” because there was “no
transfer of pecuniary value” to the companies under workout or
corporate reorganization. The panel rejected Korea’s argument, and
found that all of those transactions involved a “direct transfer of
funds” within the meaning of Article
1.1(a)(1)(i): …
…
We agree with this analysis by the panel in Korea — Commercial
Vessels. We agree in particular that it is appropriate to look
beyond the simple form of a transaction, and analyze its effects, in
determining whether or not a transaction constitutes a “direct
transfer of funds”.”(35)
24. The Appellate Body upheld the findings of the Panel in Japan
— DRAMs (Korea). The Appellate Body reasoned that:
“In our view, the term “funds” encompasses not only “money”
but also financial resources and other financial claims more generally.
The concept of “transfer of funds” adopted by Korea is too literal
and mechanistic because it fails to encapsulate how financial
transactions give rise to an alteration of obligations from which an
accrual of financial resources results. We are unable to agree that
direct transfers of funds, as contemplated in Article 1.1(a)
(1)(i), are
confined to situations where there is an incremental flow of funds to
the recipient that enhances the net worth of the recipient. Therefore,
the Panel did not err in finding that the JIA properly characterized the
modification of the terms of pre-existing loans in the present case as a
direct transfer of funds.
We observe that the words “grants, loans, and equity infusion”
are preceded by the abbreviation “e.g.”, which indicates that
grants, loans, and equity infusion are cited examples of transactions
falling within the scope of Article
1.1(a)(1)(i). This shows that
transactions that are similar to those expressly listed are also covered
by the provision. Debt forgiveness, which extinguishes the claims of a
creditor, is a form of performance by which the borrower is taken to
have repaid the loan to the lender. The extension of a loan maturity
enables the borrower to enjoy the benefit of the loan for an extended
period of time. An interest rate reduction lowers the debt servicing
burden of the borrower. In all of these cases, the financial position of
the borrower is improved and therefore there is a direct transfer of
funds within the meaning of Article
1.1(a)(1)(i).
With respect to Korea’s argument that debt-to-equity swaps cannot
be considered as direct transfers of funds given that no money is
transferred thereby to the recipient, the Panel reasoned that “the
relinquishment and modification of claims inherent in such transactions
similarly result[] in new rights, or claims, being transferred to the
former debtor.” Again, we see no error in the Panel’s analysis.
Debt-to-equity swaps replace debt with equity, and in a case such as
this, when the debt-to-equity swap is intended to address the
deteriorating financial condition of the recipient company, the
cancellation of the debt amounts to a direct transfer of funds to the
company.”(36)
25. Along the same lines, the Panel in EC and certain member
States — Large Civil Aircraft concluded that a share transfer
involved a “direct transfer of funds” within the meaning of Article
1.1(a)(1)(i):
“We now turn to the United States’ claim that the 1992
acquisition by MBB of KfW’s 20 percent equity interest in Deutsche
Airbus was also a subsidy. We first consider whether the transfer by KfW
of its shares in Deutsche Airbus to MBB is a “financial contribution”
in the sense of Article 1.1(a)(1)(i) of the SCM
Agreement. The Appellate
Body has indicated that the term “funds” in Article 1.1(a)(1)(i)
encompasses not only “money” but also financial resources and other
financial claims more generally.(37) We regard shares in a company as
financial claims to a stream of income (in the form of dividends paid
out of a company’s profits) and to a share in the capital of the
company on its liquidation. Therefore, we consider that shares in a
company fall within the scope of the term “funds” in Article
1.1(a)(1)(i), and that a transfer of shares falls within the scope of
the term “direct transfer of funds”. We thus conclude that the
transfer by KfW of its 20 percent equity interest in Deutsche Airbus to
MBB was a “financial contribution” within the meaning of Article
1.1(a)(1)(i).”(38)
26. Applying similar reasoning, the Panel in EC and certain member
States — Large Civil Aircraft also found that the relinquishment
of a government-held debt may also constitute a “direct transfer of
funds” within the meaning of Article
1.1(a)(1)(i):
“The United States characterizes the financial contribution arising
out of the 1998 debt settlement as “debt forgiveness”. Our approach
is, rather, to determine first, whether the 1998 debt settlement
involves a financial contribution within the meaning of Article
1.1(a)(1) of the SCM Agreement, and second, whether that financial
contribution confers a benefit on Deutsche Airbus within the meaning of
Article 1.1(b) of the SCM Agreement. If we conclude that the financial
contribution confers a “benefit” on Deutsche Airbus, then it may be
that the subsidy in question could be described as “debt forgiveness”
in an amount equal to the amount of benefit found to have been
conferred. However, the first issue for us to determine is whether the
1998 debt settlement constitutes one of the forms of financial
contribution set forth in Article 1.1(a)(1). We conclude that the 1998
debt settlement constitutes a financial contribution in the form of a
“direct transfer of funds” within the meaning of Article
1.1(a)(1)(i) of the SCM Agreement. We note that, in Japan — DRAMS,
the Appellate Body interpreted the term “funds” in Article
1.1(a)(1)(i) broadly, as encompassing not only “money” but also “financial
resources and other financial claims more generally.”(39) Debt
owed to the government is an asset held by the government consisting of
certain financial claims (i.e., rights to payment of money
or equivalents) that the government has against a debtor. A settlement
of government-held debt essentially involves the transfer to the debtor
of the government’s financial claims against that debtor, resulting in
the cancellation of the debt. We therefore regard a settlement of debt
as a “direct transfer of funds” by a government, and thus a “financial
contribution” within the meaning of Article 1.1(a)(1)(i) of the SCM
Agreement.”(40)
27. In US — Large Civil Aircraft
(2nd complaint), the Panel
found that transactions involving purchases of services are excluded
from the scope of Article 1.1(a)(1). The Panel recognized that the plain
meaning of “transfer of funds” is broad, but considered it necessary
to interpret the terms of Article 1.1(a)(1)(i) in their context:
“Article 1.1(a)(1)(i) provides in relevant part that a financial
contribution exists where “a government practice involves a direct
transfer of funds (e.g. grants, loans, and equity infusion)”. We accept
that if the terms of Article 1.1(a)(1)(i) of the SCM Agreement are read
in isolation, the ordinary meaning of the words “a government practice
involves a direct transfer of funds” might be broad enough to cover
purchases of services. First, there is nothing in the dictionary
definitions of these terms to suggest that transactions properly
characterized as purchases of services fall outside of their scope: the
definition of “transfer” is “a conveyance from one person to
another”(41), and the definition of “funds” is “a stock or sum of
money, esp. one set apart for a particular purpose” or “financial
resources”.(42) Second, there is no qualifying or limiting language in
the text of this provision. Third, one of the examples of a “direct
transfer of funds” given in Article 1.1(a)(1)(i) is that of “equity
infusion”, which refers to a situation in which a government “purchases”
something (i.e. shares in a company).(43) Fourth, previous panels and the
Appellate Body have not given a restrictive interpretation to these
terms.(44) However, the terms of
Article 1.1(a)(1)(i) must be read in
their context.”(45)
(iii) “potential direct transfers of funds”
28. 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”.(46) The Appellate Body 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
that case, and declared the Panel findings on this point to be moot.(47)
29. The Panel in Brazil — Aircraft 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.”(48)
30. In EC and certain member States — Large Civil Aircraft,
the Panel set forth the following interpretation of the concept of a “potential
direct transfer of funds”:
“The explicit identification of “loan guarantees” as an example
of “potential direct transfers of funds or liabilities” is
instructive for the purpose of understanding the types of measures that
may constitute “potential direct transfers of funds or liabilities”.
A loan guarantee may be described as a legally binding promise to repay
the outstanding balance of a loan when the loan recipient defaults on
its repayments. Thus, it is the promise to repay an outstanding loan in
the event of default that is the financial contribution (i.e.,
the potential direct transfer of funds), not the funds that may be
transferred in the future in the event of default.
…
In our view, the fact that a loan guarantee will confer a benefit on
a recipient when it enables that recipient to obtain the guaranteed loan
at a below market price implies that the benefit of a potential direct
transfer of funds arises from the mere existence of an obligation
to make a direct transfer of funds in the event of default. Thus, when
assessing whether a transaction involves a “potential direct transfer{
} of funds”, the focus should be on the existence of a government
practice that involves an obligation to make a direct transfer of funds
which, in and of itself, is claimed and capable of conferring a
benefit on the recipient that is separate and independent from the
benefit that might be conferred from any future transfer of funds. This
can be contrasted with financial contributions in the form of direct
transfers of funds, which will result in a benefit being conferred on a
recipient when there is a government practice that involves a direct
transfer of funds.
…
As we have previously explained, the explicit identification of “loan
guarantees” as an example of a “potential direct transfers of funds
or liabilities” is instructive for the purpose of understanding the
types of measures that may constitute “potential direct transfers of
funds or liabilities”. A loan guarantee may be described as a legally
binding promise to repay the outstanding balance of a loan when the loan
recipient defaults on its repayments. Thus, it is the promise to repay
an outstanding loan in the event of default that is the financial
contribution (i.e., the potential direct transfer of funds), not
the funds that may be transferred in the future in the event of default.
…
In respect of the funding that was committed, but not disbursed under
LuFo III as of 1 July 2005, the European Communities’ principal
argument in response to the United States’ claims amounts to the
submission that a government commitment of funds, without any actual
disbursement of those funds, cannot amount to a “financial
contribution”. However, as we have noted elsewhere in this Report, a
commitment to provide funds may well be a “financial contribution”
if in the form of a “potential direct transfer of funds”. As we
understand it, the United States argues that the funds that were
committed but not disbursed to Airbus under the LuFo III programme
represent precisely this form of “financial contribution”. We agree.
Just as the disbursement of funds is a “direct transfer of funds”, a
commitment — or a promise — to disburse funds may be properly
characterized as a “potential direct transfer of funds” falling
within the definition of a “financial contribution” set out in
Article 1.1(a)(1)(i) of the SCM Agreement. Thus, on the basis of the
parties’ submissions and the evidence that has been presented, we find
that as of 1 July 2005, the German Federal government provided Airbus
with a “potential direct transfer of funds” in the form of a
commitment to transfer approximately EUR [***] to Airbus under the LuFo
III programme.”(49)
31. The Panel in US — Large Civil Aircraft
(2nd complaint) also
considered the meaning of “potential direct transfer of funds”. The
principal point of contention between the parties was whether a “potential
direct transfer of funds” can only exist when a direct transfer of
funds is required upon the occurrence of a “triggering event” or
condition, or whether it can be found to exist where a potential direct
transfer of funds is one of a number of possible consequences following
the fulfilment of a predefined condition. The Panel considered that the
“mere possibility that a government may transfer funds” upon the
fulfilment of a pre-defined condition will not be enough to satisfy the
definition of a financial contribution:
“In this regard, we note that the definition of “potential” is
“possible as opposed to actual, capable of coming into being or
action; latent”.(50) On its face, this definition does not appear to
exclude from the reach of Article 1.1(a)(1)(i) of the SCM Agreement the
possible transfer of funds identified by the European Communities.
However, accepting the European Communities’ submissions on this issue
would require a broad interpretation of potential direct transfer of
funds. The European Communities’ position is essentially that any time
there is a possibility that the government will transfer funds in the
future, upon the occurrence of a defined triggering event, this is a
financial contribution. The contextual guidance provided by the example
of a “potential direct transfer” in Article
1.1(a)(1)(i), namely a
loan guarantee, suggests that this was not intended to be the case. A
loan guarantee is a commitment by the government to assume
responsibility for a loan when a defined set of circumstances arise.
Therefore, the example chosen in Article 1.1(a)(1)(i) suggests that the
mere possibility that a government may transfer funds upon the
fulfilment of a pre-defined condition will not be enough to satisfy the
definition of a financial contribution. In our view, a potential direct
transfer of funds is a “possibility” due to uncertainty about
whether the triggering event will occur, rather than uncertainty about
whether the transfer of funds will follow once the pre-defined event has
transpired.”(51)
(d) Article 1.1(a)(1)(ii): “government revenue otherwise due is
foregone or not collected”
32. In US — FSC, the Appellate Body held that in determining
if revenue “otherwise due” has been foregone, a comparison must be
made between the revenue actually raised and the revenue that would have
been raised “otherwise”. The Panel and the Appellate Body agreed
that the basis of comparison in determining what would otherwise have
been due “must be the tax rules applied by the Member in question”.(52)
33. In US — FSC, the Panel applied a “but for” test in
determining whether revenue had been foregone that was “otherwise due”.
This involved examining the situation that would have existed but for
the measure in question and determining whether there would have been a
higher tax liability in the absence of the measure.(53) In US — FSC,
the Appellate Body expressed some reservations about whether the “but
for” test is an appropriate general test that should apply in all
situations.(54) The Appellate Body reasoned:
“[T]he 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’…
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’. In the present case, this
legal standard provides a sound basis for comparison because it is not
difficult to establish in what way the … income … 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 … It would, we
believe, not be difficult to circumvent such a test … We observe,
therefore, that, although the Panel’s ‘but for’ test works in this
case, it may not work in other cases.”(55)
34. In US — FSC (Article 21.5 — EC), the Appellate Body
clarified that there may be situations where it is possible to apply a
“but for” test, namely where the measure at issue is an “exception”
to a “general” rule of taxation.(56)
However, a panel is not always
required to identify the “general” rule of taxation. In many
situations, it may be difficult to do so.(57) In such circumstances:
“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 …
[T]he 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.”(58)
35. In Canada — Autos, the Appellate Body found a foregoing
of revenue “otherwise due” by comparing Canada’s “normal MFN
duty rate” for imports of motor vehicles with the import duty
exemption at issue in that case:
“We note, once more, that Canada has established a normal MFN duty
rate for imports of motor vehicles of 6.1 per cent. Absent the import
duty exemption, this duty would be paid on imports of motor vehicles.
Thus, through the measure in dispute, the Government of Canada has, in
the words of United States — FSC, “given up an entitlement to
raise revenue that it could ‘otherwise’ have raised.” More
specifically, through the import duty exemption, Canada has ignored the
“defined, normative benchmark” that it established for itself for
import duties on motor vehicles under its normal MFN rate and, in so
doing, has foregone “government revenue that is otherwise due”.”(59)
36. 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”.(60) 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.”(61)
37. In US — Large Civil Aircraft (2nd complaint), the Panel
found that certain measures involved a foregoing of revenue otherwise
due within the meaning of Article
1.1(a)(1)(ii). The Panel recalled the
Appellate Body’s guidance in US — FSC and US — FSC
(Article 21.5 — EC), which it summarized as follows:
“Therefore, the Appellate Body’s analysis suggests that where it
is possible to identify a general rule of taxation applied by the Member
in question, a “but for” test can be applied. In other situations,
the challenged taxation measure should be compared to the treatment
applied to comparable income, for taxpayers in comparable circumstances
in the jurisdiction in issue.”(62)
38. The Panel in US — Large Civil Aircraft
(2nd complaint) then
found that “[a]pplying the guidance from the Appellate Body to the Washington
B&O tax reduction, a review of the evidence before the Panel
reveals that there is indeed a general rate of taxation applicable to
manufacturing activities in the State of Washington and that the tax
reduction provided to aircraft manufacturing activities constitutes an
exception to this rule”.(63) The Panel explained that:
“In these circumstances, where it is not difficult to identify a
general rule of taxation and exceptions to it, the guidance provided by
the Appellate Body suggests that a “but for” test can be applied.
The relevant question is whether, “but for” the challenged tax
reduction, a higher B&O tax rate would otherwise apply to
manufacturers of commercial aircraft and their components. The answer to
this question is in the affirmative. The standard rate for manufacturing
and wholesaling activities is 0.484 per cent and for retailing
activities is 0.471 per cent. Were it not for the “preferential rate”
introduced by HB 2294, aircraft manufacturers would be subject to the
rates of 0.484 per cent for manufacturing and wholesaling and 0.471 per
cent for retail sales. For these reasons, the Panel finds that the
reductions in the B&O tax rates constitute the foregoing of revenue
otherwise due and, as a result, are a financial contribution under
Article 1.1(a)(1)(ii) of the SCM Agreement.”(64)
(e) Article 1.1(a)(1)(iii): a government provides goods or services
other than general infrastructure, or purchases goods
(i) General
39. 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,”(65) 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.”(66)
(ii) “provides”
40. In US — Softwood Lumber IV, the Appellate Body upheld
the Panel’s finding that the stumpage arrangements at issue “provide”
goods within the meaning of Article
1.1(a)(1)(iii):
“[W]e begin with the ordinary meaning of the term. Before the
Panel, the United States pointed to a definition of the term “provides”,
which suggested that the term means, inter alia, to “supply or
furnish for use; make available”.(67) This definition is the same as
that relied upon by USDOC in making its determination that “regardless
of whether the Provinces are supplying timber or making it available
through a right of access, they are providing timber” within the
meaning of the provision of United States countervailing duty law that
corresponds to Article 1.1(a)(1)(iii) of the SCM Agreement. We
note that another definition of “provides” is “to put at the
disposal of”.(68)
…
With respect to Canada’s first argument, we do not see how the
general governmental acts referred to by Canada would necessarily fall
within the concept of a government “making available” services or
goods. In our view, such actions would be too remote from the concept of
“making available” or “putting at the disposal of”, which
requires there to be a reasonably proximate relationship between the
action of the government providing the good or service on the one hand,
and the use or enjoyment of the good or service by the recipient on the
other. Indeed, a government must have some control over the availability
of a specific thing being “made available”.
…
In any event, in our view, it does not make a difference, for
purposes of applying the requirements of Article 1.1(a)(1)(iii) of the SCM
Agreement to the facts of this case, if “provides” is
interpreted as “supplies”, “makes available” or “puts at the
disposal of”… .
With respect to Canada’s second argument regarding the Agreement
on Agriculture and the GATS, the articles cited by Canada involve
the provision of “subsidies” or “support”. We note that in
Article 1.1(a)(1)(iii) of the SCM Agreement, the term “provides”
relates to the provision of “goods” and “services” in the
context of describing a certain type of financial contribution. The
different context of these provisions means that it is not necessarily
appropriate to equate, precisely, the scope of the term “provide” or
“provides” as they are used in these different agreements.”(69)
41. Turning to the facts of that case, the Appellate Body explained
that:
“[W]e note that the Panel found that stumpage arrangements give
tenure holders a right to enter onto government lands, cut standing
timber, and enjoy exclusive rights over the timber that is harvested.
Like the Panel, we conclude that such arrangements represent a situation
in which provincial governments provide standing timber. Thus, we
disagree with Canada’s submission that the granting of an intangible
right to harvest standing timber cannot be equated with the act of
providing that standing timber. By granting a right to harvest, the
provincial governments put particular stands of timber at the disposal
of timber harvesters and allow those enterprises, exclusively, to make
use of those resources. Canada asserts that governments do not supply
felled trees, logs, or lumber through stumpage transactions. In our
view, this assertion misses the point, because felled trees, logs and
lumber are all distinct from the “standing timber” on which the
Panel based its conclusions. Moreover, what matters, for purposes of
determining whether a government “provides goods” in the sense of
Article 1.1(a)(1)(iii), is the consequence of the transaction. Rights
over felled trees or logs crystallize as a natural and inevitable
consequence of the harvesters’ exercise of their harvesting rights.
Indeed, as the Panel indicated, the evidence suggests that making
available timber is the raison d’être of the
stumpage arrangements. Accordingly, like the Panel, we believe that, by
granting a right to harvest standing timber, governments provide that
standing timber to timber harvesters. We therefore agree with the Panel
that, through stumpage arrangements, the provincial governments “provide”
such goods, within the meaning of Article 1.1(a)(1)(iii) of the SCM
Agreement.”(70)
42. In EC and certain member States — Large Civil Aircraft,
the Appellate Body found that the Panel erred in its interpretation and
application of Article 1.1(a)(1)(iii) by failing to recognize that the
relevant transaction for purposes of its analysis under Article
1.1(a)(1)(iii) was the provision of goods or services in the form
of infrastructure to Airbus, not the creation of that
infrastructure.(71) The Appellate Body began by noting that the ordinary
meaning of the verb “provide” is to “[s]upply or furnish
for use; make available”.(72) The Appellate Body confirmed that “when
a good or service has not been provided by a government, there
cannot be a financial contribution cognizable under Article
1.1(a)(1)(iii)”.(73) However, the Appellate Body clarified that:
“While government action concerning the creation of a good or
service may not be relevant if that good or service is not ultimately
provided to a recipient, we do not understand on what basis such actions
would necessarily be excluded in assessing what has been provided.
Recalling the meaning of the term “provide” set out above — supply
or furnish for use; make available — we consider that this term
permits taking into account what was involved in supplying or furnishing
that infrastructure. The creation of infrastructure is a precondition,
and thus necessary, for the provision of that infrastructure. We
therefore do not view the use of the term “provision” in Article
1.1(a)(1)(iii) as excluding the possibility that circumstances of the
creation of infrastructure may be relevant to a proper characterization
of what it is that is provided.”(74)
(iii) “goods”
43. In US — Softwood Lumber IV, the Appellate Body upheld
the Panel’s finding that nothing in the text of Article
1.1(a)(1)(iii), its context, or the object and purpose of the SCM
Agreement supported the conclusion that standing timber is not covered
by the term “goods” in Article
1.1(a)(1)(iii). The Panel began by
analyzing the ordinary meaning of the term “goods”:
“The meaning of a treaty provision, properly construed, is rooted
in the ordinary meaning of the terms used.(75) The Panel adopted a
definition of the term “goods”, drawn from Black’s Law
Dictionary, put forward in the submissions of both Canada and the
United States, that the term “goods” includes “tangible or movable
personal property other than money”.(76) In particular, the Panel noted
that this definition set out in Black’s Law Dictionary contemplates
that the term “goods” could include “growing crops, and other
identified things to be severed from real property”.(77) We observe that
the Shorter Oxford English Dictionary offers a more general
definition of the term “goods” as including “property or
possessions” especially — but not exclusively — ”movable
property”.(78)
These definitions offer a useful starting point for discerning the
ordinary meaning of the word “goods”. In particular, we agree 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. We note, however, as we have done on previous
occasions, that dictionary definitions have their limitations in
revealing the ordinary meaning of a term.(79) 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. We note that the
European Communities, in its third participant’s submission, observed
that in the French version of the SCM Agreement, Article
1.1(a)(1)(iii) addresses, inter alia, the provision of “biens”.(80)
In the Spanish version, the term used is “bienes”.(81) The
ordinary meanings of these terms include a wide range of property,
including immovable property. As such, they correspond more closely to a
broad definition of “goods” that includes “property or possessions”
generally, than with the more limited definition adopted by the Panel.
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.”(82)
44. After considering the context of the term “goods” in
Article 1.1(a)(1)(iii), the Appellate Body considered the consequences of
adopting a restrictive interpretation of the scope of Article
1.1(a)(1)(iii):
“[T]o accept Canada’s interpretation of the term “goods”
would, in our view, undermine the object and purpose of the SCM
Agreement, which is to strengthen and improve GATT disciplines
relating to the use of both subsidies and countervailing measures,
while, recognizing at the same time, the right of Members to impose such
measures under certain conditions.(83) It is in furtherance of this object
and purpose that Article 1.1(a)(1)(iii) recognizes that subsidies may be
conferred, not only through monetary transfers, but also by the
provision of non-monetary inputs. Thus, to interpret the term “goods”
in Article 1.1 (a)(1)(iii) narrowly, as Canada would have us do, would
permit the circumvention of subsidy disciplines in cases of financial
contributions granted in a form other than money, such as through the
provision of standing timber for the sole purpose of severing it from
land and processing it.”(84)
(iv) “other than general infrastructure”
45. In EC and certain member States — Large Civil Aircraft,
the Panel developed an interpretation of the concept of “general
infrastructure”:
“Dictionaries define the term “infrastructure” as, inter
alia, “installations and services (power stations, sewers, roads,
housing, etc.) regarded as the economic foundation of a country,” the
“underlying foundation or basic framework (as of a system or
organization),” and the “system of public works of a country, state,
or region.” The term “general” is defined as “including,
involving, or affecting all or nearly all the parts of a (specified or
implied) whole as a territory, community, organization, etc.; completely
or nearly universal; not partial, particular, local, or sectional” and
“involving, applicable to, or affecting the whole; involving, relating
to, or applicable to every member of a class, kind, or group”. We
consider that the term “general infrastructure”, taken in its
ordinary and natural meaning, refers to infrastructure that is not
provided to or for the advantage of only a single entity or limited
group of entities, but rather is available to all or nearly all
entities. In our view, this interpretation is consistent with the
ordinary meaning of the term “general” when used to modify the word
“infrastructure.” However, we consider that it is difficult if not
impossible to define the concept of “general infrastructure” in the
abstract.
For us, the existence of limitations on access to or use of
infrastructure, whether de jure or de facto, is highly
relevant in determining whether that infrastructure is “general
infrastructure”. However, we are not persuaded by the United States’
argument that the existence of de jure or de facto limitations
on access or use is the only legally relevant consideration, and one
that will always be determinative. We find no support for such a test in
the words of Article 1.1(a)(1)(iii), and we see no reason why other
considerations concerning the provision of the infrastructure in
question should be categorically excluded from the analysis. In our
view, such additional factors could include, inter alia, the
circumstances under which the infrastructure in question was created and
the nature and type of infrastructure in question.”(85)
46. The Panel emphasized the need for a case-by-case analysis:
“Thus, we do not consider that there is any form or type of
infrastructure which is inherently “general” per se. For
instance, in our view, such things as railroads or electrical
distribution systems do not necessarily constitute “general
infrastructure”.(86) Rather, the determination whether the provision of
the good or service in question is “general infrastructure” or not
must be made on a case-by-case basis, taking into account the existence
or absence of de jure or de facto limitations on access or
use, and any other factors that tend to demonstrate that the
infrastructure was or was not provided to or for the use of only a
single entity or a limited group of entities. Such factors may relate to
the circumstances surrounding the creation of the infrastructure in
question, consideration of the type of infrastructure, the conditions
and circumstances of the provision of the infrastructure, the recipients
or beneficiaries of the infrastructure, and the legal regime applicable
to such infrastructure, including the terms and conditions of access to
and/or limitations on use of the infrastructure. If an evaluation of
relevant facts concerning such factors demonstrates that the
infrastructure was provided to a single entity or a limited group of
entities, then we believe it cannot properly be considered “general”
infrastructure, and consequently falls within the scope of Article
1.1(a)(1) of the SCM Agreement, necessitating further analysis to
determine whether a subsidy exists.”(87)
47. In US — Large Civil Aircraft
(2nd complaint), the key
question of interpretation arising out of the arguments advanced by the
parties on the issue of “general infrastructure” was whether the
existence of limitations on use or access by the public at large is
determinative of whether or not an infrastructure improvement measure is
general.(88) The Panel did not consider it necessary to provide a
definitive interpretation of the terms “general infrastructure” in
Article 1.1(a)(1)(iii) in order to resolve the issues before it.(89)
However, the Panel noted that it had “some doubts” regarding the
argument that even if there are “no limitations on the use of or
access to an infrastructure improvement measure by the public”, such a
measure could nevertheless be found to be something other than “general
infrastructure”.(90)
(v) Purchases of services
48. In US —
Large Civil Aircraft (2nd complaint), the Panel found that purchases of services are excluded from the
definition of “financial contribution” in Article
1.1(a). Following
an analysis of the terms, context, object and purpose, drafting history,
and circumstances of the conclusion of the SCM Agreement(91), the Panel
concluded that:
“The Panel is not entitled to assume that the disappearance of
certain terms from the text of Article 1 of the SCM Agreement “wasmerely
accidental or an inadvertent oversight on the part of either harassed
negotiators or inattentive draftsmen”.(92) The Panel must “read and
interpret the words actually used” in Article 1, not the words that
the Panel “may feel should have been used”.(93) It is not open to the
Panel to impute into Article 1 “words that are not there”.(94) Having
considered the ordinary meaning of the terms of Article
1.1(a)(1)(i),
their context, the object and purpose of the SCM Agreement, and the
preparatory work and circumstances of the conclusion of the SCM
Agreement, the Panel finds that transactions properly characterized as
purchases of services are excluded from the scope of Article
1.1(a)(1)(i) of the SCM Agreement.”(95)
(f) Article 1.1(a)(1)(iv): entrustment or direction of private bodies
49. Article 1.1(a)(1)(iv) was interpreted and applied by the Panels
in US — Export Restraints(96), Korea — Commercial Vessels(97),
US — Anti-Dumping and Countervailing Duties (China)(98), and in
three cases on separate countervailing duty investigations of the same
Korean support and restructuring programmes and loan guarantees for a
Korean DRAM producer: US — Countervailing Duty Investigation on
DRAMS(99), EC — Countervailing Measures on DRAM Chips(100), and
Japan — DRAMs (Korea).(101)
50. In US — Softwood Lumber IV, the Appellate Body observed
that “Paragraph (iv) of Article 1.1(a)(1) recognizes that
paragraphs (i)
— (iii) could be circumvented by a government making payments to a
funding mechanism or through entrusting or directing a private body to
make a financial contribution”.(102)
51. The Appellate Body examined
Article 1.1(a)(1)(iv) in detail in US
— Countervailing Duty Investigation on DRAMs. The Appellate Body
began by noting that “situations involving exclusively private conduct
— that is, conduct that is not in some way attributable to a
government or public body — cannot constitute a “financial
contribution” for purposes of determining the existence of a subsidy
under the SCM Agreement”.(103) The Appellate Body then explained
that Article 1.1(a)(1)(iv) cover situations in which a private body is
being used as a “proxy” by the government:
“Paragraphs
(i) through (iv) of Article 1.1(a)(1) set forth the
situations where there is a financial contribution by a government or
public body. The situations listed in paragraphs
(i) through (iii) refer
to a financial contribution that is provided directly by the
government through the direct transfer of funds, the foregoing of
revenue, the provision of goods or services, or the purchase of
goods.166 By virtue of paragraph (iv), a financial contribution may also
be provided indirectly by a government where it “makes payments
to a funding mechanism”, or, as alleged in this case, where a
government “entrusts or directs a private body to carry out one or
more of the type of functions illustrated in (i) to (iii) … which
would normally be vested in the government and the practice, in no real
sense, differs from practices normally followed by governments”. Thus,
paragraphs (i) through (iii) identify the types of actions that, when
taken by private bodies that have been so “entrusted” or “directed”
by the government, fall within the scope of paragraph
(iv). In other
words, paragraph (iv) covers situations where a private body is being
used as a proxy by the government to carry out one of the types of
functions listed in paragraphs (i) through
(iii). Seen in this light,
the terms “entrusts” and “directs” in paragraph (iv) identify
the instances where seemingly private conduct may be attributable to a
government for purposes of determining whether there has been a
financial contribution within the meaning of the SCM Agreement.”(104)
52. In US — Countervailing Duty Investigation on DRAMs, the
Appellate Body also clarified that “entrustment” occurs where a
government gives responsibility to a private body, and “direction”
refers to situations where the government exercises its authority over a
private body:
“The term ‘entrusts’ connotes the action of giving
responsibility to someone for a task or an object.(105) … Delegation is
usually achieved by formal means, but delegation also could be informal
… Therefore, an interpretation of the term “entrusts” that is
limited to acts of “delegation” is too narrow.
As for the term ‘directs’ … in our view, that the private body
under paragraph (iv) is directed ‘to carry out’ a function
underscores the notion of authority that is included in some of the
definitions of the term ‘direct’ … A ‘command’ (the word used
by the Panel) is certainly one way in which a government can exercise
authority over a private body in the sense foreseen by Article
1.1(a)(1)(iv), but governments are likely to have other means at their
disposal to exercise authority over a private body. Some of these means
may be more subtle than a ‘command’ or may not involve the same
degree of compulsion. Thus, an interpretation of the term ‘directs’
that is limited to acts of ‘command’ is also too narrow.
In most cases, one would expect entrustment or direction of a private
body to involve some form of threat or inducement, which could, in turn,
serve as evidence of entrustment or direction.”(106)
53. In US — Countervailing Duty Investigation on DRAMs, the
Appellate Body further observed that Article 1.1(a)(1)(iv) “is
intended to ensure that governments do not evade their obligations under
the SCM Agreement by using private bodies to take actions that
would otherwise fall within Article 1.1(a)(1), were they to be taken by
the government itself. In other words, Article 1.1(a)(1)(iv) is, in
essence, an anti-circumvention provision”.(107)
54. In US — Countervailing Duty Investigation on DRAMs, the
Appellate Body agreed with Korea that there must be a demonstrable link
between the government and the conduct of the private body. It further
said that “mere policy pronouncements” are insufficient, and that
“entrustment and direction” “imply a more active role than mere
acts of encouragement” and cannot be “inadvertent or a mere
by-product of government regulation”:
“It follows, therefore, that not all government acts necessarily
amount to entrustment or direction. We note that both the United States
and Korea agree that ‘mere policy pronouncements’ by a government
would not, by themselves, constitute entrustment or direction for
purposes of Article 1.1(a)(1)(iv). Furthermore, entrustment and
direction — through the giving of responsibility to or exercise of
authority over a private body — imply a more active role than mere
acts of encouragement. Additionally, we agree with the panel in US
— Export Restraints that entrustment and direction do not cover
‘the situation in which the government intervenes in the market in
some way, which may or may not have a particular result simply based on
the given factual circumstances and the exercise of free choice by the
actors in that market’. Thus, government “entrustment” or “direction”
cannot be inadvertent or a mere by-product of governmental regulation.
This is consistent with the Appellate Body’s statement in US —
Softwood Lumber IV that ‘not all government measures capable of
conferring benefits would necessarily fall within Article 1.1(a)’;
otherwise paragraphs (i) through (iv) of Article 1.1(a) would not be
necessary ‘because all government measures conferring benefits, per
se, would be subsidies.’” (108)
55. In Japan — DRAMs (Korea), the Appellate Body recognized
that the “commercial unreasonableness” of a financial transaction is
a relevant factor in determining the existence of entrustment or
direction under Article 1.1(a)(1)(iv):
“We recognize that the commercial unreasonableness of the financial
transactions is a relevant factor in determining government entrustment
or direction under Article 1.1(a) (1)(iv) of the SCM Agreement,
particularly where an investigating authority seeks to establish
government intervention based on circumstantial evidence. However, this
does not mean that a finding of entrustment or direction can never be
made unless it is established that the financial transactions were on
non-commercial terms. A finding that creditors acted on the basis of
commercial reasonableness, while relevant, is not conclusive of the
issue of entrustment or direction. A government could entrust or direct
a creditor to make a loan, which that creditor then does on commercial
terms. In other words, as a conceptual matter, there could be entrustment
or direction by the government, even where the financial contribution is
made on commercially reasonable terms.(109)
56. In US — Anti-Dumping and Countervailing Duties (China),
the Appellate Body reversed the Panel’s finding that the term “public
body” in Article 1.1(a)(1) of the SCM Agreement means “any entity
controlled by a government”, and found instead that the term “public
body” in the context of Article 1.1(a)(1) of the SCM Agreement covers
only those entities that possess, exercise or are vested with
governmental authority. The Appellate Body found support for this
interpretation in Article 1.1(a)(1)(iv):
“In seeking to refine our understanding of the concept of “public
body” in Article 1.1(a)(1) of the SCM Agreement, and, in
particular, of the core characteristics that such an entity must share
with government in the narrow sense, we consider next the context
provided by Article 1.1(a)(1) (iv). As noted above, this provision
introduces the concept of “private body”. The meaning of the term
“private body” may be helpful in illuminating the essential
characteristics of public bodies, because the term “private body”
describes something that is not “a government or any public
body”. The panel in US — Export Restraints made a similar
point when it observed that the term “private body” is used in
Article 1.1(a)(1)(iv) as a counterpoint to government or any public
body, that is, any entity that is neither a government in the narrow
sense nor a public body would be a private body.(110)
The definition of the word “private” includes “of a service,
business, etc: provided or owned by an individual rather than the state
or a public body” and “of a person: not holding public office or an
official position”. We note that both the definition of “public”
and of “private” encompass notions of authority as well as of
control. The definitions differ, most notably, with regard to the
subject exercising authority or control.
We also consider that, because the word “government” in
Article
1.1(a)(1)(iv) is used in the sense of the collective term “government”,
that provision covers financial contributions provided by a government
or any public body where “a government or any public body” entrusts
or directs a private body to carry out one or more of the type of
functions or conduct illustrated in subparagraphs
(i)–(iii).
Accordingly, subparagraph (iv) envisages that a public body may “entrust”
or “direct” a private body to carry out the type of functions or
conduct illustrated in subparagraphs (i)–(iii).
The verb “direct” is defined as to give authoritative
instructions to, to order the performance of something, to command, to
control, or to govern an action. The verb “entrust” means giving a
person responsibility for a task. The Appellate Body has interpreted “direction”
as referring to situations where a government exercises its authority,
including some degree of compulsion, over a private body, and “entrustment”
as referring to situations in which a government gives responsibility to
a private body.(111) Thus, pursuant to
subparagraph (iv), a public body
may exercise its authority in order to compel or command a private body,
or govern a private body’s actions (direction), and may be responsible
for certain tasks to a private body (entrustment). As we see it, for a
public body to be able to exercise its authority over a private body
(direction), a public body must itself possess such authority, or
ability to compel or command. Similarly, in order to be able to give
responsibility to a private body (entrustment), it must itself be vested
with such responsibility. If a public body did not itself dispose
of the relevant authority or responsibility, it could not effectively
control or govern the actions of a private body or delegate such
responsibility to a private body. This, in turn, suggests that the
requisite attributes to be able to entrust or direct a private body,
namely, authority in the case of direction and responsibility in the
case of entrustment, are common characteristics of both government in
the narrow sense and a public body.”(112)
57. In US — Anti-Dumping and Countervailing Duties (China),
the Appellate Body also considered the phrase “which would normally be
vested in the government” in Article
1.1(a)(1)(iv):
“This brings us to the next contextual element, namely, the phrase
“which would normally be vested in the government” in subparagraph
(iv). As we see it, the reference to “normally” in this phrase
incorporates the notion of what would ordinarily be considered part of
governmental practice in the legal order of the relevant Member. This
suggests that whether the functions or conduct are of a kind that are
ordinarily classified as governmental in the legal order of the relevant
Member may be a relevant consideration for determining whether or not a
specific entity is a public body. The next part of that provision, which
refers to a practice that, “in no real sense, differs from practices
normally followed by governments”, further suggests that the
classification and functions of entities within WTO Members generally
may also bear on the question of what features are normally exhibited by
public bodies.”(113)
58. In US — Anti-Dumping and Countervailing Duties (China),
the Appellate Body also emphasized that:
“[T]he question of whether an entity constitutes a public body is not
tantamount to the question of whether measures taken by that entity
fall within the ambit of the SCM Agreement. A finding that a
particular entity does not constitute a public body does not, without
more, exclude that entity’s conduct from the scope of the SCM
Agreement. Such measures may still be attributed to a government and
thus fall within the ambit of the SCM Agreement pursuant to
Article 1.1(a)(1)(iv) if the entity is a private entity entrusted or
directed by a government or by a public body.”(114)
3. Article 1.1(b): “benefit is thereby conferred”
(a) “benefit”
(i) benefit to recipient vs. cost to government
59. In Canada — Aircraft, Canada argued that a financial
contribution only conferred a “benefit” to the extent that it
resulted in a net cost to the government. The Panel rejected Canada’s
argument, finding that the ordinary meaning of “benefit” does not
include any notion of net “cost to the government”.(115) According to
the Panel, the ordinary meaning of “benefit” instead “clearly
encompasses some form of advantage.”(116) In order to establish the
existence of that advantage, the Panel found that “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.”(117) The Panel’s finding that benefit is
determined by reference to the situation of the recipient, rather than
any cost to the government, was upheld by the Appellate Body:
“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’.”(118)
(ii) Advantage vis-a-vis the market
60. The Panel in Canada — Aircraft found that “the only
logical basis” for determining whether the financial contribution
places the recipient in a more advantageous position than it otherwise
would have been “is the market”.(119) According to the Panel:
“[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.”(120)
61. The Appellate Body upheld the Panel’s finding that “benefit”
must be established by determining whether the financial contribution
makes the recipient better off vis-à-vis the market than it would have
been absent that financial contribution:
“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.
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.”(121)
62. Numerous dispute settlement reports confirm that a financial
contribution confers a “benefit” if it is provided to the recipient
on terms more favourable than the recipient could have obtained from the
market.(122) The Panel in US — Large Civil Aircraft
(2nd complaint) observed
that it is now “well established” that a financial contribution
confers a benefit within the meaning of Article 1.1(b) of the SCM
Agreement if the terms of the financial contribution are more favourable
than the terms available to the recipient in the market.(123)
(iii) The relevant recipient — scope of the SCM Agreement
63. In Brazil — Aircraft (Article 21.5 — Canada II), the
underlying subsidy took the form of government payments to lenders in
support of export credit transactions, i.e. financial services. The
Panel found that without such support, export credit would likely not
have been made available to purchasers of regional aircraft. The Panel
provided the following clarification regarding the scope of the SCM
Agreement:
“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.”(124)
64. The Panel further clarified its reasoning in two footnotes:
“As the SCM Agreement is an Annex 1A agreement on trade in goods,
and as this case relates to alleged export subsidies in respect of a
particular good — Brazilian regional aircraft — it is incumbent upon
Canada to establish that the benefit derived from PROEX III payments is
not retained exclusively by the lender but rather is passed through in
some way to producers of regional aircraft.”(125)
65. In terms of the burden of proof on the complaining party in such
cases, the Panel explained that proof of subsidized financial services
to the customer would constitute prima facie proof of benefit to
the producer:
“We note that PROEX III payments are made in support of export
credits extended to the purchaser, and not to the producer,
of Brazilian regional aircraft. In our view, however, to the extent
Canada can establish that PROEX III payments allow the purchasers of a
product to obtain export credits on terms more favourable than those
available to them in the market, this will, at a minimum, represent a prima
facie case that the payments confer a benefit on the producers of
that product as well, as it lowers the cost of the product to their
purchasers and thus makes their product more attractive relative to
competing products.”(126)
66. The Panel in Canada — Aircraft Credits and Guarantees endorsed
the approach taken in Brazil — Aircraft (Article 21.5 — Canada
II).(127)
(iv) Evidence establishing the existence of benefit
67. The Panel in Japan — DRAMs (Korea) acknowledged the
evidentiary problems that may arise in seeking to establish “benefit”
by reference to the market, particularly where no “market” benchmark
exists:
“As noted above, it is now well established that the concept of
benefit is defined by reference to the market, such that a financial
contribution confers a ‘benefit’ within the meaning of Article
1.1(b) of the SCM Agreement when it is made available on terms
that are more favourable than the recipient could have obtained on the
market. While an investigating authority must apply this standard on the
basis of relevant evidence, there are no provisions in the SCM
Agreement regarding the precise nature of the evidence on which an
investigating authority must rely. The guidelines set forth in Article
14 of the SCM Agreement offer some guidance on the types of
evidence that might be relevant. However, the Article 14 guidelines do
not cover all eventualities. For example, Article 14(b) does not
indicate how an investigating authority should establish the existence
of benefit conferred by a loan in the event that there are no ‘comparable
commercial loans which the firm could actually obtain on the market’.
In certain circumstances, an investigating authority might examine
the existence of benefit by gathering available evidence of the terms
that the market would have offered, and by comparing those terms with
those of the financial contribution at issue. This is the approach
advocated by Korea in the present case. In other circumstances, an
investigating authority might rely on evidence of whether or not the
financial contribution was provided on the basis of commercial
considerations. This is the approach adopted by the JIA in the present
case. In our view, both types of evidence are relevant in determining
the existence of benefit. The first, because such evidence provides a
market benchmark against which to determine whether or not the terms on
offer were more favourable than those available from the market. The
second, because evidence of reliance on non-commercial considerations
indicates terms more favourable than those available from the market (as
the market is presumed to operate on the basis of commercial
considerations).(128) Depending on the particular circumstances of
a case, an investigating authority might also rely on other types of
evidence that could be equally relevant.”(129)
68. The Panel went on to note that:
“An investigating authority might also be confronted with both
types of evidence described above, and one type of evidence might not
support the conclusion suggested by the other. For example, there might
be evidence that, although the financial contribution was not provided
on the basis of commercial considerations, it would in fact have been
provided by “creditors acting in accordance with the ‘usual practice’
in the relevant market”. In such cases, the investigating authority
would need to weigh the probative value of one type of evidence against
the probative value of the other.”(130)
69. On appeal from this finding, Korea argued that an entity’s
failure to undertake an analysis based on commercial considerations does
not necessarily mean that a benefit is conferred. According to Korea, an
entity might arrive at a market result without applying market
considerations. Without specifically addressing Korea’s argument, the
Appellate Body upheld the Panel’s reliance on evidence regarding
reliance on non-commercial considerations.(131)
(b) “is … conferred”
(i) General
70. 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. 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 United States asserted that “if WTO Members were required to
conduct an ‘ongoing demonstration’ that the original benefit still
constitutes an advantage to the relevant company, it would become “nearly
impossible” to administer countervailing duty laws.”(132) The
Appellate Body in US — Lead and Bismuth II rejected the United
States’ argument, holding that “Article 1.1 does not address the time
at which the ‘financial contribution’ and/or the ‘benefit’
must be shown to exist.”(133) On this basis, the Appellate Body found
that an investigating authority may, in certain circumstances, be
required to confirm the continued existence of benefit, even after
countervailing duties have been imposed.(134)
(ii) Mandatory/discretionary conferral of a benefit
Challenging subsidy programmes “as such”
Relevance of the mandatory/discretionary distinction
71. 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 “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(135) — 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.”(136),(137)
Order of analysis when applying the mandatory/ discretionary
distinction
72. The Panel in 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:(138)
“[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 manner inconsistent with Article 3.1(a)
of the SCM Agreement.”(139)
“Substantive context” in the application of the
mandatory/discretionary distinction
73. 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.(140) 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(141), 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.”(142)
Extent of the complainant’s burden of proof
74. The Panel in 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.”(143)
75. The Panel in 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.”(144)
76. The Panel in Korea — Commercial Vessels considered
whether the KEXIM legal regime confers a “benefit” as such because
the KEXIM Act imposes no obligation on KEXIM to take market conditions
into account when disbursing funds. The Panel concluded that it does
not:
“We do not consider that a legal instrument may be found to mandate
subsidization simply because it neither prohibits subsidization nor
requires market conditions to be taken into account. The fact that a
legal instrument is silent on subsidization should not lead to a
conclusion that the resultant discretion will of necessity be exercised
in a manner that results in subsidization. As stated by the Appellate
Body in US — Section 211 Appropriations Act, “where
discretionary authority is vested in the executive branch of a WTO
Member, it cannot be assumed that the WTO Member will fail to implement
its obligations under the WTO Agreement in good faith”.(145)”(146)
77. The Panel in Korea — Commercial Vessels explained that
although certain provisions of a legal instrument might indicate that it
was intended as a means of providing subsidies “a conclusion that the
[KLR] could be applied in a manner that confers a benefit would not be a
sufficient basis to conclude that the KLR as such is mandatory
legislation susceptible of inconsistency with Article 3.1(a) of the SCM
Agreement.(147),(148)
Fiscal advantages
78. The Panel in 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’. 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. 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.(149)
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(150), it does not follow from this that the EDC is required
to provide such subsidies.”(151)
Compliance with the OECD Arrangement
79. The Panel in 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.”(152)
Provision of services not available in the market
80. The Panel in 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.(153),(154)
Challenging subsidy programmes “as applied”
81. The Panel in 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’(155). 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.”(156)
(c) Pass-through of benefit: changes in ownership
82. In US — Lead and Bismuth II, the European Communities
challenged the administrative review of the imposition of countervailing
duties by US authorities. The US investigating authorities had imposed
countervailing duties on products of a company which had received
subsidized equity infusions from the UK 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 US authorities. The applicable US 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.”(157)
As a consequence, the competent US 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.”(158) 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.(159)
Upon appeal, the Appellate Body held that it saw “no error in the
Panel’s conclusion”.(160)
83. Discussing the payment of value by owners of companies, rather
than the companies themselves, the Panel in US — Lead and Bismuth
II 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’.”(161)
84. In EC and certain member States — Large Civil Aircraft,
the Appellate Body reversed the Panel’s finding that the sales
transactions at issue did not “extinguish” a portion of past
subsidies, because the Panel failed to assess whether the partial
privatizations and private-to-private sales transactions were at arm’s-length
terms and for fair market value, and to what extent they involved a
transfer in ownership and control to new owners. The Appellate Body
found that there were insufficient factual findings by the Panel or
undisputed facts on the Panel record to complete the legal analysis and
determine whether these transactions “extinguished” a portion of
past subsidies. The Appellate Body did not a priori exclude the
possibility that all or part of a subsidy may be “extracted” by the
removal of cash or cash equivalents, but upheld the Panel’s ultimate
finding that the “cash extractions” at issue in that case did not
remove a portion of past subsidies. The Appellate Body upheld the Panel’s
ultimate finding that the “cash extractions” did not result in the
“withdrawal” of subsidies within the meaning of Articles 4.7 and
7.8
of the SCM Agreement; and had no basis on which to make a finding that
the sales transactions at issue resulted in the “withdrawal” of
subsidies within the meaning of Articles 4.7 and
7.8 of the SCM Agreement.(162)
(d) Pass-through of benefit: subsidized inputs
85. In US — Softwood Lumber III, the Panel, basing itself on
the findings of the Appellate Body in US — Lead and Bismuth II,(163)
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.(164)
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.”(165)
86. The Panel in 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.(166) There was no appeal in this case.
87. Pass-through in respect of subsidized inputs was also examined in
United States — Softwood Lumber IV. Although the claims in that
case were not brought under Article 1.1(b) of the SCM
Agreement, the
Appellate Body made the following remarks regarding the relevance of
that provision to the broader issue at hand:
“This interpretation is also borne out by the general definition of
a “subsidy” in Article 1 of the SCM Agreement. According to
that definition, a subsidy shall be deemed to exist only if there is
both a financial contribution by a government within the meaning
of Article 1.1(a)(1),(167) and a benefit is thereby
conferred within the meaning of Article 1.1(b).(168) If countervailing
duties are intended to offset a subsidy granted to the producer of an
input product, but the duties are to be imposed on the processed
product (and not the input product), it is not sufficient for
an investigating authority to establish only for the input product
the existence of a financial contribution and the conferral of a benefit
to the input producer. In such a case, the cumulative conditions set out
in Article 1 must be established with respect to the processed product,
especially when the producers of the input and the processed product are
not the same entity. The investigating authority must establish that a
financial contribution exists; and it must also establish that
the benefit resulting from the subsidy has passed through, at least in
part, from the input downstream, so as to benefit indirectly
the processed product to be countervailed.
In this respect, the Appellate Body’s interpretation of the term
“benefit” in Canada — Aircraft is useful:
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.(169)
Thus, for a potentially countervailable subsidy to exist, there must
be a financial contribution by the government that confers a benefit to
a recipient. Where a subsidy is conferred on input products, and
the countervailing duty is imposed on processed products, the initial
recipient of the subsidy and the producer of the eventually
countervailed product, may not be the same. In such a case, there is a direct
recipient of the benefit — the producer of the input product.
When the input is subsequently processed, the producer of the processed
product is an indirect recipient of the benefit — provided
it can be established that the benefit flowing from the input subsidy is
passed through, at least in part, to the processed product. Where the
input producers and producers of the processed products operate at arm’s
length, the pass-through of input subsidy benefits from the direct
recipients to the indirect recipients downstream cannot simply be
presumed; it must be established by the investigating authority. In the
absence of such analysis, it cannot be shown that the essential elements
of the subsidy definition in Article 1 are present in respect of the processed
product. In turn, the right to impose a countervailing duty on the
processed product for the purpose of offsetting an input subsidy, would
not have been established in accordance with Article VI:3 of the GATT
1994, and, consequently, would also not have been in accordance with
Articles 10 and 32.1 of the SCM Agreement.”(170)
(e) Pass-through: sales of the subsidized product to unrelated buyers
88. In Mexico — Olive Oil, the European Communities relied
on the findings of the Appellate Body in US — Softwood Lumber IV regarding
“pass-through” (see preceding sub-section above) to claim that,
pursuant to Article 1.1(b), Mexico should have conducted a
pass-through
analysis to determine whether any of the subsidy benefit conferred on
olive growers was transmitted to the unrelated exporters of olive oil to
Mexico. The Panel rejected the European Communities’ claim. The Panel
distinguished US — Softwood Lumber IV, since the case before
the Panel did not involve the use of inputs (e.g. olives) not covered by
the investigation in the production of the product subject to the
investigation (i.e. olive oil). Rather, the transactions referred to by
the European Communities all involved the investigated product (i.e.
olive oil). The Panel found that a pass-through analysis was not required
when the product under investigation was sold prior to exportation, even
if the sale involved unrelated parties:
“The US — Softwood Lumber IV and US — Canadian Pork jurisprudence
does not support the European Communities’ argument that
whenever there is any arm’s-length transaction between
unrelated companies in the chain of the production of an imported
product subject to a countervail investigation, a pass-through analysis
must be conducted. To the contrary, as discussed above, in US —
Softwood Lumber IV, the Appellate Body found that where an input
product and a further manufactured product both are covered by
the definition of the product subject to the countervailing duty
investigation, a pass-through analysis is not required even if
the producers of the respective products are unrelated and
operating at arm’s length. If this is the case for certain arm’s
length
sales of inputs between unrelated firms, then a fortiori the
mere existence of an arms’-length transaction between firms involving
the product under investigation somewhere between the receipt of the
subsidy and the export of the merchandise should not, by itself, give
rise to an obligation to conduct a pass-through analysis under Article
VI:3 of the GATT 1994 and Article 10 of the SCM Agreement.
In this respect, we recall that the SCM Agreement and
Article
VI:3 of the GATT 1994 both explicitly permit the application of
countervailing measures to “offset” subsidies “bestowed upon […]
the manufacture, production or export” of a product (emphasis
added). Taking the simplest hypothetical example, where a subsidy is
provided directly to a producer of a product coming within the scope of
a countervailing duty investigation, we do not see how that company’s
eventual sale of the product to an unrelated firm (e.g., a distributor)
would have a bearing on the fact that a subsidy has been bestowed in
respect of the “production” of that product. Taken to its logical
conclusion, the argument by the European Communities, that a
pass-through analysis must be conducted in every case in which there are
transactions between unrelated firms relating to the product under
investigation, would mean that a pass-through analysis would be required
in almost every countervail investigation, even when the subsidy was
provided directly on the investigated product.”(171)
89. Turning to the specifics of the European Communities’ claim,
the Panel first noted that, whereas the findings of the Appellate Body
in US — Softwood Lumber IV were based on Article 10 of the SCM
Agreement and Article VI:3 of the GATT
1994, the European Communities’
claim was based inter alia on Article 1.1(b) of the SCM
Agreement. The Panel then noted that the European Communities did not
argue that a benefit was not conferred in respect of exports of olive
oil to Mexico. Rather, the European Communities argued that Mexico did
not properly calculate the amount of the benefit that was directly
attached to the exports of olive oil. The Panel rejected the European
Communities’ argument on the basis that Article 1.1(b) “in itself
does not establish a requirement to calculate precisely the amount of
the benefit accruing to a particular recipient in a countervail
investigation”.(172)
(f) Rebuttal of a prima facie case of benefit
90. Considering whether a party has rebutted a prima facie case
of subsidization established against it, the Panel in 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.”(173)
91. 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.”(174)
(g) Relationship with other Articles
(i) Article 14
92. 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.”(175)
(ii) Article 14(c)
93. With regard to establishing the existence of a benefit relating
to equity guarantees in the framework of the SCM Agreement, the Panel in
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.(176)
(iii) Annex I, item (k)
94. The Panel in 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.”(177)
95. 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 in Canada — Aircraft.(178)
(iv) Annex IV
96. The Appellate Body in Canada — Aircraft agreed with the
Panel “that Annex IV is not a useful context for interpreting Article
1.1(b)”,(179) 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.”(180)
4. Relationship of Article 1.1 with other Articles
(i) Footnote 1 and Footnote 59
97. The Appellate Body in 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’.”(181)
98. 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.”(182)
5. Relationship with other WTO Agreements
(a) Article XVI of the WTO Agreement
99. The Appellate Body in 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.(183) 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.”(184)
100. 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’.(185) 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.”(186)
III. Article 2
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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 nonspecificity 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
(a) General
101. The Appellate Body addressed Article 2 for the first time in US
— Anti-Dumping and Countervailing Duties (China). In that case,
the Appellate Body provided general guidance on the interpretation of
Article 2 in general, its sub-paragraphs, and the relationship between
its sub-paragraphs:
“The chapeau of Article 2.1 offers interpretative guidance with
regard to the scope and meaning of the subparagraphs that follow. The
chapeau frames the central inquiry as a determination as to whether a
subsidy is specific to “certain enterprises” within the jurisdiction
of the granting authority and provides that, in an examination of
whether this is so, the “principles” set out in subparagraphs (a)
through (c) “shall apply”. We consider that the use of the term “principles”
— instead of, for instance, “rules” — suggests that
subparagraphs (a) through (c) are to be considered within an analytical
framework that recognizes and accords appropriate weight to each
principle. Consequently, the application of one of the subparagraphs of
Article 2.1 may not by itself be determinative in arriving at a
conclusion that a particular subsidy is or is not specific.
Article 2.1(a) establishes that a subsidy is specific if the granting
authority, or the legislation pursuant to which the granting authority
operates, explicitly limits access to that subsidy to eligible
enterprises or industries. Article 2.1(b) in turn sets out that
specificity “shall not exist” if the granting authority, or the
legislation pursuant to which the granting authority operates,
establishes objective criteria or conditions governing the eligibility
for, and the amount of, the subsidy, provided that eligibility is
automatic, that such criteria or conditions are strictly adhered to, and
that they are clearly spelled out in an official document so as to be
capable of verification.(187) These provisions thus set out indicators as
to whether the conduct or instruments of the granting authority
discriminate or not: Article 2.1(a) describes limitations on eligibility
that favour certain enterprises, whereas Article 2.1 (b) describes
criteria or conditions that guard against selective eligibility.
Finally, Article 2.1(c) sets out that, notwithstanding any appearance of
non-specificity resulting from the principles laid down in subparagraphs
(a) and (b), other factors may be considered if there are reasons to
believe that a subsidy may, in fact, be specific in a particular case.(188)
We observe that Article 2.1(a) and
(b) identify certain common
elements in the analysis of the specificity of a subsidy. For instance,
these principles direct scrutiny to the eligibility requirements imposed
by “the granting authority, or the legislation pursuant to which the
granting authority operates”. This is a critical feature of both
provisions as it situates the analysis for assessing any limitations on eligibility
in the particular legal instrument or government conduct effecting
such limitations. We also note that both provisions turn on indicators
of eligibility for a subsidy. Article 2.1(a) thus focuses not on
whether a subsidy has been granted to certain enterprises, but on
whether access to that subsidy has been explicitly limited. This
suggests that the focus of the inquiry is on whether certain enterprises
are eligible for the subsidy, not on whether they in fact receive it.
Similarly, Article 2.1(b) points the inquiry towards “objective
criteria or conditions governing the eligibility for, and the amount of,
a subsidy”. Article 2.1(b) also indicates other legal and practical
considerations relevant to the analysis, all of which centre on the
manner in which the criteria or conditions of eligibility are prescribed
and adhered to.
Notwithstanding the fact that the principles under
subparagraphs (a)
and (b) may point to opposite results, there may be situations in which
assessing the eligibility for a subsidy will give rise to indications of
specificity and nonspecificity as a result of the application of Article
2.1(a) and (b). This is because Article 2.1(a) identifies
circumstances in which a subsidy is specific, whereas Article 2.1(b)
establishes circumstances in which a subsidy shall be regarded as
non-specific. We can conceive, for example, of situations in which an
initial indication of specificity under Article 2.1(a) may need to be
considered further if additional evidence demonstrates that the subsidy
in question is available on the basis of objective criteria or
conditions within the meaning of Article 2.1(b). This therefore suggests
that, where the eligibility requirements of a measure present some
indications pointing to subparagraph (a) and certain others pointing to
subparagraph (b), the specificity analysis must accord appropriate
consideration to both principles.
Furthermore, the introductory sentence of Article 2.1(c) establishes
that “notwithstanding any appearance of non-specificity” resulting
from the application of Article 2.1(a) and (b), a subsidy may
nevertheless be found to be “in fact” specific. The reference in
Article 2.1(c) to “any appearance of non-specificity” resulting from
the application of Article 2.1(a) and (b) supports the view that the
conduct or instruments of a granting authority may not clearly satisfy
the eligibility requirements of Article 2.1(a) or
(b), but may
nevertheless give rise to specificity in fact. In such circumstances,
application of the factors under Article 2.1(c) to factual features of a
challenged subsidy is warranted. Since an “appearance of
non-specificity” under Article 2.1(a) and
(b) may still result in
specificity in fact under Article 2.1(c) of the SCM Agreement,
this reinforces our view that the principles in Article 2.1 are to be
interpreted together.
Accordingly, we consider that a proper understanding of specificity
under Article 2.1 must allow for the concurrent application of these
principles to the various legal and factual aspects of a subsidy in any
given case. Yet, we recognize that there may be instances in which the
evidence under consideration unequivocally indicates specificity or
non-specificity by reason of law, or by reason of fact, under one of the
subparagraphs, and that in such circumstances further consideration
under the other subparagraphs of Article 2.1
may be unnecessary. For
instance, Article 2.1(c) applies only when there is an “appearance”
of non-specificity. Likewise, a granting authority or authorizing
legislation may explicitly limit access to a subsidy to certain
enterprises within the meaning of Article
2.1(a), but not provide
objective criteria or conditions that could be scrutinized under Article
2.1(b). We do, however, caution against examining specificity on the
basis of the application of a particular subparagraph of Article
2.1,
when the potential for application of other subparagraphs is warranted
in the light of the nature and content of measures challenged in a
particular case.”(189)
(b) “certain enterprises”
102. The Panel in US — Upland Cotton considered that an “industry”
or “group of industries”, for the purposes of the chapeau of Article
2, may generally be understood in terms of producers of particular types
of product, although the breadth of this concept of “industry” may
depend on several factors in a given context. Hence, the specificity of
a subsidy can only be assessed on a case-by-case basis:
“According to the text of Article 2 of the SCM Agreement, a
subsidy is ‘specific’ if it is specific to an enterprise or industry
or group of enterprises or industries (referred to in the SCM
Agreement as “certain enterprises”) within the jurisdiction of
the granting authority. This is one way in which the SCM Agreement serves
to define requirements as to the ‘recipients’ of the benefit
bestowed by a subsidy. Beyond setting out this rather general principle,
Article 2 of the SCM Agreement does not speak with precision
about when ‘specificity’ may be found.
Looking more closely at the textual terms used in the chapeau of
Article 2 of the SCM Agreement, the term ‘industry’ may be
defined as ‘a particular form or branch of productive labour; a trade;
a manufacture’. ‘Specificity’ extends to a group of industries
because the words ‘certain enterprise’ are defined broadly in the
opening terms of Article 2.1, as an enterprise or industry or group of
enterprises or industries.
…
We nevertheless believe that an industry, or group of ‘industries’,
may be generally referred to by the type of products they produce. To
us, the concept of an ‘industry’ relates to producers of certain
products. The breadth of this concept of ‘industry’ may depend on
several factors in a given case. At some point that is not made precise
in the text of the agreement, and which may modulate according to the
particular circumstances of a given case, a subsidy would cease to be
specific because it is sufficiently broadly available throughout an
economy as not to benefit a particular limited group of producers of
certain products. The plain words of Article 2.1 indicate that
specificity is a general concept, and the breadth or narrowness of
specificity is not susceptible to rigid quantitative definition. Whether
a subsidy is specific can only be assessed on a case-by-case basis.
We see merit in the shared view of the parties that the concept of
“specificity” in Article 2 of the SCM Agreement serves to
acknowledge that some subsidies are broadly available and widely used
throughout an economy and are therefore not subject to the Agreement’s
subsidy disciplines. The footnote to Article 2.1 defines the nature of
‘objective criteria or conditions’ which, if used to determine
eligibility, would preclude an affirmative conclusion of specificity.
Such criteria 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.’”(190)
103. The Appellate Body in US — Anti-Dumping and Countervailing
Duties (China) considered the meaning of “certain enterprises”
in Article 2:
“Furthermore, a subsidy is specific under Article 2.1(a) of the SCM
Agreement when the explicit limitation reserves access to that
subsidy to “certain enterprises”. The chapeau of Article 2.1
establishes that the term “certain enterprises” refers to “an
enterprise or industry or group of enterprises or industries”. We
first note that the word “certain” is defined as “[k]nown and
particularized but not explicitly identified: (with sing. noun) a
particular, (with pl. noun) some particular, some definite”. The word
“group”, in turn, is commonly defined as “[a] number of people or
things regarded as forming a unity or whole on the grounds of some
mutual or common relation or purpose, or classed together because of a
degree of similarity”. Turning to the nouns qualified by “certain”
and “group”, we see that “enterprise” may be defined as “[a]
business firm, a company”, whereas “industry” signifies “[a]
particular form or branch of productive labour; a trade, a manufacture”.
We
note that the panel in US — Upland Cotton considered that “an
industry, or group of ‘industries’, may be generally referred to by
the type of products they produce”; that “the concept of an ‘industry’
relates to producers of certain products”; and that the “breadth of
this concept of ‘industry’ may depend on several factors in a given
case”.(191) The above suggests that the term “certain enterprises”
refers to a single enterprise or industry or a class of enterprises or
industries that are known and particularized. We nonetheless agree with
China that this concept involves “a certain amount of indeterminacy at
the edges”, and with the panel in US — Upland Cotton that any
determination of whether a number of enterprises or industries
constitute “certain enterprises” can only be made on a case-by-case
basis.(192),(193)
104. In EC and certain member States — Large Civil Aircraft,
the Appellate Body addressed a subsidy programme in which separate
groupings of entities had access to separate funding pools:
“[W]e do not consider that explicit limitations on access to a
subsidy to entities active in one sector of the economy will produce a
different result under Article 2.1(a) by virtue of the fact that
separate groupings of entities have access to other pools of funding
under that programme. Certainly, if access to the same subsidy is
limited to some grouping of enterprises or industries, an investigating
authority or panel would be required to assess whether the eligible
recipients can be collectively defined as “certain enterprises”.
Where access to certain funding under a subsidy programme is explicitly
limited to a grouping of enterprises or industries that qualify as “certain
enterprises”, this in our view leads to a provisional indication of
specificity within the meaning of Article
2.1(a), irrespective of how
other funding under that programme is distributed. The European Union
does not challenge the Panel’s conclusion that the entities eligible
for R&TD grants in the aeronautics sector may be considered to
constitute “certain enterprises”. We also consider that, on the
basis of the evidence before it, the Panel could properly have concluded
that those eligible to receive funding allocated to research in the
aeronautics sector qualified as “certain enterprises”. For these
reasons, we see no grounds to disturb the Panel’s conclusion that the
evidence before it “indicate[d] that amounts of subsidization were
explicitly set aside under each of the relevant Framework Programmes for
the research efforts of ‘certain enterprises’.”(194)
(c) Individual payments under a generalized programme necessarily
specific?
105. In the context of a dispute regarding an investigating authority’s
determination of de jure specificity, the Panel in Japan —
DRAMs (Korea) addressed the concern that, if an investigating
authority were to focus on individual payments made under a subsidy
programme, rather than the subsidy programme per se, a finding of
specificity would always ensue:
“In reviewing Korea’s claim, we have given careful consideration
to Korea’s argument that the JIA’s approach to specificity would
mean that investigating authorities would no longer need to show that
programmes were specific, but could focus instead on specific
transactions under those programmes. As a general matter, though, if an
investigating authority were to focus on an individual transaction, and
that transaction flowed from a generally available support programme
whose normal operation would generally result in financial contributions
on predetermined terms (that are therefore not tailored to the recipient
company), that individual transaction would not, in our view, become “specific”
in the meaning of Article 2.1 simply because it was provided to a
specific company. An individual transaction would be “specific”,
though, if it resulted from a framework programme whose normal operation
(1) does not generally result in financial contributions, and (2) does
not pre-determine the terms on which any resultant financial
contributions might be provided, but rather requires (a) conscious
decisions as to whether or not to provide the financial contribution (to
one applicant or another), and (b) conscious decisions as to how the
terms of the financial contribution should be tailored to the needs of
the recipient company.”(195)
106. The Panel in Japan —
DRAMs (Korea) also observed
that the relevant restructuring subsidies were provided pursuant to
government entrustment or direction, evidenced in part by the government’s
intent to save the recipient company. This led the Panel to conclude:
“In general, subsidies which are provided pursuant to government
entrustment or direction motivated by an intent to save a single company
from insolvency might reasonably be found to be specific to that
company.”(196)
2. Article 2.1(a): “explicitly limits”
107. The Panel in EC and certain member States — Large Civil
Aircraft defined the term “explicitly limits” in Article 2.1(a)
as follows:
“The specificity principle set out in Article 2.1(a)
focuses on
whether the granting authority, or the legislation pursuant to which the
granting authority operates, explicitly limits access to a subsidy to
certain enterprises. It follows from the ordinary meaning of the word
“explicit” that it is not any limitation on access to a subsidy to
certain enterprises that will make it specific within the meaning of Article 2.1(a), but only a limitation that “[d]istinctly express[es]
all that is meant; leaving nothing merely implied or suggested”; a
limitation that is “unambiguous” and “clear”. In US —
Upland Cotton, the panel observed that the concept of specificity
under Article 2.1 of the SCM Agreement has to do with whether a subsidy
is “sufficiently broadly available throughout an economy as not to
benefit a particular limited group of producers of certain products”.(197)
While we can broadly agree with this statement (particularly in the
context of the facts at issue in US — Upland Cotton), we would
add that it is not only a limitation to a “group of producers of
certain products” that is the focus of the concept of specificity. In
our view, the notion of specificity extends to understanding whether a
subsidy is sufficiently broadly available throughout an economy so as
not to benefit “certain enterprises” as defined in Article 2.1 —
that is, a particular enterprise or industry or a particular group of
enterprises or industries. Thus, a finding of specificity under Article 2.1(a)
requires the establishment of the existence of a limitation that
expressly and unambiguously restricts the availability of a subsidy to
“certain enterprises”, and thereby does not make the subsidy “sufficiently
broadly available throughout an economy”.”(198)
108. Along the same lines, the Panel in US — Large Civil
Aircraft (2nd complaint) stated that:
“Article 2.1(a) focuses on whether the granting authority, or the
legislation pursuant to which the granting authority operates,
explicitly limits access to a subsidy to “certain enterprises”, as
defined in the chapeau to Article 2. According to the ordinary meaning
of the term “explicit”, not just any limit on access to a subsidy
will render it specific within the meaning of Article 2.1(a). Rather,
the limitation must “distinctly express all that is meant; leaving
nothing merely implied or suggested”. The limitation must be “unambiguous”
and “clear”.(199) In other sections of the SCM Agreement, such as
Article 3, which refers to “in law or in fact” export contingency,
panels and the Appellate Body have distinguished between de jure and
de facto analyses by stating that a de jure analysis should be
confined to the text of the relevant legislation or instrument in issue.(200) Although
Article 2.1(a) of the SCM Agreement does not
specifically refer to “in law” or “de jure” specificity,
we note that Article 2.1(c) refers to “in fact” specificity, perhaps
as a means of distinguishing the analysis required under Article 2.1(c)
from that required under Article 2.1(a). However, given that
Article 2.1(a) provides that “where the granting authority, or the legislation
pursuant to which the granting authority operates, explicitly limits
access to a subsidy”, it is clear that the express limitation can be
found either in the legislation by which the granting authority
operates, or in other statements or means by which the granting
authority expresses its will.”(201)
3. Article 2.1(c): de facto specificity
(a) General
109. 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.”(202)
110. The Panel in EC — Countervailing Measures on DRAM Chips discussed
factors which an investigating authority may consider when it has
reasons to believe that the subsidy is de facto specific in the
sense of Article 2.1(c) of the SCM Agreement:
“[A]n authority … may consider such other factors as the 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.”(203)
(b) “other factors may be considered”
111. 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 in 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.(204)
(c) “account be taken of”
112. In EC and certain member States — Large Civil Aircraft,
the Panel stated that:
“The last sentence of Article 2.1(c)
provides that: “In applying
this subparagraph, account shall be taken of … the length of
time during which the subsidy programme has been in operation”. To
take something into account means to take something into reckoning or
consideration; to take something on notice. Therefore, in the context of
the third specificity factor, the last sentence of Article 2.1(c)
requires that the length of time during which the relevant subsidy
programme has been in operation must form part of the consideration
or reckoning of whether the amount of a subsidy granted to certain
enterprises pursuant to that same subsidy programme is
disproportionately large.”(205)
(d) “disproportionately large”
113. In EC and certain member States — Large Civil Aircraft,
the Panel discussed the meaning of a “disproportionately large”
amount of a subsidy in the context of Article 2.1(c). Among other
things, the Panel considered that:
“Something may be said to be “disproportionate” when it is “lacking
proportion”. The ordinary meaning of the word “proportion”
includes “a portion, a part, a share, esp. in relation to a whole”,
“a relative amount or number”, “a comparative relation or ratio
between things in size, quantity, number, etc.”. These meanings suggest
that the inquiry that must be undertaken when assessing whether the
amount of a subsidy is “disproportionately large” will involve
identifying the relationship between the amount of the subsidy at issue
and something else that is “a whole”, and determining whether that
relationship demonstrates that the amount of subsidy is greater than the
amount it would need to be in order to be proportionate — i.e.,
not lacking proportion… .
…
In our view, the language of Article 2.1(c), when interpreted in its
proper context and in the light of its object and purpose, suggests that
where the subsidy at issue has been granted pursuant to a subsidy
programme, that programme should normally be used for the purpose of
identifying the “baseline” or “reference data” needed to perform
a disproportionality analysis. However, as the United States points out,
the absence of any explicit reference to “a subsidy programme” in
the language of Article 2.1(c) suggests that it does not require that
a subsidy programme be used for this purpose in each and every factual
circumstance.”(206)
(e) “predominant use”
114. In EC and certain member States — Large Civil Aircraft,
the Panel discussed the meaning of a “predominant use” in the
context of Article 2.1(c). Among other things, the Panel considered
that:
“The second specificity factor identified in Article 2.1(c)
is “predominant
use by certain enterprises”. As we have already noted, when read in
the light of the first specificity factor (“use of a subsidy programme
by a limited number of certain enterprises”), it is clear that this
factor indirectly refers to “predominant use” of “a subsidy
programme”. The ordinary meaning of the word “predominant”
includes “constituting the main or strongest element; prevailing”.
Thus,” predominant use [of a subsidy programme] by certain enterprises”
may be simply understood to be a situation where a subsidy programme is
mainly, or for the most part, used by certain enterprises.
In considering whether there is “predominant use [of a subsidy
programme] by certain enterprises” for the purpose of making a finding
of specificity, the last sentence of Article 2.1(c)
requires that
account be taken of: (i) “the extent of diversification of economic
activities within the jurisdiction of the granting authority”; and
(ii) “the length of time during which the subsidy programme has been
in operation”. As with determining whether a subsidy has been granted
in “disproportionately large amounts”, the relevance of these two
factors to understanding whether there has been “predominant use [of a
subsidy programme] by certain enterprises” will depend upon the
particular facts. Thus, for example, where a subsidy programme operates
in an economy made up of only a few industries, the fact that those
industries may have been the main beneficiaries of a subsidy programme
may not necessarily demonstrate “predominant use”. Rather, use of
the subsidy programme by those industries may simply reflect the limited
diversification of economic activities within the jurisdiction of the
granting authority. On the other hand, the same subsidy programme
operating in the context of a highly diversified economy that is used
mainly, or for the most part, by only a few industries would tend to
indicate “predominant use”.
Likewise, when taking into account “the length of time during which
the subsidy programme has been in operation”, the use of a subsidy
programme by certain enterprises may not necessarily indicate “predominant
use” in the context of a relatively new subsidy programme that has not
yet operated for enough time to understand its full impact on an
economy. Moreover, it may not always make sense to determine whether
there has been “predominant use” over the entire life of a subsidy
programme, where that programme has operated for decades that have
witnessed a material change in the importance of the subsidized
activities in the wider economy and/or the granting authority’s
economic priorities. As with determining whether a subsidy has been
granted under a long-standing subsidy programme in “disproportionately
large amounts”, a determination of whether there has been “predominant
use” of a long-standing subsidy programme should involve taking into
account the extent to which it would be reasonable and appropriate to
determine whether the subsidy at issue is in fact sufficiently broadly
available throughout an economy so as not to benefit “certain
enterprises” on the basis of the entire duration of the subsidy
programme or some shorter period of time.”(207)
4. Article 2.2: regional specificity
115. In EC and certain member States — Large Civil Aircraft,
the Panel addressed the question whether a subsidy granted by a regional
authority must, to be specific within the meaning of Article
2.2, not
only be limited to a designated region within the territory of the
granting authority, but must in addition be limited to only a subset of
enterprises within that region. The Panel concluded that Article
2.2 is
properly understood to provide that a subsidy available in a designated
region within the territory of the granting authority is specific, even
if it is available to all enterprises in that designated region:
“Article 2.2 is not particularly clearly drafted. It could be
understood, based on the text alone, as establishing specificity on the
basis of a geographical limitation on the recipients (“within a
designated region”), which is the United States’ position. It could
also be understood to establish specificity on the double basis posited
by the European Communities — “certain”, i.e., not all,
enterprises, “within a designated region”. While the text, standing
alone, is not unambiguous in this respect, when the text is considered
in its context and in light of its object and purpose, it is clear to us
that Article 2.2 is properly understood to provide that a subsidy
available in a designated region within the territory of the granting
authority is specific, even if it is available to all enterprises in
that designated region.”(208)
116. Likewise, the Panel in US — Anti-Dumping and Countervailing
Duties (China) also considered the question whether the term “certain
enterprises” in Article 2.2 covers all enterprises located within the
designated geographical region within the jurisdiction of the granting
authority, or is limited to some subset thereof; the Panel reached the
same conclusion as the Panel in EC and certain member States —
Large Civil Aircraft. The Panel stated that the term “certain
enterprises” in Article 2.2 “refers to those enterprises located
within, as opposed to outside, the designated geographical region in
question, with no further limitation within the region being required”.(209)
117. The Panel in US — Anti-Dumping and Countervailing Duties
(China) also addressed the question whether a “designated
geographical region” in the sense of Article
2.2 must necessarily have
some sort of formal administrative or economic identity, or whether any
identified tract of land within the territory of a granting authority
can be a “designated geographical region” for the purposes of a
specificity finding pursuant to Article 2.2. The Panel concluded that a
“designated geographic region” in the sense of Article
2.2 “can
encompass any identified tract of land within the jurisdiction of a
granting authority”.(210)
5. Article 2.3: subsidies falling under Article 3 deemed to be
specific
118. The Panel in 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”(211)
119. The Panel in Canada — Autos quoted
Article 2.3 of the
SCM Agreement and stated that “[g]iven that the central issue of the
claims under the SCM Agreement in this dispute is whether the import
duty exemption falls within the provisions of Article
3, we need not,
and do not, address the question of specificity separately.(212)
120. In US — FSC, the Panel found that the measure at issue
was a subsidy within the meaning of Article 1, and then explained that:
“A subsidy is subject to the provisions of the SCM Agreement only
if it is specific within the meaning of Article 2.
Article 2.3 provides,
however, that “[a]ny subsidy falling under the provisions of Article 3
shall be deemed to be specific”. Thus, we proceed directly to our
analysis of whether the Act is contingent upon export performance and
upon the use of domestic over imported goods within the meaning of
Article 3 of the SCM Agreement.”(213)
121. The Panel in US — Upland Cotton applied
Article 2.3
after finding that certain payments were prohibited subsidies under
Articles 3.1(a) and 3.1(b):
“We recall our findings that user marketing (Step 2) payments to
domestic users and exporters under section 1207(a) of the FSRI Act of
2002 are prohibited subsidies under Articles 3.1(a) and
(b) of the SCM Agreement. As we have found that user marketing (Step 2) payments to
domestic users and exporters under section 1207(a) of the FSRI Act of
2002 ‘fall within the provisions of Article 3’,we consequently find
that these are ‘specific’ subsidies within the meaning of Article
2.3 of the SCM Agreement. Furthermore, because of the substantial
similarities between user marketing (Step 2) payments to domestic users
and exporters under section 1207(a) of the FSRI Act of 2002 and under
section 136 of the FAIR Act of 1996, we find that the latter are also
specific within the meaning of Article 2.3 of the SCM
Agreement.”(214)
122. The Panel in Korea — Commercial Vessels concluded that
the effect of Article 2.3 is not restricted to prohibited export subsidy
claims, and that Article 2.3 applies in respect of the entirety of the
SCM Agreement. Thus “a subsidy that is specific under Article 2.3
(as
a result of export contingency) is specific for the purpose of both Part
II (prohibited export subsidy) and Part III (actionable subsidy) claims.”(215)
123. In US — Large Civil Aircraft
(2nd complaint), the Panel
concluded that certain export subsidies were specific by virtue of
Article 2.3.(216)
Part II: Prohibited Subsidies
IV. 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 lawor 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. “Except as provided in the Agreement on Agriculture”
124. In US — Upland Cotton, the Appellate Body noted that
the introductory phrase “[e]xcept as provided in the Agreement on
Agriculture” applies to both paragraphs (a) and
(b) of paragraph 1 of
Article 3, which deal with both export subsidies and import substitution
subsidies, respectively. However, the Appellate Body found no provision
in the Agreement on Agriculture that dealt specifically with import
substitution subsidies (see also paragraphs 184–187
below):
“We are mindful that the introductory language of
Article 3.1 of
the SCM Agreement clarifies that this provision applies ‘[e]xcept
as provided in the Agreement on Agriculture’. Furthermore, as the
United States has pointed out, this introductory language applies to
both the export subsidy prohibition in paragraph (a) and to the
prohibition on import substitution subsidies in paragraph (b) of Article
3.1. As we explained previously, in our review of the provisions of the Agreement
on Agriculture relied on by the United States, we did not find a
provision that deals specifically with subsidies that have an import
substitution component. By contrast, the prohibition on the provision of
subsidies contingent upon the use of domestic over imported goods in
Article 3.1(b) of the SCM Agreement is explicit and clear.
Because Article 3.1(b) treats subsidies contingent on the use of
domestic over imported products as prohibited subsidies, it would be
expected that the drafters would have included an equally explicit and
clear provision in the Agreement on Agriculture if they had
indeed intended to authorize such prohibited subsidies provided in
connection with agricultural goods. We find no provision in the Agreement
on Agriculture dealing specifically with subsidies contingent upon
the use of domestic over imported agricultural goods.”(217)
2. Article 3.1(a)
(a) General
125. In Canada — Aircraft Credits and Guarantees, the Panel
first recalled the text of Article 3.1(a) 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 Agreement and (ii) contingency of that
subsidy upon export performance”.(218)
126. The Appellate Body in 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.(219) The Appellate Body stated:
“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.(220) 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’.(221) 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’.”(222)
(b) “contingent in law … upon export performance”
127. In Canada — Autos, the Appellate Body addressed the
distinction between a de jure and a de facto export
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.”(223)
128. The Appellate Body in 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) … ”.(224)
129. Before the Panel in 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’”.(225) 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.”(226)
130. 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) … .”(227)
131. In US — Upland Cotton, the Appellate Body considered
that a payment made on proof of exportation was export-contingent even
though the payments under different conditions were also available,
without exportation, on proof of sale to a domestic consumer:
“In sum, we agree with the Panel’s view that Step 2 payments are
export-contingent and, therefore, an export subsidy for purposes of
Article 9 of the Agreement on Agriculture and Article 3.1(a) of
the SCM Agreement. The statute and regulations pursuant to which
Step 2 payments are granted, on their face, condition payments to
exporters on exportation. In order to claim payment, an exporter must
show proof of exportation. If an exporter does not provide proof of
exportation, the exporter will not receive a payment. This is sufficient
to establish that Step 2 payments to exporters of United States upland
cotton are ‘conditional upon export performance’ or ‘dependent for
their existence on export performance’. That domestic users may also
be eligible to receive payments under different conditions does not
eliminate the fact that an exporter will receive payment only upon proof
of exportation.”(228)
(c) “contingent … in fact … upon export performance”
(i) De facto contingency
132. Regarding the interpretation of the term “contingent … in
fact”, the Panel in 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.”(229)
133. 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.(230) 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.”(231)
134. While the Appellate Body in Canada — Aircraft largely
agreed with the findings of the Panel on the interpretation of the term
“contingency”, it nevertheless cautioned the use of 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.”(232)
135. The Appellate Body in 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.”(233)
136. The Appellate Body in 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.(234)
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.”(235)
137. The Panel in 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’”.(236) 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.”(237)
138. The Panel in 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 147
below). However, after referring to statements by the Appellate Body in Canada
— Aircraft,(238) 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).(239)
139. In EC and certain member States — Large Civil Aircraft,
the Appellate Body established the following test for determining
whether a subsidy is de facto contingent on export performance:
“The existence of de facto export contingency, as set out
above, “must be inferred from the total configuration of the
facts constituting and surrounding the granting of the subsidy”, which
may include the following factors: (i) the design and structure of the
measure granting the subsidy; (ii) the modalities of operation set out
in such a measure; and (iii) the relevant factual circumstances
surrounding the granting of the subsidy that provide the context for
understanding the measure’s design, structure, and modalities of
operation.
Moreover, where relevant evidence exists, the assessment could be
based on a comparison between, on the one hand, the ratio of anticipated
export and domestic sales of the subsidized product that would come
about in consequence of the granting of the subsidy, and, on the other
hand, the situation in the absence of the subsidy. The situation in the
absence of the subsidy may be understood on the basis of historical
sales of the same product by the recipient in the domestic and export
markets before the subsidy was granted. In the event that there are no
historical data untainted by the subsidy, or the subsidized product is a
new product for which no historical data exists, the comparison could be
made with the performance that a profit-maximizing firm would
hypothetically be expected to achieve in the export and domestic markets
in the absence of the subsidy. Where the evidence shows, all other
things being equal, that the granting of the subsidy provides an
incentive to skew anticipated sales towards exports, in comparison with
the historical performance of the recipient or the hypothetical
performance of a profit maximizing firm in the absence of the subsidy,
this would be an indication that the granting of the subsidy is in fact
tied to anticipated exportation within the meaning of Article 3.1(a) and
footnote 4 of the SCM Agreement.
The following numerical examples illustrate when the granting of a
subsidy may, or may not, be geared to induce promotion of future export
performance by a recipient. Assume that a subsidy is designed to allow a
recipient to increase its future production by five units. Assume
further that the existing ratio of the recipient’s export sales to
domestic sales, at the time the subsidy is granted, is 2:3. The granting
of the subsidy will not be tied to anticipated exportation if,
all other things being equal, the anticipated ratio of export sales to
domestic sales is not greater than the existing ratio. In other words,
if, under the measure granting the subsidy, the recipient would not be
expected to export more than two of the additional five units to be
produced, then this is indicative of the absence of a tie. By contrast,
the granting of the subsidy would be tied to anticipated exportation if,
all other things equal, the recipient is expected to export at least
three of the five additional units to be produced. In other words, the
subsidy is designed in such a way that it is expected to skew the
recipient’s future sales in favour of export sales, even though the
recipient may also be expected to increase its domestic sales.”(240)
140. The Appellate Body emphasized that the test for determining
whether a subsidy is de facto contingent on export performance is
an objective one, and addressed the relevance of a government’s
reasons for granting a subsidy:
“The standard for determining whether the granting of a subsidy is
“in fact tied to … anticipated exportation” is an objective
standard, to be established on the basis of the total configuration of
facts constituting and surrounding the granting of the subsidy,
including the design, structure, and modalities of operation of the
measure granting the subsidy. Indeed, the conditional relationship
between the granting of the subsidy and export performance must be
objectively observable on the basis of such evidence in order for the
subsidy to be geared to induce the promotion of future export
performance by the recipient. The standard for de facto export
contingency is therefore not satisfied by the subjective motivation of
the granting government to promote the future export performance of the
recipient. In this respect, we note that the Appellate Body and panels
have, on several occasions, cautioned against undue reliance on the
intent of a government behind a measure to determine the WTO consistency
of that measure. The Appellate Body has found that “the intent, stated
or otherwise, of the legislators is not conclusive” as to
whether a measure is consistent with the covered agreement. In our view,
the same understanding applies in the context of a determination on
export contingency, where the requisite conditionality between the
subsidy and anticipated exportation under Article 3.1(a) and
footnote 4
of the SCM Agreement must be established on the basis of
objective evidence, rather than subjective intent. We note, however,
that while the standard for de facto export contingency cannot be
satisfied by the subjective motivation of the granting government,
objectively reviewable expressions of a government’s policy objectives
for granting a subsidy may, however, constitute relevant evidence in an
inquiry into whether a subsidy is geared to induce the promotion of
future export performance by the recipient.
Similarly, the standard does not require a panel to ascertain a
government’s reason(s) for granting a subsidy. The government’s
reason for granting a subsidy only explains why the subsidy is
granted. It does not necessarily answer the question as to what the
government did, in terms of the design, structure, and modalities of
operation of the subsidy, in order to induce the promotion of future
export performance by the recipient. Indeed, whether the granting of a
subsidy is conditional on future export performance must be determined
by assessing the subsidy itself, in the light of the relevant
factual circumstances, rather than by reference to the granting
authority’s reasons for the measure. This is not to say, however, that
evidence regarding the policy reasons of a subsidy is necessarily
excluded from the inquiry into whether a subsidy is geared to induce the
promotion of future export performance by the recipient.”(241)
(ii) Treatment of facts in the determination of de facto export
contingency
Case-by-case approach
141. The Panel in 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.”(242)
142. The Panel in 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.”(243)
143. The Panel in Canada — Aircraft, in a finding expressly
endorsed by the Appellate Body,(244) confirmed this broad and case-by-case
approach to the factual analysis of the Panel in Australia —
Automotive Leather II. While it also emphasized that no factual
considerations should automatically 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.”(245)
144. The Appellate Body in Canada — Aircraft agreed with the
Panel that 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:(246)
“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.”(247)
Which facts to consider
145. The Panel in Australia — Automotive Leather II held
that “the fact of expectation cannot be the sole determinative fact on
the evaluation”.(248) 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
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.”(249)
146. While the Panel in Canada — Aircraft found that no one
factual consideration should automatically 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.”(250) 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.”(251)
Relevance of the size of the domestic industry
147. The Panel in Canada — Aircraft Credits and Guarantees referred
to the findings of the Panel in Australia — Automotive Leather II(252)
(see paragraph 142 above) 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 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.”(253)
(d) “Export performance”
(i) General
148. The Panel in 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.”(254)
149. The Panel in 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.” (255)
The Panel supported its rejection of this
argument 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.”(256)
(ii) “produced within or outside the Member”
150. The Appellate Body in 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.”(257)
151. 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 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”.(258)
152. The Appellate Body in 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. 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
153. In Canada — Dairy (Article 21.5 — New Zealand and US),
the Panel noted that a finding of violation with respect to Article 3.1
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.”(259)
(ii) Article 27
154. The Panel in 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).”(260)
155. The Appellate Body in 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”.(261)
156. The Appellate Body in 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.”(262)
157. As regards the extension of the
Article 27.4 transition period
for developing and least-developed countries of the export subsidy
prohibition, see paragraphs 530 and
555–560
below. With regard to the
graduation methodology from Annex VII(b), see
paragraphs 681–685
below.
(iii) Footnote 59
158. 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 domestic-source
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.”(263)
159. 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.”(264)
160. The Appellate Body in 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.(265)
(f) Annex
VII(b)
161. With regard to the graduation methodology from
Annex VII(b), see
paragraphs 681–685 below.
(g) Footnote 4
162. With respect to the relationship between “tied to” in
footnote 4 and “contingent … in law”, see paragraphs 130–133
above.
163. With respect to the three substantive elements in
footnote 4 as
identified by the Appellate Body in Canada — Aircraft, see
paragraph 136 above.
164. With respect to the requirement to examine all facts concerning
the grant or maintenance of a subsidy, see paragraph 141
above. As
regards the significance of the phrase “enterprises which export”
within the de facto export contingency analysis, see paragraphs
141, 144 and 147 above.
3. Article 3.1(b)
(a) “subsidies contingent … upon the use of domestic over
imported goods”
(i) Contingency
165. 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’(266),” 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)”.(267)
(ii) De facto contingency
166. 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.(268) 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.”(269)
167. 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.’”(270)
(b) Relationship with other Articles
(i) Chapeau of Article 3.1
168. As regards the relationship between
Article 3.1(b) and the
introductory phrase “[e]xcept as provided in the Agreement on
Agriculture” in the chapeau of Article 3.1, see
paragraph 124 above.
(ii) Article 3.1(a)
169. As regards the use of
Article 3.1(a) as context for the
interpretation of Article 3.1(b), see paragraphs 166–167
above.
(iii) Article 27
170. As regards the transition period exemptions for developing and
least developed countries, see paragraph 536
below.
(c) Relationship with other Agreements
(i) Agreement on Agriculture
171. As regards the relationship of
Article 3.1(b) of the SCM
Agreement with the Agreement on Agriculture, in particular, Articles 6.3
and 21.1 and paragraph 7 of Annex
3, see the relevant Sections of the
Chapter on the Agreement on Agriculture.
4. Article 3.2
(a) “grant”
172. 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 in 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.”(271) 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’.”(272)
173. In applying this standard to the facts of the case before it,
the Panel in 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.”(273) As a consequence, the Panel in Canada
— Aircraft held that it “may not make any findings on the EDC
programme per se”.(274)
174. The Panel in 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.”(275)
175. The Panel in Brazil — Aircraft, in a finding
subsequently upheld by the Appellate Body,(276) 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 semi-annual 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 the Brazil’s PROEX expenditures on that basis.”(277)
176. 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”.(278)
177. The Panel in 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 is exists for the purposes of Article
1.”(279)
(b) Relationship with other Articles
(i) Article 3.1
178. 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.”(280)
(ii) Article 27.4
179. With respect to the relationship with
Article 27.4, see
paragraphs 174–176 above.
5. Relationship with other WTO Agreements
(a) GATT 1994
180. 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.”(281)
(b) Agreement on Agriculture
181. 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 of 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.”(282)
182. The Appellate Body in 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.(283)
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.”(284)
183. 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.(285)
184. In upholding the Panel’s findings that Step 2 payments to
domestic users of United States upland cotton pursuant to a specific
provision of US legislation are subsidies contingent on the use of
domestic over imported goods inconsistent with Articles 3.1(b) and
3.2
of the SCM Agreement, the Appellate Body in US — Upland Cotton rejected
the United States’ argument on appeal that Article 3.1(b) is
inapplicable to Step 2 payments to domestic users because such payments
are consistent with the United States’ domestic support reduction
commitments under the Agreement on Agriculture.(286)
185. In finding that
Article 3.1(b) of the SCM Agreement is
applicable to agricultural products, the Appellate Body examined the
relevant provisions of the Agreement on Agriculture in order to
determine whether it contains specific provisions that deal specifically
with subsidies contingent upon the use of domestic over imported goods
in light of the introductory language in Article 3 of the SCM
Agreement,
which provides “[e]xcept as provided in the Agreement on
Agriculture, as well as Article 21 of Agreement on Agriculture,
which provides that the covered agreements on goods apply subject to the
provisions of the Agriculture Agreement”.(287)
186. The Appellate Body in US — Upland Cotton found that
both paragraph 7 of Annex 3 and
Article 6.3 of the Agreement on
Agriculture do not deal specifically with subsidies contingent upon the
use of domestic over imported goods as set forth in Article 3.1(b) of
the SCM Agreement:
“It may well be that a measure that is an import substitution
subsidy could fall within the second sentence of paragraph 7 as “[m]easures
directed at agricultural processors [that] shall be included [in the AMS
calculation] to the extent that such measures benefit the producers of
the basic agricultural products”. There is nothing, however, in the
text of paragraph 7 that suggests that such measures, when they are
import substitution subsidies, are exempt from the prohibition in
Article 3.1(b) of the SCM Agreement. We agree with the Panel that
there is a clear distinction between a provision that requires a Member
to include a certain type of payment (or part thereof) in its AMS
calculation and one that would authorize subsidies that are contingent
on the use of domestic over imported goods.
… Like the Panel, we do not believe that the scope of
paragraph 7
is limited to measures that have an import substitution component in
them. There could be other measures covered by paragraph 7 of Annex 3
that do not necessarily have such a component. Indeed, Brazil submits
that if the Step 2 payments were provided to United States processors of
cotton, regardless of the origin of the cotton, these processors “would
still buy at least some U.S. upland cotton, so producers would
continue to derive some benefit”. Thus, paragraph 7 of Annex 3
refers more broadly to measures directed at agricultural processors that
benefit producers of a basic agricultural product and, contrary to the
United States’ assertion, it is not rendered inutile by the Panel’s
interpretation. WTO Members may still provide subsidies directed at
agricultural processors that benefit producers of a basic agricultural
commodity in accordance with the Agreement on Agriculture, as
long as such subsidies do not include an import substitution component.
…
Like paragraph 7 of Annex
3, Article 6.3 does not explicitly refer to
import substitution subsidies. Article 6.3 deals with domestic support.
It establishes only a quantitative limitation on the amount of
domestic support that a WTO Member can provide in a given year. The
quantitative limitation in Article 6.3 applies generally to all domestic
support measures that are included in a WTO Member’s AMS. Article
3.1(b) of the SCM Agreement prohibits subsidies that are
contingent — that is, “conditional” — on the use of domestic
over imported goods.
Article 6.3
does not authorize subsidies that are contingent on the
use of domestic over imported goods. It only provides that a WTO Member
shall be considered to be in compliance with its domestic support reduction
commitments if its Current Total AMS does not exceed that Member’s
annual or final bound commitment level specified in its Schedule. It
does not say that compliance with Article 6.3 of the Agreement on
Agriculture insulates the subsidy from the prohibition in
Article 3.1(b). We, therefore, agree with the Panel that:
Article 6.3 does not provide that compliance with such ‘domestic
support reduction commitments’ shall necessarily be considered to be
in compliance with other applicable WTO obligations. Nor does it contain
an explicit textual indication that otherwise prohibited measures are
necessarily justified by virtue of compliance with the domestic support
reduction commitments.”(288),(289)
187. The Appellate Body in US — Upland Cotton also found
that since the introductory phrase “[e]xcept as provided in the Agreement
on Agriculture” in Article 3.1 of the SCM Agreement applies
to both the export subsidy prohibition in Article 3.1(a) and the import
substitution subsidy prohibition in Article 3.1(b) it is reasonable to
conclude that the drafters would have also included an explicit and
clear provision in the Agreement on Agriculture if it was their
intention to authorize these prohibited subsidies in respect of
agricultural products.(290) Moreover, in looking at the introductory
phrase, the Appellate Body agreed with the Panel that Article 3.1(b) of
the SCM Agreement can be read together with provisions of the Agreement
on Agriculture pertaining to domestic support coherently and
consistently that gives effective meaning to the relevant terms of both
agreements.(291)
Footnotes:
1. Panel Report, Brazil — Aircraft,
para. 7.26.
back to text
2. Panel Report, Canada — Aircraft,
para. 9.119.
back to text
3. Panel Report, US — Exports Restraints,
para. 8.62.
back to text
4. Panel Report, US — Exports Restraints,
para. 8.63.
back to text
5. (footnote original) Appellate Body Report on Brazil
— Desiccated Coconut, at 181. back to text
6. (footnote original) Panel Report,
para. 8.32.
back to text
7. (footnote original) Ibid., para. 8.68.
back to text
8. Appellate Body Report, US — Carbon Steel,
paras. 73–74.
back to text
9. Panel Report, US — FSC (Article 21.5 — EC),
para.
8.39. back to text
10. Panel Report, US — FSC (Article 21.5 — EC),
para.
8.39. back to text
11. Appellate Body Report, US — Softwood Lumber IV,
para.
64. back to text
12. Panel Report, Japan — DRAMs (Korea), footnote 605.
back to text
13. (footnote original) In making this observation, the
Appellate Body based itself on the 1986 Punta del Este Ministerial
Declaration, which initiated the Uruguay Round, and charted the course
of the negotiations. (See Appellate Body Report, US — Carbon Steel,
footnote 65 to para. 73 (quoting Ministerial Declaration on the Uruguay
Round, GATT Doc. No. MIN.DEC (20 September 1986), p. 7))
back to text
14. (footnote original) Appellate Body Report, US — Softwood Lumber IV,
para. 64. (footnote omitted)
back to text
15. (footnote original) Appellate Body Report, US —
Countervailing Duty Investigation on DRAMS, para. 115.
back to text
16. (footnote original) Moreover, a finding that an entity
is a public body does not, in itself, result in the application of the
“disciplines” of the SCM Agreement, as the financial
contribution by the public body must confer a benefit and the subsidy
granted must be specific for such disciplines to apply.
back to text
17. Appellate Body Report, US — Anti-Dumping and
Countervailing Duties (China), paras. 301–303.
back to text
18. Appellate Body Report, Brazil — Aircraft,
para. 157.
back to text
19. (footnote original) Appellate Body Report on Brazil
— Aircraft, para. 157 (emphasis in original).
back to text
20. Panel Report, US — Export Restraints,
para. 8.20.
back to text
21. (footnote original) Appellate Body Report, Brazil — Aircraft,
para. 157. back to text
22. Appellate Body Report, US — Softwood Lumber IV,
para.
51. back to text
23. Panel Report, US — Export Restraints,
paras. 8.65
and 8.73. back to text
24. Appellate Body Report, US — Softwood Lumber IV,
para.
52. back to text
25. Panel Report, US — Softwood Lumber IV, footnote 35.
back to text
26. Panel Report, US — Large Civil Aircraft (2nd complaint),
para. 7.955. back to text
27. Panel Report, Korea — Commercial Vessels,
para.
7.50. back to text
28. (footnote original) In this context, we note that the
panel in US — Countervailing Duty Investigation on DRAMS commented,
with respect to certain entities, that the USDOC had treated as “private
bodies”, that, “[d]epending on the circumstances”, the evidence
“might well have justified treatment of such creditors as public
bodies.” (Panel Report, US — Countervailing Duty Investigation on
DRAMS, footnote 29 to para. 7.8) While we do not agree with that
panel’s implication that the particular evidence to which it referred
— evidence of government ownership — could be decisive, we do
consider that the statement illustrates that the analysis of whether the
conduct of a particular entity is conduct of the government or a public
body or conduct of a private body is indeed multi-faceted and that an
entity may display characteristics pointing in different directions.
back to text
29. Appellate Body Report, US — Anti-Dumping and
Countervailing Duties (China), paras. 317–318.
back to text
30. Panel Report, Korea — Commercial Vessels,
paras.
7.424–425. back to text
31. Panel Report, Korea — Commercial Vessels,
paras.
7.28. back to text
32. Panel Report, Korea — Commercial Vessels,
paras.
7.29. back to text
33. Panel Report, Korea — Commercial Vessels,
paras.
7.411–7.413, 7.420. back to text
34. Panel Report, Japan — DRAMs (Korea),
para. 7.442.
back to text
35. Panel Report, Japan — DRAMs (Korea),
paras. 7.443–7.444.
back to text
36. Appellate Body Report, Japan — DRAMs (Korea),
paras.
250–252. back to text
37. (footnote original) Appellate Body Report, Japan — DRAMs (Korea),
para. 250. back to text
38. Panel Report, EC and certain member States — Large Civil
Aircraft, para. 7.1291. back to text
39. (footnote original) Appellate Body Report, Japan — DRAMs (Korea),
para. 250. back to text
40. Panel Report, EC and certain member States — Large Civil
Aircraft, para. 7.1318. back to text
41. (footnote original) Shorter Oxford English
Dictionary, L. Brown (ed.) (Clarendon Press, 2002), Vol. II, p.
3367. See also, Webster’s Online Dictionary, defining
“transfer” to mean, among other things, the “conveyance of right,
title, or property, either real or personal, from one person to another,
whether by sale, by gift, or otherwise”. back to text
42. (footnote original) Shorter Oxford English
Dictionary, L. Brown (ed.) (Clarendon Press, 2002), Vol. I, p. 1042.
See also, Webster’s Online Dictionary, defining “funds”
to mean, among other things, “Assets in the form of money” and “A
reserve of money set aside for some purpose.” back to text
43. (footnote original) Panel Report, EC —
Countervailing Measures on DRAM Chips, para. 7.92 (“Article
1.1(a)(1)(i) of the SCM Agreement provides that there is a
financial contribution where a government practice involves a direct
transfer of funds, such as in the case of a grant, loan and equity
infusion for example. The purchase of corporate bonds is such a
direct transfer of funds, and therefore constitutes a financial
contribution.”) (emphasis added) back to text
44. (footnote original) Appellate Body Report, Japan — DRAMs (Korea),
para. 250 (“In our view, the term “funds”
encompasses not only “money” but also financial resources and other
financial claims more generally. The concept of “transfer of funds”
adopted by Korea is too literal and mechanistic because it fails to
encapsulate how financial transactions give rise to an alteration of
obligations from which an accrual of financial resources results.”)
back to text
45. Panel Report, US — Large Civil Aircraft (2nd complaint),
para. 7.954. back to text
46. Panel Report, Brazil — Aircraft,
paras. 7.68 and
7.70. back to text
47. Appellate Body Report, Brazil — Aircraft,
para. 157.
back to text
48. Panel Report, Brazil — Aircraft,
para. 7.13.
back to text
49. Panel Report, EC and certain member States — Large Civil
Aircraft, paras. 7.302, 7.304 and 7.1495. back to text
50. (footnote original) Shorter Oxford English Dictionary,
L. Brown (ed.) (Clarendon Press, 1993), Vol. II, p. 2302. This is
confirmed by Webster’s New Encyclopedic Dictionary, (Könemann,
1993), p. 788, which gives the definition of “potential” as “capable
of becoming real … something that can develop or become actual”.
back to text
51. Panel Report, US — Large Civil Aircraft
(2nd complaint),
para. 7.164. back to text
52. Appellate Body Report, US — FSC,
para. 90.
back to text
53. Panel Report, US — FSC,
para. 7.45.
back to text
54. Appellate Body Report, US — FSC,
para. 91.
back to text
55. Appellate Body Report, US — FSC,
paras. 90–91.
back to text
56. Appellate Body Report, US — FSC (Article 21.5 — EC),
para. 91. back to text
57. Appellate Body Report, US — FSC (Article 21.5 — EC),
para. 91. back to text
58. Appellate Body Report, US — FSC (Article 21.5 — EC),
paras. 91 and 98. back to text
59. Appellate Body Report, Canada — Autos,
para. 91.
back to text
60. Appellate Body Report, Canada — Autos,
para. 92.
back to text
61. Appellate Body Report, Canada — Autos,
para. 92.
back to text
62. Panel Report, US — Large Civil Aircraft
(2nd complaint),
para. 7.120. back to text
63. Panel Report, US — Large Civil Aircraft
(2nd complaint),
para. 7.121. back to text
64. Panel Report, US — Large Civil Aircraft
(2nd complaint),
para. 7.133. The Panel also considered a number of other measures under
Article 1.1(a)(1)(ii). See Panel Report, US — Large Civil Aircraft
(2nd complaint),
paras. 7.310–7.39, 7.504–7.514, 7.522–7.546,
and 7.706–7.711. back to text
65. Appellate Body Report, US — Softwood Lumber IV,
para.
52. back to text
66. Appellate Body Report, US — Softwood Lumber IV,
para.
53. back to text
67. (footnote original) United States’ first written
submission to the Panel, para. 29, referring to The New Shorter
Oxford English Dictionary, supra, footnote 81, Vol. II, p.
2393. We observe that this definition is unchanged in the recently
published fifth edition of the Shorter Oxford English Dictionary,
supra, footnote 83, Vol. II, p. 2382. back to text
68. (footnote original) Collins Dictionary of the
English Language, G.A. Wilkes (ed.) (Wm. Collins Publishing, 1979),
p. 1176. back to text
69. Appellate Body Report, US — Softwood Lumber IV,
paras. 69–74. back to text
70. Appellate Body Report, US — Softwood Lumber IV,
para.
75. back to text
71. Appellate Body Report, EC and certain member States —
Large Civil Aircraft, para. 966. back to text
72. Appellate Body Report, EC and certain member States —
Large Civil Aircraft, para. 963 (citing Shorter Oxford English
Dictionary, 6th edn, W. R. Trumble, A. Stevenson (eds.) (Oxford
University Press, 2007), Vol. 2, p. 2383.) back to text
73. Appellate Body Report, EC and certain member States —
Large Civil Aircraft, para. 964. back to text
74. Appellate Body Report, EC and certain member States —
Large Civil Aircraft, para. 965. back to text
75. (footnote original) Article 31(1) of the Vienna
Convention on the Law of Treaties (the “Vienna Convention”)
provides: “[a] treaty shall be interpreted in good faith in accordance
with the ordinary meaning to be given to the terms of the treaty in
their context and in the light of its object and purpose”. (Done at
Vienna, 23 May 1969, 1155 U.N.T.S. 331; 8 International Legal Materials
679) back to text
76. (footnote original) Panel Report,
paras. 7.23–7.24,
citing Black’s Law Dictionary, 7th ed., B. A. Garner
(ed.) (West Group, 1999), pp. 701–702. The Panel also noted that The
Shorter Oxford Dictionary defines “goods” as “saleable
commodities, merchandise, wares”. (The Shorter Oxford Dictionary,
L. Brown (ed.) (Clarendon Press, 1993), Vol. I, p. 1116)
back to text
77. (footnote original) Panel Report,
para. 7.23.
back to text
78. (footnote original) Shorter Oxford English
Dictionary, 5th ed., W. R. Trumble, A. Stevenson (eds.) (Oxford
University Press, 2002), Vol. I, p. 1125. back to text
79. (footnote original) Appellate Body Report, Canada
— Aircraft, para. 153. See also, Appellate Body Report, EC —
Asbestos, para. 92. back to text
80. (footnote original) European Communities’ third
participant’s submission, para. 7. The term “biens”
includes “chose matérielle susceptible d’appropriation,
et tout droit faisant partie du patrimoine” and can mean “acquêt,
… capital, cheptel, domaine, fortune, … fruit,
héritage, patrimoine, possession, produit, propriété, récolte,
richesse”. (Le Nouveau Petit Robert, P. Robert (ed.) (Dictionnaires
le Robert, 2003), p. 252) back to text
81. (footnote original) According to the Diccionario de
la Lengua Española, the term “bienes” encompasses both
“bienes muebles” and “bienes immuebles”. (Diccionario
de la Lengua Española, (22nd ed.) (Real Academia Española, 2001),
p. 213) back to text
82. Appellate Body Report, US — Softwood Lumber IV,
paras. 58–59. back to text
83. (footnote original) Appellate Body Report, US — Carbon Steel,
paras. 73–74. back to text
84. Appellate Body Report, US — Softwood Lumber IV,
para.
64. back to text
85. Panel Report, EC and certain member States — Large Civil
Aircraft, paras. 7.1036–7.1037. back to text
86. (footnote original) Take as an extreme example a 2
kilometer stretch of railway from a mine to a mineral processing plant,
used for transporting raw ore for processing, on land owned by the
mining company. It seems clear to us that the provision by a government
of such a railway cannot properly be considered “general
infrastructure” simply because it is a railway. back to text
87. Panel Report, EC and certain member States — Large Civil
Aircraft, para. 7.1039. back to text
88. Panel Report, US — Large Civil Aircraft
(2nd complaint),
para. 7.429. back to text
89. Panel Report, US — Large Civil Aircraft
(2nd complaint),
para. 7.431. back to text
90. Panel Report, US — Large Civil Aircraft
(2nd complaint),
footnote 1681. back to text
91. Panel Report, US — Large Civil Aircraft
(2nd complaint),
paras. 7.953–7.970. back to text
92. (footnote original) Appellate Body Report, US —
Underwear, p. 17. back to text
93. (footnote original) Appellate Body Report, EC —
Hormones, para. 181. back to text
94. (footnote original) Appellate Body Report, India
— Patents (US), para. 45. back to text
95. Panel Report, US — Large Civil Aircraft
(2nd complaint),
para. 7.970. back to text
96. Panel Report, US — Exports Restraints,
paras. 8.15–8.75.
back to text
97. Panel Report, Korea — Commercial Vessels,
paras.
7.350–7.426. back to text
98. Panel Report, US — Anti-Dumping and Countervailing
Duties (China), paras. 12.32–12.38. back to text
99. Panel Report, US — Countervailing Duty Investigation on
DRAMS, paras. 7.10–7.178. back to text
100. Panel Report, EC — Countervailing Measures on DRAM
Chips, paras. 7.18–7.146. back to text
101. Panel Report, Japan — DRAMs (Korea),
paras. 7.49–7.254.
back to text
102. Appellate Body Report, US — Softwood Lumber IV,
para. 52. back to text
103. Appellate Body Report, US —
Countervailing Duty Investigation on DRAMS, para.107. back to text
104. Appellate Body Report, US —
Countervailing Duty Investigation on DRAMS, para. 108. back to text
105. (footnote original) Spanish and French versions of
the SCM Agreement use the verbs “encomendar” and “charger”,
respectively, which have similar meanings. The Diccionario de la
lengua española defines “encomendar” as: Encargar a alguien que
haga algo o que cuide de algo o de alguien. (Diccionario de la lengua
española, 22nd edn (Real Academia Española, 2001), p. 612) Le
Nouveau Petit Robert defines “charger” as: Revêtir d’une
fonction, d’un office… . commettre, déléguer, préposer (à). (Le
Nouveau Petit Robert, P. Varrod (ed.) (Dictionnaires Le Robert,
1993), p. 403) back to text
106. Appellate Body Report, US —
Countervailing Duty Investigation on DRAMS, paras. 108, 110, 111 and 116.
back to text
107. Appellate Body Report, US —
Countervailing Duty Investigation on DRAMS, para. 113. back to text
108. Appellate Body Report, US —
Countervailing Duty Investigation on DRAMS, para. 114. back to text
109. Appellate Body Report, Japan — DRAMs (Korea),
para.
138. back to text
110. (footnote original) Panel Report, US — Export Restraints,
para. 8.49. back to text
111. (footnote original) Appellate Body Report, US —
Countervailing Duty Investigation on DRAMS, paras. 111 and 116.
back to text
112. Appellate Body Report, US — Anti-Dumping and
Countervailing Duties (China), paras. 29–294.
back to text
113. Appellate Body Report, US — Anti-Dumping and
Countervailing Duties (China), para. 297. back to text
114. Appellate Body Report, US — Anti-Dumping and
Countervailing Duties (China), para. 302. back to text
115. Panel Report, Canada — Aircraft,
para. 9.112.
back to text
116. Panel Report, Canada — Aircraft,
para. 9.112.
back to text
117. Panel Report, Canada — Aircraft,
para. 9.112.
back to text
118. Appellate Body Report, Canada
— Aircraft, para.
154. back to text
119. Panel Report, Canada — Aircraft,
para. 9.112.
back to text
120. Panel Report, Canada — Aircraft,
para. 9.112.
back to text
121. Appellate Body Report, Canada
— Aircraft, paras.
157 and 158. back to text
122. See e.g. Panel Report, Canada — Aircraft,
para.
9.112; Panel Report, Brazil — Aircraft,
para. 7.24; Appellate Body Report, Canada
— Aircraft, paras. 154, 157; Panel Report, Korea — Commercial Vessels,
para. 7.427; Panel Report, EC — Countervailing Measures on DRAM
Chips, para. 7.176; Appellate Body Report, Japan — DRAMs (Korea),
para. 225; Appellate Body Report, EC and certain member States —
Large Civil Aircraft, para.
705. back to text
123. Panel Report, US — Large Civil Aircraft (2nd complaint),
para. 7.475. back to text
124. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), paras. 5.27–5.28. back to text
125. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), footnote 41. back to text
126. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada II), footnote 42. back to text
127. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.229. back to text
128. (footnote original) We note that such an approach to
determining the existence of benefit was upheld by the panel in EC
— Countervailing Measures on DRAM Chips. That panel upheld the
investigating authority’s finding of benefit in respect of the October
2001 restructuring on the basis that the investigating authority had
reasonably concluded that none of the nonentrusted / directed creditors
had acted “in a commercially reasonable manner.” (EC —
Countervailing Measures on DRAM Chips, para. 7.209)
back to text
129. Panel Report, Japan — DRAMs (Korea),
paras. 7.275
and 7.276. back to text
130. Panel Report, Japan — DRAMs (Korea), footnote 475.
back to text
131. Appellate Body Report, Japan — DRAMs (Korea),
para.
226. back to text
132. Appellate Body Report, US — Lead and Bismuth II,
para. 12. back to text
133. Appellate Body Report, US — Lead and Bismuth II,
para. 60. back to text
134. Appellate Body Report, US — Lead and Bismuth II,
para. 62. back to text
135. (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
136. (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
137. Panel Report, Canada — Aircraft Credits and Guarantees,
paras. 7.56–7.57. back to text
138. Panel Report, Canada — Aircraft Credits and Guarantees,
paras. 7.56–7.59 and 7.68. back to text
139. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.59. See also the Panel Report, Korea — Commercial Vessels,
paras.7.121–127, where the Panel, while examining whether APRG and PSL
programmes “as such” mandated a benefit within the meaning of
Article 1, and, if so, whether that subsidy was contingent upon export
performance, recalled that the issue is whether or not these programmes
mandate the conferral of a benefit by requiring the provision of APRGs
and PSLs, respectively, on terms more favorable than Korean shipyards
could obtain on the market. In respect of both of these programmes, the
Panel concluded that the EC had not established a prima facie case to
this effect because the relevant provisions of the measures did not even
refer to the terms on which financing in question would be offered, let
alone requiring the below-market guarantees. In this context, the Panel
also concluded that evidence adduced by the EC regarding certain
practices under these programmes was irrelevant, given that the claims
were against the programmes “as such”. back to text
140. Brazil cited paragraph 8.11 of the Panel Report in 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
141. (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
142. Panel Report, Canada — Aircraft Credits and Guarantees,
paras. 7.61–7.62. back to text
143. Panel Report, Canada — Aircraft Credits and Guarantees,
paras. 7.76–7.77. back to text
144. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.107. See also paras. 7.123–7.125 and Panel Report, Brazil
— Aircraft (Article 21.5 — Canada II), paras. 5.43 and 5.50.
back to text
145. (footnote original) Appellate Body Report, US —
Section 211 Appropriations Act, para. 259. back to text
146. Panel Report, Korea — Commercial Vessels,
paras.
7.78. back to text
147. (footnote original) We note that a similar
approach was adopted by the panel in Brazil — Aircraft,
Second Recourse by Canada to Article 21.5 of the DSU, WT/DS46/RW/2,
adopted 23 August 2001, para. 5.43, DSR 2001:XI, 5481.
back to text
148. Panel Report, Korea — Commercial Vessels,
paras.
7.107. back to text
149. (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
150. (footnote original) We are making no findings,
however, in this respect at this juncture. back to text
151. Panel Report, Canada — Aircraft Credits and Guarantees,
paras. 7.80–7.81. back to text
152. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.93. back to text
153. (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
154. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.111. back to text
155. (footnote original) United States — Export
Restraints, Report of the Panel, footnote, supra,
para. 8.9
(emphasis in original). back to text
156. Panel Report, Canada — Aircraft Credits and Guarantees,
paras. 7.130 and 7.132. back to text
157. Panel Report, US — Lead and Bismuth II,
para. 6.59,
quoting from the United States’ submission. back to text
158. Panel Report, US — Lead and Bismuth II,
para. 6.71.
back to text
159. Panel Report, US — Lead and Bismuth II,
para. 6.81.
back to text
160. Appellate Body Report, US — Lead and Bismuth II,
para. 68. back to text
161. Panel Report, US — Lead and Bismuth II,
para. 6.82.
back to text
162. Appellate Body Report, EC and certain member States —
Large Civil Aircraft, paras. 718–749. back to text
163. Appellate Body Report, US — Lead and Bismuth II,
para. 68. back to text
164. Panel Report, US — Softwood Lumber III,
paras. 7.68–7.69.
back to text
165. Panel Report, US — Softwood Lumber III,
para. 7.71.
back to text
166. Panel Report, US — Softwood Lumber III,
paras. 7.72
and 7.74. back to text
167. (footnote original) Or income or price support within
the meaning of Article 1.1(a)(2). back to text
168. (footnote original) Appellate Body Report, Brazil — Aircraft,
para. 157. back to text
169. (footnote original) Appellate Body Report, Canada
— Aircraft, para. 154. back to text
170. Appellate Body Report, US — Softwood Lumber IV,
paras.
142 — 143. back to text
171. Panel Report, Mexico — Olive Oil,
paras. 7.143 and
7.144. back to text
172. Panel Report, Mexico — Olive Oil,
para. 7.152.
back to text
173. Panel Report, Canada — Aircraft,
para. 9.312.
back to text
174. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.144. back to text
175. Appellate Body Report, Canada
— Aircraft, paras.
155 and 158. back to text
176. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.345. back to text
177. Panel Report, Canada — Aircraft,
para. 9.117.
back to text
178. Appellate Body Report, Brazil — Aircraft,
para.
179. back to text
179. Appellate Body Report, Canada
— Aircraft, para.
159. back to text
180. Appellate Body Report, Canada
— Aircraft, para.
159. back to text
181. Appellate Body Report, US — FSC,
para. 93.
back to text
182. Appellate Body Report, US — FSC,
para. 93.
back to text
183. Panel Report, 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
184. Appellate Body Report, US — FSC,
paras. 109–110
and 112. back to text
185. (footnote original) Appellate Body Report on Brazil
— Desiccated Coconut, fn. 50. back to text
186. Appellate Body Report, US — FSC,
paras. 115 and 117–118.
back to text
187. (footnote original) Footnote 2 further states that
these criteria or conditions have to be neutral, do not favour certain
enterprises over others, and are economic in nature and horizontal in
application, such as the number of employees or size of enterprise.
back to text
188. (footnote original) According to
Article 2.1(c) of
the SCM Agreement, these factors are: (i) use of a subsidy
programme by a limited number of certain enterprises; (ii) predominant
use by certain enterprises; (iii) the granting of disproportionately
large amounts of subsidy to certain enterprises; and (iv) the manner in
which discretion has been exercised by the granting authority in the
decision to grant a subsidy. Footnote 3 to Article 2.1(c) specifies that
“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”. The final sentence of Article 2.1(c) adds that,
in applying these four factors, account shall be taken of two general
parameters, namely, the diversification of economic activities in the
subsidizing country, and the length of time the programme has been in
operation. back to text
189. Appellate Body Report, US — Anti-Dumping and
Countervailing Duties (China), paras. 366–371.
back to text
190. Panel Report, US — Upland Cotton,
paras. 7.1139,
7.1140, 7.1142 and 7.1143. back to text
191. (footnote original) Panel Report, US — Upland Cotton,
para. 7.1142. We note that understanding “industry” by
reference to the producers of a particular product is also consistent
with Article 16.1 of the SCM Agreement, which defines “domestic
industry” as “the domestic producers as a whole of the like products
… ”. back to text
192. (footnote original) Panel Report, US — Upland Cotton,
para. 7.1142. back to text
193. Appellate Body Report, US — Anti-Dumping and
Countervailing Duties (China), para. 373. back to text
194. Appellate Body Report, EC and certain member States —
Large Civil Aircraft, para. 949. back to text
195. Panel Report, Japan — DRAMs (Korea),
para. 7.374.
back to text
196. Panel Report, Japan — DRAMs (Korea),
para. 7.373.
back to text
197. (footnote original) Panel Report, US — Upland Cotton,
para. 7.1142. back to text
198. Appellate Body Report, EC and certain member States —
Large Civil Aircraft, para. 949. back to text
199. (footnote original) Shorter Oxford English
Dictionary, L. Brown (ed.) (Clarendon Press, 1993), Vol. I, p. 888.
This is confirmed by Webster’s New Encyclopedic Dictionary,
(Könemann, 1993), p. 353, which provides that “explicit” means “so
clear in statement that there is no doubt about the meaning … such
verbal plainness and distinctness that there is no room for doubt or
difficulty in understanding”. back to text
200. (footnote original) See e.g. Panel Report, Canada
— Autos, para. 10.179 and Appellate Body Report, Canada — Autos,
para. 167. back to text
201. Panel Report, US — Large Civil Aircraft
(2nd complaint),
para. 7.190. back to text
202. Panel Report, US — Softwood Lumber IV,
para. 7.116.
back to text
203. Panel Report, EC — Countervailing Measures on DRAM
Chips, paras. 7.223–230. back to text
204. Panel Report, US — Softwood Lumber IV,
para. 7.123.
back to text
205. Panel Report, EC and certain member States — Large Civil
Aircraft, para. 7.969. back to text
206. Panel Report, EC and certain member States — Large Civil
Aircraft, paras. 7.961, 7.964. back to text
207. Panel Report, EC and certain member States — Large Civil
Aircraft, paras. 7.974–7.976. back to text
208. Panel Report, EC and certain member States — Large Civil
Aircraft, para. 7.1223. back to text
209. Panel Report, US — Anti-Dumping and Countervailing
Duties (China), para. 9.135. back to text
210. Panel Report, US — Anti-Dumping and Countervailing
Duties (China), para. 9.144. back to text
211. Panel Report, Indonesia — Autos,
para. 14.155.
back to text
212. Panel Report, Canada — Autos,
para. 10.172.
back to text
213. Panel Report, US — FSC, footnote 114.
back to text
214. Panel Report, US — Upland Cotton,
para. 7.1153.
back to text
215. Panel Report, Korea — Commercial Vessels,
para.
7.514. back to text
216. Panel Report, US — Large Civil Aircraft
(2nd complaint),
paras. 7.1405 and 7.1461. back to text
217. Appellate Body Report, US — Upland Cotton,
para.
547. back to text
218. Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.16. back to text
219. Panel Report, US — FSC (Article 21.5 — EC),
paras.
8.54–8.55 On this issue, the Panel in 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, Canada — Autos,
para. 118].
back to text
220. (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
221. (footnote original) Appellate Body Report, supra,
footnote 86, para. 166. back to text
222. Appellate Body Report, US — FSC (Article 21.5 — EC),
para. 111. back to text
223. Appellate Body Report, Canada — Autos,
para. 100.
See also Panel Report, Canada — Aircraft Credits and Guarantees,
para. 7.365 and Panel Report, US — FSC (Article 21.5 — EC),
paras. 8.54–8.56. back to text
224. Appellate Body Report, Canada — Autos,
para. 104.
See also Appellate Body Report, Canada — Autos,
para. 100.
back to text
225. Panel Report, Canada — Aircraft,
para. 6.52.
back to text
226. Panel Report, Canada — Aircraft,
para. 9.230.
back to text
227. Appellate Body Report, Canada — Autos,
para. 107.
See also Panel Report, Canada — Aircraft Credits and Guarantees,
paras. 7.365 and 7.367–7.368. back to text
228. Appellate Body Report, US — Upland Cotton,
para.
582. back to text
229. Panel Report, Australia — Automotive Leather II,
para. 9.55. back to text
230. Panel Report, Canada — Aircraft,
para. 9.331.
back to text
231. Appellate Body Report, Canada
— Aircraft, para.
171. back to text
232. Appellate Body Report, Canada
— Aircraft, para.
171, footnote 102. back to text
233. Appellate Body Report, Canada
— Aircraft, paras.
166–167. back to text
234. (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
235. Appellate Body Report, Canada
— Aircraft, paras.
169–172. back to text
236. Panel Report, Canada — Aircraft,
para. 9.326.
back to text
237. Panel Report, Canada — Aircraft,
para. 9.346.
back to text
238. Appellate Body Report, Canada
— Aircraft, paras.
169–173. back to text
239. Panel Report, Canada — Aircraft Credits and Guarantees,
paras. 7.370–7.376. back to text
240. Appellate Body Report, EC and certain member States —
Large Civil Aircraft, paras. 1046–1048. back to text
241. Appellate Body Report, EC and certain member States —
Large Civil Aircraft, paras. 1051–1052. back to text
242. Panel Report, Australia — Automotive Leather II,
paras. 9.56–9.57. back to text
243. Panel Report, Australia — Automotive Leather II,
para. 9.70. back to text
244. Appellate Body Report, Canada
— Aircraft, para.
169. back to text
245. Panel Report, Canada — Aircraft,
paras. 9.337–9.338.
back to text
246. Panel Report, Canada — Aircraft,
para. 9.336.
back to text
247. Appellate Body Report, Canada
— Aircraft, para.
173. back to text
248. Panel Report, Australia — Automotive Leather II,
para. 9.66. back to text
249. Panel Report, Australia — Automotive Leather II,
para. 9.75. back to text
250. Panel Report, Canada — Aircraft,
paras. 9.337–9.339.
back to text
251. Appellate Body Report, Canada
— Aircraft, para.
174. back to text
252. Panel Report, Australia — Leather II,
para. 9.67.
back to text
253. Panel Report, Canada — Aircraft Credits and Guarantees,
paras. 7.370 and 7.372. back to text
254. Panel Report, Canada — Aircraft (Article 21.5 —
Brazil), para. 5.33. back to text
255. Panel Report, Canada — Aircraft,
para. 9.343.
back to text
256. Panel Report, Canada — Aircraft,
para. 9.343.
back to text
257. Appellate Body Report, US — FSC (Article 21.5 — EC),
paras. 114–115. back to text
258. Appellate Body Report, US — FSC (Article 21.5 — EC),
para. 117. back to text
259. Panel Report, Canada — Dairy (Article 21.5 — New
Zealand and US), para. 6.100. back to text
260. Panel Report, Brazil — Aircraft,
para. 7.56.
back to text
261. Appellate Body Report, Brazil — Aircraft,
para.
140. back to text
262. Appellate Body Report, Brazil — Aircraft,
para.
141. back to text
263. Appellate Body Report, US — FSC,
paras. 97–98.
back to text
264. Appellate Body Report, US — FSC,
paras. 99–100.
back to text
265. Appellate Body Report, US — FSC,
paras. 101 and
103. back to text
266. Appellate Body Report, Canada
— Aircraft, para.
166. back to text
267. Appellate Body Report, Canada — Autos,
para. 123.
back to text
268. Panel Report, Canada — Autos,
paras. 10.220–10.222.
back to text
269. Appellate Body Report, Canada — Autos,
paras. 137–138.
back to text
270. Appellate Body Report, Canada — Autos,
paras. 139–143.
back to text
271. Panel Report, Canada — Aircraft,
para. 9.124. back to text
272. Panel Report, Canada — Aircraft,
para. 9.124.
back to text
273. Panel Report, Canada — Aircraft,
para. 9.127.
back to text
274. Panel Report, Canada — Aircraft,
para. 9.129.
back to text
275. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada), para. 6.11. back to text
276. Appellate Body Report, Brazil — Aircraft,
para.
159. back to text
277. Panel Report, Brazil — Aircraft,
paras. 7.71–7.72.
back to text
278. Appellate Body Report, Brazil — Aircraft,
paras.
156–157. back to text
279. Panel Report, Brazil — Aircraft (Article 21.5 —
Canada), para. 6.14. back to text
280. Panel Report, US — FSC (Article 21.5 — EC),
para.
8.110. back to text
281. Appellate Body Report, Canada — Autos,
para. 116.
back to text
282. Panel Report, Canada — Dairy (Article 21.5 — New
Zealand and US), para. 6.92. back to text
283. See also Panel Report, 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
284. Appellate
Body Report, Canada — Dairy (Article 21.5 — New Zealand and US),
paras. 123–125. back to text
285. Panel Report, Canada — Dairy (Article 21.5 — New
Zealand and US), para. 6.101. back to text
286. Appellate Body Report, US — Upland Cotton,
para.
552. back to text
287. Appellate Body Report, US — Upland Cotton,
paras.
530–533. back to text
288. (footnote original) Panel Report,
para. 7.1058.
(original emphasis) back to text
289. Appellate Body Report, US — Upland Cotton,
paras.
541, 542, 544 and 545. back to text
290. Appellate Body Report, US — Upland Cotton,
para.
547. back to text
291. Appellate Body Report, US — Upland Cotton,
para.
549. back to text
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