Analysis, statistics, publications, downloads, links, etc

WTO ANALYTICAL INDEX: SUBSIDIES AND COUNTERVAILING MEASURES

Agreement on Subsidies and Countervailing Measures

150pxls.gif (76 bytes)
The texts reproduced here do not have the legal standing of the original documents which are entrusted and kept at the WTO Secretariat in Geneva.

> General
> Article 1
> Article 2
> Article 3
> Article 4
> Article 5
> Article 6
> Article 7
> Article 8
> Article 9
> Article 10
> Article 11
> Article 12
> Article 13
> Article 14
> Article 15
> Article 16
> Article 17
> Article 18
> Article 19
> Article 20
> Article 21
> Article 22
> Article 23
> Article 24
> Article 25
> Article 26
> Article 27
> Article 28
> Article 29
> Article 30
> Article 31
> Article 32
> Annex I
> Annex II
> Annex III
> Annex IV
> Annex V
> Annex VI
> Annex VII
> 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


V. Article 4    back to top

A. Text of Article 4

Article 4: Remedies

4.1     Whenever a Member has reason to believe that a prohibited subsidy is being granted or maintained by another Member, such Member may request consultations with such other Member.

 

4.2     A request for consultations under paragraph 1 shall include a statement of available evidence with regard to the existence and nature of the subsidy in question.

 

4.3     Upon request for consultations under paragraph 1, the Member believed to be granting or maintaining the subsidy in question shall enter into such consultations as quickly as possible. The purpose of the consultations shall be to clarify the facts of the situation and to arrive at a mutually agreed solution.

 

4.4     If no mutually agreed solution has been reached within 30 days(6) of the request for consultations, any Member party to such consultations may refer the matter to the Dispute Settlement Body (“DSB”) for the immediate establishment of a panel, unless the DSB decides by consensus not to establish a panel.

 

(footnote original) 6 Any time-periods mentioned in this Article may be extended by mutual agreement.

 

4.5     Upon its establishment, the panel may request the assistance of the Permanent Group of Experts(7) (referred to in this Agreement as the “PGE”) with regard to whether the measure in question is a prohibited subsidy. If so requested, the PGE shall immediately review the evidence with regard to the existence and nature of the measure in question and shall provide an opportunity for the Member applying or maintaining the measure to demonstrate that the measure in question is not a prohibited subsidy. The PGE shall report its conclusions to the panel within a time-limit determined by the panel. The PGE’s conclusions on the issue of whether or not the measure in question is a prohibited subsidy shall be accepted by the panel without modification.

 

(footnote original) 7 As established in Article 24.

 

4.6     The panel shall submit its final report to the parties to the dispute. The report shall be circulated to all Members within 90 days of the date of the composition and the establishment of the panel’s terms of reference.

 

4.7     If the measure in question is found to be a prohibited subsidy, the panel shall recommend that the subsidizing Member withdraw the subsidy without delay. In this regard, the panel shall specify in its recommendation the time-period within which the measure must be withdrawn.

 

4.8     Within 30 days of the issuance of the panel’s report to all Members, the report shall be adopted by the DSB unless one of the parties to the dispute formally notifies the DSB of its decision to appeal or the DSB decides by consensus not to adopt the report.

 

4.9     Where a panel report is appealed, the Appellate Body shall issue its decision within 30 days from the date when the party to the dispute formally notifies its intention to appeal. When the Appellate Body considers that it cannot provide its report within 30 days, it shall inform the DSB in writing of the reasons for the delay together with an estimate of the period within which it will submit its report. In no case shall the proceedings exceed 60 days. The appellate report shall be adopted by the DSB and unconditionally accepted by the parties to the dispute unless the DSB decides by consensus not to adopt the appellate report within 20 days following its issuance to the Members.(8)

 

(footnote original) 8 If a meeting of the DSB is not scheduled during this period, such a meeting shall be held for this purpose.

 

4.10     In the event the recommendation of the DSB is not followed within the time-period specified by the panel, which shall commence from the date of adoption of the panel’s report or the Appellate Body’s report, the DSB shall grant authorization to the complaining Member to take appropriate(9) countermeasures, unless the DSB decides by consensus to reject the request.

 

(footnote original) 9 This expression is not meant to allow countermeasures that are disproportionate in light of the fact that the subsidies dealt with under these provisions are prohibited.

 

4.11     In the event a party to the dispute requests arbitration under paragraph 6 of Article 22 of the Dispute Settlement Understanding (“DSU”), the arbitrator shall determine whether the countermeasures are appropriate.(10)

 

(footnote original) 10 This expression is not meant to allow countermeasures that are disproportionate in light of the fact that the subsidies dealt with under these provisions are prohibited.

 

4.12     For purposes of disputes conducted pursuant to this Article, except for time-periods specifically prescribed in this Article, time-periods applicable under the DSU for the conduct of such disputes shall be half the time prescribed therein.


B. Interpretation and Application of Article 4

1. General

(a) Accelerated procedure and the deadline for the submission of new evidence, allegations and affirmative defences

188.     The Panel in Canada — Aircraft rejected a request for a preliminary ruling that the complaining party may not adduce new evidence or allegations after the end of the first substantive meeting of the Panel with the parties. Canada had argued that given the accelerated procedure under Article 4 of the SCM Agreement, the late submission of allegations or evidence by Brazil, the complaining party, would be prejudicial to Canada’s position, as Canada would effectively be denied an adequate opportunity to respond to these allegations or evidence.(292) The Panel referred to the Appellate Body’s finding in Argentina — Textiles and Apparel that “neither Article 11 of the DSU, nor the Working Procedures in Appendix 3 of the DSU, establish precise deadlines for the presentation of evidence by parties to a dispute”,(293) and concluded that “[t] here is nothing in the DSU, or in the Appendix 3 Working Procedures, to suggest that a different approach should be taken in ‘fast-track’ cases under Article 4 of the SCM Agreement.”(294)

189.     The Panel in Canada — Aircraft followed the reasoning set out in the previous paragraph regarding the submission of new allegations and stated that “[w]e can see nothing in the DSU, or in the Appendix 3 Working Procedures, that would require the submission of new allegations to be treated any differently than the submission of new evidence.”(295)

190.     In the Panel proceedings in Canada — Aircraft, Brazil requested the Panel not to accept any affirmative defences by Canada which had not been submitted prior to the end of the first substantive meeting,(296) on the basis that “this is particularly important in this fasttrack proceeding.”(297) The Panel stated that “there is nothing in the DSU, or in Appendix 3 Working Procedures, to prevent a party submitting new evidence or allegations after the first substantive meeting. We can see no basis in the DSU to treat the submission of affirmative defences after the first substantive meeting any differently.”(298) However, the Panel added that “Brazil’s due process rights would not be respected if Canada were able to submit an affirmative defence … after the second substantive meeting with the Panel.”(299)

2. Article 4.2

(a) “include a statement of available evidence”

191.     The Panel in Canada — Aircraft stated that “although Article 4.2 of the SCM Agreement requires the Member requesting consultations to provide a ‘statement of available evidence’, there is nothing in either the DSU or the SCM Agreement to suggest that requests for establishment of panels for ‘fast-track’ cases should be any more precise than requests for establishment of panels in ‘standard’ WTO dispute settlement cases.”(300)

192.     The Panel in Australia — Automotive Leather II rejected the argument that Article 4.2 “imposes an obligation on the complainant to disclose in its request for consultations, not only facts, but also the argumentation why such facts lead the complainant to believe there is a violation of Article 3.1,”(301) and stated that “[t]he ordinary meaning of the phrase ‘include a statement of available evidence’ does not, on its face, require disclosure of arguments in the request for consultations. Nothing in the context or object and purpose of Article 4.2 … suggests a different conclusion.”(302) The Panel in Australia — Automotive Leather II then addressed the claim that Article 4.2 requires the disclosure of all facts and evidence upon which the complaining Member intends to rely in the course of the dispute settlement proceedings:

“Turning to the question of what is required as a ‘statement of available evidence’, we note that Australia reads this to require disclosure of all facts and evidence on which the complaining Member will rely in the course of the dispute. Indeed, Australia asserts that any exhibits should have been provided at the time consultations were requested. The ordinary meaning of the phrase ‘statement of available evidence’ does not support Australia’s position. The word ‘evidence’ is defined as ‘available facts, circumstances, etc., supporting or otherwise a belief, proposition, etc.’ ‘Available’ is defined as ‘at one’s disposal’, and ‘statement’ is defined as ‘expression in words’. Thus, based on the ordinary meaning of the terms, Article 4.2 requires a complaining Member to include in the request for consultations an expression in words of the facts at its disposal at the time it requests consultations in support of the conclusion that it has, in the words of Article 4.1, ‘reason to believe that a prohibited subsidy is being granted or maintained… .’

 

Moreover, nothing in the context or object and purpose of Article 4.2 suggests to us that the statement of available evidence must be as comprehensive as Australia would require. The mere fact that proceedings under Article 4 of the SCM Agreement are accelerated by comparison to dispute settlement proceedings under the DSU does not, in our view, require us to read into Article 4.2 a requirement that the complainant disclose all facts and arguments in its request for consultations. … To the extent that the additional requirement of Article 4.2 can be linked to the expedited nature of the proceedings, the additional requirement of a statement of available evidence satisfies the need adequately to apprise the responding Member of the information upon which the complaining Member bases its request for consultations, and serves in addition to inform the resulting consultations.”(303)

193.     The Panel in Australia — Automotive Leather II also rejected the arguments that “the requirement of Article 4.2, that a request for consultations ‘include a statement of available evidence’, in conjunction with the expedited nature of the proceedings, [requires] a panel to limit the complaining Member to using the evidence and arguments set forth in the request for consultations”,(304) and “that to allow a complainant to come forward with additional facts and arguments in its first submission is inconsistent with Article 4 SCM Agreement”.(305) In so holding, the Panel referred to its obligation under Article 11 of the DSU to conduct an objective assessment of the matter before it; specifically, the Panel held that “a decision to limit the facts and arguments that the United States may present during the course of this proceeding to those set forth in the request for consultations would make it difficult, if not impossible, for us to fulfill our obligation to conduct an ‘objective assessment’ of the matter before us.”(306)

194.     In rejecting Australia’s claim that in the light of the requirement under Article 4.2 to make a “statement of available evidence”, a complainant was disallowed from coming forward with additional facts and arguments in its first submission, the Panel in Australia — Automotive Leather II did not rely exclusively on Article 11 of the DSU. The Panel also referred to the right of panels, under Article 13.2 of the DSU, to seek information from any relevant source, a right which, in the opinion of the Panel, is in no way curtailed by Article 4 of the SCM Agreement. Finally, the Panel also considered the requirements with respect to the request for consultations:

Article 4.2 does contain a requirement, not present in the DSU, that a complainant include a ‘statement of available evidence’ in its request for consultations. However, we do not consider that the scope of the evidence that a panel may consider is limited in any way by such a statement of available evidence. In this respect, we note Article 4.3 of the SCM Agreement, which explicitly states that one of the purposes of consultations ‘shall be to clarify the facts of the situation…’. (emphasis added) This provision implies that additional facts or evidence will be developed during consultations. Moreover, the Appellate Body has recognized that consultations play a significant role in developing the facts in a dispute settlement proceeding. For example, in India — Patents, the Appellate Body observed that ‘the claims that are made and the facts that are established during consultations do much to shape the substance and the scope of subsequent panel proceedings’. (emphasis added) This is consistent with the view that a central purpose of consultations in general, and of consultations under Article 4 of the SCM Agreement in particular, is to clarify and develop the facts of the situation.

 

Moreover, we note that panels have, under Article 13.2 of the DSU, a general right to seek information ‘from any relevant source’. Indeed, it is a common feature of panel proceedings for panelists to question parties about the facts and arguments underlying their positions. There is nothing in Article 4 SCM Agreement to suggest that this right is somehow limited by the expedited nature of dispute settlement proceedings conducted under that provision. If Australia’s position were correct, a panel might be constrained from seeking out replacement information from the party … that was limited to reliance on the facts set forth in its request for consultations. Similarly, under Australia’s view, the defending party might introduce information during the panel proceedings, which the complaining party … would not be able to rebut, as it would be limited to reliance on the facts set forth in its request for consultations. We do not believe Article 4.2 requires this result.”(307)

195.     The Panel in US — FSC, in a finding subsequently confirmed by the Appellate Body,(308) considered the ordinary meaning of the terms “statement of available evidence” and indicated that a complainant must identify but need not annex available evidence to its request for consultations. It also considered that there is no need to use explicitly the words “statement of available evidence” provided that the relevant evidence is itself referred to. The Panel stated:

“We note that the word ‘evidence’ has been defined as ‘available facts, circumstances, etc., supporting or otherwise a belief, proposition, etc.’, the word ‘available’ has been defined as ‘at one’s disposal’, and the word ‘statement’ has been defined as ‘expression in words’.(309) Thus, in its ordinary meaning Article 4.2 requires that a Member include in its request for consultations an expression in words of the facts at its disposal at the time it requests consultations in support of its view that it has, in the words of Article 4.1, ‘reason to believe that a prohibited subsidy is being granted or maintained’. On the basis of the ordinary meaning of Article 4.2, it is evident that a complainant must identify, but need not annex, available evidence to its request for consultations.

 

… Although the European Communities did not recite the formulation ‘statement of available evidence’ when referring to these materials, we do not consider that the explicit use of that descriptive term is necessary provided that the relevant evidence is itself referred to. It is true, of course, that the European Communities in its first submission referred to a variety of additional materials, primarily in the form of secondary sources,(310) and that these additional materials were not identified in the request for consultations. Even assuming that these materials represent “evidence” and that a Member is required to identify all available evidence in its request for consultations, we are not in a position to determine whether as a factual matter these materials were at the disposal of the European Communities at the time it made its request for consultations and that the European Communities knew at that time that it would rely on those materials. In short, it may well be that the European Communities’ request for consultations does contain a statement of available evidence.”(311)

196.     In US — FSC, the Appellate Body rejected the United States’ argument that a complaint should be dismissed because the complainant failed to “include a statement of available evidence” in its request for consultations. The Appellate Body pointed out a variety of facts, for example, that “[f]ollowing the European Communities’ request for consultations, the United States and the European Communities held three separate sets of consultations over a period of nearly five months.”(312) The Appellate Body also invoked Article 3.10 of the DSU and the principle of good faith:

Article 3.10 of the DSU commits Members of the WTO, if a dispute arises, to engage in dispute settlement procedures ‘in good faith in an effort to resolve the dispute’. This is another specific manifestation of the principle of good faith which, we have pointed out, is at once a general principle of law and a principle of general international law.(313) This pervasive principle requires both complaining and responding Members to comply with the requirements of the DSU (and related requirements in other covered agreements) in good faith. By good faith compliance, complaining Members accord to the responding Members the full measure of protection and opportunity to defend, contemplated by the letter and spirit of the procedural rules. The same principle of good faith requires that responding Members seasonably and promptly bring claimed procedural deficiencies to the attention of the complaining Member, and to the DSB or the panel, so that corrections, if needed, can be made to resolve disputes. The procedural rules of WTO dispute settlement are designed to promote, not the development of litigation techniques, but simply the fair, prompt and effective resolution of trade disputes.”(314)

197.     The Panel in US — FSC had found that the European Communities’ request for consultations under Article 4.1 of the SCM Agreement contained a sufficient statement of available evidence within the meaning of Article 4.2, and, consequently, rejected the United States’ request that the Panel dismiss the European Communities’ claim as not properly before it as a result of the alleged insufficiency of the statement of available evidence. Upon appeal, the Appellate Body rejected the United States’ appeal with respect to the second point and, as a result, declined to rule on the United States’ appeal on the first point, i.e. whether the European Communities had given a sufficient statement of available evidence within the meaning of Article 4.2. In its analysis, the Appellate Body distinguished between the requirements imposed on the complaining party under Article 4.4 of the DSU and Article 4.2 of the SCM Agreement and held that the Panel had not differentiated between these requirements carefully enough:

Article 1.2 of the DSU states that ‘the rules and procedures of the DSU shall apply subject to the special or additional rules and procedures on dispute settlement contained in the covered agreements as are identified in Appendix 2 to this Understanding’. Article 4.2 of the SCM Agreement is listed as a ‘special or additional rule or procedure’ in Appendix 2 to the DSU. In our Report in Guatemala — Cement, we said that ‘the rules and procedures of the DSU apply together with the special or additional provisions of the covered agreement’ except that, ‘in the case of a conflict between them’, the special or additional provision prevails.(315) Article 4.4 of the DSU requires that all requests for consultations, under the covered agreements, ‘give reasons for the request, including identification of the measures at issue and an indication of the legal basis for the complaint.’ (emphasis added) It is clear to us that Article 4.4 of the DSU and Article 4.2 of the SCM Agreement can and should be read and applied together, so that a request for consultations relating to a prohibited subsidy claim under the SCM Agreement must satisfy the requirements of both provisions.

 

Article 4 SCM Agreement provides for accelerated dispute settlement procedures for claims involving prohibited subsidies under Article 3 of the SCM Agreement. The determination of whether a prohibited subsidy is being granted or maintained under C of the SCM Agreement raises complex factual questions, particularly in the case of subsidies that are claimed to be de facto contingent upon export performance. Also, Article 4.5 of the SCM Agreement allows a panel to request the assistance of the Permanent Group of Experts on whether the measure is a prohibited subsidy. Given the accelerated timeframes for disputes involving claims of prohibited subsidies, and given that the issue of whether a measure is a prohibited subsidy often requires a detailed examination of facts, it is important to stress the requirement of Article 4.2 that there be ‘a statement of available evidence with regard to the existence and nature of the subsidy in question’ at the consultation stage in a dispute.

 

We emphasize that this additional requirement of ‘a statement of available evidence’ under Article 4.2 of the SCM Agreement is distinct from — and not satisfied by compliance with — the requirements of Article 4.4 of the DSU. Thus, as well as giving the reasons for the request for consultations and identifying the measure and the legal basis for the complaint under Article 4.4 of the DSU, a complaining Member must also indicate, in its request for consultations, the evidence that it has available to it, at that time, ‘with regard to the existence and nature of the subsidy in question’. In this respect, it is available evidence of the character of the measure as a ‘subsidy’ that must be indicated, and not merely evidence of the existence of the measure. We would have preferred that the panel give less relaxed treatment to this important distinction.”(316)

198.     In US — Upland Cotton, the Panel explained the scope of the requirement set out in Article 4.2:

“This additional requirement in Article 4.2 of the SCM Agreement serves to provide a responding Member with a better understanding of the matter in dispute and serves as the basis for consultations. The statement of available evidence informs the responding Member of facts at the disposal of the complaining Member at the time it requests consultations about the prohibited subsidy it alleges is being granted or maintained.

 

However, Article 4.2 does not require disclosure of all facts and evidence upon which the complaining Member will ultimately rely in the course of the dispute settlement proceedings. Article 4.3 explicitly states that one of the purposes of consultations shall be to “clarify the facts of the situation”. This implies that additional facts and evidence will be developed during the consultations.(317) This is consistent with the view that a central purpose of consultation in general, and of consultations under Article 4 of the SCM Agreement in particular, is to clarify and develop the facts of the situation.

 

The statement of available evidence directs attention to the measures concerned. It is the starting point for consultations, and for the emergence of more evidence concerning the measures by reason of the clarification of the “situation”. If the dispute proceeds to the panel stage, additional evidence may well come to light by reason of the parties’ participation in the panel procedures, including in response to the panel’s questions and requests for information.”(318)

199.     In US — Upland Cotton, the Appellate Body upheld the Panel’s ruling that Brazil provided a statement of available evidence as required by Article 4.2. In the course of its analysis, the Appellate Body stated that:

“We recognize that the statement of available evidence plays an important role in WTO dispute settlement. The adequacy of the statement of available evidence must be determined on a case by case basis. As the Panel stated, moreover, the “statement of available evidence … is the starting point for consultations, and for the emergence of more evidence concerning the measures by reason of the clarification of the ‘situation’”. It is, therefore, important to bear in mind that the requirement to submit a statement of available evidence applies in the earliest stages of WTO dispute settlement, and that the requirement is to provide a “statement” of the evidence and not the evidence itself.(319),(320)

(b) Relationship with other WTO Agreements

200.     With respect to the different evidence to be submitted in the course of consultations under Article 4.4 of the DSU and Article 4.2 of the SCM Agreement, respectively, see paragraph 197 above.

3. Article 4.3

(a) “shall be to clarify the facts of the situation”

201.     With respect to this phrase, see paragraph 194 above.

4. Article 4.4

(a) Relationship between the matter before a panel as defined by its terms of reference and the matter consulted upon

202.     In Brazil — Aircraft, the Panel considered whether and to what extent a panel is limited in its consideration of the matter identified in its terms of reference by the scope of the matter with respect to which consultations were held.(321) The Appellate Body agreed with the Panel’s finding in this regard and stated as follows:

“In our view, Articles 4 and 6 of the DSU, as well as paragraphs 1 to 4 of Article 4 SCM Agreement, set forth a process by which a complaining party must request consultations, and consultations must be held, before a matter may be referred to the DSB for the establishment of a panel. Under Article 4.3 of the SCM Agreement, moreover, the purpose of consultations is ‘to clarify the facts of the situation and to arrive at a mutually agreed solution.’

 

We do not believe, however, that Articles 4 and 6 of the DSU, or paragraphs 1 to 4 of Article 4 SCM Agreement, require a precise and exact identity between the specific measures that were the subject of consultations and the specific measures identified in the request for the establishment of a panel.”(322)

203.     The Panel in Canada — Aircraft adopted a very similar approach to the relationship between a panel’s terms of reference and the matter consulted upon:

“In our view, a panel’s terms of reference would only fail to be determinative of a panel’s jurisdiction if, in light of Article 4.1 4.4 of the SCM Agreement applied together with Article 4.2 4.7 of the DSU, the complaining party’s request for establishment were found to cover a ‘dispute’ that had not been the subject of a request for consultations. Article 4.4 of the SCM Agreement permits a Member to refer a ‘matter’ to the DSB if ‘nomutually agreed solution’ is reached during consultations. In our view, this provision complements Article 4.7 of the DSU, which allows a Member to refer a ‘matter’ to the DSB if ‘consultations fail to settle a dispute’. Read together, these provisions prevent a Member from requesting the establishment of a panel with regard to a ‘dispute’ on which no consultations were requested. In our view, this approach seeks to preserve due process while also recognising that the ‘matter’ on which consultations are requested will not necessarily be identical to the ‘matter’ identified in the request for establishment of a panel. The two ‘matters’ may not be identical because, as noted by the Appellate Body in India — Patents, ‘the claims that are made and the facts that are established during consultations do much to shape the substance and the scope of subsequent panel proceedings’”.(323)

(b) Relationship with other WTO Agreements

204.     With respect to the relationship between Article 4 of the SCM Agreement on the one hand and Articles 4 and 6 of the DSU on the other, see paragraphs 202203 above.

5. Article 4.5

(a) Relationship with other Articles

205.     As regards the establishment of the Permanent Group of Experts by Article 24.3, see paragraph 509 below.

6. Article 4.7

(a) “withdraw the subsidy”

206.     The Appellate Body in Brazil — Aircraft (Article 21.5 — Canada) analysed the meaning of the word “withdraw”, and stated that: “we observe first that this word has been defined as ‘remove’, or ‘take away’, and as ‘to take away what has been enjoyed; to take from.’ This definition suggests that ‘withdrawal’ of a subsidy, under Article 4.7 of the SCM Agreement, refers to the ‘removal’ or ‘taking away’ of that subsidy.”(324) Applied to the facts of the dispute, the Appellate Body concluded that “[i]n our view, to continue to make payments under an export subsidy measure found to be prohibited is not consistent with the obligation to ‘withdraw’ prohibited export subsidies, in the sense of ‘removing’ or ‘taking away’”.(325)

207.     The Appellate Body in Brazil — Aircraft (Article 21.5 — Canada) considered the argument by Brazil that Brazil had a contractual obligation under domestic law to issue PROEX bonds pursuant to commitments that had already been made, and that Brazil could be liable for damages for breach of contract under Brazilian law if it failed to respect its contractual obligations. The Appellate Body considered that these issues were not relevant to the “issue of whether the DSB’s recommendation to ‘withdraw’ the prohibited export subsidies permitted the continued issuance of NTN-I bonds under letters of commitment issued before [the date set by the Panel for the withdrawal of the prohibited subsidies]”.(326)

208.     In contrast to the findings of the Panel in Brazil — Aircraft (Article 21.5 — Canada), the Panel in Australia — Automotive Leather II (Article 21.5 — US) did not limit its findings to a situation in which a Member continues to grant a prohibited subsidy. Rather, the Panel addressed the issue whether the term “withdraw the subsidy” is limited to a recommendation with purely prospective effect, or whether it also encompasses repayment:

“Turning first to the ordinary meaning of the term, the word ‘withdraw’ has been defined as: ‘pull aside or back …; take away, remove …; retract … This definition does not suggest that ‘withdraw the subsidy’ necessarily requires only some prospective action. To the contrary, it suggests that the ordinary meaning of ‘withdraw the subsidy’ may encompass ‘taking away’ or ‘removing’ the financial contribution found to give rise to a prohibited subsidy. Consequently, an interpretation of ‘withdraw the subsidy’ that encompasses repayment of the prohibited subsidy seems a straightforward reading of the text of the provision.

 

… In the case of ‘actionable’ subsidies, Members whose trade interests are adversely affected may, under Part III of the SCM Agreement, pursue multilateral dispute settlement in order to establish whether the subsidy in question has resulted in adverse effects to the interests of the complaining Member. ‘If such a finding is made, the subsidizing Member ‘shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy’. Alternatively, a Member whose domestic industry is injured by subsidized imports may impose a countervailing measure under Part V of the SCM Agreement, ‘unless the subsidy or subsidies are withdrawn’. In both cases, withdrawal of the subsidy is an alternative, available to the subsidizing Member, to some other action. Repayment of the subsidy would certainly effectuate withdrawal of the subsidy by a subsidizing Member so as to allow it to avoid action by the complaining Member. … Thus, the use of the term ‘withdraw’ elsewhere in the SCM Agreement further supports the suggestion that it may encompass repayment. (original emphasis)

… An interpretation of Article 4.7 of the SCM Agreement which would allow exclusively ‘prospective’ action would make the recommendation to ‘withdraw the subsidy’ under Article 4.7 indistinguishable from the recommendation to ‘bring the measure into conformity’ under Article 19.1 of the DSU, thus rendering Article 4.7 redundant.”(327)

209.     After rejecting the argument that the phrase “withdraw the subsidy” under Article 4.7 of the SCM Agreement refers to a recommendation with exclusively “prospective effect,”(328) the Panel in Australia — Automotive Leather II (Article 21.5 — US) also rejected the notion that a repayment of portions of a subsidy which are deemed allocated over future periods of time should be considered a “prospective” remedy:

“[W]e do not find meaningful the distinction proposed … between repayment of ‘prospective’ and ‘retrospective’ portions of past subsidies in the context of Article 4.7 of the SCM Agreement. We do not agree that it is possible to conclude that repayment of the ‘prospective portion’ of prohibited subsidies paid in the past is a remedy having only prospective effect. In our view, where any repayment of any amount of a past subsidy is required or made, this by its very nature is not a purely prospective remedy. No theoretical construct allocating the subsidy over time can alter this fact. In our view, if the term ‘withdraw the subsidy’ can properly be understood to encompass repayment of any portion of a prohibited subsidy, ‘retroactive effect’ exists.”(329)

210.     The Panel in Brazil — Aircraft (Article 21.5 — Canada) rejected Brazil’s contention that requiring Brazil to cease issuing bonds pursuant to commitments made prior to the withdrawal date amounted to a retroactive remedy. Rather, the Panel opined that “the obligation to cease performing illegal acts in the future is a fundamentally prospective remedy”.(330)

(b) Time-period for withdrawal of measures

211.     The Panel in Brazil — Aircraft determined that “taking into account the nature of the measures and the procedures which may be required to implement our recommendation, on the one hand, and the requirement that Brazil withdraw its subsidies ‘without delay’ on the other, we conclude that Brazil shall withdraw the subsidies within 90 days.”(331) Agreeing with the Panel’s conclusion and recommendation, the Appellate Body in Brazil — Aircraft noted that “there is a significant difference between the relevant rules and procedures of the DSU and the special or additional rules and procedures set forth in Article 4.7 of the SCM Agreement. Therefore, the provisions of Article 21.3 of the DSU are not relevant in determining the period of time for implementation of a finding of inconsistency with the prohibited subsidies provisions of Part II of the SCM Agreement.”(332)

212.     In Australia — Automotive Leather II, Australia suggested seven and a half months (half of what Australia considered the “normal” period of time for implementation of panel decisions) as the time-period for withdrawal under Article 4.7. The Panel disagreed:

“Even assuming Australia is correct in its consideration of fifteen months as the ‘normal’ period of time for implementation of panel decisions, a question we do not reach, we do not agree that one-half of that period is appropriate in a dispute involving export subsidies. In the first place, Article 4.12 specifically provides that ‘except for time periods specifically prescribed in this Article’ the time periods otherwise provided for in the DSU should be halved in export subsidy disputes. Article 4.7, which provides that the subsidy shall be withdrawn ‘without delay’, and that the panel shall specify the time-period for withdrawal of the measure in its recommendation, in our view establishes that the time-period for withdrawal is ‘specifically prescribed in this Article’, that is, in Article 4 SCM Agreement itself. Moreover, we do not, as a factual matter, believe that a period of seven and one-half months can reasonably be described as corresponding to the requirement that the measure must be withdrawn ‘without delay’.”(333)

213.     In US — FSC (Article 21.5 — EC), the Appellate Body clarified that the text of Article 4.7 requires withdrawal “without delay”. The Appellate Body considered there was “no basis” for extending the time-period prescribed for withdrawal: (1) either to protect the contractual interests of private parties, or (2) to ensure an orderly transition to the regime of the new measure. The Appellate Body recalled that it had rejected similar arguments in Brazil — Aircraft (Article 21.5 — Canada), because the obligation to withdraw prohibited subsidies “without delay” is “unaffected by contractual obligations that the Member itself may have assumed under municipal law. The Appellate Body stated:

Article 4.7 of the SCM Agreement requires prohibited subsidies to be withdrawn ‘without delay’, and provides that a time-period for such withdrawal shall be specified by the panel. We can see no basis in Article 4.7 of the SCM Agreement for extending the time-period prescribed for withdrawal of prohibited subsidies for the reasons cited by the United States. In that respect, we recall that, in Brazil — Aircraft (Article 21.5 — Canada), Brazil made a similar argument to the one made by the United States in these proceedings. Brazil argued that, after the expiration of the time period for withdrawal of the prohibited export subsidies, it should be permitted to continue to grant certain of these subsidies because it had assumed contractual obligations, under municipal law, to do so.(334) We rejected this argument, and observed that:

 

… to continue to make payments under an export subsidy measure found to be prohibited is not consistent with the obligation to ‘withdraw’ prohibited export subsidies, in the sense of ‘removing’ or ‘taking away’.(335)

 

[A] Member’s obligation under Article 4.7 of the SCM Agreement to withdraw prohibited subsidies “without delay” is unaffected by contractual obligations that the Member itself may have assumed under municipal law. Likewise, a Member’s obligation to withdraw prohibited export subsidies, under Article 4.7 of the SCM Agreement, cannot be affected by contractual obligations which private parties may have assumed inter se in reliance on laws conferring prohibited export subsidies. Accordingly, we see no legal basis for extending the time-period for the United States to withdraw fully the prohibited FSC subsidies.”(336)

214.     In the same vein, with regard to the concept of “without delay” in Article 4.7, the Panel in Canada — Aircraft Credits and Guarantees took the view that because it “[is] required to make the recommendation provided for in Article 4.7 of the SCM Agreement, … [it] recommend[s] that Canada withdraw the subsidies identified above without delay”(337) and further clarified that Article 4.7:

“[P]rovides that ‘the panel shall specify in its recommendation the time-period within which the measure must be withdrawn’. In other words, we are required to specify what period would represent withdrawal ‘without delay’. Taking into account the procedures that may be required to implement our recommendation on the one hand, and the requirement that Canada withdraw its subsidies “without delay” on the other, we conclude that Canada shall withdraw the subsidies identified in sub-paragraphs (e), (f), and (g) of paragraph within 90 days.”(338)

(c) Relationship with other Articles

(i) Article 7.8

215.     The Panel in Australia — Automotive Leather II (Article 21.5 — US) referred to Article 7.8 in support of its finding in relation to the phrase “withdraw the subsidy” under Article 4.7. The Panel noted the wording of Article 7.8 that in case of a finding of adverse effects to the interests of another Member within the meaning of Article 5 SCM Agreement, the subsidizing Member “shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy”. The Panel drew the conclusion that “withdrawal of the subsidy is an alternative, available to the subsidizing Member, to some other action. Repayment of the subsidy would certainly effectuate withdrawal of the subsidy by a subsidizing Member so as to allow it to avoid action by the complaining Member.”(339)

(ii) Article 19.1

216.     The Panel in Australia — Automotive Leather II (Article 21.5 — US), in the context of considering whether Article 4.7 allowed “retroactive” remedies, rejected the argument that “Article 19.1 of the DSU, even in conjunction with Article 3.7 of the DSU, requires the limitation of the specific remedy provided for in Article 4.7 of the SCM Agreement to purely prospective action. An interpretation of Article 4.7 of the SCM Agreement which would allow exclusively ‘prospective’ action would make the recommendation to ‘withdraw the subsidy’ under Article 4.7 indistinguishable from the recommendation to ‘bring the measure into conformity’ under Article 19.1 of the DSU, thus rendering Article 4.7 redundant.”(340)

(d) Relationship with other WTO Agreements

(i) DSU

217.     In Brazil — Aircraft, the Appellate Body noted that “the provisions of Article 21.3 of the DSU are not relevant in determining the period of time for implementation of a finding of inconsistency with the prohibited subsidies provisions of Part II of the SCM Agreement”.

218.     The Panel in US — FSC (Article 21.5 — EC) found that since the Member failed to comply with the required recommendations under Article 4.7 of the SCM Agreement, it had also “failed to comply with Article 21 of the DSU”. The Panel stated:

“Having found that the United States has not fully withdrawn the FSC subsidies as required by the recommendations and rulings of the DSB made pursuant to Article 4.7 SCM Agreement, we do not believe that it is necessary to also determine whether the United States “failed to comply with the DSB recommendations and rulings within the period of time specified by the DSB and has therefore also failed to comply with Article 21 DSU”.”(341)

(ii) Agreement on Agriculture

219.     Regarding the relationship between the Agreement on Agriculture and Article 4.7 of the SCM Agreement, see paragraph 153 above.

7. Article 4.9

220.     For a table showing the length of time taken in Appellate Body proceedings to date, see Article 17.5 of the DSU.

8. Article 4.10

(a) Meaning of “appropriate countermeasures”

(i) Countermeasures

221.     In Brazil — Aircraft (Article 22.6 — Brazil), the Arbitrators looked at the word “countermeasure” as context for finding a meaning for the word “appropriate”. The Arbitrators disregarded the dictionary meaning of the word and preferred to refer to its general meaning in international law and to the work of the International Law Commission on state responsibility:

“While the parties have referred to dictionary definitions for the term ‘countermeasures’, we find it more appropriate to refer to its meaning in general international law(342) and to the work of the International Law Commission (ILC) on state responsibility, which addresses the notion of countermeasures.(343) We note that the ILC work is based on relevant state practice as well as on judicial decisions and doctrinal writings, which constitute recognized sources of international law.(344) When considering the definition of ‘countermeasures’ in Article 47 of the Draft Articles,(345) we note that countermeasures are meant to ‘induce [the State which has committed an internationally wrongful act] to comply with its obligations under articles 41 to 46’. We note in this respect that the Article 22.6 arbitrators in the EC — Bananas (1999) arbitration made a similar statement.(346) We conclude that a countermeasure is ‘appropriate’ inter alia if it effectively induces compliance.”(347)

222.     In US — FSC (Article 22.6 — US), the Arbitrators looked into the ordinary meaning of the word “countermeasure”:

“Dictionary definitions of ‘countermeasure’ suggest that a countermeasure is essentially defined by reference to the wrongful action to which it is intended to respond. The New Oxford Dictionary defines ‘countermeasure’ as ‘an action taken to counteract a danger, threat, etc’.(348) The meaning of ‘counteract’ is to ‘hinder or defeat by contrary action; neutralize the action or effect of’.(349) Likewise, the term ‘counter’ used as a prefix is defined inter alia as: ‘opposing, retaliatory’.(350) The ordinary meaning of the term thus suggests that a countermeasure bears a relationship with the action to be counteracted, or with its effects (cf. ‘hinder or defeat by contrary action; neutralize the action or effect of’).(351)

 

In the context of Article 4 SCM Agreement, the term ‘countermeasures’ is used to define temporary measures which a prevailing Member may be authorized to take in response to a persisting violation of Article 3 of the SCM Agreement, pending full compliance with the DSB’s recommendations. This use of the term is in line with its ordinary dictionary meaning as described above: these measures are authorized to counteract, in this context, a wrongful action in the form of an export subsidy that is prohibited per se, or the effects thereof.

 

It would be consistent with a reading of the plain meaning of the concept of countermeasure to say that it can be directed either at countering the measure at issue (in this case, at effectively neutralizing the export subsidy) or at counteracting its effects on the affected party, or both.

 

We need, however, to broaden our textual analysis in order to see whether we can find more precision in how counter measures are to be construed in this context. We thus turn to an examination of the expression ‘appropriate’ countermeasures with a view to clarifying what level of countermeasures may be legitimately authorized.”(352)

223.     In US — Upland Cotton (Article 22.6 — US I), the Arbitrators began their analysis by interpreting the term “countermeasure” in Article 4.10:

“We note at the outset that the term “countermeasures” is used to designate retaliatory measures in the WTO Agreement only in the SCM Agreement. This contrasts with the terms of Article 22 of the DSU, which refers to the “suspension of concessions or other obligations”. However, it is not argued by either party in these proceedings that the term “countermeasures” would designate, in the SCM Agreement, anything other than a temporary suspension of certain obligations, and this is what we understand the term to refer to.

 

The prefix “counter-” can be defined as meaning “against, in return”.(353) The Oxford English Dictionary further cites the term “counter-measure” as an illustration of a situation in which this prefix is used to indicate something that is “[d]one, directed, or acting against, in opposition to, as a rejoinder or reply to another thing of the same kind already made or in existence”. Another dictionary defines the term “countermeasure” as an “action or device designed to negate or offset another”.(354)

We are not convinced that the use of the term “countermeasures” necessarily connotes, in and of itself, an intention to refer to retaliatory action that “goes beyond the mere rebalancing of trade interests”, as Brazil suggests. As noted above, the term indicates that the action is taken in response to another, in order to “counter” it. This does not necessarily connote, in our view, an intention to “go beyond” a rebalancing of trade interests. Indeed, we are not convinced that the dictionary meanings of the term, in and of themselves, provide any compelling guidance as to the exact level of countermeasures that may be permissible under Article 4.10 of the SCM Agreement. We note that the term “countermeasures” is also used in Article 7.9 of the SCM Agreement, where the permissible level of countermeasures is defined with reference to the adverse effects of the violating measure.

We note that the term “countermeasures” is the general term used by the ILC in the context of its Draft Articles on State Responsibility, to designate temporary measures that injured States may take in response to breaches of obligations under international law.(355)

 

We agree that this term, as understood in public international law, may usefully inform our understanding of the same term, as used in the SCM Agreement.(356) Indeed, we find that the term “countermeasures”, in the SCM Agreement, describes measures that are in the nature of countermeasures as defined in the ILC’s Draft Articles on State Responsibility.

 

At this stage of our analysis, we therefore find that the term “countermeasures” essentially characterizes the nature of the measures to be authorized, i.e. temporary measures that would otherwise be contrary to obligations under the WTO Agreement and that are taken in response to a breach of an obligation under the SCM Agreement. This is also consistent with the meaning of this term in public international law as reflected in the ILC Articles on State Responsibility.

 

As to the permissible level of countermeasures that may be authorized under Article 4.10 of the SCM Agreement, this is, in our view, primarily defined through the term “appropriate” and the wording of footnote 9.”(357)

(ii) appropriate

General

224.     In Brazil — Aircraft (Article 22.6 — Brazil), Canada had proposed adopting countermeasures based on the amount of subsidy per aircraft granted by Brazil instead of basing them on the level of nullification or impairment suffered. The Arbitrators examined the meaning of the term appropriate and concluded that “a countermeasure is ‘appropriate’ inter alia if it effectively induces compliance”:

“In accordance with Article 3.2 of the DSU, we proceed with an analysis of the meaning of the term ‘appropriate’ based on Article 31 of the Vienna Convention.

 

Examining only the ordinary meaning of the term ‘appropriate’ does not allow us to reply to the question before us, since dictionary definitions are insufficiently specific. Indeed, the relevant dictionary definitions of the word ‘appropriate’ are ‘specially suitable; proper’.(358) However, they point in the direction of meeting a particular objective.

 

The first context of the term ‘appropriate’ is the word ‘countermeasures’, of which it is an adjective. While the parties have referred to dictionary definitions for the term ‘countermeasures’, we find it more appropriate to refer to its meaning in general international law(359) and to the work of the International Law Commission (ILC) on state responsibility, which addresses the notion of countermeasures.(360) We note that the ILC work is based on relevant state practice as well as on judicial decisions and doctrinal writings, which constitute recognized sources of international law.(361) When considering the definition of ‘countermeasures’ in Article 47 of the Draft Articles,(362) we note that countermeasures are meant to ‘induce [the State which has committed an internationally wrongful act] to comply with its obligations under articles 41 to 46’. We note in this respect that the Article 22.6 arbitrators in the EC — Bananas (1999) arbitration made a similar statement.(363) We conclude that a countermeasure is ‘appropriate’ inter alia if it effectively induces compliance.”(364)

225.     Applying their general finding that a countermeasure is appropriate inter alia if it effectively induces compliance, the Arbitrators in Brazil — Aircraft (Article 22.6 — Brazil) found that in the case of Article 4.7 of the SCM Agreement, “inducing compliance” meant “inducing the withdrawal of the prohibited subsidy”:

“In this respect, we recall that the measure in respect of which the right to take countermeasures has been requested is a prohibited export subsidy falling under Article 3.1(a) of the SCM Agreement. Article 4.7 of the SCM Agreement provides in this respect that if a measure is found to be a prohibited subsidy, it shall be withdrawn without delay. In such a case, effectively ‘inducing compliance’ means inducing the withdrawal of the prohibited subsidy.

 

In contrast, other illegal measures do not have to be withdrawn without delay. As specified in Article 3.8 of the DSU, if a measure violates a provision of a covered agreement, the measure is considered prima facie to cause nullification or impairment. However, if the defendant succeeds in rebutting the charge, no nullification or impairment will be found in spite of the violation. Such a rebuttal may be impossible to make in a number of cases. Yet, this does not change the fact that the concept of nullification or impairment is not found in Articles 3 and 4 of the SCM Agreement. The Arbitrators are of the view that meaning must be given to the fact that the negotiators did not include the concept of nullification or impairment in those articles, whilst it is expressly mentioned in Article 5 of the SCM Agreement, which deals with the adverse effects of actionable subsidies.”(365)

226.     The Arbitrators, in US — FSC (Article 22.6 — US), considered the dictionary meaning of the word “appropriate” and concluded that, as far as the amount or level of countermeasures is concerned, the expression “appropriate” does not in and of itself predefine the precise and exhaustive conditions for the application of countermeasures.(366) According to the Arbitrators, Article 4.10 and 4.11 are not designed to lay down a precise formula or otherwise quantified benchmark or amount of countermeasures which might be legitimately authorized in each and every instance.(367) The Arbitrators indicated:

“Based on the plain meaning of the word, this means that countermeasures should be adapted to the particular case at hand. The term is consistent with an intent not to prejudge what the circumstances might be in the specific context of dispute settlement in a given case. To that extent, there is an element of flexibility, in the sense that there is thereby an eschewal of any rigid a priori quantitative formula. But it is also clear that there is, nevertheless, an objective relationship which must be absolutely respected: the countermeasures must be suitable or fitting by way of response to the case at hand.”(368)

227.     The Arbritrators in US — Upland Cotton (Article 22.6 — US I) began by considering the ordinary meaning of “appropriate”, before turning to the guidance provided in footnote 9:

Article 4.10 of the SCM Agreement requires the countermeasures that may be authorized in response to the absence of timely withdrawal of a prohibited export subsidy to be “appropriate”. This term is in turn informed by footnote 9, which clarifies that “this expression [‘appropriate countermeasures’] is not intended to allow countermeasures that would be disproportionate in light of the fact that the subsidies at issue are prohibited”. We will first consider the term “appropriate”, before turning to how it is informed by the terms of footnote 9.

 

Dictionary definitions of the adjective “appropriate” include: “Specially fitted or suitable, proper”(369) and “especially suitable or compatible: fitting”.(370) “Fitting”, in turn, can be defined as “of a kind appropriate to the situation”. The terms “fit, suitable, meet, proper, appropriate, fitting, apt, happy, felicitous” are further identified as synonyms that mean “right with respect to some end, need, use, or circumstance”.(371)

 

“These definitions suggest that the adjective “appropriate” conveys the notion of something being “adapted” or “suited” to the particular situation at hand. This very general indication does not provide explicit guidance as to the exact parameters that legitimately may be taken into account in assessing the “appropriateness” of countermeasures in the context of Article 4.10 of the SCM Agreement. Rather, the term suggests that countermeasures should be “adapted” to the particular circumstances, and thus that there may be a degree of legitimate variability in what may be “appropriate”, depending on the circumstances of the case. To that extent, we agree with the United States that the term “appropriate” “connotes the close relationship between countermeasures and the particular circumstances of a particular case.

 

Brazil, for its part, likens the term “appropriate” to the term “reasonable”, in that it “similarly involves ‘a degree of flexibility’“, and that “the word requires the treaty interpreter to consider all of the circumstances of a particular case in assessing whether the respondent has demonstrated that proposed countermeasures are inappropriate”. Leaving aside for now the question of the burden to be discharged by the responding Member in arbitral proceedings, we agree that the term “appropriate” suggests that “all of the circumstances of a particular case” should be taken into account in assessing the “appropriateness” of proposed countermeasures, and that it also suggests a degree of flexibility in what might be considered “appropriate” in a given case.”(372)

Footnote 9 of the SCM Agreement

228.     In US — FSC (Article 22.6 — US), the Arbitrators noted that the term “appropriate” countermeasures in Article 4.10 is informed by footnote 9, which provides guidance as to what the expression “appropriate” should be understood to mean. In the Arbitrators’ view, “these two elements are part of a single assessment and that the meaning of the expression ‘appropriate countermeasures’ should result from a combined examination of these terms of the text in light of its footnote”.(373) The Arbitrators thus concluded that “[t]his footnote effectively clarifies further how the term ‘appropriate’ is to be interpreted. We understand it to mean that countermeasures that would be ‘disproportionate in light of the fact that the subsidies dealt with under these provisions are prohibited’ could not be considered “appropriate” within the meaning of Article 4.10 of the SCM Agreement”.(374) After analysing the dictionary meaning of the word “disproportionate” in footnote 9, the Arbitrators considered that:

[F]ootnote 9 further confirms that, while the notion of “appropriate countermeasures” is intended to ensure sufficient flexibility of response to a particular case, it is a flexibility that is distinctly bounded. Those bounds are set by the relationship of appropriateness. That appropriateness, in turn, entails an avoidance of disproportion between the proposed countermeasures and, as our analysis to this point has brought us, either the actual violating measure itself, the effects thereof on the affected Member, or both.”(375)

229.     In US — FSC (Article 22.6 — US), the Arbitrators further looked at the text of the final part of footnote 9 and considered that this text directed them “to consider the ‘appropriateness’ of countermeasures under Article 4.10 from this perspective of countering a wrongful act and taking into account its essential nature as an upsetting of the rights and obligations as between Members”.(376) The Arbitrators further noted that that:

“[T]he negative formulation of the requirement under footnote 9 is consistent with a greater degree of latitude than a positive requirement may have entailed: footnote 9 clarifies that Article 4.10 is not intended to allow countermeasures that would be “disproportionate”. It does not require strict proportionality.(377),(378)

230.     The Arbitrators in US — Upland Cotton (Article 22.6 — US I) considered footnote 9 in the context of interpreting the concept of “appropriate” countermeasures:

“The very formulation of the footnote, i.e. “this expression is not meant to allow countermeasures that are disproportionate” (emphasis added) indicates, in our view, that it serves to guard against an interpretation of the terms “appropriate countermeasures” that would allow measures that are “disproportionate”. We therefore understand this proportionality requirement to be a protection against excessive countermeasures. In other words, while the expression “appropriate countermeasures” allows a degree of flexibility in assessing what may be “appropriate” in the circumstances of a given case, this flexibility is not unbounded. As observed by the arbitrator on US — FSC (Article 22.6 — US), “footnote 9 further confirms that, while the notion of “appropriate countermeasures” is intended to ensure sufficient flexibility of response to a particular case, it is a flexibility that is distinctly bounded.”(379)

 

As noted earlier, countermeasures are an exceptional, “last resort”, remedy within the WTO dispute settlement system. Footnote 9, in our view, invites us to exercise caution and to ensure that the response is “measured” and that the countermeasures to be authorized do not result in a greater disruption in the trade relations among Members and in the application of the WTO agreements than is warranted by the circumstances of the case at hand.

 

This requirement confirms us in our view that countermeasures, in order to be “appropriate”, should bear some relationship to the extent to which the complaining Member has suffered from the trade-distorting impact of the illegal subsidy. Countermeasures are in essence trade restrictive measures to be taken in response to a Member’s application of a trade-distorting measure that has been determined to nullify or impair the benefits accruing to another Member. Countermeasures that would ensure a relationship of proportionality between the extent to which the trade opportunities of the Member applying the countermeasures has been affected and the extent to which the trade opportunities of the violating Member will in turn be adversely affected would notionally restore the balance of rights and obligations arising from the covered agreements that has been upset between the parties. This would ensure a proper relationship between the level of the countermeasures and the circumstances out of which the dispute arises.”(380)

(iii) Same meaning in Articles 4.10 and 4.11

231.     The Arbitrators in US — Upland Cotton (Article 22.6 — US I) noted that in their decision, “reference is made to the terms “appropriate countermeasures” as contained in Article 4.10 of the SCM Agreement. It is understood that these terms are assumed to have the same meaning also in Article 4.11 of the SCM Agreement.”(381)

(b) Purpose of countermeasures under Article 4.10

232.     The Arbitrators in US — Upland Cotton (Article 22.6 — US I) agreed with prior arbitrators that the objective of countermeasures under Article 4.10 is to “induce compliance”:

“We note that the objective of “inducing compliance” in relation to retaliatory measures was first recognized in the context of proceedings under Article 22.4 of the DSU. The arbitrator on EC — Bananas III (US) (Article 22.6 — EC) thus found that:

 

“[T]he overall objective of compensation or the suspension of concessions or other obligations as described in Article 22.1:

 

‘Compensation and the suspension of concession or other obligations are temporary measures available in the event that the recommendations or rulings are not implemented within a reasonable period of time. However, neither compensation nor the suspension of concessions or other obligations is preferred to full implementation of a recommendation to bring a measure into conformity with the covered agreements. Compensation is voluntary and, if granted, shall be consistent with the covered agreements.’

 

Accordingly, the authorization to suspend concessions or other obligations is a temporary measure pending full implementation by the Member concerned. We agree with the United States that this temporary nature indicates that it is the purpose of countermeasures to induce compliance. But this purpose does not mean that the DSB should grant authorization to suspend concessions beyond what is equivalent to the level of nullification or impairment. In our view, there is nothing in Article 22.1 of the DSU, let alone in paragraphs 4 and 7 of Article 22, that could be read as a justification for counter-measures of a punitive nature.”(382)

 

As the cited passage makes clear, the arbitrator in that dispute did not consider that the objective of “inducing compliance” implied that this constituted the benchmark by which retaliatory measures may be quantified. Rather, the objective of inducing compliance defined the purpose of suspension of concessions or other obligations, while the benchmark (in that case, Article 22.4 of the DSU) required that the level of suspension of concessions or other obligations should be in line with the trade effects of the illegal measure on the complainant.

 

This objective of suspension of concessions or other obligations under Article 22.4 of the DSU has been recently confirmed by the Appellate Body in US — Continued Suspension.(383) Prior arbitrators have also found that the objective of countermeasures under Article 4.10 of the SCM Agreement is to “induce compliance”.(384)

 

“We agree that countermeasures under Article 4.10 of the SCM Agreement serve to “induce compliance”. However, it seems abundantly clear that this purpose does not, in and of itself, distinguish Article 4.10 from the other comparable provisions in the WTO Agreement. “Inducing compliance” appears rather to be the common purpose of retaliation measures in the WTO dispute settlement system, including in the context of Article 22.4 of the DSU. The fact that countermeasures under Article 4.10 of the SCM Agreement serve to induce compliance does not in and of itself provide specific indications as to the level of countermeasures that may be permissible under this provision.

 

This distinction is also found under general rules of international law, as reflected in the ILC’s Articles on State Responsibility, which have been referred to by Brazil in these proceedings. Article 49 of these Draft Articles defines “inducing compliance” as the only legitimate object of countermeasures, while a separate provision, Article 51, addresses the question of the permissible level of countermeasures, which is defined in relation to proportionality to the injury suffered, taking into account the gravity of the breach.”(385),(386)

(c) Amount of subsidy as the basis for the calculation of countermeasures

(i) General

233.     The Arbritrators in US — Upland Cotton (Article 22.6 — US I) discussed the approach of having recourse to the “amount of the subsidy” as the basis for the calculation of “appropriate” countermeasures:

“In the three prior cases in which countermeasures under Article 4.10 of the SCM Agreement have been considered, the arbitrators had recourse to the “amount of the subsidy” as the basis for the calculation of “appropriate countermeasures”.(387) This is also the principle on which Brazil purports to calculate the level of “appropriate countermeasures” in these proceedings. The United States, as already noted above, does not disagree, as a matter of principle, with the use of the amount of the subsidy as a starting point for the Arbitrator’s analysis in this case.

 

The use of the “amount of the subsidy” in prior cases does not imply, however, that the arbitrators in these earlier cases necessarily considered that the “amount of the subsidy” was the only basis on which “appropriate countermeasures” might have been calculated. In fact, as we understand it, the arbitrators in these cases took into account the fact that the legal standard embodied in Article 4.10 of the SCM Agreement allows greater flexibility than those under Article 22.4 of the DSU or Article 7.9 of the SCM Agreement to tailor the countermeasures to the specific circumstances of the case at hand, but did not exclude trade effects as a relevant consideration. In fact, in these decisions, some form of consideration was given to the trade effects of the measure on the complaining Member.(388) As the United States has acknowledged in these proceedings, “while prior arbitrators considering requests for countermeasures for prohibited subsidies have used an “amount of the subsidy” approach, they also have acknowledged the “trade effects” approach”.

 

Subsidies may operate in a variety of ways, and, depending on the design of the subsidy, as well as its actual operation on the market, the trade effects of the subsidy may be complex to establish. This is well illustrated by the Canada — Aircraft Credits and Guarantees (Article 22.6 — Canada) and the US — FSC (Article 22.6 — US) cases. As we have observed above, the terms of Article 4.10 of the SCM Agreement allow some flexibility in the manner in which “appropriate countermeasures” might be calculated.

 

This Arbitrator is not convinced, however, that an “amount of subsidy” approach, of itself and without adjustment, will always be consistent with the legal standard embodied in Article 4.10 of the SCM Agreement. Actually, we think that in most cases such an approach will not be “appropriate”, notwithstanding its convenience, from a calculation perspective, and its literal attraction, from a “withdraw the subsidy” perspective. As we have determined above, a consideration of the “appropriateness” of countermeasures, and in particular the requirement for the countermeasures not to be “disproportionate”, suggests that there should be a degree of relationship between the level of countermeasures and the trade-distorting impact of the measure on the complaining Member.

 

As noted above, we do not exclude that, in particular circumstances, the complaining Member could perhaps rightly claim that a countermeasure in the amount of the subsidy would be “appropriate”. However, in most cases, the trade-distorting impact of the subsidy on one or several other Members would not necessarily bear any particular relationship to the amount of the subsidy. As observed by previous arbitrators, the amount of the subsidy may in fact be lower than its trade effects, and apportioning it would ordinarily exacerbate that likelihood.(389) This amount therefore does not seem to us to be a priori appropriate, nor is it necessarily proportionate to the extent to which the trade of the Member concerned is adversely affected. In these circumstances, it cannot be assumed that the total amount of the subsidy is an appropriate measure of its trade effects, or even that it is necessarily a relevant “proxy” for those effects.

 

Complaining Members do have choices with respect to the amount of countermeasures they seek to impose, and it is the task of an arbitrator to determine whether the choice leads to an appropriate outcome which is consistent with the rights and obligations spelt out in the covered Agreements, the nature of the subsidy concerned and the remedy which is offered, and the balance struck between the rights of all Members. We recall in this context our interpretation of “appropriateness” in the case of countermeasures against prohibited subsidies, in particular its less precise quantitative constraints. In particular, we note our previous observation that a range of factors can be presented to an arbitrator, together with a number of calculation methods. The arbitrator need not calculate direct equivalence, but instead may accept what the arbitrator feels to be within the bounds of what is appropriate in the circumstances of the case. The legal approach must emanate from the terms of the SCM Agreement, the economic principles applied must be logical and unified, and the claims concerning the trade effects must be relevant and reasonable.”(390)

(ii) Exception to the requirement of equivalence to level of nullification or impairment

234.     The Arbitrators in Brazil — Aircraft (Article 22.6 — Brazil) rejected Brazil’s argument that the countermeasures must be equivalent to the level of nullification or impairment pursuant to Article 22.4 of the DSU, noting that the concept of nullification or impairment is not found in Articles 3 and 4 of the SCM Agreement. The Arbitrators explained:

“A first approach would be to consider that the concept of nullification or impairment does not apply to Article 4 SCM Agreement. We note in this respect that, in relation to actionable subsidies, Article 5 refers to nullification or impairment as only one of the three categories of adverse effects. This could mean that another test than nullification or impairment could also apply in the context of Article 4 SCM Agreement.

 

That said, we note that the Original Panel concluded that, since a violation had been found, a prima facie case of nullification or impairment had been made within the meaning of Article 3.8 of the DSU, which Brazil had not rebutted. In that context, we are more inclined to consider that no reference was expressly made to nullification or impairment in Article 4 SCM Agreement for the following reasons:

 

(a)     a violation of Article 3 of the SCM Agreement entails an irrebuttable presumption of nullification or impairment. It is therefore not necessary to refer to it;

 

(b)     the purpose of Article 4 is to achieve the withdrawal of the prohibited subsidy. In this respect, we consider that the requirement to withdraw a prohibited subsidy is of a different nature than removal of the specific nullification or impairment caused to a Member by the measure.(391) The former aims at removing a measure which is presumed under the WTO Agreement to cause negative trade effects, irrespective of who suffers those trade effects and to what extent. The latter aims at eliminating the effects of a measure on the trade of a given Member;

 

(c)     the fact that nullification or impairment is established with respect to a measure does not necessarily mean that, in the presence of an obligation to withdraw that measure, the level of appropriate countermeasures should be based only on the level of nullification or impairment suffered by the Member requesting the authorisation to take countermeasures.”(392)

235.     In their finding that the concept of nullification or impairment is not found in Articles 3 and 4 of the SCM Agreement, the Arbitrators in Brazil — Aircraft (Article 22.6 — Brazil) also noted that a different term than “appropriate countermeasures” was being used in a comparable context in Articles 7.9 and 10 of the SCM Agreement:

“We also note that, when the negotiators have intended to limit countermeasures to the effect caused by the subsidy on a Member’s trade, they have used different terms than ‘appropriate countermeasures’. Article 7.9 and 10, which is the provision equivalent for actionable subsidies to Article 4.9 and 10 for prohibited subsidies, uses the terms ‘commensurate with the degree and nature of the adverse effects determined to exist’. In that context, we do not consider the arguments made by Brazil in its oral presentation and based on the central position of the notion of nullification in the GATT to be compelling. As we have seen above, the term ‘appropriate countermeasures’ does not impose similar constraints.”(393)

236.     Further, the Arbitrators in Brazil — Aircraft (Article 22.6 — Brazil) addressed the relevance of footnotes 9 and 10 to Article 4.10 and 4.11, respectively:

“We agree that, as those footnotes are drafted, it seems difficult to clearly identify how the second part of the sentence (‘in light of the fact that the subsidies dealt with under these provisions are prohibited’) relates to the first part of the sentence (‘This expression is not meant to allow countermeasures that are disproportionate’). This is probably due to the use of the words ‘in light of the fact that’. However, since the text of the treaty is supposed to be the most achieved expression of the intent of the parties, we should refrain from second guessing the negotiators at this point. We can nonetheless note that the reference to the fact that the subsidies dealt with are prohibited can most probably be considered more as an aggravating factor than as a mitigating factor. We also find the use of the word ‘disproportionate’ to be interesting in light of the term ‘out of proportion’ used in Article 49 of the Draft Articles. We do not draw any firm conclusions as to the meaning of footnotes 9 and 10. However, we note that footnotes 9 and 10 at least confirm that the term ‘appropriate’ in Articles 4.10 and 4.11 of the SCM Agreement should not be given the same meaning as the term ‘equivalent’ in Article 22 of the DSU.(394),(395)

237.     The Arbitrators in US — FSC (Article 22.6 — US) found that an assessment of the proposed countermeasures in relation to the initial violating measures was sufficient to conclude that the countermeasures were appropriate. In this regard, they compared Articles 7.9 and 9.4 of the SCM Agreement with Article 10 and concluded that the clear reference to trade effects in Article 7.9 “highlights” the lack of any such indication in Article 4.10. The Arbitrators then concluded that Article 4.10 does not “require” that trade effects be the standard by which “appropriateness” is determined. However, they found that Article 4.10 does not “preclude” a Member from adopting countermeasures that are “tailored” to offset adverse “trade effects”:

“Recourse to countermeasures is foreseen in three provisions of the SCM Agreement: Article 4.10, which we are concerned with here, Article 7.9 and Article 9.(396) As regards actionable subsidies, Article 7.9 provides for authorization of countermeasures ‘commensurate with the degree and nature of the adverse effects determined to exist …’. In a similar vein, Article 9.4 provides, in relation to non-actionable subsidies, for the authorization of countermeasures ‘commensurate with the nature and degree of the effects determined to exist’. The explicit precision of these indications clearly highlights the lack of any analogous explicit textual indication in Article 4.10 and contrasts with the broader and more general test of ‘appropriateness’ found in Articles 4.10 and 4.11.

 

In short, as far as prohibited subsidies are concerned, there is no reference whatsoever in remedies foreseen under Article 4 to such concepts as ‘trade effects’, ‘adverse effects’ or ‘trade impact’. Yet, by contrast, such a concept is to be found very clearly in the context of remedies under Article 7, through the notion of ‘adverse effects’.

 

We believe that this difference must be given a meaning and that we should give due consideration to the fact that the drafters — who obviously could have used other terms in order to quantify precisely the permissible amount of countermeasures in the context of Article 4.10 — chose not to do so. It is not our task to read into the treaty text words that are not there.(397) We are also cognizant that the terms that do appear in the text of the treaty must be presumed to have meaning and must be read effectively.(398) The implications of the use of the term ‘appropriate’ must therefore be acknowledged and we must give this expression in Article 4.10 its full meaning.(399)

This reading of the text in its context confirms us in our view that, rather than there being any requirement to confine ‘appropriate countermeasures’ to offsetting the effects of the measure on the relevant Member, there is a clear rationale exhibited that reinforces our textual interpretation that the Member concerned is entitled to take countermeasures that are tailored to neutralizing the offending measure qua measure as a wrongful act. The expression ‘appropriate countermeasures’, in our view, would entitle the complaining Member to countermeasures which would at least counter the injurious effect of the persisting illegal measure on it. However, it does not require trade effects to be the effective standard by which the appropriateness of countermeasures should be ascertained. Nor can the relevant provisions be interpreted to limit the assessment to this standard. Members may take countermeasures that are not disproportionate in light of the gravity of the initial wrongful act and the objective of securing the withdrawal of a prohibited export subsidy, so as to restore the balance of rights and obligations upset by that wrongful act.”(400)

238.     In US — FSC (Article 22.6 — US), the Arbitrators considered that, since Articles 4.10 and 4.11 of the SCM Agreement may prevail over those of the DSU, there can be no presumption that the drafters intended the standard under Article 4.10 to be necessarily coextensive with that under Article 22.4:

“It should be recalled here that Articles 4.10 and 4.11 of the SCM Agreement are ‘special or additional rules’ under Appendix 2 of the DSU, and that in accordance with Article 1.2 of the DSU, it is possible for such rules or procedures to prevail over those of the DSU. There can be no presumption, therefore, that the drafters intended the standard under Article 4.10 to be necessarily coextensive with that under Article 22.4 so that the notion of ‘appropriate countermeasures’ under Article 4.10 would limit such countermeasures to an amount ‘equivalent to the level of nullification or impairment’ suffered by the complaining Member. Rather, Articles 4.10 and 4.11 of the SCM Agreement use distinct language and that difference must be given meaning.

 

Indeed, reading the text of Article 4.10 in its context, one might reasonably observe that if the drafters had intended the provision to be construed in this way, they could certainly have made it clear. Indeed, relevant provisions both elsewhere in the SCM Agreement and in the DSU use distinct terms to convey precisely such a standard as described by the United States, in so many words. Yet the drafters chose terms for this provision in the SCM Agreement different from those found in Article 22.4 of the DSU. It would not be consistent with effective treaty interpretation to simply read away such differences in terminology.

 

We therefore find no basis in the language itself or in the context of Article 4.10 of the SCM Agreement to conclude that it can or should be read as amounting to a ‘trade effect-oriented’ provision where explicitly alternative language is to be read away in order to conform it to a different wording to be found in Article 22.4 of the DSU.

 

We would simply add that, while we consider that the precise difference in language must be given proper meaning, this goes no further than that. Our interpretation of Article 4.10 of the SCM Agreement as embodying a different rule from Article 22.4 of the DSU does not make the DSU otherwise inapplicable or redundant.”(401)

239.     Finally, the Arbitrators in US — FSC (Article 22.6 — US) considered that under Article 4.10, a Member is entitled to act with countermeasures that properly take into account the seriousness and nature of the breach. However, they warned that Article 4.10 “does not amount to a blank cheque”. The Arbitrators concluded that from the perspective of the measures’ trade effects on the part of the complainant did not provide any reason to reach a different conclusion from that already reached:(402)

“Thus, as we interpret Article 4.10 of the SCM Agreement, a Member is entitled to act with countermeasures that properly take into account the gravity of the breach and the nature of the upset in the balance of rights and obligations in question. This cannot be reduced to a requirement that constrains countermeasures to trade effects, for the reasons we have set out above.

 

At the same time, Article 4.10 of the SCM Agreement does not amount to a blank cheque. There is nothing in the text or in its context which suggests an entitlement to manifestly punitive measures. On the contrary, footnote 9 specifically guards us against such an unbounded interpretation by clarifying that the expression ‘appropriate’ cannot be understood to allow ‘disproportionate’ countermeasures. However, to read this indication as effectively reintroducing into that provision a quantitative limit equivalent to that found in other provisions of the SCM Agreement or Article 22.4 of the DSU would effectively read the specific language of Article 4.10 of the SCM Agreement out of the text. Countermeasures under Article 4.10 of the SCM Agreement are not even, strictly speaking, obliged to be ‘proportionate’ but not to be ‘disproportionate’. Not only is a Member entitled to take countermeasures that are tailored to offset the original wrongful act and the upset of the balancing of rights and obligations which that wrongful act entails, but in assessing the ‘appropriateness’ of such countermeasures — in light of the gravity of the breach — a margin of appreciation is to be granted, due to the severity of that breach.”(403)

(iii) Factors relevant for the calculation of countermeasures

240.     The Arbitrators in Brazil — Aircraft (Article 22.6 — Brazil) addressed Brazil’s argument that certain sales should be excluded because competition was based upon factors other than price, or that there was no competition with the Canadian manufacturer:

“Since we selected the amount of the subsidy as the basis for the countermeasures and not the level of nullification or impairment suffered by Canada, it is appropriate and logical to include in our calculation all the sales of subsidised aircraft, whether they compete or not with Bombardier’s production. However, consistent with our approach on the burden of proof, we excluded all the sales where Brazil demonstrated that no PROEX interest rate equalization payments had been made and we assumed that future sales of the xxx xxxxxxx and xxx would not benefit from the PROEX interest rate equalization payments.”(404)

241.     The Arbitrators in Brazil — Aircraft (Article 22.6 — Brazil) also rejected Brazil’s argument that only sales of aircraft subsequent to the implementation period should be considered although they were delivered after that period:

“We note that, in its report within the framework of the proceedings under Article 21.5 of the DSU, the Appellate Body made the following findings:

 

‘[the Appellate Body] upholds the conclusion of the Article 21.5 Panel that as a result of the continued issuance by Brazil of NTN-I bonds, after 18 November 1999, pursuant to letters of commitment issued before 18 November 1999, Brazil has failed to implement the recommendation of the DSB that it withdraw the prohibited export subsidies under PROEX within 90 days’(405)

 

We, therefore, consider that we have to include in the calculation of the appropriate countermeasures the firm sales for which PROEX letters of commitment were issued before 18 November 1999 and which had not yet been delivered (since the NTN-I bonds are issued at the time of the delivery of the aircraft).(406) We do not consider the arguments based on Brazil’s contractual obligations to be compelling. Obligations under internal law are no justification for not performing international obligations.(407),(408)

(d) Relationship with other Articles

242.     With respect to the relationship with Article 7.9, see paragraph 237 above.

(e) Relationship with other WTO Agreements

(i) DSU

243.     As regards the requirement of equivalence of the suspension of concessions to the level of nullification or impairment in Article 22.6 arbitrations, see Article 22.6 of the Chapter on the DSU.

9. Article 4.11

(a) Task of the Arbitrators under Article 4.11

244.     In Brazil — Aircraft (Article 22.6 — Brazil), a case which dealt with Canada’s request for authorization to take “appropriate countermeasures” under Article 4.10 of the SCM Agreement, the Arbitrators described their task under Article 4.11 of the SCM Agreement in the following terms:

“As to our task, we follow the approach adopted by previous arbitrators under Article 22.6 of the DSU.(409) We will have not only to determine whether Canada’s proposal constitutes ‘appropriate countermeasures’, but also to determine the level of countermeasures we consider to be appropriate in case we find that Canada’s level of countermeasures is not appropriate, if necessary by applying our own methodology.”(410)

245.     In US — Upland Cotton (Article 22.6 — US I), the Arbitrators stated the following in respect of their mandate:

“We agree that, in the event that we find that Brazil’s proposed countermeasures are not “appropriate” within the meaning of Article 4.10 of the SCM Agreement, we would be required also to determine what would constitute “appropriate” countermeasures. This would enable the complaining party to seek an authorization consistent with our decision, as foreseen in Article 22.7 of the DSU. In order to fulfil this part of our mandate, we may be required to adopt an approach or methodology that differs from those proposed by the parties.”(411)

(b) Article 4.11 provisions as special or additional rules

246.     In Brazil — Aircraft (Article 22.6 — Brazil), the Arbitrators indicated that they read the provisions of Article 4.11 of the SCM Agreement as special or additional rules:

“We read the provisions of Article 4.11 of the SCM Agreement as special or additional rules. In accordance with the reasoning of the Appellate Body in Guatemala — Cement,(412) we must read the provisions of the DSU and the special or additional rules in the SCM Agreement so as to give meaning to all of them, except if there is a conflict or a difference…”(413)

247.     In US — FSC (Article 22.6 — US), the Arbitrators recalled Article 30 of the SCM Agreement and concluded that Article 22.6 of the DSU applies to arbitrations pursuant to Article 4.11 of the SCM Agreement although this latter provision would prevail in case of conflict:

“We also recall the terms of Article 30 of the SCM Agreement, which clarifies that the provisions of the DSU are applicable to proceedings concerning measures covered by the SCM Agreement. Article 22.6 of the DSU therefore remains relevant to arbitral proceedings under Article 4.11 of the SCM Agreement, as illustrated by the textual reference made to Article 22.6 of the DSU in that provision. However, the special or additional rules and procedures of the SCM Agreement, including Articles 4.10 and 4.11, would prevail to the extent of any difference between them.”(414),(415)

(c) Burden of proof

248.     In Brazil — Aircraft (Article 22.6 — Brazil), Canada requested that the DSB authorize it to take appropriate “countermeasures” pursuant to Article 4.10 of the SCM Agreement, and Article 22.2 of the DSU, in the amount of Can$700 million, in relation to Brazil’s subsidy granted to its domestic producer of aircraft. In response to Brazil’s request, the DSB referred the matter to an arbitrator in accordance with Article 22.6 of the DSU. With respect to the burden of proof, the Arbitrators held that it was up to Brazil to demonstrate that the countermeasures that Canada was proposing to take were not “appropriate”:

“In application of the well-established WTO practice on the burden of proof in dispute resolution, it is for the Member claiming that another has acted inconsistently with the WTO rules to prove that inconsistency.(416) In the present case, the action at issue is the Canadian proposal to suspend concessions and other obligations in the amount of C$700 million as ‘appropriate countermeasures’ within the meaning of Article 4.10 of the SCM Agreement.(417) Brazil challenges the conformity of this proposal with Article 22 of the DSU and Article 4.10 of the SCM Agreement. It is therefore up to Brazil to submit evidence sufficient to establish a prima facie case or ‘presumption’ that the countermeasures that Canada proposes to take are not ‘appropriate’. Once Brazil has done so, it is for Canada to submit evidence sufficient to rebut that ‘presumption’. Should the evidence remain in equipoise on a particular claim, the Arbitrators would conclude that the claim has not been established. Should all evidence remain in equipoise, Brazil, as the party bearing the original burden of proof, would lose the case.

 

An issue to be distinguished from the question of who bears the burden of proof is that of the duty that rests on both parties to produce evidence and to collaborate in presenting evidence to the Arbitrators. This is why, even though Brazil bears the original burden of proof, we expected Canada to come forward with evidence explaining why its proposal constitutes appropriate countermeasures and we requested it to submit a ‘methodology paper’ describing how it arrived at the level of countermeasures it proposes.”(418),(419)

249.     Along the same lines, the Arbritrators in US — Upland Cotton (Article 22.6 — US I) stated that:

“We therefore find that the United States bears the initial burden of establishing the countermeasures are not “appropriate”. If that initial burden is discharged, Brazil will then have an opportunity of rebutting the conclusion that the countermeasures are not appropriate.

 

This allocation of burden of proof does not alleviate the burden on each party to establish the facts that it alleges during the proceedings. As observed by the Arbitrator in US — FSC (Article 22.6 — US), “it is generally for each party asserting a fact, whether complainant or respondent, to provide proof thereof”.(420) Accordingly, it is also for Brazil to provide evidence in support of the facts that it advances. The Arbitrator will consider all the evidence and arguments provided by both parties (United States and Brazil) to determine whether the proposed countermeasures are “appropriate”, in line with the principles we have set out concerning burden, and the evidence.”(421)

(d) Treatment of data supplied by private entities

250.     In Brazil — Aircraft (Article 22.6 — Brazil), the Arbitrators evaluated the trustworthiness of data supplied by Brazil, and stated that they “could not treat statements from that company as [they] would have if [the statements] had originated from a subject of international law”:

“A related problem faced by the Arbitrators in this case was that, in many instances, the original data necessary for the calculations or assessments was solely in the hands of Brazil. When this information originated in the Brazilian government, we assumed good faith and accepted the information and the supporting evidence provided by Brazil to the extent Canada also accepted it or did not provide sufficient evidence to put in doubt the accuracy of Brazil’s statements and/or evidence.

 

However, since this case relates to subsidies granted for the purchase of aircraft produced by the Brazilian aircraft manufacturer, Embraer, a large number of data essential for the resolution of our task is only available to that company. We assumed that Embraer was independent from the Brazilian government and, for that reason, we could not treat statements from that company as we would have if they had originated from a subject of international law.(422) When Brazil only provided statements regarding information available solely to Embraer, we requested that Brazil support those statements with materials usually regarded as evidence, such as articles or statements reproduced in the specialized press, company annual reports or any other certified information originating in Embraer or other reliable sources. When Brazil was not in a position to provide documentary evidence, we requested a detailed explanation of the reasons why such evidence was not available and expressed our willingness to consider written declarations from authorised Embraer officials, if duly certified. We then weighed this evidence against the evidence submitted by Canada.”(423)

(e) Relationship with other provisions

(i) SCM Agreement

Article 7.9

251.     The Arbitrators in US — FSC (Article 22.6 — US) referred to the wording of Articles 7.9 and 7.10 as context for the interpretation of Article 4.10 and considered that “the explicit precision of these indications [in Articles 7.9 and 7.10] clearly highlights the lack of any analogous explicit textual indication in Article 4.10 and contrasts with the broader and more general test of “appropriateness” found in Articles 4.10 and 4.11”. For the Arbitrators, such a difference in the text “must be given a meaning.”(424)

252.     The Arbitrators in US — Upland Cotton (Article 22.6 — US I) contrasted the terms of Article 4.10 with the terms used in Article 7.9:

“[W]ithin the context of the SCM Agreement, the terms of Article 4.10 contrast with those of Article 7.9, which foresees, in relation to actionable subsidies, countermeasures “commensurate with the degree and nature of the adverse effects determined to exist”. Here too, the terms of Article 7.9, through this reference to the “degree and nature of the adverse effects determined to exist”, point to a single specific benchmark as reference, and require the countermeasures to be “commensurate” with this benchmark, which is carefully defined in relation to the specific adverse effects that form the basis of the underlying findings. These elements distinguish the terms of Article 7.9 from the terms of Article 4.10. This difference can be understood in the broader context of the SCM Agreement, where actionable subsidies may only be challenged to the extent that they result in certain enumerated adverse effects for other WTO Members. By contrast, prohibited subsidies are prohibited independently of any demonstration of adverse effects. In such cases, no specific “adverse effects” will have been “determined to exist” prior to the request for authorization to apply countermeasures, and therefore there are none that could be referred to.(425)

(ii) DSU

Article 22.4

253.     In Brazil — Aircraft (Article 22.6 — Brazil), the Arbitrators addressed Canada’s request for authorization to take “appropriate countermeasures” under Article 4.10 of the SCM Agreement. Referring to Article 22.4 of the DSU, Brazil argued that the “countermeasures” must be equivalent to the level of nullification or impairment (this argument was rejected by the Arbitrator as referenced in paragraphs 224225 above). The Arbitrator explained the relationship between Article 4.11 of the SCM Agreement and Article 22.4 of the DSU by characterizing Article 4.11 of the SCM Agreement as “special or additional rules” and held that the concept of “nullification or impairment” was absent from Articles 3 and 4 of the SCM Agreement and that the principle of effectiveness would be counteracted if the “appropriate countermeasures” had to be necessarily limited to the level of nullification or impairment:

“We read the provisions of Article 4.11 of the SCM Agreement as special or additional rules. In accordance with the reasoning of the Appellate Body in Guatemala — Cement,(426) we must read the provisions of the DSU and the special or additional rules in the SCM Agreement so as to give meaning to all of them, except if there is a conflict or a difference. While we agree that in practice there may be situations where countermeasures equivalent to the level of nullification of impairment will be appropriate, we recall that the concept of nullification or impairment is absent from Articles 3 and 4 of the SCM Agreement. In that framework, there is no legal obligation that countermeasures in the form of suspension of concessions or other obligations be equivalent to the level of nullification or impairment.

 

On the contrary, requiring that countermeasures in the form of suspension of concessions or other obligations be equivalent to the level of nullification or impairment would be contrary to the principle of effectiveness by significantly limiting the efficacy of countermeasures in the case of prohibited subsidies. Indeed, as shown in the present case,(427) other countermeasures than suspension of concessions or obligations may not always be feasible because of their potential effects on other Members. This would be the case of a counter-subsidy granted in a sector where other Members than the parties compete with the products of the parties. In such a case, the Member taking the countermeasure may not be in a position to induce compliance.

 

We are mindful that our interpretation may, at a first glance, seem to cause some risk of disproportionality in case of multiple complainants. However, in such a case, the arbitrator could allocate the amount of appropriate countermeasures among the complainants in proportion to their trade in the product concerned. The ‘inducing’ effect would most probably be very similar.”(428)

254.     The Arbitrators in US — Upland Cotton (Article 22.6 — US I) contrasted the standard of “appropriate” countermeasures in Article 4.10 with the “equivalence” standard in Article 22.4 of the DSU:

“We agree that the term “appropriate”, by contrast to the terms “equivalent to the level of nullification or impairment”, does not require us to engage in an exact exercise to work out the correspondence between the level of countermeasures to be authorized and a specific benchmark such as the level of nullification or impairment of benefits suffered by the complainant. We agree that this difference in wording must be given meaning. The term “appropriate” in Article 4.10 of the SCM Agreement suggests a degree of flexibility and adaptation to the circumstances of the case that is not found in Article 22.4 of the DSU.”(429)

 

Part III: Actionable Subsidies

 

VI. Article 5     back to top

A. Text of Article 5

Article 5: Adverse Effects

          No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members, i.e.:

 

(a)     injury to the domestic industry of another Member(11);

 

(footnote original) 11 The term “injury to the domestic industry” is used here in the same sense as it is used in Part V.

 

(b)     nullification or impairment of benefits accruing directly or indirectly to other Members under GATT 1994 in particular the benefits of concessions bound under Article II of GATT 1994(12);

 

(footnote original) 12 The term “nullification or impairment” is used in this Agreement in the same sense as it is used in the relevant provisions of GATT 1994, and the existence of such nullification or impairment shall be established in accordance with the practice of application of these provisions.

 

(c)     serious prejudice to the interests of another Member.(13)

 

(footnote original) 13 The term “serious prejudice to the interests of another Member” is used in this Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT 1994, and includes threat of serious prejudice.

 

This Article does not apply to subsidies maintained on agricultural products as provided in Article 13 of the Agreement on Agriculture.


B. Interpretation and Application of Article 5

1. General

(a) Elements of a claim under Article 5

255.     In US — Offset Act (Byrd Amendment), the Panel explained that “a measure constitutes an actionable subsidy if it is a subsidy, if it is “specific”, and if its use causes “adverse effects.”(430)

(b) Temporal scope of Article 5

256.     In EC and certain member States — Large Civil Aircraft, the Appellate Body rejected the European Communities’ request to exclude all alleged prohibited and actionable subsidies granted prior to 1 January 1995 from the temporal scope of the dispute. The Appellate Body concluded that:

“In sum, we agree with the Panel that Article 5 addresses a “situation” that consists of causing, through the use of any subsidy, adverse effects to the interests of another Member. It is this “situation”, which is subject to the requirements of Article 5 SCM Agreement, that is to be construed consistently with the non-retroactivity principle reflected in Article 28 of the Vienna Convention. The relevant question for purposes of determining the temporal scope of Article 5 is whether the causing of adverse effects has “ceased to exist” or continues as a “situation”. We consequently disagree with the European Union that, by virtue of Article 28 of the Vienna Convention, no obligation arising out of Article 5 SCM Agreement is to be imposed on a Member in respect of subsidies granted or brought into existence prior to the entry into force of the SCM Agreement. This may mean that a subsidy granted prior to 1 January 1995 falls within the scope of Article 5 SCM Agreement, but this is only because of its possible nexus to the continuing situation of causing, through the use of this subsidy, adverse effects to which Article 5 applies. In reaching this conclusion, we are not saying that the causing of adverse effects, through the use of pre-1995 subsidies, can necessarily be characterized as a “continuing” situation in this case. Rather, we simply find that a challenge to pre-1995 subsidies is not precluded under the terms of the SCM Agreement.”(431)

(c) No requirement of “continuing” benefit

257.     In EC and certain member States — Large Civil Aircraft, the Appellate Body upheld the Panel’s finding that Articles 5 and 6 of the SCM Agreement do not require that a complainant demonstrate that a benefit “continues” or is “present” during the reference period for purposes of an adverse effects analysis. The Appellate Body emphasized, however, that “the effects of a subsidy will ordinarily dissipate over time and will end at some point after the subsidy has expired. Indeed, as with a subsidy that has a finite life and materializes over time, so too do the effects of a subsidy accrue and diminish over time.”(432)

(d) No requirement of “pass-through” in a claim under Article 5 of the SCM Agreement

258.     In EC and certain member States — Large Civil Aircraft, the Appellate Body upheld the Panel’s finding that the Appellate Body upheld the Panel’s finding that the United States was not required to demonstrate, as part of its prima facie case under Article 5 of the SCM Agreement, that subsidies provided to the Airbus Industrie consortium “passed through” to the current producer of Airbus LCA, Airbus SAS.(433)

(e) Reference period for determining whether subsidies cause adverse effects

259.     In EC and certain member States — Large Civil Aircraft, the Panel offered the following general observations regarding the use of a “reference period” for the purpose of determining adverse effects:

Articles 5(a) and (c) and 6.3(a), (b) and (c) do not specify any particular time period for a panel to consider in evaluating whether the subsidies in dispute cause adverse effects to the complaining Member’s interests, either in the form of injury to the domestic industry of the complaining Member, or in the form of serious prejudice. Article 6.4 does indicate that, for purposes of analysis of impedance or displacement of exports under Article 6.3(b), a panel should examine changes in relative market shares “over an appropriately representative period sufficient to demonstrate clear trends in the development of the market for the product concerned, which, in normal circumstances, shall be at least one year.” However, while this establishes a minimum period of data to be considered in normal circumstances, it does not provide any guidance regarding either a starting date, or an end date, of a relevant period. Nor does it provide any guidance as to the appropriate length of a relevant period, so long as a minimum of one year is generally respected in the context of an analysis under Article 6.4.

 

It is clear that the finding we are required to make is whether there are “present” adverse effects caused by the subsidies in dispute, and the parties do not argue otherwise. Of course, it is impossible to assess the “present” situation, as immediate data is not available, and thus a review of the past is necessary to draw conclusions about present adverse effects. The issue we must consider here is what evidence we should take into account, what historical period we should refer to, in drawing such conclusions. In our view, in the absence of any specific guidance on this issue, we should avoid making an a priori choice of reference period. The legal arguments of the parties do not establish that a panel is either precluded from, or required to, focus on either of the periods proposed by them, in the sense of a limitation on the panel’s consideration of information in the abstract. Rather, we consider that it is our responsibility, in making a determination consistent with our obligations under Article 11 of the DSU, to examine the evidence put forward by the United States, and the rebuttal evidence put forward by the European Communities, including recent information where relevant and reliable, in determining whether the United States has demonstrated that subsidies cause present adverse effects within the meaning of Article 5 SCM Agreement. While this makes our task of assessment of the evidence more complicated, it serves to ensure that we carry out an objective examination, as required by Article 11 of the DSU, of all the evidence in reaching our conclusions.”(434)

2. Article 5(a): injury to the domestic industry

260.     In EC and certain member States — Large Civil Aircraft, the United States claimed that the subsidies at issue caused injury to its domestic industry within the meaning of Article 5(a). The Panel explained that it would interpret “injury to the domestic industry” in Article 5(a) harmoniously with the provisions of Article 15 governing countervailing duty investigations:

“In our view, the term “injury to the domestic industry”, which we are to apply in the same way under Article 5(a) as an investigating authority would in the context of a countervailing duty investigation, includes the question of causation. Thus, we consider that a consistent interpretation of the concept of “injury to the domestic industry” requires us to examine, in considering causation, the effects of subsidized imports as set forth in Articles 15.2 and 15.4 in our analysis of material injury under Article 5(a). Any other conclusion would, we believe, inappropriately establish a different legal standard and obligations for analysis of injury in the context of Part III from that developed under Part V of the SCM Agreement, which in our view would be contrary to footnote 11.

Since in this case we are essentially fulfilling the role that would be taken by the investigating authority in a countervailing or anti-dumping duty investigation, this means that we must base our examination and determination with respect to injury on positive evidence and an objective examination of the various injury elements as required by the more specific provisions of Article 15.”(435)

3. Article 5(b): “nullification or impairment”

(a) General

261.     In US — Offset Act (Byrd Amendment), with respect to “adverse effects,” Mexico made arguments of both violation and non-violation nullification or impairment. In relation to claims of violation nullification or impairment, the Panel stated that any presumption arising under Article 3.8 of the DSU stemming from these violations would relate to nullification or impairment caused by the violation at issue. The Panel rejected the argument by Mexico on the grounds that, for the purpose of Article 5(b) of the SCM Agreement, Mexico must demonstrate that “the use of a subsidy” caused nullification or impairment.(436)

(b) Application of a measure

262.     In US — Offset Act (Byrd Amendment), the Panel clarified that the drafters of Article 5 SCM Agreement had envisaged the possibility of nullification or impairment resulting from the “use” of a subsidy. Furthermore, the Panel noted that Article 7.1 of the SCM Agreement provides useful context by clarifying that the “use” of a subsidy is to be equated with the grant or maintaining of a subsidy. In this sense, the Panel stated “[e]ven if disbursements have not been granted under the [Offset Act], the maintenance of the [offset programme] constitutes ‘application’ of a measure for the purpose of a ‘non-violation’ nullification or impairment claim under SCM Article 5(b).”(437) The Panel went on to find that the existence of a subsidy programme, and the potential use of that subsidy programme, is sufficient for that programme to “apply.”(438)

(c) Existence of a benefit

263.     The Panel in US — Offset Act (Byrd Amendment) explained that there was no reason why the Panel should not find that the requirement of existence of a benefit had been met, since the United States had not disputed that benefits resulting from the negotiated tariff concessions accrued to Mexico under Articles II and VI of the GATT 1994.(439)

(d) Nullification or impairment of a benefit

264.     The Panel in US — Offset Act (Byrd Amendment) recalled one adopted GATT panel report, namely EEC — Oilseeds, where the panel “considered that non-violation nullification or impairment would arise when the effect of a tariff concession is systematically offset or counteracted by a subsidy programme.”(440) The Panel found the approach of the Panel in EEC — Oilseeds to be reasonable.

4. Article 5 (c)

(a) “serious prejudice”

265.     In addressing the issue of whether a finding that the “effect of a subsidy” constitutes “significant price suppression” “in the same market” following an analysis pursuant to Article 6.3(c) of the SCM Agreement is conclusive in establishing “serious prejudice” under Article 5(c), the Panel in US — Upland Cotton was of the view that for the purposes of the dispute, the “significant price suppression” that it found had occurred amounts to “serious prejudice” pursuant to Article 5(c), even though the Panel did not consider it needed to articulate a specific interpretation of the definition of “serious prejudice” in Article 5(c):

“For the purposes of this dispute, we do not believe that it is necessary to develop a fixed interpretation of the outer parameters of what may constitute “serious prejudice” to the interests of another Member within the meaning of Article 5(c) of the SCM Agreement. At the very least, given the subject matter covered by the SCM Agreement — government subsidies in respect of goods — the effects-based situations identified in the sub-paragraphs of Article 6.3, and the reference in the chapeau of Article 6.3 to serious prejudice “in the sense of” Article 5(c), we believe that such “serious prejudice” may involve the effects of subsidies on the complaining Member’s trade in a given product. That is, it addresses the volumes and prices and flows of such trade, which may, by logical extension, affect a producing Member’s domestic production of that product. We therefore consider that a detrimental impact on a complaining Member’s production of, and/or trade in, the product concerned may fall within the concept of “prejudice” in Article 5(c) of the SCM Agreement.

 

Moreover, the prejudice involved must be “serious”. In one of its ordinary meanings, “serious” means “important” and “not slight or negligible”. Thus, the prejudice in terms of the effect on Brazil’s production of, and/or trade in, upland cotton must be such as to affect Brazil’s production of upland cotton, to a degree that is “important”, “not slight or negligible”, or meaningful.

 

We recall our conclusion that the price suppression is “significant”. We note, moreover, Brazil has submitted evidence to substantiate its assertions that there is a close relationship between movements of Brazilian prices and movements in the A-Index and that Brazilian producers have suffered from the suppressed price trends in the Brazilian market and in Brazilian export markets, including in terms of Brazilian producers having reduced production and investment.

 

In the particular facts and circumstances of this case, whether or not we consider the impact and magnitude of the price suppression or the materiality of effect upon Brazilian producers of upland cotton in terms of the “significance” of the price suppression or in terms of the question as to whether or not such “significant” price suppression amounts to “serious prejudice” under the chapeau of Article 6.3, we arrive at the same conclusion: such “significant price suppression” amounts to “serious prejudice” within the meaning of Article 5(c) of the SCM Agreement.”(441)

(b) “another Member”

266.     In addressing the issue of whether serious prejudice to the interests of “another Member” refers only to the interests of the particular WTO Member bringing forth the claim of serious prejudice or whether the term also includes Members other than the complainant in a particular dispute, the Panel in US — Upland Cotton was of the view that the relevant context of the SCM Agreement and the DSU does not preclude it from taking into account the interest of all Members in the dispute, though it emphasized that it did not base its finding on any claims of serious prejudice caused to those other Members:

“For these reasons, in examining Brazil’s allegations under Part III of the SCM Agreement that it has suffered serious prejudice to its interests within the meaning of Article 5(c), we take full account of the interest of all Members — including those of least-developed Members — in these dispute settlement proceedings in accordance with the rights and obligations provided for in Part III of the SCM Agreement. Pursuant to Article 3.2 of the DSU, we are called upon to clarify the rights and obligations in this covered agreement through application of customary principles of interpretation of public international law.

 

Therefore, we have taken into account serious prejudice allegations of other Members to the extent these constitute evidentiary support of the effect of the subsidy borne by Brazil as a Member whose producers are involved in the production and trade in upland cotton in the world market. However, we have not based our decision on any alleged serious prejudice caused to them.(442)

 

Therefore, we have taken into account serious prejudice allegations of other Members to the extent these constitute evidentiary support of the effect of the subsidy borne by Brazil as a Member whose producers are involved in the production and trade in upland cotton in the world market. However, we have not based our decision on any alleged serious prejudice caused to them.”(443)

(c) Standing as complainant

267.     The Panel in Indonesia — Autos considered whether “the United States may claim that it has suffered serious prejudice as a result of displacement/ impedance or of price undercutting with respect to a product which does not originate in the United States solely on the basis that the producer of that product is a ‘US company’.”(444) The Panel drew a distinction between United States’ products and United States’ companies/producers and rejected the claim that the nationality of producers is relevant to establishing the existence of serious prejudice:

“In our view, the text of Article XVI [of the GATT 1994] and of Part III of the SCM Agreement make clear that serious prejudice may arise where a Member’s trade interests have been affected by subsidization. We see nothing in Article XVI or in Part III that would suggest that the United States may claim that it has suffered adverse effects merely because it believes that the interests of US companies have been harmed where US products are not involved. The United States has cited no language in Article XVI:1 or Part III suggesting that the nationality of producers is relevant to establishing the existence of serious prejudice. Accordingly, given that serious prejudice may only arise in the case at hand where there is ‘displacement or impedance of imports of a like product from another Member’ or price undercutting ‘as compared with the like product of another Member’, we do not consider that the United States can convert such effects on products from the European Communities into serious prejudice to US interests merely by alleging that the products affected were produced by US companies.”(445)

5. Relationship with other Articles

(a) Article 6.3(c)

268.     The Panel in Indonesia — Autos determined the existence of serious prejudice within the meaning of Article 5(c) upon finding a significant price undercutting under Article 6.3(c):

“We note that under Article 6.3(c) serious prejudice may arise only where the price undercutting is ‘significant.’ Although the term ‘significant’ is not defined, the inclusion of this qualifier in Article 6.3(c) presumably was intended to ensure that margins of undercutting so small that they could not meaningfully affect suppliers of the imported product whose price was being undercut are not considered to give rise to serious prejudice. This clearly is not an issue here. To the contrary, it is our view that, even taking into account the possible effects of these physical differences on price comparability, the price undercutting by the Timor of the Optima and 306 cannot reasonably be deemed to be other than significant.

 

For the foregoing reasons, we find that the effect of the subsidies to the Timor pursuant to the National Car programme is to cause serious prejudice to the interests of the European Communities in the sense of Article 5(c) of the SCM Agreement through a significant price undercutting as compared with the price of EC-origin like products in the Indonesian market.”(446)

(b) Article 7.1

269. See paragraph 262 above.

 

VII. Article 6     back to top

A. Text of Article 6

Article 6: Serious Prejudice

6.1     Serious prejudice in the sense of paragraph (c) of Article 5 shall be deemed to exist in the case of:

 

(a)     the total ad valorem subsidization(14) of a product exceeding 5 per cent(15);

 

(footnote original) 14 The total ad valorem subsidization shall be calculated in accordance with the provisions of Annex IV.

 

(footnote original) 15 Since it is anticipated that civil aircraft will be subject to specific multilateral rules, the threshold in this subparagraph does not apply to civil aircraft.

 

(b)     subsidies to cover operating losses sustained by an industry;

 

(c)     subsidies to cover operating losses sustained by an enterprise, other than one-time measures which are non-recurrent and cannot be repeated for that enterprise and which are given merely to provide time for the development of long-term solutions and to avoid acute social problems;

 

(d)     direct forgiveness of debt, i.e. forgiveness of government-held debt, and grants to cover debt repayment.(16)

 

(footnote original) 16 Members recognize that where royalty based financing for a civil aircraft programme is not being fully repaid due to the level of actual sales falling below the level of forecast sales, this does not in itself constitute serious prejudice for the purposes of this subparagraph.

 

6.2     Notwithstanding the provisions of paragraph 1, serious prejudice shall not be found if the subsidizing Member demonstrates that the subsidy in question has not resulted in any of the effects enumerated in paragraph 3.

 

6.3     Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where one or several of the following apply:

 

(a)     the effect of the subsidy is to displace or impede the imports of a like product of another Member into the market of the subsidizing Member;

 

(b)     the effect of the subsidy is to displace or impede the exports of a like product of another Member from a third country market;

 

(c)     the effect of the subsidy is a significant price undercutting by the subsidized product as compared with the price of a like product of another Member in the same market or significant price suppression, price depression or lost sales in the same market;

 

(d)     the effect of the subsidy is an increase in the world market share of the subsidizing Member in a particular subsidized primary product or commodity(17) as compared to the average share it had during the previous period of three years and this increase follows a consistent trend over a period when subsidies have been granted.

 

(footnote original) 17 Unless other multilaterally agreed specific rules apply to the trade in the product or commodity in question.

 

6.4     For the purpose of paragraph 3(b), the displacement or impeding of exports shall include any case in which, subject to the provisions of paragraph 7, it has been demonstrated that there has been a change in relative shares of the market to the disadvantage of the non-subsidized like product (over an appropriately representative period sufficient to demonstrate clear trends in the development of the market for the product concerned, which, in normal circumstances, shall be at least one year). “Change in relative shares of the market” shall include any of the following situations: (a) there is an increase in the market share of the subsidized product; (b) the market share of the subsidized product remains constant in circumstances in which, in the absence of the subsidy, it would have declined; (c) the market share of the subsidized product declines, but at a slower rate than would have been the case in the absence of the subsidy.

 

6.5     For the purpose of paragraph 3(c), price undercutting shall include any case in which such price undercutting has been demonstrated through a comparison of prices of the subsidized product with prices of a nonsubsidized like product supplied to the same market. The comparison shall be made at the same level of trade and at comparable times, due account being taken of any other factor affecting price comparability. However, if such a direct comparison is not possible, the existence of price undercutting may be demonstrated on the basis of export unit values.

 

6.6     Each Member in the market of which serious prejudice is alleged to have arisen shall, subject to the provisions of paragraph 3 of Annex V, make available to the parties to a dispute arising under Article 7, and to the panel established pursuant to paragraph 4 of Article 7, all relevant information that can be obtained as to the changes in market shares of the parties to the dispute as well as concerning prices of the products involved.

 

6.7     Displacement or impediment resulting in serious prejudice shall not arise under paragraph 3 where any of the following circumstances exist(18) during the relevant period:

 

(footnote original) 18 The fact that certain circumstances are referred to in this paragraph does not, in itself, confer upon them any legal status in terms of either GATT 1994 or this Agreement. These circumstances must not be isolated, sporadic or otherwise insignificant.

 

(a)     prohibition or restriction on exports of the like product from the complaining Member or on imports from the complaining Member into the third country market concerned;

 

(b)     decision by an importing government operating a monopoly of trade or state trading in the product concerned to shift, for non-commercial reasons, imports from the complaining Member to another country or countries;

 

(c)     natural disasters, strikes, transport disruptions or other force majeure substantially affecting production, qualities, quantities or prices of the product available for export from the complaining Member;

 

(d)     existence of arrangements limiting exports from the complaining Member;

 

(e)     voluntary decrease in the availability for export of the product concerned from the complaining Member (including, inter alia, a situation where firms in the complaining Member have been autonomously reallocating exports of this product to new markets);

 

(f)     failure to conform to standards and other regulatory requirements in the importing country.

 

6.8     In the absence of circumstances referred to in paragraph 7, the existence of serious prejudice should be determined on the basis of the information submitted to or obtained by the panel, including information submitted in accordance with the provisions of Annex V.

 

6.9     This Article does not apply to subsidies maintained on agricultural products as provided in Article 13 of the Agreement on Agriculture.


B. Interpretation and Application of Article 6

1. Article 6.1

(a) Expiry of Article 6.1

270.     This provision has lapsed pursuant to Article 31. In this respect, see paragraph 582 below.

(b) Relationship with other Articles

(i) Article 27

271.     With regard to the relationship between Article 6.1 and Article 27, see paragraph 568 below.

(ii) Article 31

272.     With regard to the relationship between Article 6.1 and Article 31, see paragraph 582 below.

2. Article 6.3

(a) General

(i) Serious prejudice may arise

273.     In Korea — Commercial Vessels, Korea argued, on the basis of the word “may” in the chapeau of Article 6.3, that “a two-step analysis is required to establish the existence of serious prejudice, i.e. that the situations listed in Articles 6.3(a) through (d) are necessary prerequisites to a finding of serious prejudice, but that they do not in themselves constitute serious prejudice.” Rather, Korea argued, serious prejudice “is a separate, distinct concept, which must be a result of the situations in Articles 6.3(a) through (d).”(447) According to the Panel, “the fundamental issue raised by this aspect of Korea’s argument” is “whether, to demonstrate the existence of serious prejudice, the SCM Agreement requires additional elements beyond those referred to in Article 6, such as injury to the domestic industry, and/or the importance of that industry to the overall interests of the complaining party.” The Panel noted that it found “neither textual nor contextual support for Korea’s argument.” In this regard, the Panel stated:

“We see the fundamental issue raised by this aspect of Korea’s argument to be whether, to demonstrate the existence of serious prejudice, the SCM Agreement requires additional elements beyond those referred to in Article 6, such as injury to the domestic industry, and/or the importance of that industry to the overall interests of the complaining party. In this respect, we find neither textual nor contextual support for Korea’s argument that a finding of serious prejudice requires the establishment of something like “serious injury” to the domestic industry of the complaining Member, or of the relative importance of the industry to that Member, and we note that Korea offers none. Rather, Korea’s entire argument to this effect is based on the premise that the word “serious” connotes something stronger than the word “material”, that material injury is a lesser standard subsumed within the standards of Articles 5 and 6, and that “serious” prejudice cannot be easier to prove than “material” injury. As an initial matter, given that the word “material” does not appear in the serious prejudice provisions of the SCM Agreement, we fail to see the relevance of the juxtaposition of terms proffered by Korea. Nor do we agree that the absence of a requirement for an injury-type analysis in the context of serious prejudice claims would necessarily make it easier to prove serious prejudice than material injury. Rather, we view these as two distinct concepts.”(448)

274.     The Panel in Korea — Commercial Vessels acknowledged that serious prejudice is an entirely different concept from injury and it explained that the former rather than having to do with the condition of a particular domestic industry within the territory of a Member, has to do in the first instance with negative effects on a Member’s trade interests in respect of a product caused by another Member’s subsidization such as lost import or export volume or market share in respect of a given product, adverse price effects, or some combination thereof, in variously-defined markets.

“In short, we see serious prejudice as an entirely different concept from injury. Rather than having to do with the condition of a particular domestic industry within the territory of a Member (the subject matter of injury analysis), in our view serious prejudice has to do in the first instance with negative effects on a Member’s trade interests in respect of a product caused by another Member’s subsidization. Article 6.3 demonstrates this in providing that the recognized “adverse effects” of subsidies on these interests include, in the context of serious prejudice, lost import or export volume or market share in respect of a given product (displacement or impedance, more than equitable share), and adverse price effects (implying lost trade revenue/income in respect of the product), or some combination thereof, in variously-defined markets.”(449)

275.     With regard to the use of the word “may,” the Panel Korea — Commercial Vessels saw this word “as a general cross-reference to other specific requirements elsewhere in Article 6 for the establishment of serious prejudice on the basis of the price and/or volume effects referred to in subparagraphs (a)-(d) of Article 6.3.” Furthermore, it viewed the word “may” as a cross-reference to “significant” in Article 6.3(c), “operating to rule out serious prejudice findings where any price suppression or price depression resulting from a subsidy is unimportant and inconsequential.”(450)

276.     With respect to the nature of “serious prejudice”, the Panel in Korea — Commercial Vessels noted that this notion is also informed by another provision, i.e. Article 6.2, which established the basis on which the now expired presumption of serious prejudice in Article 6.1 could be rebutted:

Article 6.2 provided that the subsidizer could rebut the presumption (in the sense that “serious prejudice shall not be found”) by demonstrating that the subsidy in question had not resulted in any of the effects enumerated in Article 6.3 (displacement or impedance, price undercutting, price suppression/depression, lost sales). We thus view Article 6.2 as defining by implication the situations listed in Article 6.3 to be in themselves serious prejudice.”(451)

277.     Referring to past disputes involving an examination of serious prejudice, in particular the GATT panel reports in EC — Sugar Exports (Australia) and EC — Sugar Exports (Brazil), the Panel in Korea — Commercial Vessels said that “in both of these cases, the panels’ affirmative serious prejudice determinations were based on a conception of serious prejudice the substance of which was the effect of subsidies on markets, and on trade, in respect of the product, rather than treating these effects simply as stepping stones to a separate and distinct concept of serious prejudice.”(452)

278.     The Panel in US — Upland Cotton (Article 21.5 — Brazil) agreed that serious prejudice exists once the conditions set forth in Article 6.3(a)-(d) are fulfilled:

Article 6.3(c) of the SCM Agreement provides that “serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where one or several of the following apply” (emphasis added). The Panel considers that this phrase must be interpreted to mean that “the situations listed in Article 6.3(a)-(d) in themselves constitute serious prejudice”. As a consequence, a finding of significant price suppression under Article 6.3(c) of the SCM Agreement is a sufficient basis for a finding of serious prejudice within the meaning of Article 5(c) of the SCM Agreement.”(453)

(ii) the effect of the subsidy

Genuine and substantial relationship of cause and effect

279.     The Appellate Body repeatedly stated that to satisfy the causation requirement under Articles 5(c) and 6.3, it must be shown that there is a “genuine and substantial relationship of cause and effect” between the subsidies and the alleged market phenomenon. In EC and certain member States — Large Civil Aircraft, the Appellate Body confirmed that the “genuine and substantial relationship of cause and effect” standard applies in respect of all of the forms of serious prejudice under Article 6.3:

“[T]he Appellate Body has observed that to satisfy the causation requirement under Articles 5(c) and 6.3(c), it must be shown that there is a “genuine and substantial relationship of cause and effect” between the subsidies and the alleged market phenomenon.(454) In addition, the Appellate Body has stated that panels assessing claims under Articles 5(c) and 6.3(c) must ensure that the effects of other factors are not improperly attributed to the challenged subsidies.(455) The Appellate Body’s guidance concerning the assessment of causation was provided in the context of a dispute involving Article 6.3(c) of the SCM Agreement. The language of subparagraphs (a) and (b) of Article 6.3 of the SCM Agreement expresses the causation requirement in very similar terms to those used in subparagraph (c). Under subparagraphs (a) and (b), displacement or impedance must be shown to be “the effect of the subsidy”. We see no reason why the standard for causation and non-attribution should be different under subparagraphs (a) and (b) than under subparagraph (c), and the participants and third participants have not suggested that a different standard applies.”(456)

“But for” approach

280.     The Panel in Korea — Commercial Vessels, noting that Article 6.3(c) provides in relevant part that “the effect of the subsidy is … significant price suppression [or] price depression … in the same market”, said that “there must be a causal relationship between the subsidy and the significant price suppression or price depression.”(457) To establish the existence of such a relationship, the Panel, having recalled that “the text of Article 6.3(c) implies a ‘but for’ approach to causation in respect of price suppression/price depression”, concluded:

“Looking at a counterfactual situation, i.e. trying to determine what prices would have been in the absence of the subsidy, seems to us the most logical and straightforward way to answer this question.(458) … The question to be answered in respect of the affirmative link between subsidies and prices is, in the case of alleged price depression, whether in the absence of the subsidies prices for ships would not have declined, or would have declined by less than was in fact the case. For price suppression, the question would be whether, in the absence of the subsidies, ship prices would have increased, or would have increased by more than was in fact the case.”(459)

281.     The Panel in US — Upland Cotton (Article 21.5 — Brazil) adopted a similar “but for” approach to causation. In particular, the Panel determined whether, but for the relevant subsidies, the world market price for upland cotton would have increased significantly, or would have increased by significantly more than was in fact the case.(460) The Appellate Body upheld the approach taken by the Panel:

“We recall that “a panel has a certain degree of discretion in selecting an appropriate methodology for determining whether the ‘effect’ of a subsidy is significant price suppression”. Articles 5(c) and 6.3(c) of the SCM Agreement do not exclude, therefore, that a panel could examine causation based on a “but for” approach. We have explained that a price suppression analysis is counterfactual in nature. The Panel’s choice of a “but for” approach reflects this. In consequence, the Panel had to determine whether the world price of upland cotton would have been higher in the absence of the subsidies (that is, but for the subsidies).

 

In the original proceedings, the Appellate Body observed that:

 

… the ordinary meaning of the transitive verb “suppress” implies the existence of a subject (the challenged subsidies) and an object (in this case, prices in the world market for upland cotton). This suggests that it would be difficult to make a judgement on significant price suppression without taking into account the effect of the subsidies. The Panel’s definition of price suppression, explained above, reflects this problem; it includes the notion that prices “do not increase when they otherwise would have” or “they do actually increase, but the increase is less than it otherwise would have been”. The word “otherwise” in this context refers to the hypothetical situation in which the challenged subsidies are absent. Therefore, the fact that the Panel may have addressed some of the same or similar factors in its reasoning as to significant price suppression and its reasoning as to “effects” is not necessarily wrong. (original emphasis; footnotes omitted)

 

The Panel’s choice of a “but for” approach, therefore, is consistent with the definition of price suppression endorsed by the Appellate Body in the original proceedings, insofar as the counterfactual determination of whether price suppression exists cannot be separated from the analysis of the effects of the subsidies.

 

We note that Article 6.3(c) does not use the word “cause” but, rather, provides that serious prejudice may arise where “the effect of the subsidy is … significant price suppression”. The Appellate Body stated in the original proceedings that the text of Article 6.3(c) nevertheless requires the establishment of a causal link between the subsidy and the significant price suppression. We agree that Article 6.3(c) requires the establishment of a causal link, but we observe that, while the term “cause” focuses on the factors that may trigger a certain event, the term “effect of” focuses on the results of that event. The effect — price suppression — must result from a chain of causation that is linked to the impugned subsidy.”(461)

282.     In EC and certain member States — Large Civil Aircraft, the Appellate Body reiterated that the “genuine and substantial relationship of cause and effect” standard applies in respect of all of the forms of serious prejudice under Article 6.3, and then said this about the “but for” approach:

“The Appellate Body has said furthermore that it may be possible to assess whether the particular market phenomena are the effect of the subsidies by recourse to a “but for” approach.(462) Thus, one possible approach to the assessment of causation is an inquiry that seeks to identify what would have occurred “but for” the subsidies. In some circumstances, a determination that the market phenomena captured by Article 6.3 of the SCM Agreement would not have occurred “but for” the challenged subsidies will suffice to establish causation. This is because, in some circumstances, the “but for” analysis will show that the subsidy is both a necessary cause of the market phenomenon and a substantial cause. It is not required that the “but for” analysis establish that the challenged subsidies are a sufficient cause of the market phenomenon provided that it shows a genuine and substantial relationship of cause and effect. However, there are circumstances in which a “but for” approach does not suffice. For example, where a necessary cause is too remote and other intervening causes substantially account for the market phenomenon. This example underscores the importance of carrying out a proper non-attribution analysis.

 

… As we noted above, a “but for” test is one possible approach to the assessment of causation. Nevertheless, in applying a “but for” test, a panel must ensure that the assessment demonstrates that the subsidies are a “genuine and substantial” cause of the particular market situation that is alleged. Thus, the Panel in this case should have clearly indicated that, in applying a “but for” standard, it would seek to establish whether there was a “genuine and substantial relationship of cause and effect”(463) between the challenged subsidies and the displacement and lost sales. Furthermore, it should have indicated that, in doing so, it would also ensure that the effects of other factors were not improperly attributed to the challenged subsidies.”(464)

Complainant’s evidentiary burden

283.     The Panel in Korea — Commercial Vessels observed that the nature of the demonstration that the complainant will need to make to establish causation in any given case, and the difficulty of doing so, will depend on a number of factors and factual circumstances, including but not limited to the breadth of the description of the product on which the complainant brings its case, and that the burden is on the complainant to furnish specific factual evidence affirmatively demonstrating the causal link alleged:

“In this regard, we would observe that the nature of the demonstration that the complainant will need to make to establish causation in any given case, and the difficulty of doing so, will depend on a number of factors and factual circumstances, including but not limited to the breadth of the description of the product on which the complainant brings its case. Such factors might include among others the nature of the subsidy, the way in which the subsidy operates, the extent to which the subsidy is provided in respect of a particular product or products, conditions in the market, the conceptual distance between the activities of the subsidy recipient and the products in respect of which price suppression/price depression is alleged.(465) Whatever the factual situation in a given case, the burden will be on the complainant to furnish specific factual evidence affirmatively demonstrating the causal link alleged, and the difficulty and ways of meeting this burden may be very different from one case to another.(466) In all cases, if the complainant fails to meet this evidentiary burden, its serious prejudice claim will fail.”(467)

284.     Referring to guidance from the Appellate Body in US — Upland Cotton, the Panel in US — Upland Cotton (Article 21.5 — Brazil) found that “the existence of a correlation between a subsidy and a particular level of prices is not in and of itself sufficient to establish that the subsidy causes significant price suppression.”(468)

Non-attribution

285.     Regarding the need for a non-attribution analysis (i.e. an analysis to ensure that adverse effects caused by other factors are not attributed to subsidies) in the context of Article 6.3(c) of the SCM Agreement, the Appellate Body in US — Upland Cotton agreed with the Panel “that it is necessary to ensure that the effects of other factors on prices are not improperly attributed to the challenged subsidies.”(469)

286.     In terms of the manner in which non-attribution should be ensured, the Appellate Body in US — Upland Cotton found no legal error with the Panel’s approach of first examining whether or not the “effect of the subsidy” constitutes significant price suppression, and then considering whether other causal factors had the effect of attenuating such causal link between the challenged subsidies and significant price suppression:

“Pursuant to Article 6.3(c) of the SCM Agreement, “[s] erious prejudice in the sense of paragraph (c) of Article 5 may arise” when “the effect of the subsidy is … significant price suppression”. (emphasis added) If the significant price suppression found in the world market for upland cotton were caused by factors other than the challenged subsidies, then that price suppression would not be “the effect of” the challenged subsidies in the sense of Article 6.3(c). Therefore, we do not find fault with the Panel’s approach of “examin[ing] whether or not ‘the effect of the subsidy’ is the significant price suppression which [it had] found to exist in the same world market” and separately “consider[ing] the role of other alleged causal factors in the record before [it] which may affect [the] analysis of the causal link between the United States subsidies and the significant price suppression.”

287.     Reflecting on whether and how to conduct a nonattribution analysis, the Panel in Korea — Commercial Vessels noted the logic and appropriateness of the US — Upland Cotton panel, which analysed other possible causal factors, with a view to determining whether such factors “would have the effect of attenuating [the] causal link, or of rendering not ‘significant’ the effect of the subsidy”.(470) Thus, in conducting its causation analysis, it would:

“[B]ear in mind the need to take into account the effects of identified factors other than the subsidies, to determine whether such factors would attenuate any affirmative causal link that we may find, or render insignificant any price suppression or price depression effect of the subsidy that we may find.”(471)

288.     Having adopted a “but for” test for causation (see paragraph 281 above), the Panel in US — Upland Cotton (Article 21.5 — Brazil) considered that it was “not necessary … to undertake a comprehensive evaluation of factors affecting the world market price for upland cotton”:(472)

“Rather the question is whether the evidence before the Panel supports the conclusion that in the absence of the US marketing loan and counter-cyclical subsidies the world market price would increase significantly. The Panel considers, based on the evidence before it, that while China may play a significant role in the market for upland cotton, this does not diminish the significance of the impact of US subsidies on the world price for upland cotton as a result of their effect on US supply to the world market. Developments concerning the role of China’s demand and supply do not change the fact that, with a share of world exports of around 40 per cent, the United States is capable of exerting a substantial proportionate influence on the world market.”(473)

289.     The United States appealed from the Panel’s decision not to carry out a comprehensive evaluation of other factors affecting the world market price for upland cotton. The Appellate Body upheld the approach adopted by the Panel, on the basis that the Panel’s counterfactual analysis for the purpose of the “but for” test was sufficient to establish that significant price suppression was the effect of the relevant subsidies, despite the existence of other relevant causal factors:

“The Panel does not clearly articulate the standard implicated in its “but for” approach. Brazil submits that the Panel’s “but for” standard “effectively isolated the effects of [United States] subsidies from the effects of other factors.” New Zealand asserts that the Panel’s finding — that without the United States subsidies the price of upland cotton would be higher — ”stands independent of any other global factors that might also be suppressing world market prices”. This may somewhat oversimplify the position. A subsidy may be necessary, but not sufficient, to bring about price suppression. Understood in this way, the “but for” test may be too undemanding. By contrast, the “but for” test would be too rigorous if it required the subsidy to be the only cause of the price suppression. Instead, the “but for” test should determine that price suppression is the effect of the subsidy and that there is a “genuine and substantial relationship of cause and effect”.

 

The United States argues that the Panel was required to conduct a non-attribution analysis as part of its “but for” approach. While we agree that Article 6.3(c) requires the Panel to have ensured that the effects of other factors on prices did not dilute the “genuine and substantial” link between the subsidies and the price suppression, Article 6.3(c) leaves some discretion to panels in choosing the methodology used for this assessment. In the light of this flexibility, it would not have been improper for the Panel to have assessed the effect of other factors as part of its counterfactual analysis, rather than conducting a separate analysis of non-attribution. In our view, the Panel’s “but for” standard, understood as we have set out above, is permissible under Article 6.3(c) of the SCM Agreement, and it is consistent with the Panel’s counterfactual analysis of price suppression.

 

… Therefore, while the Panel agreed with the United States that “China may play a significant role in the market for upland cotton”,(474) it properly concluded that this does not diminish price suppressing effects of marketing loan and counter-cyclical payments.”(475)

Unitary vs. two-step approach

290.     In the context of a case concerning alleged significant price suppression, the Panel in US — Upland Cotton determined in three separate analytical steps: (i) whether there was price suppression in the world market for upland cotton; (ii) whether such price suppression was significant; and (iii) whether a causal relationship existed between such significant price suppression and the effects of certain price-contingent subsidies. The Appellate Body in US — Upland Cotton found no legal error with the Panel’s approach of first determining whether there is “significant price suppression” before addressing the issue of “the effect of the subsidy” on the basis that nothing in the text of Article 6.3(c) precludes such an approach.(476) Although the Appellate Body stated that it was possible for the Panel to have focused on price developments in the world market of upland cotton in its analysis of significant price suppression and then address causal factors related to the subsidies in question, including examining causal factors other than the subsidies in its “effects” analysis, it nevertheless acknowledged that it would be difficult to separate these two analyses in determining whether significant price suppression has occurred and the fact that the Panel may have addressed similar factors in both these analyses does not necessarily amount to a legal error:

“One might contend that, having decided to separate its analysis of significant price suppression from its analysis of the effects of the challenged subsidies, the Panel’s price suppression analysis should have addressed prices without reference to the subsidies and their effects. For instance, in its significant price suppression analysis, the Panel could have addressed purely price developments in the world market for upland cotton, such as whether prices fell significantly during the period under examination or whether prices were significantly lower during that period than other periods. Then, in its “effects” analysis, the Panel could have addressed causal factors related to the nature of the subsidies, their relationship to prices, their magnitude, and their impact on production and exports. In this causal analysis, the Panel could also have addressed factors other than the challenged subsidies that may have been suppressing the prices in question.

 

However, the ordinary meaning of the transitive verb “suppress” implies the existence of a subject (the challenged subsidies) and an object (in this case, prices in the world market for upland cotton). This suggests that it would be difficult to make a judgement on significant price suppression without taking into account the effect of the subsidies. The Panel’s definition of price suppression, explained above 522, reflects this problem; it includes the notion that prices “do not increase when they otherwise would have” or “they do actually increase, but the increase is less than it otherwise would have been”. The word “otherwise” in this context refers to the hypothetical situation in which the challenged subsidies are absent. Therefore, the fact that the Panel may have addressed some of the same or similar factors in its reasoning as to significant price suppression and its reasoning as to “effects” is not necessarily wrong.

 

The specific factors that the Panel examined in determining whether or not “price suppression” had occurred were: “(a) the relative magnitude of the United States’ production and exports in the world upland cotton market; (b) general price trends; and (c) the nature of the subsidies at issue, and in particular, whether or not the nature of these subsidies is such as to have discernible price suppressive effects”.525 In the absence of explicit guidance on assessing significant price suppression in the text of Article 6.3(c), we have no reason to reject the relevance of these factors for the Panel’s assessment in the present case. An assessment of “general price trends” is clearly relevant to significant price suppression (although, as the Panel itself recognized, price trends alone are not conclusive). The two other factors — the nature of the subsidies and the relative magnitude of the United States’ production and exports of upland cotton — are also relevant for this assessment. We are not persuaded that the fact that these latter factors were also considered in connection with the Panel’s analysis of “the effect of the subsidy”528 amounts to legal error for that reason alone.”(477)

291.     By contrast, the Panel in US — Upland Cotton (Article 21.5 — Brazil) did not determine whether significant price suppression existed separately from whether significant price suppression was the effect of the subsidies at issue. Instead, that Panel adopted a “unitary” approach to these issues,(478) on the basis of the finding of the Appellate Body in the original proceedings that “it would be difficult to make a judgement on significant price suppression without taking into account the effect of the subsidies”.(479) The Appellate Body concluded that, because “it is difficult to separate price suppression from its causes”, the Panel’s unitary analysis “at least in respect of identifying price suppression and its causes, has a sound foundation.”(480) The Appellate Body cautioned, though, that the adoption of a unitary approach “did not absolve the Panel from clearly explaining its position on the question of ‘significance’.”(481)

292.     In EC and certain member States — Large Civil Aircraft, the Appellate Body recalled its past precedent that either a “unitary” or a “two-step” approach may be taken, and reiterated its preference for the unitary approach:

“The Appellate Body has found that panels may undertake an analysis of serious prejudice under either a unitary or two-step approach.(482) Under a unitary approach, the analysis of the particular market phenomena identified in the subparagraphs of Article 6.3 of the SCM Agreement is not conducted separately from the analysis of whether there is a causal relationship between those market phenomena and the challenged subsidies. By contrast, under a two-step approach like the one adopted by the Panel, the analysis first seeks to identify the market phenomena and then, as a second step, examines whether there is a causal relationship. The Appellate Body has indicated a preference for the unitary approach, observing that such approach “has a sound conceptual foundation”(483) and explaining that it may be difficult to ascertain the existence of some of the market phenomena in Article 6.3 without considering the effect of the subsidy at issue.(484)

 

In this case, the Panel justified its choice of a two-step approach by stating that “the arguments and evidence advanced by the United States (including in respect of price suppression) renders a two-step approach entirely appropriate to assessing its claims under Articles 6.3(a),(b) and (c) in the present controversy.” There is no further explanation by the Panel as to why such a two-step approach was “entirely appropriate”. The Panel acknowledged the reservations concerning a two-step approach expressed by the Appellate Body in US — Upland Cotton, but the Panel did not indicate why it considered that those reservations were not relevant.

 

Our view remains that a unitary approach that uses a counterfactual will generally be the more appropriate approach to undertaking the assessment required under Article 6.3 of the SCM Agreement. As we further explain in section C below, it is difficult to understand the market phenomena described in the various subparagraphs of Article 6.3 in isolation from the challenged subsidies. Rather, consideration of the effects of the challenged subsidies is intrinsic to the identification of those market phenomena. Any attempt to identify one of the market phenomena in Article 6.3 without considering the subsidies at issue can only be preliminary in nature since Article 6.3 requires that the market phenomenon be the effect of the challenged subsidy. This also means that a two-step approach simply defers the core of the analysis to the second step. In other cases, the problem might be the opposite. By artificially leaving aside the question of whether the market phenomenon is the effect of the subsidy, one could overlook market phenomena that are in fact occurring.”(485)

Counterfactual analysis

293.     The Appellate Body in US — Upland Cotton (Article 21.5 — Brazil) stated that both price depression and price suppression should be established on the basis of counterfactual analyses:

“The identification of price suppression, therefore, presupposes a comparison of an observable factual situation (prices) with a counterfactual situation (what prices would have been) where one has to determine whether, in the absence of the subsidies (or some other controlling phenomenon), prices would have increased or would have increased more than they actually did. Price depression, by contrast, can be directly observed, in that falling prices are observable. The determination of whether such falling prices are the effect of the subsidies will require consideration of what prices would have been absent the subsidies. Thus, counterfactual analysis is an inescapable part of analyzing the effect of a subsidy under Article 6.3(c) of the SCM Agreement.”(486)

294.     The relevant subsidies in US — Upland Cotton (Article 21.5 — Brazil) were alleged to have affected pricing indirectly, through their effects on production. The Appellate Body made the following remarks at paragraphs 355356 of its Report regarding the nature of the counterfactual analysis required in such circumstances:

“In this case, the Panel was required to consider the impact of marketing loan and counter-cyclical payments on the prices of upland cotton on the world market. Brazil did not allege that marketing loan and counter-cyclical payments to United States upland cotton farmers have a direct impact on world market prices. Rather, these payments are alleged to have had an impact on farmers’ planting decisions and, consequently, on domestic upland cotton production levels. Thus, the analysis should initially focus on the effects of the subsidies on production levels by examining whether there was more production than there otherwise would have been as a result of the marketing loan and counter-cyclical payments. It is the marginal production attributable to the marketing loan and counter-cyclical payments that matters. If there were to be increased upland cotton production, the analysis would then focus on whether that increase in supply had effects on prices in the world market. All else being equal, the marginal production attributable to the subsidy would be expected to have an effect on world prices, particularly if the subsidy is provided in a country with a meaningful share of world output.

 

Given the focus on production and price effects, an analysis of price suppression would normally include a quantitative component. There is some inherent difficulty in quantifying the effects of subsidies, because, as we have indicated, the increase in prices, absent the subsidies, cannot be directly observed. One way to undertake the analysis is to use economic modelling or other quantitative techniques. These techniques can be used to estimate whether there are higher levels of production resulting from the subsidies and, in turn, the price effects of that production. Economic modelling and other quantitative techniques provide a framework to analyze the relationship between subsidies, other factors, and price movements.”

295.     The Panel in Korea — Commercial Vessels noted that whereas it is “relatively simple” to show that prices have declined, remained steady, or increased slightly, “it is likely to be more difficult to show that prices should not have decreased, or should have increased by more than they did.” For such a conclusion, it said, “the causes of these observed trends would need to be examined,” that is, “price depression is not simply a decline in prices but a situation where prices have been ‘pushed down’ by something” and “[p]rice suppression is where prices have been restrained by something.” According to the Panel, “the analysis that seems to be called for by the Agreement (by virtue of the concepts of price suppression and price depression themselves), concerns what the price movements for the relevant ships would have been in the absence of (i.e. ‘but for’) the subsidies at issue.”(487)

296.     In EC and certain member States — Large Civil Aircraft, the Appellate Body explained that the use of a counterfactual analysis provides an adjudicator with a useful analytical framework to isolate and properly identify the effects of the challenged subsidies:

“The use of a counterfactual analysis provides an adjudicator with a useful analytical framework to isolate and properly identify the effects of the challenged subsidies. In general terms, the counterfactual analysis entails comparing the actual market situation that is before the adjudicator with the market situation that would have existed in the absence of the challenged subsidies. This requires the adjudicator to undertake a modelling exercise as to what the market would look like in the absence of the subsidies. Such an exercise is a necessary part of the counterfactual approach. As with other factual assessments, panels clearly have a margin of discretion in conducting the counterfactual analysis.(488),(489)

Quantification of the amount of the subsidy

297.     According to the Appellate Body in US — Upland Cotton, the text of Article 6.3(c) and the relevant context of the SCM Agreement do not impose an obligation on a panel to quantify the amount of the challenged subsidy:

“Beginning with the text of Article 6.3(c), we note that this provision does not state explicitly that a panel needs to quantify the amount of the challenged subsidy. However, in assessing whether “the effect of the subsidy is … significant price suppression”, and ultimately serious prejudice, a panel will need to consider the effects of the subsidy on prices. The magnitude of the subsidy is an important factor in this analysis. A large subsidy that is closely linked to prices of the relevant product is likely to have a greater impact on prices than a small subsidy that is less closely linked to prices. All other things being equal, the smaller the subsidy for a given product, the smaller the degree to which it will affect the costs or revenue of the recipient, and the smaller its likely impact on the prices charged by the recipient for the product. However, the size of a subsidy is only one of the factors that may be relevant to the determination of the effects of a challenged subsidy. A panel needs to assess the effect of the subsidy taking into account all relevant factors.

The provisions of the SCM Agreement regarding quantification of subsidies reveal that the methodological approaches to quantification may be quite different, depending on the context and purpose of quantification. The absence of any indication in Article 6.3(c) as to whether one of these methods, or any other method, should be used suggests to us that no such precise quantification was envisaged as a necessary prerequisite for a panel’s analysis under Article 6.3(c).

In sum, reading Article 6.3(c) in the context of Article 6.8 and Annex V suggests that a panel should have regard to the magnitude of the challenged subsidy and its relationship to prices of the product in the relevant market when analyzing whether the effect of a subsidy is significant price suppression. In many cases, it may be difficult to decide this question in the absence of such an assessment. Nevertheless, this does not mean that Article 6.3(c) imposes an obligation on panels to quantify precisely the amount of a subsidy benefiting the product at issue in every case. A precise, definitive quantification of the subsidy is not required.”(490)

Temporal considerations

298.     The Panel in Indonesia — Autos rejected the argument that it was precluded from considering the effects of a subsidy programme which has expired when analysing whether the subsidies caused serious prejudice to the interests of the complainants. The Panel stated:

“[W]e must assess the ‘effect of the subsidies’ on the interests of another Member to determine whether serious prejudice exists, not the effect of ‘subsidy programmers’. We note that at any given moment in time some payments of subsidies have occurred in the past while others have yet to occur in the future. If we were to consider that past subsidies were not relevant to our serious prejudice analysis as they were ‘expired measures’ while future measures could not yet have caused actual serious prejudice, it is hard to imagine any situation where a panel would be able to determine the existence of actual serious prejudice.”(491)

299.     In addressing the issue of whether the effect of a subsidy may continue beyond the year in which it is paid, the Appellate Body in US — Upland Cotton found that neither the text of Article 6.3(c) nor the immediate context precludes the possibility that the effect of a subsidy may continue beyond the year it was paid out:

“The context of Article 6.3(c) within Part III of the SCM Agreement does not support the suggestion that the effect of a subsidy is immediate, short-lived, or limited to one year, regardless of whether or not it is paid every year. Article 6.2 of the SCM Agreement refers to the possibility of the subsidizing Member demonstrating that “the subsidy in question has not resulted in any of the effects enumerated in paragraph 3”. (emphasis added) The word “resulted” in this sentence highlights the temporal relationship between the subsidy and the effect, in that one might expect a time lag between the provision of the subsidy and the resulting effect. In addition, the use of the present perfect tense in this provision implies that some time may have passed between the granting of the subsidy and the demonstration of the absence of its effects.

 

Article 6.4 of the SCM Agreement is also relevant context for interpreting Article 6.3(c). Article 6.4 requires that the displacement or impeding of exports be demonstrated “over an appropriately representative period”, which “shall be at least one year”, so that “clear trends” in changes in market share can be demonstrated. This suggests that the effect of a subsidy under Article 6.4 must be examined over a sufficiently long period of time and is not limited to the year in which it was paid. As the Panel has also pointed out in the context of Article 6.3(c), “[c]onsideration of developments over a period of longer than one year … provides a more robust basis for a serious prejudice evaluation than merely paying attention to developments in a single recent year”.(492)

300.     On a related issue, the Appellate Body in US — Upland Cotton (Article 21.5 — Brazil) asserted that:

“[N]othing in Article 6.3(c) of the SCM Agreement suggests that the examination of the effect of a subsidy must focus exclusively on the short-term perspective. Whether production of a particular product is higher than it would have been in the absence of the subsidy is often a critical issue in establishing whether the effect of the subsidy is significant price suppression. In our view, the effect of a subsidy on production can also be assessed on the basis of a long-term perspective that focuses on how the subsidy affects decisions of producers to enter or exit a given industry.”(493)

301.     Regarding the relevant period of review for assessing the effect of the subsidy, the Panel in US — Upland Cotton (Article 21.5 — Brazil) noted that Article 6.3(c) of the SCM Agreement required an analysis of whether “the effect of the subsidy … is … significant price suppression”. According to the Panel, “the use of the present tense logically implies the need to make a determination with respect to the present period”.(494) For this reason, the Panel accepted to consider evidence submitted by the United States regarding subsidies provided during the marketing year in which the Panel proceeding occurred. The Panel found:

“Given that our task is to decide whether or not significant price suppression “is” the effect of the marketing loan and counter-cyclical payments at issue in this proceeding we see no reason to exclude data relating to MY 2006 to the extent that it is available.”(495)

302.     In EC and certain member States — Large Civil Aircraft, the European Communities argued that several of the subsidies in this dispute were “decades old” and could not, for that reason, be causing present serious prejudice to the United States’ interests. The Appellate Body stated that:

“In previous sections of this Report, we have found that a challenge to subsidies granted prior to 1 January 1995 is not precluded. We have also found, however, that, in order properly to assess a claim under Article 5 of the SCM Agreement, a panel must take into account in its ex ante analysis how a subsidy is expected to materialize over time. A panel is also required to consider whether the life of a subsidy has ended, for example, by reason of the amortization of the subsidy over the relevant period or because the subsidy was removed from the recipient. Moreover, we have emphasized that the effects of a subsidy will generally diminish and come to an end with the passage of time.

 

Regarding the effects of subsidies over time, the Panel found that:

 

[w]hile the effect of a single subsidy may well dissipate over time, … the fact that the subsidies at issue in this dispute were repeatedly granted over the entire history of Airbus’ LCA development with respect to that same product has had rather the opposite effect, through the learning and spillover effects, and production synergies that are inherent in this industry, which spread the effect of LA/MSF for the development of one model of LCA, and of other subsidies, to both subsequent and earlier models.

 

We do not agree that it is only the effect of a “single subsidy” that would dissipate over time, while multiple subsidies may have the “opposite effect”. To the contrary, in general, the effects of any subsidy can be expected to diminish and eventually come to an end with the passage of time. This is true for single as well as multiple acts of subsidization. The question of whether there are residual effects is a fact-specific matter that may have to be considered.”(496)

“subsidized product” vs. “effect of the subsidy”

303.     The Panel in US — Upland Cotton rejected the argument of the United States that the focal point of a serious prejudice analysis under Article 6.3(c) of the SCM Agreement is the “subsidized product” rather than the “effect of the subsidy”:

“Finally, to the extent that the United States argues that it is the “subsidized product” — rather than the “effect of the subsidy” — which must cause “significant price suppression” within the meaning of Article 6.3(c) of the SCM Agreement, we disagree. The text of Articles 5 and 6 of the SCM Agreement support the conclusion that it is the effects of the United States subsidies — not the effects of the “subsidized product” — that are at issue in a claim of price suppression under Article 6.3(c). The chapeau of Article 5 states: “No Member should cause, through the use of any subsidy … adverse effects to the interests of another Member.” (emphasis added) Similarly, Article 6.3(c) provides: “Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where … (c) the effect of the subsidy is … significant price suppression …”… . These references in Articles 5(c) and 6.3(c) to the “effect of the subsidy” contrast with the language used in the countervailing duty provisions in Part V of the Agreement.(497) (498)

Effect of each individual subsidy vs. aggregated analysis

304.     In US — Upland Cotton, the Panel concluded that the reference to the effect of the “subsidy” in the singular in Article 6.3(c), did not mean that a serious prejudice analysis of price suppression must clinically isolate each individual subsidy and its effects:

“We do not see the Article 6.3(c) reference to “the effect of the subsidy” (in the singular, rather than the plural) as meaning that a serious prejudice analysis of price suppression must clinically isolate each individual subsidy and its effects. Rather, these textual references to “any subsidy”, “the subsidy” and the “subsidized product” in Articles 5(c) and 6.3(c) suggest that while due attention must be paid to each subsidy at issue as it relates to the subsidized product, a serious prejudice analysis may be integrated to the extent appropriate in light of the facts and circumstances of a given case. In our view, these textual references to “any subsidy” and “the effect of the subsidy” permit an integrated examination of effects of any subsidies with a sufficient nexus with the subsidized product and the particular effects-related variable under examination. Thus, in our price suppression analysis under Article 6.3(c), we examine one effects related variable — prices — and one subsidized product — upland cotton. To the extent a sufficient nexus with these exists among the subsidies at issue so that their effects manifest themselves collectively, we believe that we may legitimately treat them as a “subsidy” and group them and their effects together. We derive contextual support for this view from Article 6.1 and Annex IV, which referred to the concept of total ad valorem subsidization and envisaged that, “[i]n determining the overall rate of subsidization in a given year, subsidies given under different programmes and by different authorities in the territory of a Member shall be aggregated”.”(499)

305.     In EC and certain member States — Large Civil Aircraft, the Panel considered it appropriate to undertake an analysis of the effects of the subsidies on what it termed an “aggregated” basis. Specifically, the Panel first analysed the effects of Launch Aid / Member State Financing subsidies (LA/MSF) on Airbus’ ability to launch and bring to the market particular models of LCA, and then sought to determine whether non-LA/MSF subsidies had similar effects. On the basis of a separate — and more abbreviated — assessment of the collective effect of measures comprised under each group of non-LA/MSF subsidies, the Panel came to the conclusion that the effect of LA/MSF was “complemented and supplemented” by the other specific subsidies it found to exist in this dispute.(500)

306.     On appeal, the Appellate Body concluded that the Panel’s analysis was not properly characterized as an “aggregated” analysis, because the Panel did not actually undertake an analysis of the effects of the subsidies on an aggregated basis. However, the Appellate Body concluded that it was appropriate for the Panel to do what it actually did, namely to focus its causation analysis on whether the non-LA/MSF subsidies at issue — equity infusions, infrastructure measures, and R&TD subsidies — “complemented and supplemented” the effects of LA/MSF. The Appellate Body stated that:

“In the particular circumstances of this dispute, the Panel chose first to discern the effects of each of the LA/MSF measures, which according to the United States were the primary subsidies benefiting Airbus. The Panel came to the conclusion that each of the LA/MSF measures enabled Airbus to launch and bring to the market each of its models of LCA as and when it did, thus resulting in the displacement and significant lost sales of Boeing LCA under Article 6.3(a), (b), and (c) of the SCM Agreement. In other words, a “genuine and substantial relationship of cause and effect” had been established between the LA/ MSF measures and the displacement and lost sales of Boeing LCA during the reference period. The Panel then sought to determine whether the non-LA/MSF subsidies at issue had similar effects by “shift[ing] costs of LCA development from Airbus to the governments, giving Airbus an edge and allowing it to enter the LCA market with new LCA models at a pace that would otherwise not have been possible.” The Panel concluded that, insofar as the three sets of non-LA/MSF subsidies “complemented and supplemented” the “product effect” of LA/MSF, these subsidies “had the same effect on Airbus’ ability to launch the LCA it launched at the time that it did.”

 

We consider that the approach used by the Panel is permissible under Article 6.3 of the SCM Agreement, provided that a genuine causal link between the non-LA/MSF subsidies and the market phenomena alleged under Article 6.3 is established. Having determined that each of the LA/MSF measures enabled launches of particular Airbus LCA models and therefore were a substantial cause of the displacement and significant lost sales of Boeing LCA, the Panel sought to determine whether non-LA/MSF subsidies “complemented and supplemented” the effects of LA/MSF measures, even if each of the non-LA/MSF subsidies, taken individually, would not have enabled launches of particular Airbus LCA models, and therefore would not have been a substantial cause of the displacement and significant lost sales. Once the Panel determined that LA/MSF subsidies were a substantial cause of the observed displacement and lost sales, it was not necessary to establish that non-LA/MSF subsidies were also substantial causes of the same phenomena. Moreover, the fact that LA/MSF subsidies were the substantial cause of adverse effects does not exclude that non-LA/MSF subsidies had similar effects. Rather, it was conceivable that non-LA/MSF subsidies complemented or supplemented the effects of LA/MSF subsidies. For these reasons, we do not agree with the European Union that Articles 5(c) and 6.3 of the SCM Agreement preclude an affirmative finding that non-LA/MSF subsidies cause adverse effects where they “complement and supplement” the effects of LA/MSF subsidies that have been found to be a substantial and genuine cause of adverse effects. Given that the Panel had determined that LA/MSF subsidies were a substantial cause of the alleged market phenomena, it was permissible and sufficient for the Panel to assess whether a genuine causal connection between non-LA/MSF subsidies and the same market phenomena existed such that these non-LA/MSF subsidies complemented or supplemented the effects of LA/MSF. Contrary to the European Union’s submission, the Panel was not required, in those circumstances, to establish that non-LA/MSF subsidies were themselves a substantial cause or “necessary to enable a launch decision at a particular point in time.”

 

As we observed above, the Panel’s approach to the analysis of causation did not absolve it from establishing a genuine causal link between the different categories of non-LA/MSF subsidies and Airbus’ ability to launch and bring to the market its LCA models, thereby similarly causing the displacement and significant lost sales of Boeing LCA during the reference period. The fact that LA/MSF measures enabled certain product launches, and therefore were a genuine and substantial cause of displacement and lost sales during the reference period, does not in and of itself establish that non-LA/MSF subsidies had similar effects. Instead, the Panel had to establish that non-LA/MSF subsidies had a genuine causal connection with Airbus’ ability to launch and bring to the market its models of LCA, thus contributing to the adverse effects of LA/MSF measures.”(501)

(b) Forms of serious prejudice

(i) displacesor impedes

307.     The Panel in Indonesia — Autos explored the meaning of the terms “displacement” and “impedance” and considered that :

“[A] complainant need not demonstrate a decline in sales in order to demonstrate displacement or impedance. This is inherent in the ordinary meaning of those terms. Thus, displacement relates to a situation where sales volume has declined, while impedance relates to a situation where sales which otherwise would have occurred were impeded.”(502)

308.     The Panel in Indonesia — Autos addressed the argument that “there is no reason why the type of analysis set forth in Article 6.4 should not be appropriate also in the case of claims of displacement and impedance of imports from the market of the subsidizing country”.(503) The Panel rejected this argument, but nevertheless agreed that market share data may be “highly relevant” for an analysis pursuant to Article 6.3(a):

Article 6.4 is not relevant in this case. The drafting of the provision is unambiguous, and the specific reference to Article 6.3(b) creates a strong inference that an Article 6.4 type of analysis is not appropriate in the case of Article 6.3 (a) claims. The complainants have identified nothing in the context of the provision or the object and purpose of the SCM Agreement that would suggest a different conclusion.

 

Our conclusion does not of course mean that market share data are irrelevant to the analysis of displacement or impedance into a subsidizing Member’s market. To the contrary, market share data may be highly relevant evidence for the analysis of such a claim. However, such data are no more than evidence of displacement and impedance caused by subsidization, and a demonstration that the market share of the subsidized product in the subsidizing Member has increased does not ipso facto satisfy the requirements of Article 6.3(a).”(504)

309.     In EC and certain member States — Large Civil Aircraft, the Appellate Body considered the meaning of the terms “displace” and “impede”, stating that:

“[W]e understand the term displacement to connote that there is a substitution effect between the subsidized product and the like product of the complaining Member.(505) This means that displacement arises under subparagraph (a) of Article 6.3 where the effect of the subsidy is that imports of a like product of the complaining Member are substituted by the subsidized product in the market of the subsidizing Member. Similarly, under subparagraph (b), displacement arises where exports of the like product of the complaining Member are substituted in a third country market by exports of the subsidized product.

 

We are not called upon in this appeal to interpret the term “impede” in Article 6.3. Nevertheless, consideration of the term can provide context for a better understanding of displacement. The term connotes a broader array of situations than the term “displace”.(506) It refers to situations where the exports or imports of the like product of the complaining Member would have expanded had they not been “obstructed” or “hindered” by the subsidized product. It could also refer to a situation where the exports or imports of the like product of the complaining Member did not materialize at all because production was held back by the subsidized product.(507)

 

We recognize that it may be difficult to draw a clear demarcation between the concepts of displacement and impedance. One possibility is to draw a distinction similar to the one drawn by the Appellate Body in US — Upland Cotton (Article 21.5 — Brazil) between the concepts of “price depression” and “price suppression” in Article 6.3(c) of the SCM Agreement.(508) On this approach, evidence that actual sales have declined would be relevant for a determination of displacement, whereas evidence that sales would have increased more than they did, or would have declined less than they did, would be relevant to a claim of impedance.(509) We do not need to resolve this issue in this appeal because the United States premised its allegations of displacement on there being an observable decline in Boeing’s market share.”(510)

(ii) significant

310.     In rejecting the United States contention that the Panel did not provide a basic rationale as to the extent to which it considered price suppression to be “significant”, the Appellate Body in US — Upland Cotton found that the Panel had adequately provided its reasoning in accordance with Article 12.7 of the DSU in support of its conclusion that the price suppression was “significant”.(511) Accordingly, the Panel examined the ordinary meaning of word “significant” and its relevant context in finding that the United States subsidies in question for the purposes of its serious prejudice analysis were “significant” within the meaning of Article 6.3 (c). The Panel found that the ordinary meaning of the word in its context refers to something “important, notable or consequential”(512) before looking at the degree of significance of price suppression:

“Such significance may be manifest in a number of ways. The “significance” of any degree of price suppression may vary from case to case, depending upon the factual circumstances, and may not solely depend upon a given level of numeric significance. Other considerations, including the nature of the “same market” and the product under consideration may also enter into such an assessment, as appropriate in a given case.

 

We cannot believe that what may be significant in a market for upland cotton would necessarily also be applicable or relevant to a market for a very different product. We consider that, for a basic and widely traded commodity, such as upland cotton, a relatively small decrease or suppression of prices could be significant because, for example, profit margins may ordinarily be narrow, product homogeneity means that sales are price sensitive or because of the sheer size of the market in terms of the amount of revenue involved in large volumes traded on the markets experiencing the price suppression.”(513)

311.     The Appellate Body in US — Upland Cotton (Article 21.5 — Brazil) clarified that, in cases where a finding of significant price suppression is based on several different factors, there is no need to demonstrate that each such factor is “significant”:

“What Article 6.3(c) does require is that the price suppression be “significant”, which the Appellate Body has understood as “connoting something that can be characterized as “important, notable or consequential”. However, the fact that the price suppression must be “significant” does not mean that a panel examining various factors that support a finding of significant price suppression, as did the Panel, must make a determination precisely quantifying the effects of each factor. A factor that itself is not “significant” may, together with other factors (whether individually shown to be of a significant degree or not), establish “significant price suppression”. What needs to be significant is the degree of price suppression, not necessarily the degree of each factor used as an indicator for establishing its existence. Nor does each factor necessarily have to be capable of demonstrating, to the same extent, significant price suppression.”(514)

312.     The Panel in Korea — Commercial Vessels deemed that the approach taken by the US — Upland Cotton panel, which considered that it is the price suppression itself that must be “significant” and that it is useful to consider the degree of price suppression in the context of the prices that have been affected, was broadly consistent with that taken by the Indonesia — Autos panel, which read the term “significant” as a de minimis concept intended to screen out very small, unimportant price effects that might be caused by subsidies but that would have no real impact in the market:

“We agree, and are of the view that only price suppression or price depression of sufficient magnitude or degree, seen in the context of the particular product at issue, to be able to meaningfully affect suppliers should be found to be “significant” in the sense of SCM Article 6.3(c).”(515)

313.     In EC and certain member States — Large Civil Aircraft, the Panel referred to several factors that it considered relevant to the question of whether the lost sales at issue were “significant”:

“In our view, it is clear that Boeing lost sales to Airbus involving purchases by easy Jet, Air Berlin, Czech Airlines, Air Asia, Iberia, South African Airways, Thai Airways International, Singapore Airlines, Emirates Airlines, and Qantas. Moreover, it is apparent to us that if winning a particular sale is of “strategic importance” to Airbus, as the European Communities asserts with respect to the easy Jet campaign discussed above, the loss of that sale to Boeing is similarly important, and can justifiably be considered a significant lost sale. In addition, lost sales are important to the extent that they delay a manufacturer’s ability to benefit from the important learning effects and economies of scale in this industry, and thus have a significance beyond their direct revenue effects. Moreover, both parties recognize the advantages to being the incumbent supplier with a given customer with respect to subsequent purchases, which also adds to the significance of lost sales. While it is true that a manufacturer may be able to recoup some of these disadvantages by finding another customer to take advantage of delivery slots, this does not, in our view, detract from the significance of a lost sale. Given the number of aircraft and the dollar amounts involved in those sales, as well as the considerations just described, we conclude that these lost sales are significant.”(516)

(iii) price undercutting

314.     The Panel in Indonesia — Autos stated the following on the use of the term ‘significant’ in connection with the term “price undercutting” in Article 6.3(c):

“Although the term ‘significant’ is not defined, the inclusion of this qualifier in Article 6.3(c) presumably was intended to ensure that margins of undercutting so small that they could not meaningfully affect suppliers of the imported product whose price was being undercut are not considered to give rise to serious prejudice.”(517)

(iv) price suppression

315.     The Panel in US — Upland Cotton was of the view that the text of Article 6.3(c) read in its context required it to examine “whether upland cotton prices either were pressed down, prevented or inhibited from rising, or while they did actually increase the degree and magnitude of increase was less than it otherwise would have been”.(518) In its assessment of whether “price suppression” has taken place in the same “world market”, the Panel considered the following three factors relevant: “(a) the relative magnitude of the United States’ production and exports in the world upland cotton market; (b) general price trends; and (c) the nature of the subsidies at issue, and in particular, whether or not the nature of these subsidies is such as to have discernible price suppressive effects”.(519)

316.     The Appellate Body in US — Upland Cotton agreed with the Panel’s interpretation of the ordinary meaning of the term “price suppression”.(520) According to the Panel, the ordinary meaning of “price suppression” within the meaning of Article 6.3(c) of the SCM Agreement refers to “the situation where “prices” — in terms of the “amount of money set for sale of upland cotton” or the “value or worth” of upland cotton — either are prevented or inhibited from rising (i.e. they do not increase when they otherwise would have) or they do actually increase, but the increase is less than it otherwise would have been.”(521)

(v) price depression

317.     The Appellate Body in US — Upland Cotton (Article 21.5 — Brazil) distinguished price depression from price suppression in the following terms:

“While price depression is a directly observable phenomenon, price suppression is not so. Falling prices can be observed; by contrast, price suppression concerns whether prices are less than they would otherwise have been in consequence of various factors, in this case, the subsidies.”(522)

318.     The Panel in Korea — Commercial Vessels explained the difference between price suppression and price depression thus:

“It may be relatively simple to establish that, as a threshold factual matter, the price of a particular product has decreased. Similarly, it may be relatively simple to establish that the price of a product has been flat or has increased only slightly. Conceptually, however, it is likely to be more difficult to show that prices should not have decreased, or should have increased by more than they did.

 

In particular, the existence of a flat or declining price trend, on its own, would not be a sufficient basis on which to conclude that prices were ‘suppressed’ or ‘depressed’. For such a conclusion to be reached, the causes of these observed trends would need to be examined. In other words, price depression is not simply a decline in prices but a situation where prices have been ‘pushed down’ by something. Price suppression is where prices have been restrained by something. In other words, for a finding of ‘price suppression’ or ‘price depression’ in the sense of SCM Article 6.3(c), there must not only be a flattened or downward price trend as a prerequisite, but in addition this trend must be the result of an exogenous factor, namely the subsidy or subsidies in question. Thus, the analysis that seems to be called for by the Agreement (by virtue of the concepts of price suppression and price depression themselves), concerns what the price movements for the relevant ships would have been in the absence of (i.e. ‘but for’) the subsidies at issue.”(523)

(vi) lost sales

319.     In EC and certain member States — Large Civil Aircraft, the Appellate Body considered the meaning of “lost sales” in the context of Article 6.3(c):

“We consider that a sale that is “lost” is one that a supplier “failed to obtain”.(524) We further understand lost sales to be a relational concept that includes consideration of the behaviour of both the subsidized firm(s), which must have won the sales, and the competing firm(s), which allegedly lost the sales.(525) In US — Upland Cotton, the Appellate Body held that the phrase “in the same market” applied to all four situations set forth in Article 6.3(c), including “lost sales”.(526) According to the Appellate Body, the subsidized product and the like product of the complaining Member will be in the same market “if they were engaged in actual or potential competition in that market.”(527) Thus, sales can be lost “in the same market” within the meaning of Article 6.3(c) if the subsidized product and the like product are competing products in the same product market.

 

The term “significant” in the second clause of Article 6.3(c) appears before the terms “price suppression, price depression or lost sales”.(528) We read the term “significant” as qualifying all three situations. In other words, a complaining Member invoking Article 6.3(c) must show that the alleged “lost sales” are “significant”.(529)

 

As with the other market phenomena referred to in Article 6.3 of the SCM Agreement, the lost sales must be the “effect” of the challenged subsidy. Thus, like the analysis of displacement under Article 6.3(a) and (b), we believe that a useful and appropriate approach to assessing whether lost sales are the effect of the challenged subsidy is through a counterfactual analysis. This would involve a comparison of the sales actually made by the competing firm(s) of the complaining Member with a counterfactual scenario in which the firm(s) of the respondent Member would not have received the challenged subsidies. There would be lost sales where the counterfactual scenario shows that sales won by the subsidized firm(s) of the respondent Member would have been made instead by the competing firm(s) of the complaining Member, thus revealing the effect of the challenged subsidies. It is not impermissible to assess lost sales under Article 6.3(c) of the SCM Agreement using a two step approach like the one adopted by the Panel. However, as we have discussed above, any conclusions reached under the first step are preliminary because they will show only who lost and who made the sales. A definitive determination that the lost sales are the effect of the challenged subsidy within the meaning of Article 6.3(c) must await completion of the second step of the analysis.

 

The United States directed its allegations of lost sales in this case against specific sales campaigns and the Panel focused its analysis on those sales campaigns. The European Union has not challenged the Panel’s approach on appeal. We agree that an assessment of lost sales focused on an examination of specific sales campaigns may be appropriate given the particular characteristics of a market.(530) At the same time, we note that Article 6.3(c) is concerned with lost sales “in the same market”. It will sometimes be necessary to look beyond individual sales campaigns fully to understand the competitive dynamics that are at play in a particular market. Thus, an approach in which sales are aggregated by supplier or by customer, or on a country-wide or global basis, rather than examined individually, is also permissible.

 

We acknowledge that when looked at from this broader, market-wide perspective, there could be some overlap between the concept of lost sales and the concepts of displacement and impedance in Article 6.3(a) and (b) of the SCM Agreement. Although the concepts of displacement and impedance are presented from the perspective of imports or exports under subparagraphs (a) and (b) of Article 6.3, those imports or exports are a function of the firms’ sales. At the same time, we see some distinctions between the concepts. First, the assessment of displacement or impedance under subparagraphs (a) and (b) of Article 6.3 has a well-defined geographic focus. By contrast, the reference to the “same market” in subparagraph (c) allows more flexibility in defining the relevant market, which can include the world market.(531) Second, the requirement in Article 6.3(c) that the lost sales be “significant” implies that the assessment can have quantitative and qualitative dimensions. The assessment of displacement and impedance under Article 6.3(a) and (b) is primarily quantitative in nature.”(532)

320.     In EC and certain member States — Large Civil Aircraft, the Appellate Body summarized its analysis of “lost sales” as follows:

“[W]e consider that, under Article 6.3(c), “lost sales” are sales that suppliers of the complaining Member “failed to obtain” and that instead were won by suppliers of the respondent Member. It is a relational concept and its assessment requires consideration of the behaviour of both the subsidized firm(s), which must have won the sales, and the competing firm(s), which allegedly lost the sales. The assessment can focus on a specific sales campaign when such an approach is appropriate given the particular characteristics of the market or it may look more broadly at aggregate sales in the market. The complainant must show that the lost sales are significant to succeed in its claim. Where lost sales are assessed under a two-step approach such as the one adopted by the Panel in this case, the finding of lost sales in the first step is necessarily preliminary and of limited significance in coming to a conclusion under Article 6.3(c). Similarly to the phenomena of displacement under Article 6.3(a) and (b), a definitive determination under Article 6.3(c) must await consideration of whether such lost sales are the effect of the challenged subsidy. While a two-step approach to the assessment of lost sales is permissible, in our view, the most appropriate approach to assess whether lost sales are the effect of the challenged subsidy is through a unitary counterfactual analysis. This would involve a comparison of the sales actually made by the competing firm (s) of the complaining Member with a counterfactual scenario in which the firm(s) of the respondent Member would not have received the challenged subsidies. There would be lost sales where the counterfactual analysis shows that, in the absence of the challenged subsidy, sales won by the subsidized firm(s) of the respondent Member would have been made instead by the competing firm(s) of the complaining Member.”(533)

(vii) in the same market

321.     The Appellate Body agreed with the interpretation of the Panel in US — Upland Cotton that the phrase “same market” can also refer to “a world market” for the purposes of a claim of significant price suppression pursuant to Article 6.3(c) of the SCM Agreement if the facts on the case warrant such a determination.(534) The Appellate Body agreed with the Panel that the ordinary meaning of the word “market” in Article 6.3(c) “neither requires nor excludes the possibility of a national market or a world market”(535) when read in the immediate context of the other three subparagraphs of Article 6.3, which contrastingly place a geographical limitation on the scope of the relevant market.

322.     With respect to the issue of when two products can be considered as being “in the same market” within the meaning of Article 6.3(c) of the SCM Agreement, the Appellate Body in US — Upland Cotton explained that it would depend on the competitive nature of the subsidized product at issue:

“However, recalling that one accepted definition of “market” is “the area of economic activity in which buyers and sellers come together and the forces of supply and demand affect prices”, it seems reasonable to conclude that two products would be in the same market if they were engaged in actual or potential competition in that market. Thus, two products may be “in the same market” even if they are not necessarily sold at the same time and in the same place or country. As the Panel correctly pointed out, the scope of the “market”, for determining the area of competition between two products, may depend on several factors such as the nature of the product, the homogeneity of the conditions of competition, and transport costs. This market for a particular product could well be a “world market”. However, we agree with the Panel that the fact that a world market exists for one product does not necessarily mean that such a market exists for every product. Thus the determination of the relevant market under Article 6.3(c) of the SCM Agreement depends on the subsidized product in question. If a world market exists for the product in question, Article 6.3(c) does not exclude the possibility of this “world market” being the “same market” for the purposes of a significant price suppression analysis under that Article.

 

[…] As we have explained above, there is no per se geographical limitation of a market under Article 6.3(c). It could well be a national market, a world market, or any other market. It is for the complaining party to identify the market where it alleges significant price suppression and to establish that that market exists. In doing so, it is for the complaining party to establish that the subsidized product and its product are in actual or potential competition in that alleged market. If that market is established to be a “world market”, it cannot be said, for that reason alone, that the two products are not in the “same market” within the meaning of Article 6.3(c).”(536)

323.     The European Communities in Korea — Commercial Vessels argued that “nothing in Article 6.3(c) would preclude defining the ‘world’ market as the ‘same market’ for purposes of price suppression/price depression analysis.”(537) By contrast, Korea argued that ‘the same market’ can only refer to a national market, not to the world market. The Panel noted that Article 6.3(c) “places no geographic limitations on the concept of the same market”:

“We find no basis in the text to construe this term as exclusively referring to “national markets”. Nor are we persuaded that the explicit references to particular national markets in Articles 6.3(a) and 6.3(b), and the explicit reference to the “world market” in Article 6.3(d) mean, by implication, that “the same market” in Article 6.3(c) can only be a national market.

 

… Given the very specific and carefully crafted references to particular geographic markets in the other subparagraphs of Article 6.3, we do not find it plausible that the absence of such a reference in Article 6.3(c) either was the result of an oversight by the drafters, or was intended to imply that the market in question could only be a national one.(538)

 

Our view is consistent with the approach taken in the two GATT Sugar disputes,(539) and the US — Upland Cotton dispute, in all of which serious prejudice was found based on suppression or depression of world market prices.”(540)

324.     The Panel in Korea — Commercial Vessels then stated, “however defined, to be ‘the same market,’ the market in question must be one in which the EC and Korea compete for sales of commercial vessels of particular types.” In this regard, it said, “it would seem to be for the EC first to substantiate the geographic scope in which it alleges that the European and Korean industries compete in respect of each of the three types of commercial vessels, rather than necessarily having to prove as a general matter that the overall market for commercial vessels is a global market.”(541)

325.     In EC and certain member States — Large Civil Aircraft, the Appellate Body elaborated on the concept of a “market”:

“An examination of the competitive relationship between products is therefore required so as to determine whether such products form part of the same market. We conclude therefore that a “market”, within the meaning of Articles 6.3(a) and 6.3(b) of the SCM Agreement, is a set of products in a particular geographical area that are in actual or potential competition with each other. An assessment of the competitive relationship between products in the market is required in order to determine whether and to what extent one product may displace another. Thus, while a complaining Member may identify a subsidized product and the like product by reference to footnote 46, the products thereby identified must be analyzed under the discipline of the product market so as to be able to determine whether displacement is occurring. Ordinarily, the subsidized product and the like product will form part of a larger product market. But it may be the case that a complainant chooses to define the subsidized and like products so broadly that it is necessary to analyze these products in different product markets. This will be necessary so as to analyze further the real competitive interactions that are taking place, and thereby determine whether displacement is occurring.(542)

 

Our interpretation is consistent with the fundamental economic proposition that a market comprises only those products that exercise competitive constraint on each other.(543) This is the case when the relevant products are substitutable.(544) Although physical characteristics, end-uses, and consumer preferences may assist in deciding whether two products are in the same market, they should not be treated as the exclusive factors to consider in deciding whether those products are sufficiently substitutable so as to create competitive constraints on each other. Indeed, whether two products compete in the same market is not determined simply by assessing whether they share particular physical characteristics or have the same general uses; it may also be relevant to consider whether customers demand a range of products or whether they are interested in only a particular product type. In the former case, when customers procure a range of products to satisfy their needs, this may give an indication that all such products could be competing in the same market.

 

Demand-side substitutability — that is, when two products are considered substitutable by consumers — is an indispensable, but not the only relevant, criterion to consider when assessing whether two products are in a single market. Rather, a consideration of substitutability on the supply-side may also be required. For example, evidence on whether a supplier can switch its production at limited or prohibitive cost from one product to another in a short period of time may also inform the question of whether two products are in a single market.

 

Our analysis is supported by Appellate Body jurisprudence. In US — Upland Cotton, the Appellate Body defined a “market” as “the area of economic activity in which buyers and sellers come together and the forces of supply and demand affect prices”, and considered that “two products would be in the same market if they were engaged in actual or potential competition in that market”.(545) The Appellate Body also agreed with the panel in that case that “the scope of the ‘market’, for determining the area of competition between two products, may depend on several factors such as the nature of the product, the homogeneity of the conditions of competition, and transport costs.”(546) While the Appellate Body was, in that case, considering a claim of price suppression under Article 6.3(c) of the SCM Agreement, we believe that similar considerations would also be relevant in assessing claims of serious prejudice brought under the remainder of Article 6.3, including Articles 6.3(a) and 6.3(b). This is consistent with the fact that each of the subparagraphs of Article 6.3 is concerned with the effects of a subsidy in a market. In the absence of actual or potential competition between two products in the marketplace, we fail to see how the effect of a subsidy provided to one of those products could be found to be the displacement of the other product.

 

In sum, we conclude, therefore, that the scope of the “market” to be examined for the purposes of Articles 6.3(a) and 6.3(b) of the SCM Agreement is likely to vary from case to case depending upon the particular factual circumstances, including the nature of the products at issue, as well as demand-side and supply-side factors. It should be emphasized that the scope of the relevant product market in any given case will depend on the nature and degree of competition between the products of the complaining Member and the allegedly subsidized products of the responding Member. In some cases, the entire product range offered by the complainant may compete with the range of products of the respondent that is allegedly subsidized. In other cases, an assessment of the conditions of competition may reveal the existence of multiple product markets in which particular products of the complaining Member compete with particular subsidized products of the respondent. However, it is important to note that whether or not a broad or narrow range of products benefit from subsidization says little about whether all these products compete in the same market. Indeed, products benefiting from subsidies may compete in very different markets. A panel is therefore required to make an objective assessment of the competitive relationship between specific products in the marketplace and to define the relevant product market in order to determine whether particular products can be treated as forming part of a single product market or several product markets for purposes of an analysis of displacement under Articles 6.3(a) and 6.3(b).”(547)

(viii) increase in the world market share

326.     In US — Upland Cotton, the Appellate Body decided to exercise judicial economy regarding the interpretation of the phrase “world market share” in Article 6.3(d) of the SCM Agreement. The Panel had found that it did not refer to either a Member’s share of the world market for exports as argued by Brazil, nor did it refer to all consumption of upland cotton by a Member as contended by the United States; rather, the phrase referred to the “share of the world market supplied by the subsidizing member of the product concerned”.(548) In finding that Brazil had failed to establish a prima facie case of violation of Article 6.3(d) constituting serious prejudice within the meaning of Article 5(c) of the SCM Agreement due to its erroneous legal interpretation of the phrase “world market share”, the Panel emphasized that this interpretation of the ordinary meaning of the phrase read in its context and in light of the object and purpose of the subsidy disciplines set out in the SCM Agreement “is clear and unambiguous” and additionally, is confirmed by the drafting history of the provision.(549)

 

VIII. Article 7     back to top

A. Text of Article 7

Article 7: Remedies

7.1     Except as provided in Article 13 of the Agreement on Agriculture, whenever a Member has reason to believe that any subsidy referred to in Article 1, granted or maintained by another Member, results in injury to its domestic industry, nullification or impairment or serious prejudice, such Member may request consultations with such other Member.

 

7.2     A request for consultations under paragraph 1 shall include a statement of available evidence with regard to (a) the existence and nature of the subsidy in question, and (b) the injury caused to the domestic industry, or the nullification or impairment, or serious prejudice(19) caused to the interests of the Member requesting consultations.

 

(footnote original) 19 In the event that the request relates to a subsidy deemed to result in serious prejudice in terms of paragraph 1 of Article 6, the available evidence of serious prejudice may be limited to the available evidence as to whether the conditions of paragraph 1 of Article 6 have been met or not.

 

7.3     Upon request for consultations under paragraph 1, the Member believed to be granting or maintaining the subsidy practice in question shall enter into such consultations as quickly as possible. The purpose of the consultations shall be to clarify the facts of the situation and to arrive at a mutually agreed solution.

 

7.4     If consultations do not result in a mutually agreed solution within 60 days(20), any Member party to such consultations may refer the matter to the DSB for the establishment of a panel, unless the DSB decides by consensus not to establish a panel. The composition of the panel and its terms of reference shall be established within 15 days from the date when it is established.

 

(footnote original) 20 Any time-periods mentioned in this Article may be extended by mutual agreement.

 

7.5     The panel shall review the matter and shall submit its final report to the parties to the dispute. The report shall be circulated to all Members within 120 days of the date of the composition and establishment of the panel’s terms of reference.

 

7.6     Within 30 days of the issuance of the panel’s report to all Members, the report shall be adopted by the DSB(21) unless one of the parties to the dispute formally notifies the DSB of its decision to appeal or the DSB decides by consensus not to adopt the report.

 

(footnote original) 21 If a meeting of the DSB is not scheduled during this period, such a meeting shall be held for this purpose.

 

7.7     Where a panel report is appealed, the Appellate Body shall issue its decision within 60 days from the date when the party to the dispute formally notifies its intention to appeal. When the Appellate Body considers that it cannot provide its report within 60 days, it shall inform the DSB in writing of the reasons for the delay together with an estimate of the period within which it will submit its report. In no case shall the proceedings exceed 90 days. The appellate report shall be adopted by the DSB and unconditionally accepted by the parties to the dispute unless the DSB decides by consensus not to adopt the appellate report within 20 days following its issuance to the Members.(22)

 

(footnote original) 22 If a meeting of the DSB is not scheduled during this period, such a meeting shall be held for this purpose.

 

7.8     Where a panel report or an Appellate Body report is adopted in which it is determined that any subsidy has resulted in adverse effects to the interests of another Member within the meaning of Article 5, the Member granting or maintaining such subsidy shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy.

 

7.9     In the event the Member has not taken appropriate steps to remove the adverse effects of the subsidy or withdraw the subsidy within six months from the date when the DSB adopts the panel report or the Appellate Body report, and in the absence of agreement on compensation, the DSB shall grant authorization to the complaining Member to take countermeasures, commensurate with the degree and nature of the adverse effects determined to exist, unless the DSB decides by consensus to reject the request.

 

7.10     In the event that a party to the dispute requests arbitration under paragraph 6 of Article 22 of the DSU, the arbitrator shall determine whether the countermeasures are commensurate with the degree and nature of the adverse effects determined to exist.


B. Interpretation and Application of Article 7

1. Article 7.8

(a) General

327.     The Panel in Indonesia — Autos referred in its conclusions and recommendations to the remedy in Article 7.8 as follows:

“With respect to the conclusion of serious prejudice to the interests of the European Communities, Article 7.8 of the SCM Agreement provides that, ‘[w]here a panel report or an Appellate Body report is adopted in which it is determined that any subsidy has resulted in adverse effects to the interests of another Member within the meaning of Article 5, the Member granting or maintaining the subsidy shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy.’”(550)

328.     In the context of a claim regarding the scope of Article 21.5 of the DSU, the Panel in US — Upland Cotton (Article 21.5 — Brazil) addressed the issue of whether it is only the adverse effects resulting from the subsidies at issue in the original proceeding that need to be removed, or whether the Article 7.8 obligation also requires the removal of (additional) adverse effects resulting from the continued provision of the same subsidies:

“Under Article 7.8 of the SCM Agreement the United States was obligated, with respect to the subsidies subject to the “present” serious prejudice finding of the original panel, to “take appropriate steps to remove the adverse effects or … withdraw the subsidy”.

 

It is clear from the context that the adverse effects that must be removed are the adverse effects of the subsidy that has been determined to have resulted in adverse effects. Since the original panel made a finding of present serious prejudice in respect of subsidies provided during MY 1999–2002, the question arises whether the obligation to take appropriate steps to remove the adverse effects only applies to payments of subsidies made in those years.

 

It is not in dispute that the United States presently provides marketing loan and counter-cyclical payments on the same legal basis and subject to the same conditions and criteria as the marketing loan payments and counter cyclical payments that were subject to the panel’s finding of “present” serious prejudice. In a situation where the subsidy in question has been found to be a prohibited one, the continued use of the subsidy under the same conditions and criteria is inconsistent with a Member’s obligation to “withdraw” the subsidy under Article 4.7 of the SCM Agreement. Thus, the concept of “withdrawal” must in any event be interpreted to mean that a Member must cease to act in a WTO-inconsistent manner with respect to that subsidy. If a failure to cease conduct inconsistent with a Member’s obligations under Article 3 of the SCM Agreement is inconsistent with the obligation to withdraw the subsidy in Article 4.7 of the SCM Agreement, we see no logical reason why the same concept should not also apply to the obligation that arises under Article 7.8 of the SCM Agreement to withdraw the subsidy or to take appropriate steps to remove the adverse effects of a subsidy that has been determined to result in adverse effects. In our view, the remedy under Article 7.8 must be viewed in its relationship to the obligation in Article 5 not to cause through the use of any subsidy referred to in Articles 1.1 and 1.2 of the SCM Agreement adverse effects to the interests of other Members. It must serve to restore conformity with the Member’s obligation to avoid causing adverse effects through the use of any subsidy. As a consequence, a Member does not take appropriate steps to remove adverse effects of a subsidy if it continues to provide payments under the same conditions and criteria as the original subsidy in a manner that causes adverse effects. The interpretation advocated by the United States, whereby the obligation under Article 7.8 of the SCM Agreement is limited to the removal of the adverse effects caused by subsidies granted in a particular period of time, implies that it would not be possible to review in an Article 21.5 proceeding whether a Member causes adverse effects by continuing to grant subsidies under the same conditions and criteria as the subsidies found to have caused adverse effects. Such an interpretation fails to take into account the relationship between Article 7.8 and Article 5 SCM Agreement and thus fails to interpret Article 7.8 in its proper context.”(551)

329.     The Appellate Body was in broad agreement with the Panel’s approach to Article 7.8 of the SCM Agreement:

“Pursuant to Article 7.8, the implementing Member has two options to come into compliance. The implementing Member: (i) shall take appropriate steps to remove the adverse effects; or (ii) shall withdraw the subsidy. The use of the terms “shall take” and “shall withdraw” indicate that compliance with Article 7.8 of the SCM Agreement will usually involve some action by the respondent Member. This affirmative action would be directed at effecting the withdrawal of the subsidy or the removal of its adverse effects. A Member would normally not be able to abstain from taking any action on the assumption that the subsidy will expire or that the adverse effects of the subsidy will dissipate on their own.

 

The question then becomes: With respect to which subsidies must the implementing Member take such action? Such action would certainly be expected with respect to subsidies granted in the past and which may have formed the basis of a panel’s determination of present serious prejudice and adverse effects. However, we do not see the obligation in Article 7.8 as being limited to subsidies granted in the past. Article 7.8 expressly refers to a Member “granting or maintaining such subsidy”. The verb “maintain” suggests, to us, that the obligation set forth in Article 7.8 is of a continuous nature, extending beyond subsidies granted in the past. This means that, in the case of recurring annual payments, the obligation in Article 7.8 would extend to payments “maintained” by the respondent Member beyond the time period examined by the panel for purposes of determining the existence of serious prejudice, as long as those payments continue to have adverse effects. Otherwise, the adverse effects of subsequent payments would simply replace the adverse effects that the implementing Member was under an obligation to remove. Such a reading of Article 7.8 would not give meaning and effect to the term “maintain”, which is distinct from the term “grant”, and has also been included in that Article. Indeed, it would render the term “maintain” redundant. In addition, it would fail to give meaning and effect to the obligation to “take appropriate steps to remove the adverse effects” in Article 7.8, and to the requirement under Article 21.5 to “comply” with the DSB’s recommendations and rulings, including the requirement to take the remedial action foreseen in Article 7.8 as a consequence of a finding of adverse effects.

 

Our interpretation of Article 7.8 is consistent with the context provided by Article 4.7 of the SCM Agreement, which applies in cases involving prohibited subsidies. In US — FSC (Article 21.5 — EC II), the Appellate Body stated that, “if, in an Article 21.5 proceeding, a panel finds that the measure taken to comply with the Article 4.7 recommendation made in the original proceedings does not achieve full withdrawal of the prohibited subsidy — either because it leaves the entirety or part of the original prohibited subsidy in place, or because it replaces that subsidy with another subsidy prohibited under the SCM Agreement — the implementing Member continues to be under the obligation to achieve full withdrawal of the subsidy”. Similarly, a Member would not comply with the obligation in Article 7.8 to withdraw the subsidy if it leaves an actionable subsidy in place, either entirely or partially, or replaces that subsidy with another actionable subsidy. We recognize that, unlike comply with the Article 4.7, Article 7.8 gives Members the option of removing the adverse effects as an alternative to withdrawing the subsidy. The availability of this option is arguably a consequence of the fact that actionable subsidies are not prohibited per se; rather, they are actionable to the extent they cause adverse effects. Nevertheless, the option of removing the adverse effects cannot be read as allowing a Member to continue to cause adverse effects by maintaining the subsidies that were found to have resulted in adverse effects. As observed earlier, if the contrary proposition were accepted, the adverse effects of subsequent subsidies, especially in the case of recurrent subsidies, would simply replace the adverse effects that the implementing Member was required to remove, making the obligation in Article 7.8 to “take appropriate steps to remove the adverse effects” meaningless.”(552)

(b) Relationship with other Articles

(i) Article 4.7

330.     In the context of its finding that the phrase “withdraw the subsidy” under Article 4.7 referred to retrospective remedies (repayment), the Panel in Australia — Automotive Leather II (Article 21.5 US) considered Article 7.8 and the phrase “ shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy” therein. See paragraph 208 above.

2. Article 7.9 and 7.10

(a) Meaning of “countermeasures … commensurate with the degree and nature of the adverse effects determined to exist”

(i) countermeasures

331.     The Arbitrators in US — Upland Cotton (Article 22.6 — US II) developed a detailed interpretation of the expression “countermeasures … commensurate with the degree and nature of the adverse effects determined to exist”. With respect to the term “countermeasures”, the Arbitrators stated that:

“We note at the outset that the term “countermeasures” is used to designate retaliatory measures in the WTO Agreement only in the SCM Agreement. This contrasts with the terms of Article 22 of the DSU, which refers to the “suspension of concessions or other obligations”. However, it is not argued by either party in these proceedings that the term “countermeasures” would designate, in the SCM Agreement, anything other than a temporary suspension of certain obligations, and this is what we understand this term to refer to.

 

The prefix “counter-” can be defined as meaning “against, in return”.(553) The Oxford English Dictionary further cites the term “counter-measure” as an illustration of a situation in which this prefix is used to indicate something that is “[d]one, directed, or acting against, in opposition to, as a rejoinder or reply to another thing of the same kind already made or in existence”. Another dictionary defines the term “countermeasure” as an “action or device designed to negate or offset another”.(554)

We are not convinced that the use of the term “countermeasures” necessarily connotes, in and of itself, an intention to refer to retaliatory action that “goes beyond the mere rebalancing of trade interests”, as Brazil suggests. As noted above, the term indicates that the action is taken in response to another, in order to “counter” it. This does not necessarily connote, in our view, an intention to “go beyond” a rebalancing of trade interests. Indeed, we are not convinced that the dictionary meanings of the term, in and of themselves, provide any compelling guidance as to the exact level of countermeasures that may be permissible under Article 7.9 of the SCM Agreement. We also note that the term “countermeasures” is similarly used in Article 4.10 of the SCM Agreement, where the permissible level of countermeasures is defined differently, in terms of “appropriateness”.

We note that the term “countermeasures” is the general term used by the ILC in the context of its Articles on State Responsibility to designate temporary measures that injured States may take in response to breaches of obligations under international law.(555) This has been noted by arbitrators in the context of interpreting Article 4.10 of the SCM Agreement.(556)

 

We agree that this term, as understood in public international law, may usefully inform our understanding of the same term as used in the SCM Agreement.(557) Indeed, we find that the term “countermeasures”, in the SCM Agreement, describes measures that are in the nature of countermeasures as defined in the ILC’s Articles on State Responsibility.

 

At this stage of our analysis, we therefore find that the term “countermeasures” essentially characterizes the nature of the measures to be authorized, i.e. temporary measures that would otherwise be contrary to obligations under the relevant WTO Agreement(s) and that are taken in response to a breach of an obligation under the SCM Agreement. This is also consistent with the meaning of this term in public international law as reflected in the ILC Articles on State Responsibility.”(558)

(ii) commensurate with the degree and nature

332.     In the context of providing a detailed interpretation of the expression “countermeasures … commensurate with the degree and nature of the adverse effects determined to exist”, the Arbitrators in US — Upland Cotton (Article 22.6 — US II) considered the term “commensurate”:

“Dictionary definitions of this term include: “equal in measure or extent: coextensive” and “corresponding in size, extent, amount, or degree: proportionate,”(559) “of equal extent, coextensive”.(560)

 

In light of these elements, we agree that the term “commensurate” essentially connotes a “correspondence” between two elements. In the context of Article 7.9, the “correspondence” is between the countermeasures and the “degree and nature of the adverse effects determined to exist”.

We agree that the term “commensurate” does not suggest that exact or precise equality is required, between the two elements to be compared, i.e. in this case, the proposed countermeasures and the “degree and nature of the adverse effects determined to exist”. To that extent, we agree that the term “commensurate” connotes a less precise degree of equivalence than exact numerical correspondence. Nonetheless, the term “commensurate” does indicate, in our view, a relationship of correspondence and proportionality between the two elements, and not merely a relationship of “adequacy” or “harmony” as suggested by Brazil. We do not exclude that this correspondence may be qualitative as well as quantitative. The exact nature of the correspondence at issue will further be informed by the identification of what exactly the proposed countermeasures are required to be “commensurate” with. This is defined through the terms “the degree and nature of the adverse effects determined to exist”.”(561)

333.     Regarding the terms “degree and nature”, the Arbitrators in US — Upland Cotton (Article 22.6 — US II) stated that:

“We agree that the reference to both the “degree” and the “nature” of the adverse effects determined to exist suggests that the correspondence that is required to exist, between the proposed countermeasures and the “degree and nature of the adverse effects”, may encompass both quantitative and qualitative elements. The “degree” of the effects could be understood as a quantitative element, whereas the reference to the “nature” of the adverse effects seems to point to something more qualitative.

We agree that the reference to the “nature” of the adverse effects may be understood to refer to the different “types” of adverse effects that are foreseen in Articles 5 and 6, and that this therefore invites a consideration of the specific type of “adverse effects” that have been determined to exist as a result of the specific measure in relation to which countermeasures are being requested. These effects could manifest themselves in a variety of ways, each reflecting a specific type of trade distortion.

… In assessing the “commensurateness” of the proposed countermeasures to the “degree and nature” of the adverse effects determined to exist, we are entitled to take into account fully the “degree and nature” of these adverse effects as they present themselves in the case at hand, but we are not permitted to do more than that. In other words, the “degree and nature” of the adverse effects determined to exist in the case at hand constitute the entirety of what we may and must consider in assessing the “commensurateness” of the proposed countermeasures in that case.”(562)

(iii) the adverse effects determined to exist

334.     The Arbitrators in US — Upland Cotton (Article 22.6 — US II) considered that “the adverse effects determined to exist” refers to the findings on adverse effects made by the Panel/Appellate Body in the underlying proceedings:

“Brazil observes that the term “adverse effects determined to exist” sends the treaty interpreter back to the precise findings on adverse effects made by the panels and the Appellate Body as these constitute the “adverse effects determined to exist”. We agree.

 

The expression “adverse effects determined to exist” refers us to the specific “adverse effects” within the meaning of Articles 5 and 6 of the SCM Agreement that form the basis of the underlying findings in the case at hand.

 

We note in this respect that Article 5 SCM Agreement identifies three categories of “adverse effects to the interests of other Members”, that “no Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1”. These are:

 

(a)     injury to the domestic industry of another Member;

 

(b)     nullification or impairment of benefits accruing directly or indirectly to other Members under GATT 1994 in particular the benefits of concessions bound under Article II of GATT 1994;

 

(c)     serious prejudice to the interests of another Member.

 

Article 7.1 further provides the possibility for any WTO Member to request consultations with another Member, whenever it has reason to believe that “any subsidy referred to in Article 1, granted or maintained by another Member, results in injury to its domestic industry, nullification or impairment or serious prejudice”.

 

In principle, therefore, the “adverse effects determined to exist” in the underlying proceedings ultimately leading to a request for countermeasures under Article 7.9 of the SCM Agreement may be in the form of injury to the domestic industry of a Member, nullification or impairment, or serious prejudice to the interests of another Member.”(563)

(b) Purpose of countermeasures under Article 7.9

335.     The Arbitrators in US — Upland Cotton (Article 22.6 — US II) considered the purpose of countermeasures under Article 7.9 to be essentially the same as countermeasures under Article 4.10 of the SCM Agreement and retaliatory measures under Article 22.4 of the DSU:

“The question of the objective of retaliatory measures in the WTO has been addressed in the context of proceedings under Article 22.4 of the DSU. The arbitrator on EC — Bananas III (US) (Article 22.6 — EC) thus found that:

 

“[T]he overall objective of compensation or the suspension of concessions or other obligations as described in Article 22.1:

 

‘Compensation and the suspension of concession or other obligations are temporary measures available in the event that the recommendations or rulings are not implemented within a reasonable period of time. However, neither compensation nor the suspension of concessions or other obligations is preferred to full implementation of a recommendation to bring a measure into conformity with the covered agreements. Compensation is voluntary and, if granted, shall be consistent with the covered agreements.’

 

Accordingly, the authorization to suspend concessions or other obligations is a temporary measure pending full implementation by the Member concerned. We agree with the United States that this temporary nature indicates that it is the purpose of countermeasures to induce compliance. But this purpose does not mean that the DSB should grant authorization to suspend concessions beyond what is equivalent to the level of nullification or impairment. In our view, there is nothing in Article 22.1 of the DSU, let alone in paragraphs 4 and 7 of Article 22, that could be read as a justification for countermeasures of a punitive nature.”

 

This objective of suspension of concessions or other obligations under Article 22.4 of the DSU has been recently confirmed by the Appellate Body in US — Continued Suspension.(564) Arbitrators have also found that the objective of countermeasures under Article 4.10 of the SCM Agreement is to “induce compliance”.(565)

 

We see no reason to assume that countermeasures under Article 7.9 of the SCM Agreement would serve a different purpose. The authorization of countermeasures in relation to actionable subsidies arises in circumstances comparable to those relating to countermeasures under Article 4.10 of the SCM Agreement or Article 22.4 of the DSU, i.e. in a situation where the responding Member has failed to comply with the recommendations and rulings of the DSB in the prescribed time period. As under Article 22.4 of the DSU and Article 4.10 of the SCM Agreement, countermeasures under Article 7.9 of the SCM Agreement constitute temporary measures taken in response to a continued breach of the obligations of the Member concerned, and pending full compliance with the recommendations and rulings of the DSB. We consider, therefore, that countermeasures under Article 7.9 of the SCM Agreement also serve to “induce compliance”.”(566)

(c) Task of the Arbitrators

336.     In US — Upland Cotton (Article 22.6 — US II), the Arbitrators referred to Article 7.10 and described their mandate as follows:

“In these proceedings, we are therefore called upon to determine whether the countermeasures proposed by Brazil in relation to the marketing loans and counter cyclical payments are “commensurate with the degree and nature of the adverse effects determined to exist” within the meaning of Article 7.9 of the SCM Agreement… .

We agree that, in the event that we find that Brazil’s proposed countermeasures are not commensurate with the degree and nature of the adverse effects determined to exist, we would be required also to determine what would constitute such countermeasures. This would enable the complaining party to seek an authorization consistent with our decision, as foreseen in Article 22.7 of the DSU. In order to fulfil this part of our mandate, we may be required to adopt an approach or methodology that differs from those proposed by the parties.”(567)

(d) Burden of proof

337.     In US — Upland Cotton (Article 22.6 — US II), the Arbitrators considered that the approach taken to the burden of proof under Article 4.11 was equally applicable in the context of Article 7.10:

“In the context of proceedings under Article 4.11 of the SCM Agreement and Article 22.6 of the DSU, arbitrators have consistently determined that the party objecting to the proposed countermeasure bears the burden to establish a prima facie case or presumption that the countermeasures are not “appropriate” within the meaning of Article 4.11 and that it is then up to the party proposing the countermeasures to rebut such presumption.(568)

 

The same approach applies, in our view, to proceedings under Article 22.6 of the DSU and Article 7.10 of the SCM Agreement. We therefore find that the United States bears the initial burden of establishing the countermeasures are not “commensurate with the degree and nature of the adverse effects determined to exist” and that Brazil bears the burden of rebutting such conclusions.

 

The Arbitrator is also of the view that this allocation of burden of proof does not alleviate the burden on each party to establish the facts that it alleges during the proceedings. As observed by the arbitrator on US — FSC (Article 22.6 — EC), “it is generally for each party asserting a fact, whether complainant or respondent, to provide proof thereof”.(569) Accordingly, it is also for Brazil to provide evidence in support of the facts that it advances. The Arbitrator will consider all the evidence and arguments provided by both parties (United States and Brazil) to determine whether the proposed countermeasures are “commensurate with the degree and nature of the adverse effects determined to exist”.”(570)

(e) Article 7.9 provisions as special or additional rules

338.     In US — Upland Cotton (Article 22.6 — US II), the Arbitrators were mindful that Article 7.9 establishes a special or additional rule and procedure under Appendix 2 of the DSU:

“The terms of Article 7.9 of the SCM Agreement, as a “special or additional rule and procedure”, should be interpreted on their own terms. It is clear that they may embody different rules, which would prevail in case of conflict. Nonetheless, Article 22.6 of the DSU remains relevant, as the general legal basis under which the proceedings are conducted. Indeed, Article 7.9 of the SCM Agreement refers expressly to Article 22.6 of the DSU as the legal basis for arbitral proceedings relating to countermeasures in relation to actionable subsidies.”(571)

(f) Relationship with other Articles

(i) Article 4.10

339.     The Arbitrators in US — FSC (Article 22.6 — US) referred to the wording of Articles 7.9 and 7.10 as context for the interpretation of Article 4.10 and considered that “the explicit precision of these indications [in Articles 7.9 and 7.10] clearly highlights the lack of any analogous explicit textual indication in Article 4.10 and contrasts with the broader and more general test of “appropriateness” found in Articles 4.10 and 4.11”. For the Arbitrators, such a difference in the text “must be given a meaning.”(572)

340.     The Arbitrators in US — Upland Cotton (Article 22.6 — US I) contrasted the terms of Article 4.10 with the terms used in Article 7.9:

“[W]ithin the context of the SCM Agreement, the terms of Article 4.10 contrast with those of Article 7.9, which foresees, in relation to actionable subsidies, countermeasures “commensurate with the degree and nature of the adverse effects determined to exist”. Here too, the terms of Article 7.9, through this reference to the “degree and nature of the adverse effects determined to exist”, point to a single specific benchmark as reference, and require the countermeasures to be “commensurate” with this benchmark, which is carefully defined in relation to the specific adverse effects that form the basis of the underlying findings. These elements distinguish the terms of Article 7.9 from the terms of Article 4.10. This difference can be understood in the broader context of the SCM Agreement, where actionable subsidies may only be challenged to the extent that they result in certain enumerated adverse effects for other WTO Members. By contrast, prohibited subsidies are prohibited independently of any demonstration of adverse effects. In such cases, no specific “adverse effects” will have been “determined to exist” prior to the request for authorization to apply countermeasures, and therefore there are none that could be referred to.(573)

 

Part IV: Non-Actionable Subsidies

 

IX. Article 8     back to top

A. Text of Article 8

Article 8: Identification of Non-Actionable Subsidies

8.1     The following subsidies shall be considered as non-actionable:(23)

 

(footnote original) 23 It is recognized that government assistance for various purposes is widely provided by Members and that the mere fact that such assistance may not qualify for non-actionable treatment under the provisions of this Article does not in itself restrict the ability of Members to provide such assistance.

 

(a)     subsidies which are not specific within the meaning of Article 2;

 

(b)     subsidies which are specific within the meaning of Article 2 but which meet all of the conditions provided for in paragraphs 2(a), 2(b) or 2(c) below.

 

8.2     Notwithstanding the provisions of Parts III and V, the following subsidies shall be non-actionable:

 

(a)     assistance for research activities conducted by firms or by higher education or research establishments on a contract basis with firms if:(24), (25), (26)

 

(footnote original) 24 Since it is anticipated that civil aircraft will be subject to specific multilateral rules, the provisions of this subparagraph do not apply to that product.

 

(footnote original) 25 Not later than 18 months after the date of entry into force of the WTO Agreement, the Committee on Subsidies and Countervailing Measures provided for in Article 24 (referred to in this Agreement as “the Committee”) shall review the operation of the provisions of subparagraph 2(a) with a view to making all necessary modifications to improve the operation of these provisions. In its consideration of possible modifications, the Committee shall carefully review the definitions of the categories set forth in this subparagraph in the light of the experience of Members in the operation of research programmes and the work in other relevant international institutions.

 

(footnote original) 26 The provisions of this Agreement do not apply to fundamental research activities independently conducted by higher education or research establishments. The term “fundamental research” means an enlargement of general scientific and technical knowledge not linked to industrial or commercial objectives.

 

the assistance covers(27) not more than 75 per cent of the costs of industrial research(28) or 50 per cent of the costs of pre-competitive development activity(29), (30);

 

(footnote original) 27 The allowable levels of non-actionable assistance referred to in this subparagraph shall be established by reference to the total eligible costs incurred over the duration of an individual project.

 

(footnote original) 28 The term “industrial research” means planned search or critical investigation aimed at discovery of new knowledge, with the objective that such knowledge may be useful in developing new products, processes or services, or in bringing about a significant improvement to existing products, processes or services.

 

(footnote original) 29 The term “pre-competitive development activity” means the translation of industrial research findings into a plan, blueprint or design for new, modified or improved products, processes or services whether intended for sale or use, including the creation of a first prototype which would not be capable of commercial use. It may further include the conceptual formulation and design of products, processes or services alternatives and initial demonstration or pilot projects, provided that these same projects cannot be converted or used for industrial application or commercial exploitation. It does not include routine or periodic alterations to existing products, production lines, manufacturing processes, services, and other on-going operations even though those alterations may represent improvements.

 

(footnote original) 30 In the case of programmes which span industrial research and pre-competitive development activity, the allowable level of non-actionable assistance shall not exceed the simple average of the allowable levels of non-actionable assistance applicable to the above two categories, calculated on the basis of all eligible costs as set forth in items (i) to (v) of this subparagraph.

 

and provided that such assistance is limited exclusively to:

 

(i)     costs of personnel (researchers, technicians and other supporting staff employed exclusively in the research activity);

 

(ii)     costs of instruments, equipment, land and buildings used exclusively and permanently (except when disposed of on a commercial basis) for the research activity;

 

(iii)     costs of consultancy and equivalent services used exclusively for the research activity, including bought-in research, technical knowledge, patents, etc.;

 

(iv)     additional overhead costs incurred directly as a result of the research activity;

 

(v)     other running costs (such as those of materials, supplies and the like), incurred directly as a result of the research activity.

 

(b)     assistance to disadvantaged regions within the territory of a Member given pursuant to a general framework of regional development(31) and non-specific (within the meaning of Article 2) within eligible regions provided that:

 

(footnote original) 31 A “general framework of regional development” means that regional subsidy programmes are part of an internally consistent and generally applicable regional development policy and that regional development subsidies are not granted in isolated geographical points having no, or virtually no, influence on the development of a region.

 

(i)     each disadvantaged region must be a clearly designated contiguous geographical area with a definable economic and administrative identity;

 

(ii)     the region is considered as disadvantaged on the basis of neutral and objective criteria(32), indicating that the region’s difficulties arise out of more than temporary circumstances; such criteria must be clearly spelled out in law, regulation, or other official document, so as to be capable of verification;

 

(footnote original) 32 “Neutral and objective criteria” means criteria which do not favour certain regions beyond what is appropriate for the elimination or reduction of regional disparities within the framework of the regional development policy. In this regard, regional subsidy programmes shall include ceilings on the amount of assistance which can be granted to each subsidized project. Such ceilings must be differentiated according to the different levels of development of assisted regions and must be expressed in terms of investment costs or cost of job creation. Within such ceilings, the distribution of assistance shall be sufficiently broad and even to avoid the predominant use of a subsidy by, or the granting of disproportionately large amounts of subsidy to, certain enterprises as provided for in Article 2.

 

(iii)     the criteria shall include a measurement of economic development which shall be based on at least one of the following factors:

 

  • one of either income per capita or household income per capita, or GDP per capita, which must not be above 85 per cent of the average for the territory concerned;
     
  • unemployment rate, which must be at least 110 per cent of the average for the territory concerned;

as measured over a three-year period; such measurement, however, may be a composite one and may include other factors.

 

(c)     assistance to promote adaptation of existing facilities(33) to new environmental requirements imposed by law and/or regulations which result in greater constraints and financial burden on firms, provided that the assistance:

 

(footnote original) 33 The term “existing facilities” means facilities which have been in operation for at least two years at the time when new environmental requirements are imposed.

 

(i)     is a one-time non-recurring measure; and

 

(ii)     is limited to 20 per cent of the cost of adaptation; and

 

(iii)     does not cover the cost of replacing and operating the assisted investment, which must be fully borne by firms; and

 

(iv)     is directly linked to and proportionate to a firm’s planned reduction of nuisances and pollution, and does not cover any manufacturing cost savings which may be achieved; and

 

(v)     is available to all firms which can adopt the new equipment and/or production processes.

 

8.3     A subsidy programme for which the provisions of paragraph 2 are invoked shall be notified in advance of its implementation to the Committee in accordance with the provisions of Part VII. Any such notification shall be sufficiently precise to enable other Members to evaluate the consistency of the programme with the conditions and criteria provided for in the relevant provisions of paragraph 2. Members shall also provide the Committee with yearly updates of such notifications, in particular by supplying information on global expenditure for each Other Members shall have the right to request information about individual cases of subsidization under a notified programme.(34)

 

(footnote original) 34 It is recognized that nothing in this notification provision requires the provision of confidential information, including confidential business information.

 

8.4     Upon request of a Member, the Secretariat shall review a notification made pursuant to paragraph 3 and, where necessary, may require additional information from the subsidizing Member concerning the notified programme under review. The Secretariat shall report its findings to the Committee. The Committee shall, upon request, promptly review the findings of the Secretariat (or, if a review by the Secretariat has not been requested, the notification itself), with a view to determining whether the conditions and criteria laid down in paragraph 2 have not been met. The procedure provided for in this paragraph shall be completed at the latest at the first regular meeting of the Committee following the notification of a subsidy programme, provided that at least two months have elapsed between such notification and the regular meeting of the Committee. The review procedure described in this paragraph shall also apply, upon request, to substantial modifications of a programme notified in the yearly updates referred to in paragraph 3.

 

8.5     Upon the request of a Member, the determination by the Committee referred to in paragraph 4, or a failure by the Committee to make such a determination, as well as the violation, in individual cases, of the conditions set out in a notified programme, shall be submitted to binding arbitration. The arbitration body shall present its conclusions to the Members within 120 days from the date when the matter was referred to the arbitration body. Except as otherwise provided in this paragraph, the DSU shall apply to arbitrations conducted under this paragraph.


B. Interpretation and Application of Article 8

1. General

(a) Expiry of Article 8

341.     This provision has lapsed pursuant to Article 31. In this regard, see paragraph 582 below.

(b) The Doha Round

342.     Paragraph 10.2 of the Doha Ministerial Decision on Implementation-Related Issues and Concerns(574) provides that the Doha Ministerial Conference takes note of the proposal to treat certain measures by developing countries with a view to achieving legitimate development goals as non-actionable subsidies:

“Takes note of the proposal to treat measures implemented by developing countries with a view to achieving legitimate development goals, such as regional growth, technology research and development funding, production diversification and development and implementation of environmentally sound methods of production as non-actionable subsidies, and agrees that this issue be addressed in accordance with paragraph 13 below.(575) During the course of the negotiations, Members are urged to exercise due restraint with respect to challenging such measures.”

2. Article 8.2

(a) Article 8.2(a)

343.     In US — Large Civil Aircraft (2nd complaint), the Panel rejected an argument that Article 8.2(a) gives rise to a necessary implication that governmental purchases of R&D services are covered by the SCM Agreement:

“We do not find this reasoning persuasive, and believe that the European Communities’ argument is to some extent based on a misreading of the text of Article 8.2(a), which concerns “assistance” for research activities conducted by firms, including “assistance” for higher education or research establishments that conduct research for firms on a contract basis. In addition, Article 8.2(a) does not state that “government support of R&D on a contract basis” is a subsidy. Rather, Article 8.2(a) refers to government assistance for research activities conducted by firms “or by higher education or research establishments on a contract basis with firms”. If the terms of Article 8.2(a) gave rise to the necessary implication that certain types of transactions necessarily constitute subsidies within the meaning of the SCM Agreement, we would of course agree that those types of transactions must logically involve a financial contribution within the meaning of Article 1.1(a)(1). The problem with the European Communities’ argument is that there does not appear to be anything in Article 8.2(a) to suggest that governmental purchases of R&D services from firms fall within the scope of the SCM Agreement. By its own terms, Article 8.2(a) concerns “assistance” for research conducted by firms. If the only manner in which a government could provide “assistance” for research conducted by firms was by purchasing R&D services from firms, then the European Communities argument would rest on solid ground. However, this strikes us as a false premise.”(576)

(b) Relationship with other Articles

(i) Article 8.3

344.     Referring to the Format for Notifications under Article 8.3, issued by the SCM Committee,(577) the SCM Committee stated that “[w]ith regard to the questions in this standard format on arrangements which may exist for monitoring, auditing and evaluation of assistance under a notified programme, it should be stressed that this standard format does not add to or detract from the relevant legal requirements in Article 8.2 of the SCM Agreement”.(578)

3. Article 8.3

(a) “notified”

345.     At its meeting of 22 February 1995, the SCM Committee adopted a Format for Notifications under Article 8.3 of the Agreement on Subsidies and Countervailing Measures,(579) to “assist WTO Members in making notifications under the first sentence of Article 8.3”.(580)

(b) “updates of … notifications”

346.     At its meeting of 23 October 1997, the SCM Committee adopted a Format for Updates of Notifications under Article 8.3 of the Agreement on Subsidies and Countervailing Measures,(581) which sets out the information which should be provided for each programme notified under Article 8.3.(582)

4. Article 8.5

(a) Procedures for arbitration

347.     At its meeting of 2 June 1998, the SCM Committee adopted procedures for arbitration under Article 8.5 “with the aim of facilitating the operation of arbitration proceedings and enhancing transparency and predictability for all Members with respect to the Application of Article 8 of the Agreement”.(583)

5. Relationship with other Articles

348.     With respect to the relationship with Article 31, see paragraph 582 below.

 

X. Article 9     back to top

A. Text of Article 9

Article 9: Consultations and Authorized Remedies

9.1     If, in the course of implementation of a programme referred to in paragraph 2 of Article 8, notwithstanding the fact that the programme is consistent with the criteria laid down in that paragraph, a Member has reasons to believe that this programme has resulted in serious adverse effects to the domestic industry of that Member, such as to cause damage which would be difficult to repair, such Member may request consultations with the Member granting or maintaining the subsidy.

 

9.2     Upon request for consultations under paragraph 1, the Member granting or maintaining the subsidy programme in question shall enter into such consultations as quickly as possible. The purpose of the consultations shall be to clarify the facts of the situation and to arrive at a mutually acceptable solution.

 

9.3     If no mutually acceptable solution has been reached in consultations under paragraph 2 within 60 days of the request for such consultations, the requesting Member may refer the matter to the Committee.

 

9.4     Where a matter is referred to the Committee, the Committee shall immediately review the facts involved and the evidence of the effects referred to in paragraph 1. If the Committee determines that such effects exist, it may recommend to the subsidizing Member to modify this programme in such a way as to remove these effects. The Committee shall present its conclusions within 120 days from the date when the matter is referred to it under paragraph 3. In the event the recommendation is not followed within six months, the Committee shall authorize the requesting Member to take appropriate countermeasures commensurate with the nature and degree of the effects determined to exist.


B. Interpretation and Application of Article 9

1. Expiry of Article 9

349.     This provision has lapsed pursuant to Article 31. See paragraph 582 below.

2. Relationship with other Articles

350.     With respect to the relationship with Article 31, see paragraph 582 below.

 

Part V: Countervailing Measures

 

XI. Article 10     back to top

A. Text of Article 10

Article 10: Application of Article VI of GATT 1994(35)

(footnote original) 35 The provisions of Part II or III may be invoked in parallel with the provisions of Part V; however, with regard to the effects of a particular subsidy in the domestic market of the importing Member, only one form of relief (either a countervailing duty, if the requirements of Part V are met, or a countermeasure under Articles 4 or 7) shall be available. The provisions of Parts III and V shall not be invoked regarding measures considered non-actionable in accordance with the provisions of Part IV. However, measures referred to in paragraph 1(a) of Article 8 may be investigated in order to determine whether or not they are specific within the meaning of Article 2. In addition, in the case of a subsidy referred to in paragraph 2 of Article 8 conferred pursuant to a programme which has not been notified in accordance with paragraph 3 of Article 8, the provisions of Part III or V may be invoked, but such subsidy shall be treated as non-actionable if it is found to conform to the standards set forth in paragraph 2 of Article 8.

 

Members shall take all necessary steps to ensure that the imposition of a countervailing duty(36) on any product of the territory of any Member imported into the territory of another Member is in accordance with the provisions of Article VI of GATT 1994 and the terms of this Agreement. Countervailing duties may only be imposed pursuant to investigations initiated(37) and conducted in accordance with the provisions of this Agreement and the Agreement on Agriculture.

 

(footnote original) 36 The term “countervailing duty” shall be understood to mean a special duty levied for the purpose of offsetting any subsidy bestowed directly or indirectly upon the manufacture, production or export of any merchandise, as provided for in paragraph 3 of Article VI of GATT 1994.

 

(footnote original) 37 The term “initiated” as used hereinafter means procedural action by which a Member formally commences an investigation as provided in Article 11.


B. Interpretation and Application of Article 10

1. The Doha review mandate

351.     Paragraph 10.3 of the Doha Ministerial Decision on Implementation-Related Issues and Concerns(584) mandates the SCM Committee to continue the review of the countervailing duty provisions of the SCM Agreement, and requests that the Committee report to the General Council by 31 July 2002.

352.     As regards the above requirement to report to the General Council, the Chairman of the SCM Committee submitted a report(585) on 30 July 2002. The General Council took note of the report at its meeting on 8 and 31 July 2002.(586)

2. Footnote 36

(a) “offsetting”

353.     Discussing the premise that “no countervailing duty may be imposed absent (countervailable) subsidization,”(587) the Panel in US — Lead and Bismuth II considered that this premise “underlies the very purpose of the countervailing measures envisaged by Part V of the SCM Agreement.”(588) The Panel continued with the statement that “footnote 36 to Article 10 does not envisage the imposition of countervailing duties when no (countervailable) subsidy is found to exist, for in such cases there would be no (countervailable) subsidy to ‘offset’.”(589)

354.     In US — Countervailing Measures on Certain EC Products, the Panel noted that Article VI:3 of the GATT 1994 and Article 10, footnote 36 of the SCM Agreement refer to countervailing duties as “special duties” levied for the purpose of “offsetting” a subsidy. Furthermore, the Panel found that countervailing duties are not designed to counteract all market distortions or resource misallocations which might have been caused by subsidization.(590)

(b) “any subsidy bestowed directly or indirectly upon the manufacture”: pass-through of benefit from subsidized inputs

355.     In US — Softwood Lumber IV, in examining the “pass-through” issue, the Appellate Body quoted inter alia Article 10, footnote 36 of the SCM Agreement as one of the relevant legal provisions. The Appellate Body stated that the phrase “subsid[ies] bestowed … indirectly,” as used in Article VI:3 of the GATT 1994, implies “that financial contributions by the government to the production of inputs used in manufacturing products subject to an investigation are not, in principle, excluded from the amount of subsidies that may be offset through the imposition of countervailing duties on the processed product.”(591) Moreover, the Appellate Body stated:

“In our view, it would not be possible to determine whether countervailing duties levied on the processed product are in excess of the amount of the total subsidy accruing to that product, without establishing whether, and in what amount, subsidies bestowed on the producer of the input flowed through, downstream, to the producer of the product processed from that input. Because Article VI:3 permits off setting through countervailing duties no more than the subsidy determined to have been granted … directly or indirectly, on the manufacture [or] production … of such products, it follows that Members must not impose duties to offset an amount of the input subsidy that has not passed through to the countervailed processed products. Rather, ‘[i]t is only the amount by which an indirect subsidy granted to producers of inputs flows through to the processed product, together with the amount of subsidy bestowed directly on producers of the processed product, that may be offset through the imposition of countervailing duties.’”(592)

3. Footnote 37: “initiated”

356.     The Panel in Mexico — Olive Oil interpreted the term “initiated” in the context of a claim brought under Article 13.1 of the SCM Agreement. The Panel found that the meaning of the term would vary based on the procedural actions defined in each Member’s individual countervailing duty regime:

“We begin by examining the definition of “initiated” in footnote 37 of the SCM Agreement. It is important to note that the definition describes a “procedural action by which a Member formally commences an investigation”, without specifying any particular action, or any particular procedure, that a Member must undertake in this regard. The European Communities admits that “the particular steps to be taken [in regard to initiation] are largely left to Members”, and that while “[i]t can be inferred from Footnote 37 that the process will involve one element of formality … precisely what this should consist of is not specified.”

 

The heart of this dispute is not over what constitutes a “procedural action” as many steps within an investigation may qualify as such, but rather which procedural action “formally commences” an investigation. The Shorter Oxford English Dictionary defines “formally” as “In prescribed or customary form; with the formalities required to make an action valid or definite.” The Shorter Oxford English Dictionary also defines “commence” as “make a start or beginning; come into operation.” As footnote 37 states, we are concerned with “a Member’s” initiation of an investigation. Because the SCM Agreement does not contain any specific standards for determining the validity of an action meant to start a countervailing duty investigation, the date of “formal commencement” must be in reference to the internal regime of the importing Member.

 

Other articles of the SCM Agreement that refer to initiation provide context for interpreting the term “initiated” in footnote 37. For example, Article 11 of the SCM Agreement contains a number of substantive requirements that must be satisfied before an importing Member may initiate a countervailing duty investigation. Article 11 demonstrates that when the drafters intended to prescribe that Members satisfy particular standards, they were perfectly able to do so. Additionally, Article 22.2 requires investigating authorities to give public notice of the initiation. Article 22.2 (ii) requires that the investigating authority include in the published notice the “date of initiation”. In our view, this confirms a reading of footnote 37 that leaves it up to the investigating authority to determine on what date it “formally commenced” an investigation and to then make the public aware of that date through the notice.

 

Finally, in terms of the object and purpose of the SCM Agreement, we note that the deadline for completing an investigation in Article 11.11; the requirement to release the application to interested exporters in Article 12.1.3; and the timeframes for imposing provisional measures in Article 17.3 all flow from the date of initiation. We view a reading whereby the date of initiation is based on the internal law of the importing Member as ensuring predictability for the interested parties in the investigation under the domestic system of each Member. If WTO dispute settlement proceedings taking place considerably after the termination of an investigation could revisit these procedural steps in the absence of any specific requirements in the SCM Agreement, this predictability would be substantially reduced.

 

Based on the foregoing analysis, we find that what constitutes “initiation” within the meaning of the SCM Agreement will vary based on the procedural actions defined in each Member’s individual regime. Therefore, to determine the date on which Economía initiated the investigation and whether Mexico sent the invitation to consultations prior to initiation, as required by Article 13.1 of the SCM Agreement, we must examine what constitutes the procedural act by which an investigation is formally commenced in the Mexican system.”(593)

4. Relationship with Article VI of the GATT 1994

(a) Combined application of Article VI of the GATT 1994 and the SCM Agreement

357.     In its analysis of the relationship between Article VI of the GATT 1994 and the SCM Agreement, the Appellate Body in Brazil — Desiccated Coconut relied on Article 10 and stated that “[f]rom reading Article 10, it is clear that countervailing duties may only be imposed in accordance with Article VI of the GATT 1994 and the SCM Agreement.”(594) In this determination, the Appellate Body relied also on Articles 32.1 and 32.3 of the SCM Agreement; see paragraph 583 below for Article 32.1 and paragraphs 591592 below for Article 32.3 below.

(b) Pass-through: subsidized inputs

358.     In US — Softwood Lumber IV, the Appellate Body concluded that “in cases where logs are sold by a harvester/ sawmill in arm’s-length transactions to unrelated sawmills, it may not be assumed that benefits attaching to the logs (non-subject products) automatically pass through to the lumber (the subject product) produced by the harvester/sawmill.” Therefore, a pass-through analysis is required in such situations.(595) The Appellate Body’s analysis was based on Article VI:3 of the GATT 1994 and footnote 36 to Article 10 of the SCM Agreement. It was on this basis that the Appellate Body upheld the Panel’s finding that the Department of Commerce’s failure to conduct a pass-through analysis in respect of arm’s length sales of logs by tenured harvesters/ sawmills to unrelated sawmills is inconsistent with Articles 10 and 32.1 of the SCM Agreement and Article VI of the GATT 1994.(596)

359.     For a further discussion on the relationship between Article VI of the GATT 1994 and the SCM Agreement, see also paragraphs 690692 below.

5. Relationship with other Articles

360.     With respect to the relationship with Article 32.1 and 32.3, see paragraph 583 below.

 

Footnotes:

292. Panel Report, Canada — Aircraft, para. 9.70. back to text
293. Panel Report, Canada — Aircraft, para. 9.72. back to text
294. Panel Report, Canada — Aircraft, para. 9.72. back to text
295. Panel Report, Canada — Aircraft, para. 9.74. back to text
296. Panel Report, Canada — Aircraft, para. 9.75. back to text
297. Panel Report, Canada — Aircraft, para. 9.75. back to text
298. Panel Report, Canada — Aircraft, para. 9.77. back to text
299. Panel Report, Canada — Aircraft, para. 9.78. back to text
300. Panel Report, Canada — Aircraft, para. 9.29. back to text
301. Panel Report, Australia — Automotive Leather II, para. 9.17. back to text
302. Panel Report, Australia — Automotive Leather II, para. 9.18. back to text
303. Panel Report, Australia — Automotive Leather II, paras. 9.19–9.20. back to text
304. Panel Report, Australia — Automotive Leather II, para. 9.24. back to text
305. Panel Report, Australia — Automotive Leather II, para. 9.24. back to text
306. Panel Report, Australia — Automotive Leather II, para. 9.25. back to text
307. Panel Report, Australia — Automotive Leather II, para. 9.29. back to text
308. Appellate Body Report, US — FSC, paras. 155–166. back to text
309. (footnote original) Concise Oxford Dictionary, Ninth edition, 1995. back to text
310. (footnote original) The materials in questions were comprised of testimony before the US Congress, reports and other descriptive materials relating to the FSC prepared by US government officials, articles in tax, legal and business publications about the FSC, copies of the requests for consultations and establishment of a panel in this dispute, and excerpts from OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. All of these materials are explanatory of the FSC except for the OECD Guidelines, which were submitted in support of the European Communities’ view of the meaning of the concept of the “arm’s length” principle referred to in footnote 59 to the SCM Agreement. back to text
311. Panel Report, US — FSC, paras. 7.5–7.6. back to text
312. Appellate Body Report, US — FSC, para. 162. back to text
313. (footnote original) Appellate Body Report on US — Shrimp, fn, 99. In that report, we addressed the issue of good faith in the context of the chapeau of Article XX of the GATT 1994. back to text
314. Appellate Body Report, US — FSC, para. 166. back to text
315. (footnote original) Appellate Body Report on Guatemala — Cement, fn. 55. back to text
316. Appellate Body Report, US — FSC, paras. 159–161. back to text
317. (footnote original) Indeed, consultations may play a significant role in developing the facts in a dispute settlement proceeding. For example, the Appellate Body has observed that “[…] the claims that are made and the facts that are established during consultations do much to shape the substance and the scope of the subsequent panel proceedings.” See Appellate Body Report, India — Patents (US), para. 94. back to text
318. Panel Report, US — Upland Cotton, paras. 7.98–7.100. back to text
319. (footnote original) Panel Report, Australia — Automotive Leather II, para. 9.19. back to text
320. Appellate Body Report, US — Upland Cotton, para. 308. back to text
321. Panel Report, Brazil — Aircraft, para. 7.6. back to text
322. Appellate Body Report, Brazil — Aircraft, paras. 131–132. See also Panel Report, Brazil — Aircraft, paras. 7.9–7.11. back to text
323. Panel Report, Canada — Aircraft, para. 9.12. back to text
324. Appellate Body Report, Brazil — Aircraft (Article 21.5 — Canada), para. 45. back to text
325. Appellate Body Report, Brazil — Aircraft (Article 21.5 — Canada), para. 45. See also Panel Report, US — FSC (Article 21.5 — EC), para. 8.170. back to text
326. Appellate Body Report, Brazil — Aircraft (Article 21.5 — Canada), para. 45. back to text
327. Panel Report, Australia — Automotive Leather II (Article 21.5 — US), paras. 6.27–6.28 and 6.31. back to text
328. Panel Report, Australia — Automotive Leather II (Article 21.5 — US), para. 6.20. back to text
329. Panel Report, Australia — Automotive Leather II (Article 21.5 — US), para. 6.22. back to text
330. Panel Report, Brazil — Aircraft (Article 21.5 — Canada), para. 6.15. back to text
331. Panel Report, Brazil — Aircraft, para. 8.5. See also Panel Report, Canada — Aircraft, para. 10.4. back to text
332. Appellate Body Report, Brazil — Aircraft, para. 192. back to text
333. Panel Report, Australia — Automotive Leather II, para. 10.6. back to text
334. (footnote original) Appellate Body Report, Brazil — Aircraft (Article 21.5 — Canada), supra, footnote 86, para. 46. back to text
335. (footnote original) Appellate Body Report, Brazil — Aircraft (Article 21.5 — Canada), para. 45. back to text
336. Appellate Body Report, US — FSC (Article 21.5 — EC), paras. 229–230. back to text
337. Panel Report, Canada — Aircraft Credits and Guarantees, para. 8.3. back to text
338. Panel Report, Canada — Aircraft Credits and Guarantees, para. 8.4. back to text
339. Panel Report, Australia — Automotive Leather II (Article 21.5 — US), para. 6.28. back to text
340. Panel Report, Australia — Automotive Leather II (Article 21.5 — US), para. 6.31. back to text
341. Panel Report, US — FSC (Article 21.5 — EC), para. 8.171. back to text
342. (footnote original) See, e.g., the Naulilaa arbitral award (1928), UN Reports of International Arbitral Awards, Vol. II, p. 1028 and Case Concerning the Air Services Agreement of 27 March 1946 (France v. United States of America) (1978) International Law Reports, Vol. 54 (1979), p. 338. See also, inter alia, the Draft Articles on State Responsibility With Commentaries Thereto Adopted by the International Law Commission on First Reading (January 1997), hereinafter the “Draft Articles” and the draft articles provisionally adopted by the Drafting Committee on second reading, A/CN.4/L 600, 11 August 2000. Even though the latter modify a number of provisions of the Draft Articles, they do not affect the terms to which we refer in this report. back to text
343. (footnote original) We also note that, on the basis of the definition of “countermeasures” in the Draft Articles, the notion of “appropriate countermeasures” would be more general than the term “equivalent to the level of nullification or impairment”. It would basically include it. Limiting its meaning to that given to the term “equivalent to the level of nullification or impairment” would be contrary to the principle of effectiveness in interpretation of treaties. back to text
344. (footnote original) See Article 38 of the Statute of the ICJ. back to text
345. (footnote original) We note that Canada objects to us using the Draft Articles in this interpretation process. Canada argues that the Draft Articles are not “relevant rules of international law applicable to the relations between the parties” within the meaning of Article 31.3(c) of the Vienna Convention. As already mentioned, we use the Draft Articles as an indication of the agreed meaning of certain terms in general international law. back to text
346. (footnote original) Op. Cit., para. 6.3. In that case, the arbitrators had to determine the level of nullification or impairment. Since the Article 22.6 arbitrators in the EC — Bananas case considered that measures equivalent to the level of nullification or impairment can induce compliance, it could be argued that in the present case too, countermeasures equivalent to the level of nullification or impairment should be sufficient to induce compliance. However, the arbitrators in EC — Bananas were instructed by Article 22.7 to determine whether the proposed measures were equivalent to the level of nullification or impairment. back to text
347. Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), para. 3.44. back to text
348. (footnote original) The New Shorter Oxford English Dictionary (1993). back to text
349. (footnote original) Ibid. back to text
350. (footnote original) Webster’s New Encyclopaedic Dictionary (1994). back to text
351. (footnote original) The New Shorter Oxford English Dictionary (1993). back to text
352. Decision by the Arbitrators, US — FSC (Article 22.6 — US), paras. 5.4–5.7. back to text
353. (footnote original) Oxford English Dictionary, at www.oed.com. back to text
354. (footnote original) Merriam Webster Dictionary, at www.merriamwebster.com. back to text
355. (footnote original) http://untreaty.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf. back to text
356. (footnote original) We also note however that, by their own terms, the Articles of the ILC on State Responsibility do not purport to prevail over any specific provisions relating to the areas it covers that would be contained in specific legal instruments. We note in particular the following Commentary of the ILC:
     In common with other chapters of these articles, the provisions on countermeasures are residual and may be excluded or modified by a special rule to the contrary (see article 55). Thus, a treaty provision precluding the suspension of performance of an obligation under any circumstances will exclude countermeasures with respect to the performance of the obligation. Likewise, a regime for dispute resolution to which States must resort in the event of a dispute, especially if (as with the WTO dispute settlement system) it requires an authorization to take measures in the nature of countermeasures in response to a proven breach. back to text
357. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US I), paras. 4.34–4.43. back to text
358. (footnote original) The New Shorter Oxford English Dictionary (1993), p. 103; Webster’s New Encyclopedic Dictionary (1994), p. 48. back to text
359. (footnote original) See, e.g., the Naulilaa arbitral award (1928),UN Reports of International Arbitral Awards, Vol. II, p. 1028 and Case Concerning the Air Services Agreement of 27 March 1946 (France v. United States of America) (1978) International Law Reports, Vol. 54 (1979), p. 338. See also, inter alia, the Draft Articles on State Responsibility With Commentaries Thereto Adopted by the International Law Commission on First Reading (January 1997), hereinafter the “Draft Articles” and the draft articles provisionally adopted by the Drafting Committee on second reading, A/CN.4/L 600, 11 August 2000. Even though the latter modify a number of provisions of the Draft Articles, they do not affect the terms to which we refer in this report. back to text
360. (footnote original) We also note that, on the basis of the definition of “countermeasures” in the Draft Articles, the notion of “appropriate countermeasures” would be more general than the term “equivalent to the level of nullification or impairment”. It would basically include it. Limiting its meaning to that given to the term “equivalent to the level of nullification or impairment” would be contrary to the principle of effectiveness in interpretation of treaties. back to text
361. (footnote original) See Article 38 of the Statute of the ICJ. back to text
362. (footnote original) We note that Canada objects to us using the Draft Articles in this interpretation process. Canada argues that the Draft Articles are not “relevant rules of international law applicable to the relations between the parties” within the meaning of Article 31.3(c) of the Vienna Convention. As already mentioned, we use the Draft Articles as an indication of the agreed meaning of certain terms in general international law. back to text
363. (footnote original) Op. Cit., para. 6.3. In that case, the arbitrators had to determine the level of nullification or impairment. Since the Article 22.6 arbitrators in the EC — Bananas case considered that measures equivalent to the level of nullification or impairment can induce compliance, it could be argued that in the present case too, countermeasures equivalent to the level of nullification or impairment should be sufficient to induce compliance. However, the arbitrators in EC — Bananas were instructed by Article 22.7 to determine whether the proposed measures were equivalent to the level of nullification or impairment. back to text
364. Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), paras. 3.42–3.44. back to text
365. Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), paras. 3.45–3.46. back to text
366. Decision by the Arbitrators, US — FSC (Article 22.6 — US), para. 5.10. back to text
367. Decision by the Arbitrators, US — FSC (Article 22.6 — US), para. 5.11. back to text
368. Decision by the Arbitrators, US — FSC (Article 22.6 — US), para. 5.12. back to text
369. (footnote original) “appropriate, ppl. a. and n.”, Oxford English Dictionary, at www.oed.com, definition 5. back to text
370. (footnote original) www.merriam-webster.com. back to text
371. (footnote original) www.merriam-webster.com. back to text
372. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US I), paras. 4.44–4.47. back to text
373. Decision by the Arbitrators, US — FSC (Article 22.6 — US), para. 5.8. 5.16. back to text
374. Decision by the Arbitrators, US — FSC (Article 22.6 — US), para. back to text
375. Decision by the Arbitrators, US — FSC (Article 22.6 — US), para. 5.19. back to text
376. Decision by the Arbitrators, US — FSC (Article 22.6 — US), para. 5.23. back to text
377. (footnote original) We note in this regard the view of the commentator, Sir James Crawford, on the relevant Article of the ILC text on State Responsibility, reflected in a resolution adopted on 12 December 2001 by the UN General Assembly (A/RES/56/ 83), which expresses — but only in positive terms — a requirement of proportionality for countermeasures:
     “the positive formulation of the proportionality requirement is adopted in Article 51. A negative formulation might allow too much latitude.” (J. Crawford, The ILC’s Articles on State Responsibility, Introduction, Text and Commentaries 2002, CUP, para. 5 on Article 51)
     Article 51 of the ILC Articles on State responsibility (entitled “Proportionality”) reads as follows:
     “countermeasures must be commensurate with the injury suffered, taking into account the gravity of the internationally wrongful act and the rights in question”. (emphasis added)
     We also note in this respect that, while that provision expressly refers — contrary to footnote 9 of the SCM Agreement — to the injury suffered, it also requires the gravity of the wrongful act and the right in question to be taken into account. This has been understood to entail a qualitative element to the assessment, even where commensurateness with the injury suffered is at stake. We note the view of Sir James Crawford on this point in his Commentaries to the ILC Articles:
     “Considering the need to ensure that the adoption of countermeasures does not lead to inequitable results, proportionality must be assessed taking into account not only the purely “quantitative” element of the injury suffered, but also “qualitative” factors such as the importance of the interest protected by the rule infringed and the seriousness of the breach. Article 51 relates proportionality primarily to the injury suffered but “taking into account” two further criteria: the gravity of the internationally wrongful act, and the rights in question. The reference to “the rights in question” has a broad meaning, and includes not only the effect of a wrongful act on the injured State but also on the rights of the responsible State. Furthermore, the position of other States which may be affected may also be taken into consideration.” (Op. Cit., para. 6 of the commentaries on Article 51). back to text
378. Decision by the Arbitrators, US — FSC (Article 22.6 — US), para. 5.27. back to text
379. (footnote original) Decision by the Arbitrator, US — FSC (Article 22.6 — US), para. 5.19. back to text
380. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US I), paras. 4.85–4.87. back to text
381. Decision by the Aribrators, US — Upland Cotton (Article 22.6 — US I), footnote 118. back to text
382. (footnote original) Decision by the Arbitrators, EC — Bananas III (US) (Article 22.6 — EC), para. 6.3. back to text
383. (footnote original) See Appellate Body Report, US — Continued Suspension, para. 309. back to text
384. (footnote original) See Decision by the Arbitrator, US — FSC (Article 22.6 — US), para. 5.57; Decision by the Arbitrator, Canada — Aircraft Credits and Guarantees (Article 22.6 — Canada), paras. 3.11 and 3.47. back to text
385. (footnote original) http://untreaty.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf. back to text
386. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US I), paras. 4.109–4.113. back to text
387. (footnote original) In Brazil — Aircraft (Article 22.6 — Brazil), the full payments made under the programme were used a basis for the calculation. In US — FSC (Article 22.6 — US), the calculation was based on the annual expenditure by the US Government. Finally, in the Canada — Aircraft Credits and Guarantees (Article 22.6 — Canada) case, the amount of the subsidy was calculated on the basis of the benefit conferred by the loan, which was found to correspond to “the difference between the amount Air Wisconsin pays on the loan from EDC and the amount Air Wisconsin would pay on a comparable commercial loan which that company could actually obtain on the market” (Decision by the Arbitrator, Canada — Aircraft Credits and Guarantees (Article 22.6 — Canada), para. 3.60). back to text
388. (footnote original) In Brazil — Aircraft (Article 22.6 — Brazil), both parties suggested that the calculation could be based on the amount of the subsidy. The arbitrator considered that this was “appropriate”. The arbitrator however also noted that it was of the view that “a calculation based on the level of nullification or impairment would, as suggested by the calculation of Canada based on the harm caused to its industry, produce higher figures than one based exclusively on the amount of the subsidy” (Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), para. 3.54.)
     In US — FSC (Article 22.6 — US), the requesting Member sought an authorization to take countermeasures based on the amount expended by the subsidizing Member (the United States) in granting the subsidy. The arbitrator, having previously determined that the terms of Article 4.10 of the SCM Agreement did not constrain countermeasures to trade effects, first considered the proposed countermeasures in relation to the prohibited subsidy, and considered that the countermeasures proposed by the European Communities could be considered “appropriate” within the meaning of Article 4.10 of the SCM Agreement, “on the basis of their relation to the initial violating measure”. The arbitrator nonetheless then continued its analysis and considered the proposed countermeasures on the basis of their relation to the trade effects of the subsidy on the European Communities, recalling its earlier findings that it had not interpreted Article 4.10 “to preclude a Member from taking countermeasures that are tailored to counter the adverse effects it has suffered as a result of the illegal measure” and that “the expression ‘appropriate countermeasures’, in [its] view, would entitle the complaining Member to countermeasures which would at least counter the injurious effect of the persisting illegal measure on it.”
     In Canada — Aircraft Credits and Guarantees (Article 22.6 — Canada), the Arbitrator first considered the approach proposed by the requesting Member (Brazil), based on the adverse trade effects of the subsidy on Brazil on the basis of lost sales/ competitive harm. It was only after determining that the assumptions underlying the methodology proposed by the requesting Member were not valid and that this proposed methodology did not justify the level of countermeasures, that the arbitrator turned to a calculation of the “appropriate” countermeasures based on the amount of the subsidy. As we understand the ruling of the arbitrator in that case, it did not exclude, a priori, that a calculation based on the trade effects could be the basis for “appropriate countermeasures”. Rather, it is only because it was not persuaded that the actual calculation of trade effects proposed by the requesting Member accurately reflected these trade effects, that it discarded the approach based on trade effects as proposed by the requesting Member. back to text
389. (footnote original) See Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), para. 3.54: “given that export subsidies usually operate with a multiplying effect, (a given amount allows a company to make a number of sales, thus gaining a foothold in a given market with the possibility to expand and gain market shares), we are of the view that a calculation based on the level of nullification or impairment would, as suggested by the calculation of Canada based on the harm caused to its industry, produce higher figures than one based exclusively on the amount of the subsidy”. This passage is also cited by the arbitrator in US — FSC (Article 22.6 — US), at footnote 88 of its Decision. back to text
390. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US I), paras. 4.132–4.137. back to text
391. (footnote original) We note that Article 3.7 of the DSU refers to the “withdrawal of the measures concerned” as a first objective. However, we also note that, contrary to Article 3.7 of the DSU, Article 4.7 of the SCM Agreement does not provide for any other alternative than the withdrawal of the measure once it has been found to be a prohibited subsidy. back to text
392. Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), paras. 3.47–3.48. back to text
393. Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), para. 3.49. back to text
394. (footnote original) We are mindful of the fact that, from the point of view of a textual interpretation, “equivalent” and “appropriate” should not be given the same meaning. Interpreters are not permitted to assume such a thing. What we mean is that the term “appropriate”, read in the light of footnotes 9 and 10, may allow for more leeway than the word “equivalent” in terms of assessing the appropriate level of countermeasures. A countermeasure remains “appropriate” as long as it is not disproportionate, having also regard to the fact that the measure at issue is a prohibited subsidy. back to text
395. Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), para. 3.51. back to text
396. (footnote original) We are aware of the provisions of Article 31 of the SCM Agreement and that Members took no action to extend the application of the provisions of Articles 8 and 9 of the Agreement concerning non-actionable subsidies beyond the period of five years from the date of entry into force of the WTO Agreement. However, these provisions can nevertheless be helpful, in our view, in understanding the overall architecture of the Agreement with respect to the different types of subsidies it sought and seeks to address. back to text
397. (footnote original) See for example the reports of the Appellate Body in India — Quantitative Restrictions, WT/DS90/AB/R, DSR 1999:IV, 1763, para 94; EC — Hormones, WT/DS26/AB/R, and WT/DS48/AB/R, DSR 1998:I, 135, para. 181; India — Patents (US), WT/DS50/AB/R, DSR 1998:I, 9, para. 45. back to text
398. (footnote original) See for example the reports of the Appellate Body on US — Gasoline, WT/DS2/AB/R, DSR 1996:I, 3, at 21 and Korea — Dairy, WT/DS98/AB/R, DSR 2000:I, 3, para. 81. back to text
399. (footnote original) See paras. 4.24–4.26 above. back to text
400. Decision by the Arbitrators, US — FSC (Article 22.6 — US), paras 5.32–5.34 and 5.41. back to text
401. Decision by the Arbitrators, US — FSC (Article 22.6 — US), paras. 5.47–5.50. back to text
402. Decision by the Arbitrators, US — FSC (Article 22.6 — US), paras. 6.31 and 6.60. back to text
403. Decision by the Arbitrators, US — FSC (Article 22.6 — US), paras. 5.61–5.62. back to text
404. Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), para. 3.62. xxx indicates confidential information. back to text
405. (footnote original) Appellate Body Report on Brazil — Aircraft (Article 21.5 — Canada), para. 82(a). back to text
406. (footnote original) This clarification is made in relation to the use by the Arbitrators of the delivery data provided by Brazil rather than on information relating specifically to the issuance of the NTN-I bonds. Our choice is consistent with the factual finding of the Original Panel (Op. Cit., para. 7.71) and the Appellate Body report in the original proceedings (Op. Cit. para. 154). back to text
407. (footnote original) See Article 27 of the Vienna Convention:
     “A party may not invoke the provisions of its internal law as justification for the failure to perform a treaty. […]” back to text
408. Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), paras. 3.64–3.65. back to text
409. (footnote original) See Article 22.6 arbitrations in EC — Hormones (Article 22.6 — EC), para. 12. back to text
410. Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), para. 3.18. back to text
411. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US I), para. 4.25. back to text
412. (footnote original) Op. Cit., para. 65. back to text
413. Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), para. 3.57. back to text
414. (footnote original) On the notion of “difference”, see Report of the Appellate Body on Guatemala — Anti-Dumping Investigation Regarding Portland Cement from Mexico (Guatemala — Cement I), WT/DS60/AB/R, adopted 25 November 1998, DSR 1998:IX, paras. 65 and 66. back to text
415. Decision by the Arbitrators, US — FSC (Article 22.6 — US), para. 2.6. back to text
416. (footnote original) See also how this issue is addressed in the decisions by the arbitrators in EC — Hormones (Article 22.6 — EC), paras. 8 to 11. back to text
417. (footnote original) See WT/DS/46/16. back to text
418. (footnote original) This approach is similar to those followed in the arbitrators’ decisions in EC — Bananas (1999) and EC — Hormones (Article 22.6 — EC). back to text
419. Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), paras. 2.8–2.9. back to text
420. (footnote original) Decision by the Arbitrator, US — FSC (Article 22.6 — US), para. 2.11. back to text
421. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US I), paras. 4.22–4.23. back to text
422. (footnote original) See preceding paragraph, where we apply a presumption of good faith to statements and evidence originating in subjects of international law (on production and appraisal of evidence, see, inter alia, International Court of Justice (“ICJ”) judgement of 9 April 1949 Corfu Channel Case, ICJ Reports 1949, p. 32; ICJ judgement of 11 September 1992 Land, Island and Maritime Frontier Dispute (El Salvador v. Honduras, Nicaragua intervening), ICJ Reports 1992, p. 399, para. 63; ICJ judgement on merits Military and Paramilitary Activities in and Against Nicaragua (Nicaragua v. United States of America), ICJ Reports 1986, p. 40, para. 60. back to text
423. Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), paras. 2.10–2.11. back to text
424. Panel Report, US — FSC (Article 22.6 — US), paras. 5.32–5.34. back to text
425. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US I), para. 4.98. back to text
426. (footnote original) Appellate Body on Guatemala — Cement I, para. 65. back to text
427. (footnote original) Canada mentioned that it could have applied a counter-subsidy but refrained from doing so for a number of reasons. back to text
428. Decision by the Arbitrators, Brazil — Aircraft (Article 22.6 — Brazil), paras. 3.57–3.59. back to text
429. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US I), para. 4.97. back to text
430. Panel Report, US — Offset Act (Byrd Amendment), para. 7.106. back to text
431. Appellate Body Report, EC and certain member States — Large Civil Aircraft, para. 686. back to text
432. Appellate Body Report, EC and certain member States — Large Civil Aircraft, para. 713. back to text
433. Appellate Body Report, EC and certain member States — Large Civil Aircraft, paras. 769–777. back to text
434. Panel Report, EC and certain member States — Large Civil Aircraft, paras. 7.1693–7.1694. back to text
435. Panel Report, EC and certain member States — Large Civil Aircraft, paras. 7.2068, 7.2080. back to text
436. Panel Report, US — Offset Act (Byrd Amendment), paras. 7.118–119. back to text
437. Panel Report, US — Offset Act (Byrd Amendment), para. 7–122. back to text
438. Panel Report, US — Offset Act (Byrd Amendment), para. 7–123. back to text
439. Panel Report, US — Offset Act (Byrd Amendment), para. 7–124. back to text
440. Panel Report, US — Offset Act (Byrd Amendment), para. 7–127. back to text
441. Panel Report, US — Upland Cotton, paras. 7.1392–1395. back to text
442. Panel Report, US — Upland Cotton, paras. 7.1414–7.1415. See also Panel Report, Korea — Commercial Vessels, para. 7.525. back to text
443. Panel Report, US — Upland Cotton, paras. 7.1414–7.1415. back to text
444. Panel Report, Indonesia — Autos, para. 14.198. back to text
445. Panel Report, Indonesia — Autos, para. 14.201. back to text
446. Panel Report, Indonesia — Autos, paras. 14.254–14.255. back to text
447. Panel Report, Korea — Commercial Vessels, para. 7.572. back to text
448. Panel Report, Korea — Commercial Vessels, para. 7.576. back to text
449. Panel Report, Korea — Commercial Vessels, para. 7.578. back to text
450. Panel Report, Korea — Commercial Vessels, para. 7.582. back to text
451. Panel Report, Korea — Commercial Vessels, para. 7.583. back to text
452. Panel Report, Korea — Commercial Vessels, para. 7.593. back to text
453. Panel Report, US — Upland Cotton, para. 10.255. back to text
454. (footnote original) Appellate Body Report, US — Upland Cotton, para. 438; Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), para. 374. back to text
455. Appellate Body Report, US — Upland Cotton, para. 437. back to text
456. Appellate Body Report, EC and certain member States — Large Civil Aircraft, para. 1232. back to text
457. Panel Report, Korea — Commercial Vessels, para. 7.604. back to text
458. Panel Report, Korea — Commercial Vessels, para. 7.612. back to text
459. Panel Report, Korea — Commercial Vessels, para. 7.615. back to text
460. Panel Report, US — Upland Cotton, para. 10.49. back to text
461. Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), paras. 370–372. back to text
462. Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), paras. 374 and 375. The Appellate Body explained that a “but for” test may be “too undemanding” if the subsidy is “necessary, but not sufficient, to bring about” a market phenomenon, and “too rigorous if it required the subsidy to be the only cause.” Instead, the “but for” test should determine that there is a “genuine and substantial relationship of cause and effect”. (Ibid., para. 374) back to text
463. (footnote original) Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), para. 374. back to text
464. Appellate Body Report, EC and certain member States — Large Civil Aircraft, paras. 1233–1234. back to text
465. (footnote original) Of course, factors such as these presumably would be relevant in all types of serious prejudice cases. back to text
466. (footnote original) For example, in a case involving alleged significant suppression or depression of the price for a given kind of narrowly-defined product due to product-specific subsidization of a physically identical product produced by another Member, product definition issues presumably would figure little if at all in respect of the evidence necessary to demonstrate causation. The situation presumably would be quite different where the alleged subsidy was in respect of an input product, while significant price suppression or depression was alleged in respect of a downstream product of the complainant, or where a subsidy in respect of one product was alleged to cause significant price suppression or depression in respect of a completely unrelated product. Clearly in the latter two cases, product definition issues would create a significant, if not insurmountable, evidentiary hurdle in respect of causation. back to text
467. Panel Report, Korea — Commercial Vessels, para. 7.560. back to text
468. Panel Report, US — Upland Cotton (Article 21.5 — Brazil), para. 10.133. back to text
469. Appellate Body Report, US — Upland Cotton, para. 437. back to text
470. Panel Report, Korea — Commercial Vessels, para. 7.617. back to text
471. Panel Report, Korea — Commercial Vessels, para. 7.618. back to text
472. Panel Report, US — Upland Cotton (Article 21.5 — Brazil), para. 10.243. back to text
473. Panel Report, US — Upland Cotton (Article 21.5 — Brazil), para. 10.243. back to text
474. (footnote original) Panel Report, para. 10.243. back to text
475. Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), paras. 373 — 375 and 378. back to text
476. Appellate Body Report, US — Upland Cotton, para. 431. back to text
477. Appellate Body Report, US — Upland Cotton, paras. 432–434. back to text
478. Panel Report, US — Upland Cotton (Article 21.5 — Brazil), para. 10.46. back to text
479. Appellate Body Report, US — Upland Cotton, para. 433. back to text
480. Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), para. 354. back to text
481. Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), para. 361. back to text
482. (footnote original) See Appellate Body Report, US — Upland Cotton, para. 431; and Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), para. 354. back to text
483. (footnote original) Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), para. 354. back to text
484. (footnote original) The Appellate Body made that statement in a case involving a claim of price suppression under Article 6.3(c) of the SCM Agreement. The Appellate Body also suggested that the same difficulty could apply to claims of displacement or impedance under Articles 6.3(a) and (b) of the SCM Agreement:
     Similarly, it might be difficult to ascertain whether imports or exports are “displace[d]” or “impede[d]” under paragraphs (a) or (b) of Article 6.3 of the SCM Agreement without considering the effect of the challenged subsidy.
     (Appellate Body Report, US — Upland Cotton, footnote 521 to para. 433) back to text
485. Appellate Body Report, EC and certain member States — Large Civil Aircraft, paras. 1107–1109. back to text
486. Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), para. 351. back to text
487. Panel Report, Korea — Commercial Vessels, paras. 7.536–537. back to text
488. (footnote original) See Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), para. 357. back to text
489. Appellate Body Report, EC and certain member States — Large Civil Aircraft, para. 1110. back to text
490. Appellate Body Report, US — Upland Cotton, paras. 461, 465 and 467. back to text
491. Panel Report, Indonesia — Autos, para. 14.206. back to text
492. Appellate Body Report, US — Upland Cotton, paras. 477–478. back to text
493. Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), para. 392. back to text
494. Panel Report, US — Upland Cotton (Article 21.5 — Brazil), para. 10.18. back to text
495. Panel Report, US — Upland Cotton (Article 21.5 — Brazil), para. 10.18. The Panel added in footnote 199 of its Report that “the failure to take into account relevant and available data placed before us pertaining to the period since July 2006 would not be consistent with the requirement under Article 11 of the DSU that a panel “make an objective assessment of the matter before it, including an objective assessment of the facts of the case…”. back to text
496. Appellate Body Report, EC and certain member States — Large Civil Aircraft, paras. 1236–1238. back to text
497. (footnote original) For example, Article 15 of the SCM Agreement deals with the determination of injury in a countervailing duty investigation. Article 15.1 requires a determination of injury to be based “on positive evidence and involve an objective examination of both (a) the volume of the subsidized imports and the effect of the subsidized imports on prices in the domestic market for like products and (b) the consequent impact of these imports on the domestic producers of such products.” (emphasis added, footnotes omitted). Article 15.2 states, in part: “… With regard to the effect of the subsidized imports on prices, the investigating authorities shall consider whether there has been a significant price undercutting by the subsidized imports as compared with the price of a like product of the importing Member, or whether the effect of such imports is otherwise to depress prices to a significant degree or to prevent price increases, which otherwise would have occurred, to a significant degree.” (emphasis added) Similar additional references to the “effects of the imports”; “impact of the subsidized imports”, “the effect of the subsidized imports” also exist in Article 15. Article 15.5 stipulates:
     “It must be demonstrated that the subsidized imports are, through the effects of subsidies, causing injury within the meaning of this Agreement. The demonstration of a causal relationship between the subsidized imports and the injury to the domestic industry shall be based on an examination of all relevant evidence before the authorities.” (emphasis added, footnotes omitted).
     Other provisions in Part V of the SCM Agreement contain similar references to “through the effects of the subsidy, subsidized imports are causing injury …” e.g. Article 19.1. back to text
498. Panel Report, US — Upland Cotton, para. 7.1227. back to text
499. Panel Report, US — Upland Cotton, para. 7.1192. back to text
500. Panel Report, EC and certain member States — Large Civil Aircraft, para. 7.1956. back to text
501. Appellate Body Report, EC and certain member States — Large Civil Aircraft, paras. 1377–1379. back to text
502. Panel Report, Indonesia — Autos, para. 14.218. back to text
503. Panel Report, Indonesia — Autos, para. 14.208. back to text
504. Panel Report, Indonesia — Autos, paras. 14.210–14.211. back to text
505. (footnote original) The term “displace” is defined as to “remove; replace with something else[0]; take the place of, supplant”. (The New Shorter Oxford English Dictionary, 4th edn, L. Brown (ed.) (Clarendon Press, 1993), Vol. 1, p. 698) back to text
506. (footnote original) The term “impede” is defined as to “obstruct, hinder”. (The New Shorter Oxford English Dictionary, 4th edn, L. Brown (ed.) (Clarendon Press, 1993), Vol. 1, p. 1319) back to text
507. (footnote original) There also could be situations where displacement and impedance overlap. However, in the light of the principle of effective treaty interpretation, a distinction needs to be made as to the concepts covered by each term. (See Appellate Body Report, US — Gasoline, p. 23, DSR 1996:I, 3, at 21; and Appellate Body Report, Japan — Alcoholic Beverages II, p. 12, DSR 1997:I, 97, at 106) back to text
508. (footnote original) Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), para. 351. In the original proceedings, the panel described “price suppression” as the situation where prices “either are prevented or inhibited from rising (i.e. they do not increase when they otherwise would have) or they do actually increase, but the increase is less than it otherwise would have been”, and defined “price depression” as the situation where prices “are pressed down, or reduced.” (Panel Report, US — Upland Cotton, para. 7.1277). The Appellate Body recognized that situations where prices are prevented or inhibited from rising and the situation where “prices” are pressed down, or reduced, could overlap, but it also pointed out that Article 6.3(c) mentioned price suppression and price depression as distinct concepts.
     In US — Upland Cotton (Article 21.5 — Brazil), the Appellate Body noted that “price depression is a directly observable phenomenon, [whereas] price suppression is not so. Falling prices can be observed; by contrast, price suppression concerns whether prices are less than they would otherwise have been in consequence of various factors, in this case, the subsidies. The identification of price suppression, therefore, presupposes a comparison of an observable factual situation (prices) with a counterfactual situation (what prices would have been) where one has to determine whether, in the absence of the subsidies …, prices would have increased or would have increased more than they actually did. (Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), para. 351 (emphasis added)) back to text
509. (footnote original) We note that there may be situations in which the imports or exports of the like product of the complaining Member are declining, but are declining by more than they otherwise would. To the extent that there is an observable decline in the imports or exports, it could be considered a situation of displacement. At the same time, there is an aspect of the decline that is not directly observable — the decline is sharper than it would otherwise have been. In this respect, this situation could be considered one of impedance. These issues, however, are not before us given the manner in which the United States framed its case. back to text
510. Appellate Body Report, EC and certain member States — Large Civil Aircraft, paras. 1160–1162. back to text
511. Appellate Body Report, US — Upland Cotton, para. 490. back to text
512. Panel Report, US — Upland Cotton, para. 7.1326. back to text
513. Panel Report, US — Upland Cotton, paras. 7.1329–7.1330. back to text
514. Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), para. 416. back to text
515. Panel Report, Korea — Commercial Vessels, para. 7.571. back to text
516. Panel Report, EC and certain member States — Large Civil Aircraft, para. 7.1845. back to text
517. Panel Report, Indonesia — Autos, para. 14.254. back to text
518. Panel Report, US — Upland Cotton, para. 7.1279. back to text
519. Panel Report, US — Upland Cotton, para. 7.1280. back to text
520. Appellate Body Report, US — Upland Cotton, para. 424. back to text
521. Panel Report, US — Upland Cotton, para. 7.1277. back to text
522. Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), para. 351. back to text
523. Panel Report, Korea — Commercial Vessels, paras. 7.536–537. back to text
524. (footnote original) The New Shorter Oxford English Dictionary, 4th edn, L. Brown (ed.) (Clarendon Press, 1993), Vol. 1, p. 1632. back to text
525. (footnote original) The United States asserted before the Panel that a “‘lost’ sale is any sale that is captured by the subsidized product instead of the product of the complaining Member.” (Panel Report, para. 7.1797 (quoting United States’ first written submission to the Panel, para. 776)) back to text
526. (footnote original) Appellate Body Report, US — Upland Cotton, para. 407. back to text
527. (footnote original) Appellate Body Report, US — Upland Cotton, para. 408. back to text
528. (footnote original) The term “significant” also appears in the first clause of Article 6.3(c), which describes “price undercutting”. back to text
529. (footnote original) At the oral hearing, both participants agreed that the lost sales, within the meaning of Article 6.3(c) of the SCM Agreement, must be “significant”. back to text
530. (footnote original) We recognize that Article 6.3(c) of the SCM Agreement refers to “lost sales” in the plural. While the United States’ allegations of lost sales in this case related to individual sales campaigns, each of these campaigns involved the sale of a number of LCA. We are therefore in this case not faced with the question whether Article 6.3(c) can be invoked in relation to an allegedly lost sale of a single unit of a product. back to text
531. (footnote original) As the Appellate Body explained in US — Upland Cotton:
     The only express qualification on the type of “market” referred to in Article 6.3(c) is that it must be “the same” market. Aside from this qualification … Article 6.3(c) imposes no explicit geographical limitation on the scope of the relevant market. This contrasts with the other paragraphs of Article 6.3… We agree with the Panel that this difference may indicate that the drafters did not intend to confine, a priori, the market examined under Article 6.3(c) to any particular area. Thus, the ordinary meaning of the word “market” in Article 6.3(c), when read in the context of the other paragraphs of Article 6.3, neither requires nor excludes the possibility of a national market or a world market.
     (Appellate Body Report, US — Upland Cotton, para. 406 (footnotes omitted)) back to text
532. Appellate Body Report, EC and certain member States — Large Civil Aircraft, paras. 1214–1218. back to text
533. Appellate Body Report, EC and certain member States — Large Civil Aircraft, para. 1220. back to text
534. Appellate Body Report, US — Upland Cotton, para. 410. back to text
535. Appellate Body Report, US — Upland Cotton, para. 406. back to text
536. Appellate Body Report, US — Upland Cotton, paras. 408–409. back to text
537. Panel Report, Korea — Commercial Vessels, para. 7.562. back to text
538. Panel Report, Korea — Commercial Vessels, para. 7.564. back to text
539. (footnote original) EC — Sugar Exports (Brazil) para. V.(f), and EC — Sugar Exports (Australia), para. 4.9. back to text
540. Panel Report, Korea — Commercial Vessels, para. 7.565. back to text
541. Panel Report, Korea — Commercial Vessels, para. 7.566. back to text
542. (footnote original) A similar argument can be made with respect to impedance. back to text
543. (footnote original) The term “market” has been defined as “[g]enerally, any context in which the sale and purchase of goods and services takes place.” (Macmillan Dictionary of Modern Economics, 4th edn, D. W. Pearce, J. Cairns, R. Elliot, I. McAvinchey, R. Shaw (eds) (Palgrave McMillan, 1992), p. 266) Another definition of the term “market” is “[a] collection of homogenous transactions. A market is created whenever potential sellers of a product are brought into contact with potential buyers and a means of exchange.” (Dictionary of Economics, 2nd edn, G. Bannock, R. E. Baxter, E. Davis (eds) (The Economist Books, 1999), p. 262). See also European Court of Justice, Judgment, Case 27/76, United Brands Company and United Brands Continental BV v. Commission [1978] ECR 207; and US Supreme Court, Brown Shoe Co., Inc. v. United States, 370 US 294 (1962). The recently revised merger guidelines issued by the US Department of Justice and the Federal Trade Commission also provide a useful reference for understanding the word “market”. (See US Department of Justice and the Federal Trade Commission, Horizontal Merger Guidelines, 19 August 2010) The term “market” has also been defined for purposes of EU competition law. (See European Commission Notice on the definition of relevant market for the purposes of Community competition law, published in the Official Journal of the European Communities, C Series, No. 372 (9 December 1997)) One commentator submits that a market definition, both from a product and geographical point of view, “is not of interest by itself, but only as a preliminary step towards the objective of assessing the market power of the firms under analysis.” (M. Motta, Competition Policy: Theory and Practice, p. 101) Thus, since a market definition “is instrumental only to the assessment of market power, the relevant market should not be a set of products, which ‘resemble’ each other on the basis of some characteristics, but rather the set of products (and geographical areas) that exercise some competitive constraint on each other.” (Ibid., p. 102) back to text
544. (footnote original) Motta, supra, footnote 562, p. 103. A test that is commonly used to ascertain whether two products exercise competitive constraint on each other, and thus “should guide the analysis of market definition in both the product and the geographic dimension”, is the so-called “Small but Significant Non-Transitory Increase in Prices” test (“SSNIP”, also described as the “hypothetical monopolist” test). (Ibid., p. 102) Put simply, this test asks whether or not a hypothetical seller of a certain product would find it profitable to raise the price of that product by a certain amount. If the price increase is found to be profitable, this would generally indicate that the product does not face significant competitive constraint from other products, and that it should therefore be considered to be in a separate market. Conversely, if the increase in price is found not to be profitable, this indicates that the product should not be considered to be in a separate market, as there exist other products that exercise competitive constraint on the seller. The test should, in such cases, continue to consider a wider market until a profitable hypothetical price increase is found, thus indicating the scope of the relevant market. (Ibid., p. 105) back to text
545. (footnote original) Appellate Body Report, US — Upland Cotton, para. 408. back to text
546. (footnote original) Appellate Body Report, US — Upland Cotton, para. 408. back to text
547. Appellate Body Report, EC and certain member States — Large Civil Aircraft, paras. 1119–1123. back to text
548. Panel Report, US — Upland Cotton, para. 7.1464. back to text
549. Panel Report, US — Upland Cotton, para. 7.1455. back to text
550. Panel Report, Indonesia — Autos, para. 15.3. back to text
551. Panel Report, US — Upland Cotton (Article 21.5 — Brazil), paras. 9.77–9.79. back to text
552. Appellate Body Report, US — Upland Cotton (Article 21.5 — Brazil), paras. 236–238. back to text
553. (footnote original) Oxford English Dictionary, at www.oed.com. back to text
554. (footnote original) Merriam Webster Dictionary, at www.merriamwebster.com. back to text
555. (footnote original) http://untreaty.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf. back to text
556. (footnote original) See Decision by the Arbitrator, US — FSC (Article 22.6 — US), para. 5.58. back to text
557. (footnote original) We also note however that, by their own terms, the Articles of the ILC on State Responsibility do not purport to prevail over any specific provisions relating to the areas it covers that would be contained in specific legal instruments. We note in particular the following Commentary of the ILC:
     “In common with other chapters of these articles, the provisions on countermeasures are residual and may be excluded or modified by a special rule to the contrary (see article 55). Thus, a treaty provision precluding the suspension of performance of an obligation under any circumstances will exclude countermeasures with respect to the performance of the obligation. Likewise, a regime for dispute resolution to which States must resort in the event of a dispute, especially if (as with the WTO dispute settlement system) it requires an authorization to take measures in the nature of countermeasures in response to a proven breach.” back to text
558. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US II), paras. 4.24–4.32. back to text
559. (footnote original) Merriam Webster Dictionary online, at www.merriamwebster.com back to text
560. (footnote original) Shorter Oxford English Dictionary, p. 459. back to text
561. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US II), paras. 4.36–4.39. back to text
562. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US II), paras. 4.41–4.47. back to text
563. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US II), paras. 4.49–4.53. back to text
564. (footnote original) See Appellate Body Report, US — Continued Suspension, para. 309. back to text
565. (footnote original) See Decision by the Arbitrator, US — FSC (Article 22.6 — US), para. 5.57; Decision by the Arbitrator, Canada — Aircraft Credits and Guarantees (Article 22.6 — Canada), paras. 3.47–3.48; Decision by the Arbitrator, Brazil — Aircraft (Article 22.6 — Brazil), paras. 3.44, 3.54, 3.57 and 3.58. back to text
566. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US II), paras. 4.57–4.59. back to text
567. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US II), paras. 4.8, 4.16. back to text
568. (footnote original) See Decision of the Arbitrator, Brazil — Aircraft (Article 22.6 — Brazil), paras. 2.8–2.9. back to text
569. (footnote original) Decision of the Arbitrator, US — FSC (Article 22.6 — US), para. 2.11. back to text
570. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US II), paras. 4.12–4.14. back to text
571. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US II), para. 4.19. back to text
572. Panel Report, US — FSC (Article 22.6 — US), paras. 5.32–5.34. back to text
573. Decision by the Arbitrators, US — Upland Cotton (Article 22.6 — US I), para. 4.98. back to text
574. WT/MIN(01)/17. back to text
575. (footnote original) paragraph 13 of the Doha Ministerial Decision on Implementation reads as follows:
     “13. Outstanding Implementation Issues Agrees that outstanding implementation issues be addressed in accordance with paragraph 12 of the Ministerial Declaration (WT/MIN(01)/DEC/1).” back to text
576. Panel Report, US — Large Civil Aircraft (2nd complaint), para 958. back to text
577. G/SCM/14. back to text
578. G/SCM/14, para. 3. back to text
579. G/SCM/14. back to text
580. G/SCM/14, para. 1. back to text
581. G/SCM/13. back to text
582. G/SCM/13, para. 1. back to text
583. Procedures for Arbitration under Article 8.5 of the SCM Agreement, G/SCM/19, para. 1. back to text
584. WT/MIN(01)/17. back to text
585. G/SCM/45. See also relevant sections of prior Chairman’s reports in G/SCM/36 and G/SCM/38. back to text
586. WT/GC/M/75, Item 16. back to text
587. Panel Report, US — Lead and Bismuth II, para. 6.56. back to text
588. Panel Report, US — Lead and Bismuth II, para. 6.56. back to text
589. Panel Report, US — Lead and Bismuth II, para. 6.56. back to text
590. Panel Report, US — Countervailing Measures on Certain EC Products, paras. 7.41–7.43. back to text
591. Appellate Body Report, US — Softwood Lumber IV, para. 140. back to text
592. Appellate Body Report, US — Softwood Lumber IV, para. 141. For a discussion of this case law, see the Panel Report, Mexico — Olive Oil, paras. 7.130 — 7.142. back to text
593. Panel Report, Mexico — Olive Oil, paras. 7.24 — 7.28. back to text
594. Appellate Body Report, Brazil — Desiccated Coconut, p. 15. back to text
595. Appellate Body Report, US — Softwood Lumber IV, paras. 156–157. back to text
596. Appellate Body Report, US — Softwood Lumber IV, para. 159. back to text

150pxls.gif (76 bytes)
 

 

   show next page