DS: European Union — Countervailing Measures on Certain Polyethylene Terephthalate from Pakistan

1. This dispute concerns countervailing measures imposed by the European Union on certain polyethylene terephthalate from Pakistan.

Pakistan's claims regarding the Manufacturing Bond Scheme

2. With respect to the Manufacturing Bond Scheme (MBS), which the European Commission (the Commission) found to be a countervailable subsidy contingent on export performance, Pakistan claimed that the Commission acted inconsistently with Article 1.1(a)(1)(ii) of the SCM Agreement, because it improperly determined the existence of a financial contribution. The Panel found that the Commission acted inconsistently with Article 1.1(a)(1)(ii) of the SCM Agreement by failing to provide a reasoned and adequate explanation for why the entire amount of remitted duties was “in excess of those which have accrued” within the meaning of footnote 1 of the SCM Agreement.
    
3. Pakistan also claimed that the Commission violated Article 3.1(a) of the SCM Agreement, because – given its incorrect interpretation and application of Article 1 – the Commission incorrectly determined the existence of an export subsidy. The Panel found that the Commission acted inconsistently with Article 3.1(a) of the SCM Agreement by improperly finding the existence of a “subsidy” that was contingent on export performance.
    
4. The Panel found that it need not address certain claims made by Pakistan under Annex I(i), Annex II(II), Annex II(II)(1), Annex II(II)(2), Annex III(II), Annex III(II)(2), Annex III(II)(3), Article 1.1(b), Article 10, Article 19 and Article 32 of the SCM Agreement, and Article VI:3 of the GATT 1994.

Pakistan's claims regarding the Long Term Financing of Export-Oriented Projects (LTF-EOP)

5. With respect to the LTF-EOP, which the Commission found to be a countervailable subsidy contingent on export performance, Pakistan contended that the Commission violated Article 14(b) of the SCM Agreement, because the Commission failed to properly calculate any benefit as the difference between the amount that the firm receiving the loan (Novatex) pays on the government loan and the amount the firm would pay on a comparable commercial loan which the firm could actually obtain on the market. The Panel found that the Commission acted inconsistently with Article 14(b) of the SCM Agreement by failing to properly identify what Novatex would have paid on a “comparable commercial loan” in calculating the benefit conferred by the LTF-EOP Loan.
    
6. Pakistan further contended that the Commission acted inconsistently with its obligations under Article 1.1(b) of the SCM Agreement by improperly analysing and determining the existence of benefit. The Panel found that the Commission acted inconsistently with Article 1.1(b) of the SCM Agreement as a consequence of having acted inconsistently with Article 14(b) of the SCM Agreement.
    
7. Pakistan also claimed that the Commission acted inconsistently with the chapeau of Article 14 of the SCM Agreement, because the Commission failed to adequately explain the application of the method used by the investigating authority in calculating the benefit (which is provided for in the national legislation or implementing regulations) to the particular case at hand. The Panel found that the Commission acted inconsistently with the chapeau of Article 14 of the SCM Agreement by failing to transparently and adequately explain how it identified a “comparable commercial loan”.
    
8. The Panel exercised judicial economy in respect of Pakistan's claims that as a result of violating Article 14(b) of the SCM Agreement and/or the chapeau of Article 14 of the SCM Agreement, the Commission acted inconsistently with Articles 10, 19 and 32 of the SCM Agreement, and Article VI of the GATT 1994.

Pakistan's claims under Article 15.5 of the SCM Agreement

9. Pakistan argued that the Commission's “approach to causation”, whereby the Commission made a finding of the existence of a causal link between subject imports and the injury to the domestic industry prior to the assessment of other known factors, was inconsistent with Article 15.5 of the SCM Agreement. Further, Pakistan claimed that the Commission failed to properly “separate and distinguish” the effects of certain other known factors, i.e. imports from Korea, the 2008 economic downturn, competition from non-cooperating EU producers, and oil prices, from those of subject imports. The Panel found that Pakistan failed to establish that the Commission's use of the “break the causal link” methodology in this case was inconsistent with Article 15.5 of the SCM Agreement. The Panel found that the Commission acted inconsistently with Article 15.5 of the SCM Agreement by failing to conduct a proper non-attribution analysis in respect of competition from non-cooperating EU producers and oil prices. It also found that Pakistan failed to establish that the Commission's non-attribution analysis in respect of imports from Korea and the economic downturn was inconsistent with Article 15.5 of the SCM Agreement.

Pakistan's claims regarding verification visits

10. Pakistan claimed that the Commission acted inconsistently with Article 12.6 of the SCM Agreement by failing to satisfy its obligation to disclose the results of the verification visit to the exporting producer in Pakistan. The Panel upheld Pakistan's claim and found that the Commission acted inconsistently with Article 12.6 of the SCM Agreement because it failed to adequately provide the “results” of the Novatex verification visit to Novatex.

On appeal, the European Union claimed that the Panel's decision to make findings on Pakistan's claims in this dispute, notwithstanding the expiry of the measure at issue, was inconsistent with Article 11 of the DSU, as informed by Article 3 of the DSU. Instead, the European Union argued that the Panel should have dismissed the case in its entirety once the measure had expired. In addition, in connection with the Panel's findings concerning the MBS, the European Union appealed the Panel's interpretation of Article 1(1)(a)(1)(ii), footnote 1, and Annexes I to III to the SCM Agreement that, in the context of duty drawback schemes, a subsidy exists only when an “excess” remission occurs representing government revenue foregone that is otherwise due. Pakistan challenged the Panel's rejection of Pakistan's claim that the Commission's use of the “break the causal link” approach in this case was inconsistent with Article 15.5 of the SCM Agreement. The remainder of the Panel's findings were not appealed.

Expiry of the measure at issue

The Appellate Body explained that panels have a margin of discretion in the exercise of their inherent adjudicative powers under Article 11 of the DSU. Within this margin of discretion, it is for a panel to decide how it takes into account subsequent modifications to, or expiry or repeal of, the measure at issue. The fact that a measure has expired is not dispositive of the question of whether a panel can address claims in respect of that measure. Rather, a panel, in the exercise of its jurisdiction, has the authority to assess objectively whether the “matter” before it, within the meaning of Article 7.1 and Article 11 of the DSU, has been fully resolved or still requires to be examined following the expiry of the measure at issue.

From its consideration of the arguments of the parties before the Panel, and the Panel's reasoning, the Appellate Body considered it apparent that there still existed a dispute between the parties on the “applicability of and conformity with the relevant covered agreements”, within the meaning of Article 11 of the DSU, as regards the Commission's findings underpinning the measure at issue, despite its expiry. Thus, for the Appellate Body, the Panel in this dispute made an objective assessment that “the matter” before it still required to be examined because the parties were still in disagreement as to the “applicability of and conformity with the relevant covered agreements” in respect of the Commission's findings underpinning the expired measure at issue.

The Appellate Body therefore found that the European Union had not demonstrated that the Panel failed to comply with its duty under Article 11 of the DSU, as informed by Article 3 of the DSU, by deciding to make findings on Pakistan's claims in this dispute, notwithstanding the expiry of the measure at issue during the Panel proceedings. The Appellate Body found that the expiry of the measure at issue did not mean that the matter before the Panel had been fully resolved. The Appellate Body therefore rejected the European Union's request that the Appellate Body reversethe entirety of the Panel Report and declare moot and of no legal effect the findings and legal interpretations contained therein.

In a separate opinion, one Appellate Body Member found that the Panel failed to sufficiently assess whether the matter before it had been fully resolved or still required to be examined following the expiry of the measure at issue.

Government revenue foregone

The Appellate Body considered that a harmonious reading of Article 1.1(a)(1)(ii), footnote 1, and Annexes I(i), II, and III to the SCM Agreement and the Ad Note to Article XVI of the GATT 1994 confirms that, in the context of duty drawback schemes, the financial contribution element of the subsidy (i.e. the government revenue foregone that is otherwise due) is limited to the excess remission or drawback of import charges on inputs and does not encompass the entire amount of the remission or drawback of import charges.

Accordingly, the Appellate Body found that the European Union had not demonstrated that the Panel erred in its interpretation of Article 1.1(a)(1)(ii), footnote 1, and Annexes I(i), II, and III to the SCM Agreement and the Ad Note to Article XVI of the GATT 1994.

The Appellate Body noted that the European Union had not challenged the Panel's review of the Commission's findings on the MBS, beyond the European Union's claim that the Panel had applied the wrong legal standard to the facts of this case. Accordingly, the Appellate Body found that the European Union had not demonstrated that the Panel erred in its application of Article 1.1(a)(1)(ii) and footnote 1 of the SCM Agreement to the facts of this case. Consequently, the Appellate Body upheld the Panel's finding that the Commission erred under Article 1.1(a)(1)(ii) of the SCM Agreement by failing to provide a reasoned and adequate explanation for why the entire amount of remitted duties was “in excess of those which have accrued” within the meaning of footnote 1 of the SCM Agreement. The Appellate Body also upheld the Panel's finding that the Commission acted inconsistently with Article 3.1(a) of the SCM Agreement by improperly finding the existence of a “subsidy” that was contingent upon export performance.

The European Commission's causation analysis

The Appellate Body observed that the key objective of a causation analysis under Article 15.5 of the SCM Agreement is for an investigating authority to establish whether there is a “genuine and substantial relationship of cause and effect” between the subsidized imports and the injury to the domestic industry. A showing of such a “genuine and substantial” causal relationship entails: (i) an examination of the existence and extent of the link between the subsidized imports and the injury suffered by the domestic industry through an assessment of the “effects” of the subsidized imports; and (ii) a non‑attribution analysis of the injurious effects of other known factors. The Appellate Body thus held that an investigating authority is required under Article 15.5 to determine whether, in light of the injurious effects of other known factors, the subsidized imports can be considered a “genuine and substantial” cause of the injury suffered by the domestic industry.

Turning to the relevant findings by the Panel, the Appellate Body observed that the Panel had correctly found that, while the Commission had stated that a “causal link” existed between the subsidized imports and the injury before it turned to its non‑attribution analysis, such consideration of a “causal link” was not a final conclusion, and it had not necessarily prejudged the Commission's assessment of the effects of the other known factors.

The Appellate Body considered that a careful reading of the Commission's findings at issue revealed that, despite its unfortunate use of the “break the causal link” terminology, the Commission had in fact examined whether the subsidized imports could be considered as a “genuine and substantial” cause of the injury to the domestic industry, while not attributing the injuries caused by other known factors to subsidized imports, in a manner consistent with the requirements of that provision. Accordingly, the Appellate Body upheld the Panel's finding that Pakistan had failed to establish that the Commission's approach to examining causation in this case, including its non‑attribution analysis, was inconsistent with Article 15.5 of the SCM Agreement.