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Issues covered by the WTO’s committees and agreements

REPERTORY OF APPELLATE BODY REPORTS

SCM Agreement


ON THIS PAGE:

Object and Purpose
Article 1.1 — “subsidy”. See also SCM Agreement, Article 15 — Determination of injury (S.2.25)
Article 1.1(a)(1) — “financial contribution”
Article 1.1(a)(1)(ii) — “government revenue … otherwise due”
Article 1.1(a)(1)(ii), Footnote 1 — Exemption from or remission of internal taxes upon exportation
Article 1.1(a)(1)(iii) — “Goods” provided by the government
Article 1.1(a)(1)(iii) — “Provision” of goods
Article 1.1(a)(1)(iv) — Payments to a funding mechanism
Article 1.1(b) — Conferral of a benefit to a recipient. See also SCM Agreement, Article 14 — Chapeau — Calculation of the benefit to the “recipient” (S.2.22)
Article 1.1 — Pass-through of indirect subsidies. See also SCM Agreement, Article VI.3 of the GATT 1994 — Subsidies (S.2.43)
Article 3.1(a) — “except as provided in the Agreement on Agriculture” — export subsidies
Article 3.1(a) — “contingent, in law or in fact, … upon export performance”
Article 3.1(a) — Contingency in law
Article 3.1(a) — Contingency in fact
Article 3.1(b) — “except as provided in the Agreement on Agriculture” — import substitution subsidies
Article 3.1(b) — “contingent upon the use of domestic over imported products”
Article 3.1(b) — Contingent in law and contingent in fact
Article 4, paragraphs 1 to 4 — Consultations
Article 4.2 — “statement of available evidence”
Article 4.7 — “withdraw the subsidy without delay”
Article 5 — “adverse effects” — Relationship with Article 6.3(c)
Article 6.3(c) — Serious Prejudice
Article 7.8 — Remedies. See also Implementation Recommendations — Article 19.1 of the DSU (I.0)
Article 11.4 — Initiation of an investigation
Article 11.9 — Termination of an investigation
Article 14 — Chapeau — Calculation of the benefit to the “recipient”. See also SCM Agreement, Article 1.1(b) — Conferral of a benefit to a recipient (S.2.9)
Article 14 — Chapeau — Calculation of the benefit to the “recipient”. See also SCM Agreement, Article 1.1(b) — Conferral of a benefit to a recipient (S.2.9)
Article 14(d) — Calculation of adequacy of remuneration
Article 14(d) — Alternative benchmark for calculating the adequacy of remuneration
Article 15 — Determination of injury
Article 19.1 — Conditions for the imposition of countervailing duties
Article 19.3 — Imposition of countervailing duties on a non-discriminatory basis after aggregate investigation
Article 19.4 — Calculation of countervailing duty rates on per unit basis
Article 21 — Duration and review of countervailing duties
Article 21.1 — “only as long and to the extent necessary”
Article 21.2 — Review of the need for continued imposition
Article 21.3 — Termination of countervailing duties unless continued or recurrent subsidization and injury likely
Article 21.4 — Relationship with Articles 11 and 12
Article 22 — Public notice and explanation of determinations
Article 27 — Special and differential treatment for developing country Members
Article 32.1 — Specific action against a subsidy. See also Anti-Dumping Agreement, Article 18.1 — Specific action against dumping (A.3.61); SCM Agreement, Article 1.1 — Pass-through of indirect subsidies (S.2.10); SCM Agreement, Article VI:3 of the GATT 1994 — Subsidies (S.2.43)
Illustrative List of Export Subsidies: Item (e), footnote 59, first sentence — “remission or deferral of direct taxes”
> Illustrative List of Export Subsidies: Item (e), footnote 59, fifth sentence — “double taxation”
Illustrative List of Export Subsidies: Item (j) — Export credit guarantee or insurance. See also Agreement on Agriculture, Article 9.1(c) — Governmental action vs. Private action (A.1.25)
> Illustrative List of Export Subsidies: Item (k) — Export credits. See also Agreement on Agriculture, Article 9.1(c) — Governmental action vs. Private action (A.1.25); SCM Agreement, Illustrative List of Export Subsidies: Item (j) (S.2.39)
Relationship between the SCM Agreement and the GATT 1994
Article III:8 of the GATT 1994 — Subsidies
Article VI:3 of the GATT 1994 — Subsidies. See also Anti-Dumping Agreement, Article 18.1 — Specific action against dumping (A.3.61); SCM Agreement, Article 1.1 — Pass-through of indirect subsidies (S.2.10); SCM Agreement, Article 32.1 — Specific action against a subsidy (S.2.36)
 


S.2.1 Object and Purpose     back to top

S.2.1.1 US — Carbon Steel, paras. 73-74
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

… we turn to the object and purpose of the SCM Agreement. We note, first, that the Agreement contains no preamble to guide us in the task of ascertaining its object and purpose. In BrazilDesiccated Coconut [Appellate Body Report, p. 17, DSR 1997:I, p. 167 at 181], we observed that the “SCM Agreement contains a set of rights and obligations that go well beyond merely applying and interpreting Articles VI, XVI and XXIII of the GATT 1947.” The SCM Agreement defines the concept of “subsidy”, as well as the conditions under which Members may not employ subsidies. It establishes remedies when Members employ prohibited subsidies, and sets out additional remedies available to Members whose trading interests are harmed by another Member’s subsidization practices. Part V of the SCM Agreement deals with one such remedy, permitting Members to levy countervailing duties on imported products to offset the benefits of specific subsidies bestowed on the manufacture, production or export of those goods. However, Part V also conditions the right to apply such duties on the demonstrated existence of three substantive conditions (subsidization, injury, and a causal link between the two) and on compliance with its procedural and substantive rules, notably the requirement that the countervailing duty cannot exceed the amount of the subsidy. Taken as a whole, the main object and purpose of the SCM Agreement is to increase and improve GATT disciplines relating to the use of both subsidies and countervailing measures.

We thus believe that the Panel properly identified, as among the objectives of the SCM Agreement, the establishment of a framework of rights and obligations relating to countervailing duties, and the creation of a set of rules which WTO Members must respect in the use of such duties. Part V of the Agreement is aimed at striking a balance between the right to impose countervailing duties to offset subsidization that is causing injury, and the obligations that Members must respect in order to do so. …

S.2.1.2 US — Softwood Lumber IV, para. 64
(WT/DS257/AB/R)

Moreover, to accept Canada’s interpretation of the term “goods” would, in our view, undermine the object and purpose of the SCM Agreement, which is to strengthen and improve GATT disciplines relating to the use of both subsidies and countervailing measures, while, recognizing at the same time, the right of Members to impose such measures under certain conditions. It is in furtherance of this object and purpose that Article 1.1(a)(1)(iii) recognizes that subsidies may be conferred, not only through monetary transfers, but also by the provision of non-monetary inputs. Thus, to interpret the term “goods” in Article 1.1(a)(1)(iii) narrowly, as Canada would have us do, would permit the circumvention of subsidy disciplines in cases of financial contributions granted in a form other than money, such as through the provision of standing timber for the sole purpose of severing it from land and processing it.

S.2.1.3 US — Softwood Lumber IV, para. 95
(WT/DS257/AB/R)

… the Panel’s restrictive interpretation … frustrates the object and purpose of the SCM Agreement, which includes disciplining the use of subsidies and countervailing measures while, at the same time, enabling WTO Members whose domestic industries are harmed by subsidized imports to use such remedies … If the calculation of the benefit yields a result that is artificially low, or even zero, as could be the case under the Panel’s approach, then a WTO Member could not fully offset, by applying countervailing duties, the effect of the subsidy as permitted by the Agreement.

S.2.1.4 US — Softwood Lumber IV, para. 109
(WT/DS257/AB/R)

… This is because countervailing measures may be used only for the purpose of offsetting a subsidy bestowed upon a product, provided that it causes injury to the domestic industry producing the like product. They must not be used to offset differences in comparative advantages between countries.

 
S.2.2 Article 1.1 — “subsidy”.
See also SCM Agreement, Article 15 — Determination of injury (S.2.25)     back to top

S.2.2.1 US — FSC, para. 89
(WT/DS108/AB/R)

We start with the United States’ argument that the Panel erred by failing to begin its examination of the European Communities’ claim under Article 3.1(a) of the SCM Agreement with footnote 59 of that Agreement. Instead, the Panel began its examination with the general definition of a “subsidy” that is set forth in Article 1.1 of the SCM Agreement. This definition applies throughout the SCM Agreement, to all the different types of “subsidy” covered by that Agreement. In our view, it was not a legal error for the Panel to begin its examination of whether the FSC measure involves export subsidies by examining the general definition of a “subsidy” that is applicable to export subsidies in Article 3.1(a). …

S.2.2.2 US — FSC, para. 93
(WT/DS108/AB/R)

Article 1.1 sets forth the general definition of the term “subsidy” which applies “for the purpose of this Agreement”. This definition, therefore, applies wherever the word “subsidy” occurs throughout the SCM Agreement and conditions the application of the provisions of that Agreement regarding prohibited subsidies in Part II, actionable subsidies in Part III, non-actionable subsidies in Part IV and countervailing measures in Part V. By contrast, footnote 59 relates to one item in the Illustrative List of Export Subsidies. …

S.2.2.3 US — FSC (Article 21.5 — EC), paras. 85-86
(WT/DS108/AB/RW)

… Article 1.1 itself does not impose any obligation on Members with respect to the subsidies it defines. It is the provisions of the SCM Agreement which follow Article 1, such as Articles 3 and 5, which impose obligations on Members with respect to subsidies falling within the definition set forth in Article 1.1. …

… Article 1.1 of the SCM Agreement does not prohibit a Member from foregoing revenue that is otherwise due under its rules of taxation, even if this also confers a benefit under Article 1.1(b) of the SCM Agreement. …

S.2.2.4 US — Carbon Steel, paras. 80-81
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

… Article 1 of the SCM Agreement sets out a definition of “subsidy” that applies to the whole of that Agreement. This definition includes all such subsidies, regardless of their amount. None of the provisions in the SCM Agreement that uses the term “subsidization” confines the meaning of “subsidization” to subsidization at a rate equal to or in excess of 1 percent ad valorem, or to any other de minimis threshold. It is also worth noting that, under Part of the SCM Agreement, prohibited subsidies are prohibited regardless of the amount of the subsidy.

Thus, in our view, the terms “subsidization” and “injury” each have an independent meaning in the SCM Agreement which is not derived by reference to the other. It is unlikely that very low levels of subsidization could be demonstrated to cause “material” injury. Yet such a possibility is not, per se, precluded by the Agreement itself, as injury is not defined in the SCM Agreement in relation to any specific level of subsidization.

 
S.2.3 Article 1.1(a)(1) — “financial contribution”     back to top

S.2.3.1 US — Softwood Lumber IV, para. 52 and footnote 35
(WT/DS257/AB/R)

An evaluation of the existence of a financial contribution involves consideration of the nature of the transaction through which something of economic value is transferred by a government. A wide range of transactions falls within the meaning of “financial contribution” in Article 1.1(a)(1). According to paragraphs (i) and (ii) of Article 1.1(a)(1), a financial contribution may be made through a direct transfer of funds by a government, or the foregoing of government revenue that is otherwise due. Paragraph (iii) of Article 1.1(a)(1) recognizes that, in addition to such monetary contributions, a contribution having financial value can also be made in kind through governments providing goods or services, or through government purchases. Paragraph (iv) of Article 1.1(a)(1) recognizes that paragraphs (i) — (iii) could be circumvented by a government making payments to a funding mechanism or through entrusting or directing a private body to make a financial contribution. It accordingly specifies that these kinds of actions are financial contributions as well. This range of government measures capable of providing subsidies is broadened still further by the concept of “income or price support” in paragraph (2) of Article 1.1(a).35

 
S.2.4 Article 1.1(a)(1)(ii) — “government revenue … otherwise due”     back to top

S.2.4.1 US — FSC, para. 90
(WT/DS108/AB/R)

… In our view, the “foregoing” of revenue “otherwise due” implies that less revenue has been raised by the government than would have been raised in a different situation, or, that is, “otherwise”. Moreover, the word “foregone” suggests that the government has given up an entitlement to raise revenue that it could “otherwise” have raised. This cannot, however, be an entitlement in the abstract, because governments, in theory, could tax all revenues. There must, therefore, be some defined, normative benchmark against which a comparison can be made between the revenue actually raised and the revenue that would have been raised “otherwise”. We, therefore, agree with the Panel that the term “otherwise due” implies some kind of comparison between the revenues due under the contested measure and revenues that would be due in some other situation. We also agree with the Panel that the basis of comparison must be the tax rules applied by the Member in question. …

S.2.4.2 US — FSC, para. 91
(WT/DS108/AB/R)

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

S.2.4.3 Canada — Autos, para. 91
(WT/DS139/AB/R, WT/DS142/AB/R)

… We note, once more, that Canada has established a normal MFN duty rate for imports of motor vehicles of 6.1 per cent. Absent the import duty exemption, this duty would be paid on imports of motor vehicles. Thus, through the measure in dispute, the Government of Canada has, in the words of United States — FSC, “given up an entitlement to raise revenue that it could ‘otherwise’ have raised.” More specifically, through the import duty exemption, Canada has ignored the “defined, normative benchmark” that it established for itself for import duties on motor vehicles under its normal MFN rate and, in so doing, has foregone “government revenue that is otherwise due”.

S.2.4.4 US — FSC (Article 21.5 — EC), paras. 88-89
(WT/DS108/AB/RW)

… the mere fact that revenues are not “due” from a fiscal perspective does not determine that the revenues are or are not “otherwise due” within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.

… the treaty phrase “otherwise due” implies a comparison with a “defined, normative benchmark”. … the comparison under Article 1.1(a)(1)(ii) of the SCM Agreement must necessarily be between the rules of taxation contained in the contested measure and other rules of taxation of the Member in question. …

S.2.4.5 US — FSC (Article 21.5 — EC), para. 90
(WT/DS108/AB/RW)

… In identifying the appropriate benchmark for comparison [under Article 1.1(a)(1)(ii)], panels must obviously ensure that they identify and examine fiscal situations which it is legitimate to compare. In other words, there must be a rational basis for comparing the fiscal treatment of the income subject to the contested measure and the fiscal treatment of certain other income. In general terms, in this comparison, like will be compared with like. …

S.2.4.6 S.2.4.6 US — FSC (Article 21.5 — EC), para. 91
(WT/DS108/AB/RW)

… We do not, however, consider that Article 1.1(a)(1)(ii) always requires panels to identify, with respect to any particular income, the “general” rule of taxation prevailing in a Member. Given the variety and complexity of domestic tax systems, it will usually be very difficult to isolate a “general” rule of taxation and “exceptions” to that “general” rule. Instead, we believe that panels should seek to compare the fiscal treatment of legitimately comparable income to determine whether the contested measure involves the foregoing of revenue which is “otherwise due”, in relation to the income in question.

 
S.2.5 Article 1.1(a)(1)(ii), Footnote 1 — Exemption from or remission of internal taxes upon exportation     back to top

S.2.5.1 Canada — Autos, para. 92
(WT/DS139/AB/R, WT/DS142/AB/R)

Canada argues that the measure is “analogous” to the situation described in footnote 1 to the SCM Agreement, which provides that “the exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued, shall not be deemed to be a subsidy.” We do not share Canada’s view. Footnote 1 to the SCM Agreement deals with duty and tax exemptions or remissions for exported products. The measure at issue applies, in contrast, to imports of motor vehicles which are sold for consumption in Canada. For this reason, we do not consider that footnote 1 bears upon the import duty exemption at issue in this case.

 
S.2.6 Article 1.1(a)(1)(iii) — “Goods” provided by the government     back to top

S.2.6.1 US — Softwood Lumber IV, para. 53
(WT/DS257/AB/R)

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

S.2.6.2 US — Softwood Lumber IV, para. 59
(WT/DS257/AB/R)

… we find that the ordinary meaning of the term “goods” in the English version of Article 1.1(a)(1)(iii) of the SCM Agreement should not be read so as to exclude tangible items of property, like trees, that are severable from land.

S.2.6.3 US — Softwood Lumber IV, para. 60
(WT/DS257/AB/R)

We find that terms that accompany the word “goods” in Article 1.1(a)(1)(iii) support [an interpretation of that term that does not exclude tangible items of property, like trees, that are severable from land.] In Article 1.1(a)(1)(iii), the only explicit exception to the general principle that the provision of “goods” by a government will result in a financial contribution is when those goods are provided in the form of “general infrastructure”. In the context of Article 1.1(a)(1)(iii), all goods that might be used by an enterprise to its benefit — including even goods that might be considered infrastructure — are to be considered “goods” within the meaning of the provision, unless they are infrastructure of a general nature.

S.2.6.4 US — Softwood Lumber IV, para. 64
(WT/DS257/AB/R)

Moreover, to accept Canada’s interpretation of the term “goods” would, in our view, undermine the object and purpose of the SCM Agreement, which is to strengthen and improve GATT disciplines relating to the use of both subsidies and countervailing measures, while, recognizing at the same time, the right of Members to impose such measures under certain conditions. It is in furtherance of this object and purpose that Article 1.1(a)(1)(iii) recognizes that subsidies may be conferred, not only through monetary transfers, but also by the provision of non-monetary inputs. Thus, to interpret the term “goods” in Article 1.1(a)(1)(iii) narrowly, as Canada would have us do, would permit the circumvention of subsidy disciplines in cases of financial contributions granted in a form other than money, such as through the provision of standing timber for the sole purpose of severing it from land and processing it.

 
S.2.7 Article 1.1(a)(1)(iii) — “Provision” of goods     back to top

S.2.7.1 US — Softwood Lumber IV, paras. 68, 71
(WT/DS257/AB/R)

… we now turn to consider what it means to “provide” goods, for purposes of Article 1.1(a)(1)(iii) of the SCM Agreement. …

… we do not see how the general governmental acts referred to by Canada would necessarily fall within the concept of a government “making available” services or goods. In our view, such actions would be too remote from the concept of “making available” or “putting at the disposal of”, which requires there to be a reasonably proximate relationship between the action of the government providing the good or service on the one hand, and the use or enjoyment of the good or service by the recipient on the other. Indeed, a government must have some control over the availability of a specific thing being “made available”.

S.2.7.2 US — Softwood Lumber IV, paras. 73, 75
(WT/DS257/AB/R)

… in our view, it does not make a difference, for purposes of applying the requirements of Article 1.1(a)(1)(iii) of the SCM Agreement to the facts of this case, if “provides” is interpreted as “supplies”, “makes available” or “puts at the disposal of”. What matters for determining the existence of a subsidy is whether all elements of the subsidy definition are fulfilled as a result of the transaction, irrespective of whether all elements are fulfilled simultaneously.

… what matters, for purposes of determining whether a government “provides goods” in the sense of Article 1.1(a)(1)(iii), is the consequence of the transaction. Rights over felled trees or logs crystallize as a natural and inevitable consequence of the harvesters’ exercise of their harvesting rights. Indeed, as the Panel indicated, the evidence suggests that making available timber is the raison d’être of the stumpage arrangements. Accordingly, like the Panel, we believe that, by granting a right to harvest standing timber, governments provide that standing timber to timber harvesters. …

 
S.2.8 Article 1.1(a)(1)(iv) — Payments to a funding mechanism     back to top

S.2.8.1 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 128 and footnote 113
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

We observe that Article 9.1(c) does not require that payments be financed by virtue of government “mandate”, or other “direction”. Although the word “action” certainly covers situations where government mandates or directs that payments be made, it also covers other situations where no such compulsion is involved.113

 
S.2.9 Article 1.1(b) — Conferral of a benefit to a recipient.
See also SCM Agreement, Article 14 — Chapeau — Calculation of the benefit to the “recipient” (S.2.22)     back to top

S.2.9.1 Canada — Aircraft, para. 154
(WT/DS70/AB/R)

A “benefit” does not exist in the abstract, but must be received and enjoyed by a beneficiary or a recipient. Logically, a “benefit” can be said to arise only if a person, natural or legal, or a group of persons, has in fact received something. The term “benefit”, therefore, implies that there must be a recipient. …

S.2.9.2 Canada — Aircraft, para. 157
(WT/DS70/AB/R)

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

S.2.9.3 US — Lead and Bismuth II, para. 58
(WT/DS138/AB/R)

We … agree with the Panel’s findings that benefit as used in Article 1.1(b) is concerned with the “benefit to the recipient”, [and] that such recipient must be a natural or legal person…

S.2.9.4 US — Lead and Bismuth II, para. 68
(WT/DS138/AB/R)

The question whether a “financial contribution” confers a “benefit” depends, therefore, on whether the recipient has received a “financial contribution” on terms more favourable than those available to the recipient in the market. In the present case, the Panel made factual findings that UES and BSplc/BSES paid fair market value for all the productive assets, goodwill, etc., they acquired from BSC and subsequently used in the production of leaded bars imported into the United States in 1994, 1995 and 1996. We, therefore, see no error in the Panel’s conclusion that, in the specific circumstances of this case, the “financial contributions” bestowed on BSC between 1977 and 1986 could not be deemed to confer a “benefit” on UES and BSplc/BSES.

S.2.9.5 US — Countervailing Measures on Certain EC Products, para. 102
(WT/DS212/AB/R)

We agree with the United States that, irrespective of the price paid by the new private owner, privatization does not remove the equipment that a state-owned enterprise may have acquired (or received) with a financial contribution and that, consequently, the same firm may “continue[] to make the same products on the same equipment”. However, this observation serves only to illustrate that, following privatization, the utility value of equipment acquired as a result of a financial contribution is not extinguished, because it is transferred to the newly-privatized firm. But, the utility value of such equipment to the newly-privatized firm is legally irrelevant for purposes of determining the continued existence of a “benefit” under the SCM Agreement. As we found in Canada Aircraft [Appellate Body Report, para. 157], the value of the “benefit” under the SCM Agreement is to be assessed using the marketplace as the basis for comparison. It follows, therefore, that once a fair market price is paid for the equipment, its market value is redeemed, regardless of the utility the firm may derive from the equipment. Accordingly, it is the market value of the equipment that is the focal point of analysis, and not the equipment’s utility value to the privatized firm.

S.2.9.6 US — Countervailing Measures on Certain EC Products, paras. 108, 110
(WT/DS212/AB/R)

… In Canada Aircraft, we were asked whether the “cost to government” was relevant to the interpretation of “benefit” within the meaning of Article 1.1(b) of the SCM Agreement. In finding the “cost to government” not to be the relevant benchmark for identifying the “benefit”, we said that Article 14 of the SCM Agreement prescribes the guidelines required to “calculate the benefit to the recipient conferred pursuant to paragraph 1 of Article 1”. (emphasis added) We concluded that this phrase in Article 14 necessarily provides relevant context for interpreting Article 1.1, and we found that:

[a] “benefit” does not exist in the abstract, but must be received and enjoyed by a beneficiary or a recipient. Logically, a “benefit” can be said to arise only if a person, natural or legal, or a group of persons, has in fact received something. The term “benefit”, therefore, implies that there must be a recipient. (emphasis added) [Appellate Body Report, para. 154]

Contrary to what has been argued here by the United States, when referring to “a recipient” in Canada Aircraft, we did not exclude the possibility that “a recipient” could include both a firm and its owner. A “group of persons” could include a group of “natural persons”, or a group of “natural and legal persons”, or a group exclusively of “legal persons”.

Contrary to the reading that has been suggested by the United States, when we referred, in USLead and Bismuth II [paragraphs 56 and 58], to “legal or natural persons”, we were not seeking to distinguish between a firm and its owners. … In our reasoning, we simply explained that the focus of any analysis of whether a “benefit” exists should be on “legal or natural persons” instead of on productive operations; we did not rely in our reasoning on what the United States describes as “normal corporate law principles”. Moreover, there is nothing in these findings indicating that the “benefit” of a financial contribution, as contemplated in Article 1.1(b) of the SCM Agreement, should necessarily be “received and enjoyed” by the same person or, put differently, there is nothing indicating that the “benefit” cannot be “received and enjoyed” by two or more distinct persons.

S.2.9.7 US — Countervailing Measures on Certain EC Products, paras. 112-113
(WT/DS212/AB/R)

The SCM Agreement does not include a specific definition of the “recipient” of a “benefit”. However, several terms are used to refer to the “recipient” of a “benefit” in the Agreement. Article 2 refers to “an enterprise or industry or group of enterprises or industries”; Article 6.1(b) refers to “an industry”; footnote 36 to Article 10 refers to subsidies “bestowed directly or indirectly upon the manufacture, production or export of any merchandise”; Article 14 refers to “the firm”; Article 11.2(ii) refers to “exporter or foreign producer”; Article 19.3 refers to “sources found to be subsidized”; Annex I refers to “a firm or an industry”; and Annex IV refers to the “recipient firm”. This is not an exhaustive list, but it certainly indicates that the SCM Agreement does not identify the “recipient” of a “benefit” by using any particular legal term of art. Rather, the SCM Agreement uses several terms to describe the economic entity that receives a “benefit”. Thus, the reliance by the United States on the list of financial contributions in Article 1.1(a)(1) is not persuasive, because, when viewed in the context of the SCM Agreement as a whole, that list cannot be read to imply that the “recipient” is necessarily defined as a “legal person”.

In addition, we observe that a transfer of funds could be provided directly from the government to the legal person that is the producer of the subsidized product, or it could be provided indirectly, say, through an income tax concession to the natural persons that own the firm (inasmuch as they invest in the legal person’s productive activities). In both cases, the cost of raising capital for the legal person that is the producer would be reduced. Hence, contrary to the contention of the United States, it is possible to confer a “benefit” on a firm by providing a financial contribution to its owners, whether natural or legal persons, possibly holding property by means of shares. Moreover, we note that Article VI:3 of the GATT 1994 and footnote 36 of Article 10 of the SCM Agreement contemplate this possibility by providing that a subsidy may be bestowed “indirectly” upon the manufacture, production or export of merchandise. (emphasis added)

S.2.9.8 US — Countervailing Measures on Certain EC Products, paras. 115-116, 118
(WT/DS212/AB/R)

… the legal distinction between firms and their owners that may be recognized in a domestic legal context is not necessarily relevant, and certainly not conclusive, for the purpose of determining whether a “benefit” exists under the SCM Agreement, because a financial contribution bestowed on those investing in a firm may confer a benefit “upon the manufacture, production or export of any merchandise, as provided for in paragraph 3 of Article VI of GATT 1994.”

… we are of the view that the Panel went too far in stating, in paragraph 7.54 of the Panel Report, that, “for the purpose of the benefit determination under the SCM Agreement, no distinction should be made [because] … [w]hen the SCM Agreement refers to the recipient of a benefit it means the company and its shareholders together”. (emphasis added) In so finding, the Panel adopted too sweeping an interpretation of the SCM Agreement.

… we note that the Panel’s overly broad finding that a firm and its owners are, for all purposes of the SCM Agreement, virtually the same, could be interpreted as entitling investigating authorities to assume, in all cases, that, for the purpose of calculating the benefit, and irrespective of the means and conditions imposed by a government for the provision of a financial contribution to owners of the firm, that firm will receive a benefit equivalent to the full financial contribution. This may or may not be so in all cases. We do not express an opinion on this question, but we caution that this finding of the Panel must not be interpreted as entitling authorities to overlook the possibility that some of the financial contribution provided to owners may not flow into the firm. …

S.2.9.9 US — Countervailing Measures on Certain EC Products, paras. 126-127
(WT/DS212/AB/R)

We understand the Panel to be stating that privatization at arm’s length and for fair market value privatization presumptively extinguishes any benefit received from the non-recurring financial contribution bestowed upon a state-owned firm. The effect of such a privatization is to shift to the investigating authority the burden of identifying evidence which establishes that the benefit from the previous financial contribution does indeed continue beyond privatization. In the absence of such proof, the fact of the arm’s-length, fair market value privatization is sufficient to compel a conclusion that the “benefit” no longer exists for the privatized firm, and, therefore, that countervailing duties should not be levied. This is an accurate characterization of a Member’s obligations under the SCM Agreement.

Therefore, we find that the Panel erred in concluding that “[p]rivatizations at arm’s length and for fair market value must lead to the conclusion that the privatized producer paid for what he got and thus did not get any benefit or advantage from the prior financial contribution bestowed upon the state-owned producer.” (emphasis added) Privatization at arm’s length and for fair market value may result in extinguishing the benefit. Indeed, we find that there is a rebuttable presumption that a benefit ceases to exist after such a privatization. Nevertheless, it does not necessarily do so. There is no inflexible rule requiring that investigating authorities, in future cases, automatically determine that a “benefit” derived from pre-privatization financial contributions expires following privatization at arm’s length and for fair market value. It depends on the facts of each case. …

S.2.9.10 US — Upland Cotton, para. 731
(WT/DS267/AB/R)

We need not decide, in this case, whether an export credit guarantee program that meets the standard of item (j) of the Illustrative List of Export Subsidies — because the premiums charged are adequate to cover long-term operating costs and losses — may nevertheless be challenged as a prohibited export subsidy under Article 3.1(a) on the basis that it confers a benefit. This is because, even if we were to assume that such a claim were possible, we would conclude that the Panel was within its discretion in exercising judicial economy in respect of Brazil’s claim.

 
S.2.10 Article 1.1 — Pass-through of indirect subsidies.
See also SCM Agreement, Article VI.3 of the GATT 1994 — Subsidies (S.2.43)     back to top

S.2.10.1 US — Softwood Lumber IV, para. 142
(WT/DS257/AB/R)

[According to] the general definition of a “subsidy” in Article 1 of the SCM Agreement … a subsidy shall be deemed to exist only if there is both a financial contribution by a government within the meaning of Article 1.1(a)(1), and a benefit is thereby conferred within the meaning of Article 1.1(b). If countervailing duties are intended to offset a subsidy granted to the producer of an input product, but the duties are to be imposed on the processed product (and not the input product), it is not sufficient for an investigating authority to establish only for the input product the existence of a financial contribution and the conferral of a benefit to the input producer. In such a case, the cumulative conditions set out in Article 1 must be established with respect to the processed product, especially when the producers of the input and the processed product are not the same entity. The investigating authority must establish that a financial contribution exists; and it must also establish that the benefit resulting from the subsidy has passed through, at least in part, from the input downstream, so as to benefit indirectly the processed product to be countervailed.

S.2.10.2 US — Softwood Lumber IV, para. 143
(WT/DS257/AB/R)

… Thus, for a potentially countervailable subsidy to exist, there must be a financial contribution by the government that confers a benefit to a recipient. Where a subsidy is conferred on input products, and the countervailing duty is imposed on processed products, the initial recipient of the subsidy and the producer of the eventually countervailed product, may not be the same. In such a case, there is a direct recipient of the benefit — the producer of the input product. When the input is subsequently processed, the producer of the processed product is an indirect recipient of the benefit — provided it can be established that the benefit flowing from the input subsidy is passed through, at least in part, to the processed product. Where the input producers and producers of the processed products operate at arm’s length, the pass-through of input subsidy benefits from the direct recipients to the indirect recipients downstream cannot simply be presumed; it must be established by the investigating authority. In the absence of such analysis, it cannot be shown that the essential elements of the subsidy definition in Article 1 are present in respect of the processed product. In turn, the right to impose a countervailing duty on the processed product for the purpose of offsetting an input subsidy, would not have been established in accordance with Article VI:3 of the GATT 1994, and, consequently, would also not have been in accordance with Articles 10 and 32.1 of the SCM Agreement.

S.2.10.3 US — Upland Cotton, para. 471
(WT/DS267/AB/R)

The United States contends that the Appellate Body’s reasoning in US — Softwood Lumber IV indicates that it cannot be presumed that a “subsidy”, as defined in Article 1.1 of the SCM Agreement, provided to a producer of an input (such as raw cotton) “passes through” to the producer of the processed product (in this case, upland cotton lint). However, the Appellate Body’s reasoning in that dispute focuses not on the requirements for establishing serious prejudice under Articles 5(c) and 6.3(c) of the SCM Agreement, but on the conduct of countervailing duty investigations pursuant to Part V of the SCM Agreement.

 
S.2.11 Article 3.1(a) — “except as provided in the Agreement on Agriculture” — export subsidies     back to top

S.2.11.1 Canada — Dairy (Article 21.5 — New Zealand and US), paras. 123-125
(WT/DS103/AB/RW, WT/DS113/AB/RW)

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

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

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

S.2.11.2 US — Upland Cotton, paras. 629-630
(WT/DS267/AB/R)

… According to the United States, “Article 3 of the SCM Agreement … is subject in its application to Article 21.1 of the Agreement on Agriculture”. The United States then argues that, because “export credit guarantees are not subject to the disciplines of export subsidies for purposes of the Agreement on Agriculture, Article 21.1 of that Agreement renders Article 3.1(a) of the SCM Agreement inapplicable to such measures”. …

… Therefore, because it is premised on an incorrect interpretation of Article 10.2 of the Agreement on Agriculture, we reject the United States’ argument. …

 
S.2.12 Article 3.1(a) — “contingent, in law or in fact, … upon export performance”     back to top

S.2.12.1 Canada — Aircraft, para. 166
(WT/DS70/AB/R)

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

S.2.12.2 Canada — Aircraft, para. 167
(WT/DS70/AB/R)

Article 3.1(a) prohibits any subsidy that is contingent upon export performance, whether that subsidy is contingent “in law or in fact”. The Uruguay Round negotiators have, through the prohibition against export subsidies that are contingent in fact upon export performance, sought to prevent circumvention of the prohibition against subsidies contingent in law upon export performance. In our view, the legal standard expressed by the word “contingent” is the same for both de jure or de facto contingency. There is a difference, however, in what evidence may be employed to prove that a subsidy is export contingent. …

S.2.12.2A Canada — Aircraft, para. 171
(WT/DS70/AB/R)

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

S.2.12.3 Canada — Aircraft (Article 21.5 — Brazil), para. 47
(WT/DS70/AB/RW)

It is worth recalling that the granting of a subsidy is not, in and of itself, prohibited under the SCM Agreement. Nor does granting a “subsidy”, without more, constitute an inconsistency with that Agreement. The universe of subsidies is vast. Not all subsidies are inconsistent with the SCM Agreement. The only “prohibited” subsidies are those identified in Article 3 of the SCM Agreement; Article 3.1(a) of that Agreement prohibits those subsidies that are “contingent, in law or in fact, upon export performance”. We have stated previously that “a subsidy is prohibited under Article 3.1(a) if it is ‘conditional’ upon export performance, that is, if it is ‘dependent for its existence on’ export performance.” We have also emphasized that a “relationship of conditionality or dependence”, namely that the granting of a subsidy should be “tied to” the export performance, lies at the “very heart” of the legal standard in Article 3.1(a) of the SCM Agreement.

S.2.12.4 Canada — Aircraft (Article 21.5 — Brazil), paras. 48, 51
(WT/DS70/AB/RW)

To demonstrate the existence of this “relationship of conditionality or dependence”, we have also stated that it is not sufficient to show that a subsidy is granted in the knowledge, or with the anticipation, that exports will result. Such knowledge or anticipation does not, taken alone, demonstrate that the granting of the subsidy is “contingent upon” export performance. The second sentence of footnote 4 of the SCM Agreement stipulates, in this regard, that the “mere fact that a subsidy is granted to enterprises which export shall not for that reason alone be considered to be an export subsidy …”. (emphasis added) That fact, by itself, does not, therefore, compel the conclusion that there is a “relationship of conditionality or dependence”, such that the granting of a subsidy is “tied to” export performance. However, we have also said that the export-orientation of a recipient “may be taken into account as a relevant fact, provided it is one of several facts which are considered and is not the only fact supporting a finding” of export contingency. (underlining added)

For all these reasons, we find that Brazil has not sufficiently established that the Canadian regional aircraft industry is “specifically targeted” because of its high export-orientation.

S.2.12.4A US — FSC (Article 21.5 — EC), para. 110
(WT/DS108/AB/RW)

The United States appeals the Panel’s finding that the measure involves the grant of a subsidy “contingent … upon export performance”. The United States contends that, under Article 3.1(a) of the SCM Agreement, export contingency is a necessary condition of grant if a subsidy is to be export contingent. It points out that the ETI measure is export-neutral as the tax exclusion is available with respect to property that is not produced in the United States and, therefore, not exported from the United States. Thus, it is argued, the tax exclusion can be obtained without exportation so that export performance is not a condition that must be satisfied in order to obtain this exclusion. The Panel, however, overlooked this fact and “artificially bifurcat[ed]” the ETI measure, examining it only as it relates to property produced in the United States. The United States insists that no such distinction exists under the ETI measure.

S.2.12.5 US — FSC (Article 21.5 — EC), paras. 114-115
(WT/DS108/AB/RW)

… The conditions for the grant of subsidy with respect to property produced outside the United States are distinct from those governing the grant of subsidy in respect of property produced within the United States.

In our view, it is hence appropriate, indeed necessary, under Article 3.1(a) of the SCM Agreement, to examine separately the conditions pertaining to the grant of the subsidy in the two different situations addressed by the measure. … The measure itself identifies the two situations which must be different since the very same property cannot be produced both within and outside the United States.

S.2.12.6 US — FSC (Article 21.5 — EC), para. 119
(WT/DS108/AB/RW)

… Our conclusion that the ETI measure grants subsidies that are export contingent in the first set of circumstances is not affected by the fact that the subsidy can also be obtained in the second set of circumstances. The fact that the subsidies granted in the second set of circumstances might not be export contingent does not dissolve the export contingency arising in the first set of circumstances. Conversely, the export contingency arising in these circumstances has no bearing on whether there is an export contingent subsidy in the second set of circumstances. …

S.2.12.7 US — Upland Cotton, para. 571
(WT/DS267/AB/R)

Although an export subsidy granted to agricultural products must be examined, in the first place, under the Agreement on Agriculture, we find it appropriate, as has the Appellate Body in previous disputes, to rely on the SCM Agreement for guidance in interpreting provisions of the Agreement on Agriculture. Thus, we consider the export-contingency requirement in Article 1(e) of the Agreement on Agriculture having regard to that same requirement contained in Article 3.1(a) of the SCM Agreement.

S.2.12.8 US — Upland Cotton, para. 572
(WT/DS267/AB/R)

The Appellate Body has indicated, in this regard, that the ordinary meaning of “contingent” is “conditional” or “dependent” and that Article 3.1(a) of the SCM Agreement prohibits subsidies that are conditional upon export performance, or are dependent for their existence on export performance. It has also emphasized that “a ‘relationship of conditionality or dependence’, namely that the granting of a subsidy should be ‘tied to’ the export performance, lies at the ‘very heart’ of the legal standard in Article 3.1(a) of the SCM Agreement”. …

S.2.12.9 US — Upland Cotton, para. 578
(WT/DS267/AB/R)

Furthermore, we agree with the Panel’s conclusion that the fact that the subsidy is also available to domestic users of upland cotton does not “dissolve” the export-contingent nature of the Step 2 payments to exporters. The Panel’s reasoning is consistent with the approach taken by the Appellate Body in US — FSC (Article 21.5 — EC). In that case, the United States argued that the tax exclusion at issue was not an export-contingent subsidy because it was available for both (i) property produced within the United States and held for use outside the United States and (ii) property produced outside the United States and held for use outside the United States. The United States asserted that, as the tax exemption was available in both circumstances, it was “export-neutral”. According to the United States, the panel’s separate examination of each situation in which the tax exemption was available “artificially bifurcat[ed]” the measure.

S.2.12.10 US — Upland Cotton, para. 579
(WT/DS267/AB/R)

The Appellate Body rejected the United States’ contention in US — FSC (Article 21.5 — EC) because it considered it necessary, under Article 3.1(a) of the SCM Agreement, “to examine separately the conditions pertaining to the grant of the subsidy in the two different situations”. [Appellate Body Report, US — FSC (Article 21.5 — EC), para. 115] It then confirmed the Panel’s finding that the tax exemption in the first situation, namely for property produced within the United States and held for use outside the United States, is an export-contingent subsidy. In its reasoning, the Appellate Body explained that whether or not the subsidies were export-contingent in both situations envisaged by the measure would not alter the conclusion that the tax exemption in the first situation was contingent upon export …

S.2.12.11 US — Upland Cotton, para. 580
(WT/DS267/AB/R)

As in US — FSC (Article 21.5 — EC), the Panel in this case found that Step 2 payments are available in two situations, only one of which involves export contingency. The Panel’s conclusion, therefore, is consistent with the Appellate Body’s holding in US — FSC (Article 21.5 — EC) quoted above that “the fact that the subsidies granted in the second set of circumstances might not be export contingent does not dissolve the export contingency arising in the first set of circumstances”.

S.2.12.12 US — Upland Cotton, para. 582
(WT/DS267/AB/R)

In sum, we agree with the Panel’s view that Step 2 payments are export-contingent and, therefore, an export subsidy for purposes of Article 9 of the Agreement on Agriculture and Article 3.1(a) of the SCM Agreement. The statute and regulations pursuant to which Step 2 payments are granted, on their face, condition payments to exporters on exportation. In order to claim payment, an exporter must show proof of exportation. If an exporter does not provide proof of exportation, the exporter will not receive a payment. This is sufficient to establish that Step 2 payments to exporters of United States upland cotton are “conditional upon export performance” or “dependent for their existence on export performance”. That domestic users may also be eligible to receive payments under different conditions does not eliminate the fact that an exporter will receive payment only upon proof of exportation.

 
S.2.13 Article 3.1(a) — Contingency in law     back to top

S.2.13.1 Canada — Autos, para. 100
(WT/DS139/AB/R, WT/DS142/AB/R)

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

S.2.13.2 Canada — Autos, para. 104
(WT/DS139/AB/R, WT/DS142/AB/R)

… Like the Panel, we fail to see how a manufacturer with a production-to-sales ratio of 100:100 could obtain access to the import duty exemption — and still maintain its required production-to-sales ratio — without exporting. … In our view, as the import duty exemption is simply not available to a manufacturer unless it exports motor vehicles, the import duty exemption is clearly conditional, or dependent upon, exportation and, therefore, is contrary to Article 3.1(a) of the SCM Agreement.

S.2.13.3 Canada — Autos, para. 107
(WT/DS139/AB/R, WT/DS142/AB/R)

Although we are not examining whether the subsidy in this case is contingent “in fact” upon export performance, we note that footnote 4 to Article 3.1(a) uses the words “tied to” as a synonym for “contingent” or “conditional”. As the legal standard is the same for de facto and de jure export contingency, we believe that a “tie”, amounting to the relationship of contingency, between the granting of the subsidy and actual or anticipated exportation meets the legal standard of “contingent” in Article 3.1(a) of the SCM Agreement.

S.2.13.4 Canada — Autos, para. 108
(WT/DS139/AB/R, WT/DS142/AB/R)

Even where the ratio requirement for a particular manufacturer is set at less than 100:100, in our view, there is contingency “in law” upon export performance because, as a result of the operation of the MVTO 1998 and the SROs themselves, the granting of, or the entitlement to, the import duty exemption is tied to the exportation of motor vehicles by the manufacturer beneficiaries. By the very operation of the measure, the more motor vehicles that a manufacturer exports, the more motor vehicles it can import duty-free. In other words, a clear relationship of dependency or conditionality exists between the granting of the import duty exemption and the exportation of motor vehicles by manufacturer beneficiaries. We find, therefore, that, even when the ratio requirements are less than 100:100, the measure is “contingent … in law … upon export performance”.

S.2.13.5 US — Upland Cotton, para. 572
(WT/DS267/AB/R)

… We are also mindful that in demonstrating export contingency in the case of subsidies that are contingent in law upon export performance, the “existence of that condition can be demonstrated on the basis of the very words of the relevant legislation, regulation or other legal instrument constituting the measure”.

 
S.2.14 Article 3.1(a) — Contingency in fact     back to top

S.2.14.1 Canada — Aircraft, para. 169
(WT/DS70/AB/R)

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

S.2.14.2 Canada — Aircraft, para. 175
(WT/DS70/AB/R)

Having examined the legal standard set forth in footnote 4 for determining de facto export contingency under Article 3.1(a), we turn next to the Panel’s application of that legal standard to the facts relating to assistance provided by TPC to the Canadian regional aircraft industry. The Panel set out in some detail the various facts that it took into account in concluding that TPC assistance was “contingent … in fact … upon export performance”. Indeed, the Panel took into account sixteen different factual elements, which covered a variety of matters, including: TPC’s statement of its overall objectives; types of information called for in applications for TPC funding; the considerations, or eligibility criteria, employed by TPC in deciding whether to grant assistance; factors to be identified by TPC officials in making recommendations about applications for funding; TPC’s record of funding in the export field, generally, and in the aerospace and defence sector, in particular; the nearness-to-the-export-market of the projects funded; the importance of projected export sales by applicants to TPC’s funding decisions; and the export orientation of the firms or the industry supported.

 
S.2.14A Article 3.1(b) — “except as provided in the Agreement on Agriculture” — import substitution subsidies     back to top

S.2.14A.1 US — Upland Cotton, para. 541
(WT/DS267/AB/R)

It may well be that a measure that is an import substitution subsidy could fall within the second sentence of paragraph 7 as “[m]easures directed at agricultural processors [that] shall be included [in the AMS calculation] to the extent that such measures benefit the producers of the basic agricultural products”. There is nothing, however, in the text of paragraph 7 [of Annex 3 of the Agreement on Agriculture] that suggests that such measures, when they are import substitution subsidies, are exempt from the prohibition in Article 3.1(b) of the SCM Agreement. We agree with the Panel that there is a clear distinction between a provision that requires a Member to include a certain type of payment (or part thereof) in its AMS calculation and one that would authorize subsidies that are contingent on the use of domestic over imported goods.

S.2.14A.2 US — Upland Cotton, para. 542
(WT/DS267/AB/R)

… Like the Panel, we do not believe that the scope of paragraph 7 is limited to measures that have an import substitution component in them. There could be other measures covered by paragraph 7 of Annex 3 that do not necessarily have such a component. Indeed, Brazil submits that if the Step 2 payments were provided to United States processors of cotton, regardless of the origin of the cotton, these processors “would still buy at least some U.S. upland cotton, so producers would continue to derive some benefit”. Thus, paragraph 7 of Annex 3 refers more broadly to measures directed at agricultural processors that benefit producers of a basic agricultural product and, contrary to the United States’ assertion, it is not rendered inutile by the Panel’s interpretation. WTO Members may still provide subsidies directed at agricultural processors that benefit producers of a basic agricultural commodity in accordance with the Agreement on Agriculture, as long as such subsidies do not include an import substitution component.

S.2.14A.3 US — Upland Cotton, para. 545
(WT/DS267/AB/R)

Article 6.3 does not authorize subsidies that are contingent on the use of domestic over imported goods. It only provides that a WTO Member shall be considered to be in compliance with its domestic support reduction commitments if its Current Total AMS does not exceed that Member’s annual or final bound commitment level specified in its Schedule. It does not say that compliance with Article 6.3 of the Agreement on Agriculture insulates the subsidy from the prohibition in Article 3.1(b). …

S.2.14A.4 US — Upland Cotton, para. 546
(WT/DS267/AB/R)

… we find that paragraph 7 of Annex 3 and Article 6.3 of the Agreement on Agriculture do not deal specifically with the same matter as Article 3.1(b) of the SCM Agreement, that is, subsidies contingent upon the use of domestic over imported goods.

S.2.14A.5 US — Upland Cotton, para. 547
(WT/DS267/AB/R)

We are mindful that the introductory language of Article 3.1 of the SCM Agreement clarifies that this provision applies “[e]xcept as provided in the Agreement on Agriculture”. Furthermore, as the United States has pointed out, this introductory language applies to both the export subsidy prohibition in paragraph (a) and to the prohibition on import substitution subsidies in paragraph (b) of Article 3.1. As we explained previously, in our review of the provisions of the Agreement on Agriculture [paragraph 7 of Annex 3 and Article 6.3 of the Agreement on Agriculture] relied on by the United States, we did not find a provision that deals specifically with subsidies that have an import substitution component. By contrast, the prohibition on the provision of subsidies contingent upon the use of domestic over imported goods in Article 3.1(b) of the SCM Agreement is explicit and clear. Because Article 3.1(b) treats subsidies contingent on the use of domestic over imported products as prohibited subsidies, it would be expected that the drafters would have included an equally explicit and clear provision in the Agreement on Agriculture if they had indeed intended to authorize such prohibited subsidies provided in connection with agricultural goods. We find no provision in the Agreement on Agriculture dealing specifically with subsidies contingent upon the use of domestic over imported agricultural goods.

S.2.14A.6 US — Upland Cotton, para. 549
(WT/DS267/AB/R)

… Furthermore, as the Appellate Body has explained, “a treaty interpreter must read all applicable provisions of a treaty in a way that gives meaning to all of them, harmoniously”. We agree with the Panel that “Article 3.1(b) of the SCM Agreement can be read together with the Agreement on Agriculture provisions relating to domestic support in a coherent and consistent manner which gives full and effective meaning to all of their terms”.

S.2.14A.7 US — Upland Cotton, para. 550
(WT/DS267/AB/R)

In sum, we are not persuaded by the United States’ submission that the prohibition in Article 3.1(b) of the SCM Agreement is inapplicable to import substitution subsidies provided in connection with products falling under the Agreement on Agriculture. WTO Members may still provide domestic support that is consistent with their reduction commitments under the Agreement on Agriculture. In providing such domestic support, however, WTO Members must be mindful of their other WTO obligations, including the prohibition in Article 3.1(b) of the SCM Agreement on the provision of subsidies that are contingent on the use of domestic over imported goods.

 
S.2.15 Article 3.1(b) — “contingent upon the use of domestic over imported products”     back to top

S.2.15.1 Canada — Autos, para. 123
(WT/DS139/AB/R, WT/DS142/AB/R)

In our discussion of Article 3.1(a) in Section VI of this Report, we recalled that in CanadaAircraft [Appellate Body Report, para. 166] we stated that “the ordinary connotation of ‘contingent’ is ‘conditional’ or ‘dependent for its existence on something else’.” Thus, a subsidy is prohibited under Article 3.1(a) if it is “conditional” upon export performance, that is, if it is “dependent for its existence on” export performance. In addition, in CanadaAircraft, we stated that contingency “in law” is demonstrated “on the basis of the words of the relevant legislation, regulation or other legal instrument.” (emphasis added) As we have already explained, such conditionality can be derived by necessary implication from the words actually used in the measure. We believe that this legal standard applies not only to “contingency” under Article 3.1(a), but also to “contingency” under Article 3.1(b) of the SCM Agreement.

S.2.15.2 Canada — Autos, paras. 131-132
(WT/DS139/AB/R, WT/DS142/AB/R)

In our view, the Panel’s examination of the CVA requirements for specific manufacturers was insufficient for a reasoned determination of whether contingency “in law” on the use of domestic over imported goods exists. For the MVTO 1998 manufacturers and most SRO manufacturers, the Panel did not make findings as to what the actual CVA requirements are and how they operate for individual manufacturers. Without this vital information, we do not believe the Panel knew enough about the measure to determine whether the CVA requirements were contingent “in law” upon the use of domestic over imported goods. We recall that the Panel did make a finding as to the level of the CVA requirements for one company, CAMI. The Panel stated that the CVA requirements for CAMI are 60 per cent of the cost of sales of vehicles sold in Canada. At this level, it may well be that the CVA requirements operate as a condition for using domestic over imported goods. However, the Panel did not examine how the CVA requirements would actually operate at a level of 60 per cent.

The Panel’s failure to examine fully the legal instruments at issue here and their implications for individual manufacturers vitiates its conclusion that the CVA requirements do not make the import duty exemption contingent “in law” upon the use of domestic over imported goods. In the absence of an examination of the operation of the applicable CVA requirements for individual manufacturers, the Panel simply did not have a sufficient basis for its finding on the issue of “in law” contingency. Thus, we conclude that the Panel erred in conducting its “in law” contingency analysis.

S.2.15.3 US — Upland Cotton, para. 544
(WT/DS267/AB/R)

… Article 3.1(b) of the SCM Agreement prohibits subsidies that are contingent — that is, “conditional” — on the use of domestic over imported goods.

 
S.2.16 Article 3.1(b) — Contingent in law and contingent in fact     back to top

S.2.16.1 Canada — Autos, paras. 139-143
(WT/DS139/AB/R, WT/DS142/AB/R)

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

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

Second, we recall our findings in European CommunitiesRegime for the Importation, Sale and Distribution of Bananas (“European CommunitiesBananas”) on whether or not Article of the GATS covers cases of de facto discrimination. In that case, the Panel found that Article XVII of the GATS provides relevant context for determining whether Article of the GATS applies to both de jure and de facto discrimination. On this issue, we said:

Article XVII of the GATS is merely one of many provisions in the WTO Agreement that require the obligation of providing “treatment no less favourable”. The possibility that the two Articles may not have exactly the same meaning does not imply that the intention of the drafters of the GATS was that a de jure, or formal, standard should apply in Article of the GATS. If that were the intention, why does Article not say as much? The obligation imposed by Article is unqualified. The ordinary meaning of this provision does not exclude de facto discrimination. [Appellate Body Report, para. 233]

We believe the same reasoning is applicable here. The fact that Article 3.1(a) refers to “in law or in fact”, while those words are absent from Article 3.1(b), does not necessarily mean that Article 3.1(b) extends only to de jure contingency.

Finally, we believe that a finding that Article 3.1(b) extends only to contingency “in law” upon the use of domestic over imported goods would be contrary to the object and purpose of the SCM Agreement because it would make circumvention of obligations by Members too easy. We expressed a similar concern with respect to the GATS in European CommunitiesBananas when we said:

Moreover, if Article was not applicable to de facto discrimination, it would not be difficult — and, indeed, it would be a good deal easier in the case of trade in services, than in the case of trade in goods — to devise discriminatory measures aimed at circumventing the basic purpose of that Article . [Appellate Body Report, para. 233]

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

 
S.2.17 Article 4, paragraphs 1 to 4 — Consultations     back to top

S.2.17.1 Brazil — Aircraft, paras. 131-132
(WT/DS46/AB/R)

In our view, Articles 4 and 6 of the DSU, as well as paragraphs 1 to 4 of Article 4 of the 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 of the 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. …

 
S.2.18 Article 4.2 — “statement of available evidence”     back to top

S.2.18.1 US — FSC, para. 159
(WT/DS108/AB/R)

… 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.

S.2.18.2 US — FSC, para. 161
(WT/DS108/AB/R)

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. …

S.2.18.3 US — Upland Cotton, para. 308
(WT/DS267/AB/R)

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.

 
S.2.19 Article 4.7 — “withdraw the subsidy without delay”     back to top

S.2.19.1 Brazil — Aircraft (Article 21.5 — Canada), para. 45
(WT/DS46/AB/RW)

Turning to the ordinary meaning of “withdraw”, 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 … In our view, to continue to make payments under an export subsidy measure found to be prohibited is not consistent with the obligation to