Topics handled by WTO committees and agreements
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) — “direct transfer of funds”
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, entrustment or direction to a private body
Article 1.1(b) — Conferral of a benefit on a recipient. See also 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 1.2 — Specificity
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 11.11 — Time-limit for investigation
Article 12.1 — Notice of information required and opportunity to present evidence. See also Anti-Dumping Agreement, Article 6.1 (A.3.30)
Article 12.7 — Determinations on the basis of the facts available. See also Anti-Dumping Agreement, Article 6.8 and Annex II (A.3.32 — 36)
Article 12.8 and 12.9 — Interested parties
Article 14 — Chapeau — Calculation of the benefit to the “recipient”. See also SCM Agreement, Article 1.1(b) — Conferral of a benefit on 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 15.5 — Causation
Article 15.7 — Threat of material injury. See also Anti-Dumping Agreement, Article 3.7 — Threat of material injury (A.3.27); and Safeguards Agreement, Article 4.1(b) — Threat of serious injury (S.1.24)
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 Brazil Desiccated 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.2.1.5 US — Countervailing Duty Investigation on DRAMS, para. 115
(WT/DS296/AB/R)

 

… the object and purpose of the SCM Agreement … reflects a delicate balance between the Members that sought to impose more disciplines on the use of subsidies and those that sought to impose more disciplines on the application of countervailing measures. … This balance must be borne in mind in interpreting paragraph (iv), which allows Members to apply countervailing measures to products in situations where a government uses a private body as a proxy to provide a financial contribution (provided, of course, that the other requirements of a countervailable subsidy are proved as well). At the same time, the interpretation of paragraph (iv) cannot be so broad so as to allow Members to apply countervailing measures to products whenever a government is merely exercising its general regulatory powers.

 
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 forgoing 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 per cent ad valorem, or to any other de minimis threshold. It is also worth noting that, under Part II 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 forgoing 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.2.3.2 US — Countervailing Duty Investigation on DRAMS, para. 107
(WT/DS296/AB/R)

 

… situations involving exclusively private conduct — that is, conduct that is not in some way attributable to a government or public body — cannot constitute a “financial contribution” for purposes of determining the existence of a subsidy under the SCM Agreement.

 
S.2.3A Article 1.1(a)(1) — “direct transfer of funds”     back to top

S.2.3A.1 Japan — DRAMs (Korea), paras. 250-252
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

In our view, the term “funds” encompasses not only “money” but also financial resources and other financial claims more generally. The concept of “transfer of funds” adopted by Korea is too literal and mechanistic because it fails to encapsulate how financial transactions give rise to an alteration of obligations from which an accrual of financial resources results. We are unable to agree that direct transfers of funds, as contemplated in Article 1.1(a)(1)(i), are confined to situations where there is an incremental flow of funds to the recipient that enhances the net worth of the recipient. Therefore, the Panel did not err in finding that the JIA properly characterized the modification of the terms of pre-existing loans in the present case as a direct transfer of funds.

 

We observe that the words “grants, loans, and equity infusion” are preceded by the abbreviation “e.g.”, which indicates that grants, loans, and equity infusion are cited examples of transactions falling within the scope of Article 1.1(a)(1)(i). This shows that transactions that are similar to those expressly listed are also covered by the provision. Debt forgiveness, which extinguishes the claims of a creditor, is a form of performance by which the borrower is taken to have repaid the loan to the lender. The extension of a loan maturity enables the borrower to enjoy the benefit of the loan for an extended period of time. An interest rate reduction lowers the debt servicing burden of the borrower. In all of these cases, the financial position of the borrower is improved and therefore there is a direct transfer of funds within the meaning of Article 1.1(a)(1)(i).

 

With respect to Korea’s argument that debt-to-equity swaps cannot be considered as direct transfers of funds given that no money is transferred thereby to the recipient, the Panel reasoned that “the relinquishment and modification of claims inherent in such transactions similarly result … in new rights, or claims, being transferred to the former debtor”. Again, we see no error in the Panel’s analysis. Debt-to-equity swaps replace debt with equity, and in a case such as this, when the debt-to-equity swap is intended to address the deteriorating financial condition of the recipient company, the cancellation of the debt amounts to a direct transfer of funds to the company.

 
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 “forgoing” 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 “forgone” 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 forgone “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 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 forgoing 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, entrustment or direction to a private body     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.2.8.2 US — Countervailing Duty Investigation on DRAMS, para. 108
(WT/DS296/AB/R)

 

… paragraph (iv) covers situations where a private body is being used as a proxy by the government to carry out one of the types of functions listed in paragraphs (i) through (iii). Seen in this light, the terms “entrusts” and “directs” in paragraph (iv) identify the instances where seemingly private conduct may be attributable to a government for purposes of determining whether there has been a financial contribution within the meaning of the SCM Agreement.

 

S.2.8.3 US — Countervailing Duty Investigation on DRAMS, paras. 110-111
(WT/DS296/AB/R)

 

The term “entrusts” connotes the action of giving responsibility to someone for a task or an object. In the context of paragraph (iv) of Article 1.1(a)(1), the government gives responsibility to a private body “to carry out” one of the types of functions listed in paragraphs (i) through (iii) of Article 1.1(a)(1). As the United States acknowledges, “delegation” (the word used by the Panel) may be a means by which a government gives responsibility to a private body to carry out one of the functions listed in paragraphs (i) through (iii). Delegation is usually achieved by formal means, but delegation also could be informal. Moreover, there may be other means, be they formal or informal, that governments could employ for the same purpose. Therefore, an interpretation of the term “entrusts” that is limited to acts of “delegation” is too narrow.

 

As for the term “directs”, we note that some of the definitions — such as “give authoritative instructions to” and “order (a person) to do” — suggest that the person or entity that “directs” has authority over the person or entity that is directed. In contrast, some of the other definitions — such as “inform or guide” — do not necessarily convey this sense of authority. In our view, that the private body under paragraph (iv) is directed “to carry out” a function underscores the notion of authority that is included in some of the definitions of the term “direct”. This understanding of the term “directs” is reinforced by the Spanish and French versions of the SCM Agreement, which use the verbs “ordenar” and “ordonner”, respectively. Both of these verbs unambiguously convey a sense of authority exercised over someone. In the context of paragraph (iv), this authority is exercised by a government over a private body. A “command” (the word used by the Panel) is certainly one way in which a government can exercise authority over a private body in the sense foreseen by Article 1.1(a)(1)(iv), but governments are likely to have other means at their disposal to exercise authority over a private body. Some of these means may be more subtle than a “command” or may not involve the same degree of compulsion. Thus, an interpretation of the term “directs” that is limited to acts of “command” is also too narrow.

 

S.2.8.4 US — Countervailing Duty Investigation on DRAMS, para. 112
(WT/DS296/AB/R)

 

… As the panel [at paragraph 8.53] in US — Export Restraints explained, this means that “the scope of the actions … covered by subparagraph (iv) must be the same as those covered by subparagraphs (i)—(iii)”. A situation where the government entrusts or directs a private body to carry out a function that is outside the scope of paragraphs (i) through (iii) would consequently fall outside the scope of paragraph (iv). Thus, we agree with the US — Export Restraints panel that “the difference between subparagraphs (i)—(iii) on the one hand, and subparagraph (iv) on the other, has to do with the identity of the actor, and not with the nature of the action”. … We therefore agree with Korea that there must be a demonstrable link between the government and the conduct of the private body.

 

S.2.8.5 US — Countervailing Duty Investigation on DRAMS, para. 113
(WT/DS296/AB/R)

 

We recall, moreover, that Article 1.1(a)(1) of the SCM Agreement is concerned with the existence of a financial contribution. Paragraph (iv), in particular, is intended to ensure that governments do not evade their obligations under the SCM Agreement by using private bodies to take actions that would otherwise fall within Article 1.1(a)(1), were they to be taken by the government itself. In other words, Article 1.1(a)(1)(iv) is, in essence, an anti-circumvention provision. A finding of entrustment or direction, therefore, requires that the government give responsibility to a private body — or exercise its authority over a private body — in order to effectuate a financial contribution.

 

S.2.8.6 US — Countervailing Duty Investigation on DRAMS, para. 114
(WT/DS296/AB/R)

 

It follows, therefore, that not all government acts necessarily amount to entrustment or direction. We note that both the United States and Korea agree that “mere policy pronouncements” by a government would not, by themselves, constitute entrustment or direction for purposes of Article 1.1(a)(1)(iv). Furthermore, entrustment and direction — through the giving of responsibility to or exercise of authority over a private body — imply a more active role than mere acts of encouragement. Additionally, we agree with the panel in US — Export Restraints that entrustment and direction do not cover “the situation in which the government intervenes in the market in some way, which may or may not have a particular result simply based on the given factual circumstances and the exercise of free choice by the actors in that market”. Thus, government “entrustment” or “direction” cannot be inadvertent or a mere by-product of governmental regulation. …

 

S.2.8.7 US — Countervailing Duty Investigation on DRAMS, para. 115
(WT/DS296/AB/R)

 

… This balance [in the object and purpose of the SCM Agreement] must be borne in mind in interpreting paragraph (iv), which allows Members to apply countervailing measures to products in situations where a government uses a private body as a proxy to provide a financial contribution (provided, of course, that the other requirements of a countervailable subsidy are proved as well). At the same time, the interpretation of paragraph (iv) cannot be so broad so as to allow Members to apply countervailing measures to products whenever a government is merely exercising its general regulatory powers.

 

S.2.8.8 US — Countervailing Duty Investigation on DRAMS, para. 116
(WT/DS296/AB/R)

 

In sum, we are of the view that, pursuant to paragraph (iv), “entrustment” occurs where a government gives responsibility to a private body, and “direction” refers to situations where the government exercises its authority over a private body. In both instances, the government uses a private body as proxy to effectuate one of the types of financial contributions listed in paragraphs (i) through (iii). It may be difficult to identify precisely, in the abstract, the types of government actions that constitute entrustment or direction and those that do not. The particular label used to describe the governmental action is not necessarily dispositive. Indeed, as Korea acknowledges, in some circumstances, “guidance” by a government can constitute direction. In most cases, one would expect entrustment or direction of a private body to involve some form of threat or inducement, which could, in turn, serve as evidence of entrustment or direction. The determination of entrustment or direction will hinge on the particular facts of the case.

 

S.2.8.9 US — Countervailing Duty Investigation on DRAMS, para. 118
(WT/DS296/AB/R)

 

… We explained earlier that the terms “entrusts” and “directs” in Article 1.1(a)(1)(iv) are not limited to “delegation” and “command”, respectively. In our view, there may be other means by which governments can give responsibility to or exercise authority over a private body that may not fall within the terms “delegation” and “command”, if these terms are strictly construed. … We do not consider that these words, on their own, convey what we understand by “entrusts” or “directs”, as used in Article 1.1(a)(1)(iv), for the terms “delegation” and “command”, as we have explained above, are too narrow. Therefore, we modify the Panel’s interpretation of Article 1.1(a)(1)(iv) of the SCM Agreement … to the extent that it may be understood as limiting the terms “entrusts” and “directs” to acts of “delegation” and “command”.

 

S.2.8.10 US — Countervailing Duty Investigation on DRAMS, para. 122-125
(WT/DS296/AB/R)

 

… Korea explains that a finding of entrustment or direction under Article 1.1(a)(1)(iv) requires that the private body carry out one of the functions listed in that provision. “Mere direction without action”, Korea submits, is not sufficient. …

 

… even assuming arguendo Korea is correct that a finding of entrustment or direction requires that the function so entrusted or directed be carried out, we are not persuaded that the basis for the Panel’s finding is as narrow as that alleged by Korea.

 

In any event, a finding of entrustment or direction, by itself, does not establish the existence of a financial contribution. Where a government entrusts or directs a private body — by giving responsibility to or exercising its authority over the private body — it is likely that the function that is allegedly entrusted or directed will indeed be carried out. The private body’s refusal to carry out the function may be evidence that the government did not give it responsibility for such function, or that the government did not exercise the requisite authority over it such that the private body did not heed the government. It does not, however, on its own, mean that the private body was not entrusted or directed. Depending on the circumstances, a private body may decide not to carry out a function with which it was so entrusted or directed, despite the possible negative consequences that may follow.

 

Still, this does not mean that it is possible to make a finding of a financial contribution under Article 1.1(a)(1)(iv) where a private body does not carry out the function allegedly entrusted or directed to it. Failure by the private body to carry out one of the functions of the types listed in paragraphs (i) through (iii) means that nothing of economic value has been transferred from the grantor to the recipient. Simply put, if the private body has not carried out the function allegedly entrusted or directed to it, nothing will have changed hands. Therefore, there is no financial contribution and, consequently, there would be no right to apply countervailing measures.

 

S.2.8.11 US — Countervailing Duty Investigation on DRAMS, paras. 192-193
(WT/DS296/AB/R)

 

… we have found it useful, nevertheless, to modify the Panel’s interpretation of “entrusts” and “directs” in order to clarify the meaning of these terms in accordance with the interpretation we set out above. We have also found multiple errors in the Panel’s analysis of the USDOC’s finding of entrustment or direction. In particular, we have found that the Panel erred in (i) applying Article 1.1(a)(1)(iv) so as to examine the USDOC’s evidence piecemeal rather than in its totality, notwithstanding the Panel’s stated intention to follow the USDOC’s approach; (ii) refusing to admit certain record evidence submitted by the United States; and (iii) faulting the USDOC for its failure to address facts that were not on the record of the investigation. On the basis of these errors, we have found that the Panel failed to apply the proper standard of review in accordance with Article 11 of the DSU. In our view, these errors, taken together with the modification we found necessary to the Panel’s interpretation of the terms “entrusts” and “directs”, invalidate the basis for the Panel’s conclusion, quoted above, that there was not sufficient evidence to support the USDOC’s finding of entrustment or direction.

 

Because this conclusion is the sole basis for the Panel’s finding of inconsistency with Article 1.1(a)(1)(iv) of the SCM Agreement, we reverse the Panel’s findings, in paragraphs 7.178, 7.209, and 8.1 of the Panel Report, that the USDOC’s determination of GOK entrustment or direction of Hynix’s Group B and C creditors is inconsistent with Article 1.1(a)(1)(iv) of the SCM Agreement.

 

S.2.8.12 Japan — DRAMs (Korea), para. 138
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

We recognize that the commercial unreasonableness of the financial transactions is a relevant factor in determining government entrustment or direction under Article 1.1(a)(1)(iv) of the SCM Agreement, particularly where an investigating authority seeks to establish government intervention based on circumstantial evidence. However, this does not mean that a finding of entrustment or direction can never be made unless it is established that the financial transactions were on non-commercial terms. A finding that creditors acted on the basis of commercial reasonableness, while relevant, is not conclusive of the issue of entrustment or direction. A government could entrust or direct a creditor to make a loan, which that creditor then does on commercial terms. In other words, as a conceptual matter, there could be entrustment or direction by the government, even where the financial contribution is made on commercially reasonable terms.

 
S.2.9 Article 1.1(b) — Conferral of a benefit on a recipient. See also 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 US Lead and Bismuth II [at 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 presumptively extinguishes any benefit received from the nonrecurring 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 programme 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.2.9.11 US — Countervailing Duty Investigation on DRAMS, para. 205 and footnote 377
(WT/DS296/AB/R)

 

Having reversed the Panel’s findings that the USDOC’s determination of entrustment or direction is inconsistent with Article 1.1(a)(1)(iv), there is no basis for us to uphold the Panel’s finding on benefit. Consequently, we also reverse the Panel’s finding …that the USDOC’s benefit determination is inconsistent with Article 1.1(b) of the SCM Agreement.377

 

S.2.9.12 Japan — DRAMs (Korea), para. 172
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

We do not consider the distinction between inside and outside investors to be helpful in order to determine the appropriate benchmark for calculating the amount of benefit under Articles 1.1(b) and 14 of the SCM Agreement. The terms of a financial transaction must be assessed against the terms that would result from unconstrained exchange in the relevant market. The relevant market may be more or less developed; it may be made up of many or few participants. By way of example, there are now well-established markets in many economies for distressed debt, and a variety of financial instruments are traded on these markets. In some instances, the market may be more rudimentary. In other instances, it may be difficult to establish the relevant market and its results. But these informational constraints do not alter the basic framework from which the analysis should proceed. We also do not consider that there are different standards applicable to inside and to outside investors. There is but one standard — the market standard — according to which rational investors act.

 
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.2.10A Article 1.2 — Specificity     back to top

S.2.10A.1 US — Countervailing Duty Investigation on DRAMS, paras. 206-208
(WT/DS296/AB/R)

 

… In paragraph 7.206 of the Panel Report, the Panel explains its view that “the [US]DOC’s finding of GOK entrustment cannot provide a proper basis for a determination of specificity in respect of alleged subsidies provided by Group B and C creditors”. The Panel provides no other basis for its finding.

 

Accordingly, we reverse the Panel’s findings … that the USDOC’s finding of specificity is inconsistent with Article 2 of the SCM Agreement insofar as it relates to alleged subsidies by Group B and C creditors.

 

… Consequently, there are neither sufficient findings by the Panel nor undisputed facts contained in the record to allow us to conduct our own analysis of Korea’s claims regarding benefit and specificity. We recall that it is not sufficient to determine that there is a “financial contribution by a government or any public body” in order to find that there is a “subsidy” under Article 1.1 of the SCM Agreement. This provision also requires that “a benefit is thereby conferred”. Article 1.2 requires, in addition, that the subsidy be “specific”. Because the Panel’s findings on benefit and specificity were premised exclusively on its conclusion relating to entrustment or direction, there is insufficient basis for us to examine the consistency of the USDOC’s benefit and specificity determinations with the SCM Agreement. Even though we reverse the Panel’s findings, we offer no view as to the consistency of the USDOC’s underlying determinations of benefit and specificity.

 
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 keyword 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 fulfilment 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 Canada — Aircraft [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 Canada — Aircraft, 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 Communities — Regime for the Importation, Sale and Distribution of Bananas (“European Communities — Bananas”) on whether or not Article II 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 II 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 II of the GATS. If that were the intention, why does Article II not say as much? The obligation imposed by Article II 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 Communities — Bananas when we said:

 

Moreover, if Article II 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 “withdraw” prohibited export subsidies, in the sense of “removing” or “taking away”. …

 

S.2.19.2 US — FSC (Article 21.5 — EC), para. 230
(WT/DS108/AB/RW)

 

… 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. …

 

S.2.19.3 Brazil — Aircraft, para. 192
(WT/DS46/AB/R)

 

With respect to implementation of the recommendations or rulings of the DSB in a dispute brought under Article 4 of the SCM Agreement, 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 … Article 4.7 of the SCM Agreement, which is applicable to this case, stipulates a time-period. …

 

S.2.19.4 EC — Export Subsidies on Sugar, paras. 333-335
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

Pursuant to Article 1.2 of the DSU, the situation is different for disputes brought under Part II of the SCM Agreement. The SCM Agreement contains “special rules and additional procedures on dispute settlement” in respect of subsidies prohibited under Article 3 of the SCM Agreement.

 

Thus, where a panel finds that a complaining Member has established that the subsidy in question is prohibited within the meaning of Article 3 of the SCM Agreement, it shall make an additional recommendation as described in Article 4.7. Upon adoption, this additional recommendation — that the subsidizing Member “withdraw the subsidy without delay” — will become a recommendation or ruling of the DSB.

 

In this case, the Panel’s findings under Articles 3 and 8 of the Agreement on Agriculture were not sufficient to “fully resolve” the dispute. This is because, in declining to rule on the Complaining Parties’ claims under Article 3 of the SCM Agreement, the Panel precluded the possibility of a remedy being made available to the Complaining Parties, pursuant to Article 4.7 of the SCM Agreement, in the event of the Panel finding in favour of the Complaining Parties with respect to their claims under Article 3 of the SCM Agreement. Moreover, in declining to rule on the Complaining Parties’ claims under Article 3 of the SCM Agreement, the Panel failed to discharge its obligation under Article 11 of the DSU by failing to make “such other findings as will assist the DSB in making the recommendations or in giving the rulings provided for in the covered agreements”, namely, a recommendation or ruling by the DSB pursuant to Article 4.7. This constitutes false judicial economy and legal error.

 

S.2.19.5 EC — Export Subsidies on Sugar, para. 340
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

Moreover, we do not have the requisite factual findings to complete the legal analysis. In particular, we do not have sufficient facts before us, as would be necessary to specify the period of time for withdrawal, as required by Article 4.7 of the SCM Agreement. We note in this respect that, when specifying what period would represent “without delay”, panels have taken into account, inter alia, “the nature of the measures and the difficulties likely to be faced in implementing the recommendation”. Based on our reading of the Panel Reports and the Panel record, we fail to see any evidence therein regarding the nature of the measures that would be required to “withdraw” the subsidy, which would permit us to make a recommendation under Article 4.7. Hence, even if we were able to examine the Complaining Parties’ claims under the SCM Agreement and, even if we were to conclude that the SCM Agreement applies in the circumstances of this dispute and that the European Communities acted inconsistently with its obligations under the SCM Agreement, we would not necessarily be in a position to make a recommendation under Article 4.7 as to the time period for withdrawal of the subsidy.

 

S.2.19.6 US — FSC (Article 21.5 — EC II), para. 82
(WT/DS108/AB/RW2)

 

It is clear from the text of Article 4.7 that, when a panel finds a measure at issue to be a prohibited subsidy, the panel is required to make a recommendation with two components: (i) that the subsidy be withdrawn “without delay”; and (ii) that the time period within which the subsidy must be withdrawn be specified by the Panel. When such a recommendation is adopted by the DSB, it must be, by virtue of Article 17.14 of the DSU, “unconditionally accepted by the parties to the dispute”, and it thus becomes effective and binding on the parties. Pursuant to Article 4.10 of the SCM Agreement, if compliance with an Article 4.7 recommendation is not achieved within the time period specified, the DSB may authorize the imposition of appropriate countermeasures upon the subsidizing Member.

 

S.2.19.7 US — FSC (Article 21.5 — EC II), para. 83
(WT/DS108/AB/RW2)

 

We are of the view that the obligation of the subsidizing Member to withdraw the prohibited subsidy “without delay”, and within the time period specified, emanates from a finding of a violation of Article 3 of the SCM Agreement and a consequent Article 4.7 recommendation once adopted by the DSB. That recommendation under Article 4.7 remains in effect until the Member concerned has fulfilled its obligation by fully withdrawing the prohibited subsidy. Where a Member withdraws a prohibited subsidy only in part, it has failed to comply fully with its WTO obligation and the Article 4.7 recommendation continues to be in effect with respect to the part of the subsidy that has not been withdrawn. Similarly, full withdrawal of a prohibited subsidy within the meaning of Article 4.7 of the SCM Agreement cannot be achieved by a “measure taken to comply” that replaces the original subsidy with yet another subsidy found to be prohibited. In both instances, the Member cannot be said to have complied with the obligation to withdraw fully the prohibited subsidy.

 

S.2.19.8 US — FSC (Article 21.5 — EC II), para. 84
(WT/DS108/AB/RW2)

 

As a result, 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. The obligation to comply with an Article 4.7 recommendation remains in effect, even if several proceedings under Article 21.5 become necessary, until the prohibited subsidy is fully withdrawn.

 

S.2.19.9 US — FSC (Article 21.5 — EC II), para. 85
(WT/DS108/AB/RW2)

 

These second Article 21.5 proceedings before us concern a situation where the measure taken to comply with the DSB recommendations from the original and first Article 21.5 proceedings — the Jobs Act — has in large part withdrawn the prohibited subsidies. However, to the extent that the Jobs Act, by virtue of its transition and grandfathering provisions, does not fully withdraw the ETI subsidies found in the previous proceedings to be prohibited under the SCM Agreement, it was sufficient for the second Article 21.5 Panel to conclude that the original Article 4.7 recommendation adopted by the DSB has not been complied with entirely and remains in effect for the part that has not been implemented.

 

S.2.19.10 US — FSC (Article 21.5 — EC II), para. 86
(WT/DS108/AB/RW2)

 

Even if, arguendo, an Article 21.5 panel made a new Article 4.7 recommendation to withdraw the prohibited subsidy “without delay”, it would presumably also “specify … the time period within which the measure must be withdrawn”. If this were to result in an extension of the time period set for withdrawal of the subsidy found to be prohibited in the original proceedings, compliance proceedings could have the effect of extending implementation periods through new Article 4.7 recommendations in successive Article 21.5 proceedings. This could lead to a potentially “never-ending cycle” of dispute settlement proceedings and inordinate delays in the implementation of recommendations and rulings of the DSB.

 

S.2.19.11 US — FSC (Article 21.5 — EC II), para. 89
(WT/DS108/AB/RW2)

 

In our view, whether the first Article 21.5 panel made or could make a new Article 4.7 recommendation is not dispositive of the question whether the original Article 4.7 recommendation continues to be in effect until full compliance is achieved. Like the Panel, we see “no material significance in the purported lack of an explicit ‘new’ … recommendation under Article 4.7 of the SCM Agreement in the first [Article 21.5] compliance proceeding”.

 
S.2.19A Article 5 — “adverse effects” — Relationship with Article 6.3(c)     back to top

S.2.19A.1 US — Upland Cotton, paras. 485-486
(WT/DS267/AB/R)

 

Having found that the effect of the price-contingent subsidies is significant price suppression within the meaning of Article 6.3(c) of the SCM Agreement, the Panel then considered whether the United States had caused adverse effects in the form of serious prejudice to the interests of Brazil through the use of these subsidies, contrary to Article 5(c) of the SCM Agreement. The Panel found that the significant price suppression it had found under Article 6.3(c) of the SCM Agreement amounted to serious prejudice within the meaning of the Article 5(c) of the SCM Agreement, based on [two alternative reasons]…

 

… The Panel’s primary reason was that if the effect of a subsidy is significant price suppression within the meaning of Article 6.3(c), this is sufficient, without more, to conclude that the subsidizing Member has caused serious prejudice to the interests of another Member within the meaning of Article 5(c). The Panel’s alternative reason was that, even if this is not sufficient, Brazil had fulfilled the burden of demonstrating that the United States had caused serious prejudice to the interests of Brazil within the meaning of Article 5(c).

 

S.2.19A.2 US — Upland Cotton, para. 488
(WT/DS267/AB/R)

 

As neither party has appealed the Panel’s finding … (regarding the sufficiency of a finding of an effect under Article 6.3(c) for a finding of serious prejudice under Article 5(c), in general terms) or the Panel’s alternative finding … (regarding serious prejudice to the interests of Brazil in the particular circumstances of this dispute), we express no opinion on either of those findings. Nor do we address the Panel’s consequential finding that the significant price suppression that it had found to be the effect of the price-contingent subsidies under Article 6.3(c) of the SCM Agreement amounted to serious prejudice within the meaning of Article 5(c) of the SCM Agreement. Accordingly, upon adoption of the Panel Report by the DSB, the Panel’s findings in paragraphs 7.1390 and 7.1391 of the Panel Report as mentioned above would stand, without endorsement or rejection by the Appellate Body.

 

Article 6.3 — Serious Prejudice. See SCM Agreement, Order of analysis — Use of assumptions (O.2.9); Article 5 — “Adverse effects” — Relationship with Article 6.3(c) (S.2.19A); Article 6.3(c) — Serious Prejudice (S.2.19B); Article 15.5 — Causation (S.2.25A); Review of “objective assessment” by the panel — Article 11 of the DSU (S.3.2.5); Issues of law vs. Issues of fact — Article 17.6 of the DSU (S.3.3.12); Need to address each issue raised — Article 17.12 of the DSU (S.3.4); Article 11 of the DSU — Objective assessment of the facts (S.7.3.21)

 
S.2.19B Article 6.3(c) — Serious prejudice     back to top

S.2.19B.0 GENERAL

 

S.2.19B.0.1 US — Upland Cotton (Article 21.5 — Brazil), para. 234
(WT/DS267/AB/RW)

 

We have some difficulty accepting the notion that a subsidy programme and the payments provided under that programme can be assessed separately. While the payments may cause adverse effects, the amount of the payments, beneficiaries, and the terms and conditions of eligibility will be provided in the subsidy programme or legislation authorizing those payments. …

 

S.2.19B.1 RELEVANT MARKET

 

S.2.19B.1.1 US — Upland Cotton, para. 400
(WT/DS267/AB/R)

 

Turning to the question of the relevant “market”, we observe that Article 6.3(c) of the SCM Agreement addresses the situation where “the effect of the subsidy is … significant price suppression … in the same market” (emphasis added). As the Panel suggested, and the parties agree, it is up to the complaining Member to identify the market in which it alleges that the effect of a subsidy is significant price suppression and to demonstrate that the subsidy has that effect within the meaning of Article 6.3(c). …

 

S.2.19B.1.2 US — Upland Cotton, para. 402
(WT/DS267/AB/R)

 

On appeal, the United States submits that the Panel erred in interpreting the words “same market” in Article 6.3(c) of the SCM Agreement as including a “world market”. It also submits that the Panel’s finding that a “world market” exists for upland cotton is inconsistent with certain of its other findings. The United States also argues that, in any case, the Panel did not make a finding that United States and Brazilian upland cotton compete in the world market that it had identified for upland cotton. Brazil contends that significant price suppression under Article 6.3(c) “may apply to any ‘market’, from local to global, and everything in between”.

 

S.2.19B.1.3 US — Upland Cotton, paras. 404-405, and footnotes 1355 and 1356
(WT/DS267/AB/R)

 

The Panel described the ordinary meaning of the word “market” as:

 

“a place … with a demand for a commodity or service”;1355 “a geographical area of demand for commodities or services”; “the area of economic activity in which buyers and sellers come together and the forces of supply and demand affect prices”.1356 [Panel Report, para. 7.1236]

 

We accept that this is an adequate description of the ordinary meaning of the word “market” for the purposes of this dispute, and we do not understand the parties to dispute it. This ordinary meaning does not, of itself, impose any limitation on the “geographical area” that makes up any given market. Nor does it indicate that a “world market” cannot exist for a given product. As the Panel indicated, the “degree to which a market is limited by geography will depend on the product itself and its ability to be traded across distances”.

 

S.2.19B.1.4 US — Upland Cotton, para. 406
(WT/DS267/AB/R)

 

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 (to which we return below), 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: paragraph (a) restricts the relevant market to “the market of the subsidizing Member”; paragraph (b) restricts the relevant market to “a third country market”; and paragraph (d) refers specifically to the “world market share”. 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.

 

S.2.19B.1.5 US — Upland Cotton, para. 407
(WT/DS267/AB/R)

 

Turning to the phrase “in the same market”, it is clear to us from a plain reading of Article 6.3(c) that this phrase applies to all four situations covered in that provision, namely, “significant price undercutting”, “significant price suppression, price depression [and] lost sales”. We read the Panel Report and the participants’ submissions as endorsing this interpretation. The phrase “in the same market” suggests that the subsidized product in question (United States upland cotton in this case) and the relevant product of the complaining Member must be “in the same market”. In this appeal, the Panel and the participants agree that United States upland cotton and Brazilian upland cotton must be “in the same market” for Brazil’s claim under Article 6.3(c) to succeed. Furthermore, the participants agree that these are like products.

 

S.2.19B.1.6 US — Upland Cotton, para. 408
(WT/DS267/AB/R)

 

When can two products be considered to be “in the same market” for the purposes of a claim of significant price suppression under Article 6.3(c)? Article 6.3(c) does not provide an explicit answer. 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.

 

S.2.19B.2 RELEVANT PRICE

 

S.2.19B.2.1 US — Upland Cotton, paras. 416-417
(WT/DS267/AB/R)

 

… The question before us is whether it was sufficient for the Panel to analyse the price of upland cotton in general in the world market or whether the Panel was required to analyse the price of Brazilian upland cotton in the world market and find significant price suppression with respect to that price.

 

… Therefore, the Panel found that the A-Index adequately reflected prices in the world market for upland cotton. The Panel also found that “developments in the world upland cotton price would inevitably affect prices” wherever Brazilian and United States upland cotton compete, “due to the nature of the world prices in question and the nature of the world upland cotton market, and the relative proportion of that market enjoyed by the United States and Brazil”. It was not necessary, in these circumstances, for the Panel to proceed to a separate analysis of the prices of Brazilian upland cotton in the world market.

 

S.2.19B.3 ORDER OF ANALYSIS

 

S.2.19B.3.1 US — Upland Cotton, paras. 431-433
(WT/DS267/AB/R)

 

As noted above, Article 6.3(c) is silent as to the sequence of steps to be followed in assessing whether the effect of a subsidy is significant price suppression. We note that Article 6.8 indicates that the existence of serious prejudice pursuant to Articles 5(c) and 6.3(c) is to be determined on the basis of information submitted to or obtained by the panel, including information submitted in accordance with Annex V of the SCM Agreement. Annex V provides some limited guidance about the type of information on which a panel might base its assessment under Article 6.3(c). But we find little other guidance on this issue. The text of Article 6.3(c) does not, however, preclude the approach taken by the Panel to examine first whether significant price suppression exists and then, if it is found to exist, to proceed further to examine whether the significant price suppression is the effect of the subsidy. The Panel evidently considered that, in the absence of significant price suppression, it would not need to proceed to analyse the effect of the subsidy. We see no legal error in this approach.

 

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. …

 

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, 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.

 

S.2.19B.4 SIGNIFICANT PRICE SUPPRESSION

 

S.2.19B.4.1 US — Upland Cotton, paras. 423-427
(WT/DS267/AB/R)

 

… In explaining [the term “price suppression”], the Panel stated, in paragraph 7.1277 of the Panel Report:

 

Thus, “price suppression” 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. Price depression refers to the situation where “prices” are pressed down, or reduced.1388

 

Although the Panel first identified “price suppression” and “price depression” as two separate concepts in paragraph 7.1277, footnote 1388 of the Panel Report suggests that, for its analysis, the Panel used the term “price suppression” to refer to both price suppression and price depression. We recognize that “the situation where ‘prices’ … are prevented or inhibited from rising” and “the situation where ‘prices’ are pressed down, or reduced” may overlap. Nevertheless, it would have been preferable, in our view, for the Panel to avoid using the term “price suppression” as shorthand for both price suppression and price depression, given that Article 6.3(c) of the SCM Agreement refers to “price suppression” and “price depression” as distinct concepts. We agree, however, that the Panel’s description of “price suppression” in paragraph 7.1277 of the Panel Report reflects the ordinary meaning of that term, particularly when read in conjunction with the French and Spanish versions of Article 6.3(c), as required by Article 33(3) of the Vienna Convention on the Law of Treaties (the “Vienna Convention”).

 

The Panel described its task in assessing “price suppression” under Article 6.3(c) as follows:

 

We need to examine whether these prices were suppressed, that is, lower than they would have been without the United States subsidies in respect of upland cotton. [Panel Report, para. 7.1288]

 

As regards the word “significant” in the context of “significant price suppression” in Article 6.3(c), the Panel found that this word means “important, notable or consequential”.

 

Article 6.3(c) does not set forth any specific methodology for determining whether the effect of a subsidy is significant price suppression. There may well be different ways to make this determination. However, we find no difficulty with the Panel’s approach in the particular circumstances of this dispute. We therefore turn to an examination of how the Panel carried out its assessment.

 

S.2.19B.4.2 US — Upland Cotton, para. 434
(WT/DS267/AB/R)

 

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”. 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” amounts to legal error for that reason alone.

 

S.2.19B.4.3 US — Upland Cotton (Article 21.5 — Brazil), para. 351
(WT/DS267/AB/RW)

 

At a conceptual level, we see some differences between the concepts of “price depression” and “price suppression” as defined in the original proceedings. 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. 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 analysing the effect of a subsidy under Article 6.3(c) of the SCM Agreement.

 

S.2.19B.4.4 US — Upland Cotton (Article 21.5 — Brazil), paras. 353-358
(WT/DS267/AB/RW)

 

… the Panel stated that it would adopt a “unitary” approach and would not separate into three analytical steps whether there was price suppression in the world market for upland cotton, whether this price suppression was significant, and whether a causal relationship existed between this significant price suppression and the subsidies. The Panel found support for this approach in 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”.

 

Because of the counterfactual nature of price suppression, it is difficult to separate price suppression from its causes. Hence, the Panel’s “unitary analysis”, at least in respect of identifying price suppression and its causes, has a sound conceptual foundation.

 

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 analyse the relationship between subsidies, other factors, and price movements.

 

… Because the examination of price suppression necessarily involves an analysis of what would have been the case in the absence of an intervening event, modelling exercises are likely to be an important analytical tool that a panel should scrutinize. The relative complexity of a model and its parameters is not a reason for a panel to remain agnostic about them. Like other categories of evidence, a panel should reach conclusions with respect to the probative value it accords to economic simulations or models presented to it. This kind of assessment falls within the panel’s authority as the initial trier of facts in a serious prejudice case.

 

In the present case, … [w]hile the Panel appropriately examined the model, the parameters used by each party, and the arguments made by the parties, and noted the different results generated by the simulations conducted by each party, the Panel could have gone further in its evaluation and comparative analysis of the economic simulations and the particular parameters used.

 

S.2.19B.4.5 US — Upland Cotton (Article 21.5 — Brazil), paras. 361-364, 366
(WT/DS267/AB/RW)

 

The Panel adopted, as indicated, a “unitary” approach”. It did not, as the original panel did, separate its analysis into three steps to determine whether there was price suppression in the world market for upland cotton, whether this price suppression was significant, and whether a causal relationship existed between such significant price suppression and the subsidies. Rather, in undertaking a unitary analysis, the Panel considered both quantitative and qualitative elements in its assessment. It made a quantitative assessment of significance by evaluating the magnitude of the subsidies, the gap between United States upland cotton producers’ revenues and costs of production, the United States’ share of world production and exports, and the economic simulations; and it made a qualitative assessment by evaluating the structure, design, and operation of the subsidies. The adoption of a unitary approach, however, did not absolve the Panel from clearly explaining its position on the question of “significance”. The Panel could have provided a clearer explanation of how the factors that it examined supported its finding that the price suppression was “significant”.

 

In our view, several of the factors evaluated by the Panel support the proposition that the effect of the marketing loan and counter-cyclical payments is “significant” price suppression in the world market for upland cotton. …[the] magnitude of the marketing loan and counter-cyclical payments is significant not only in absolute terms, but also as a share of United States producers’ total revenues. …

 

Although the Panel did not quantify the effect of these subsidies on upland cotton plantings and production, it established that the marketing loan and counter-cyclical payments “affect the level of [United States] upland cotton acreage and production as a result of their mandatory and price-contingent nature and their revenue-stabilizing effect”. Moreover, the Panel found that “there exists a significant gap between the total costs of production of [United States] upland cotton producers and their market revenue”. … The effect of marketing loan and counter-cyclical payments on production of upland cotton was confirmed in the economic simulations conducted by the parties. …

 

The Panel also found that “the United States exerts a substantial proportionate influence on the world market for upland cotton”. … We understand the Panel’s finding to imply that, given the United States’ significant shares of world exports and production, the increased production resulting from the marketing loan and counter-cyclical payments would have an effect on the world market for upland cotton and would be reflected in the world market price of upland cotton.

 

 

Therefore, we find that the evidence on the record supports the Panel’s conclusion that the effect of the marketing loan and counter-cyclical payments is “significant” price suppression, within the meaning of Article 6.3(c) of the SCM Agreement.

 

S.2.19B.4.6 US — Upland Cotton (Article 21.5 — Brazil), paras. 416-418
(WT/DS267/AB/RW)

 

… As the Appellate Body explained in the original proceedings, “Article 6.3(c) does not set forth any specific methodology for determining whether the effect of a subsidy is significant price suppression” and, consequently, “[t]here may well be different ways to make this determination”. Accordingly, Article 6.3(c) does not specifically require a panel to determine whether a subsidy “insulates” producers, nor does it require a quantification of the degree of such insulation. 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.

 

In the present case, the Panel examined market insulation as part of its examination of the structure, design, and operation of the marketing loan and countercyclical payments. The structure, design, and operation of the payments, in turn, were one of several elements on which the Panel based its conclusion that the effect of marketing loan and counter-cyclical payments is “significant price suppression”. Moreover, the Panel emphasized that, “in determining whether the structure, design and operation of these subsidies support a finding of significant price suppression under current factual conditions, we need to consider this factor in conjunction with other facts”.

 

Article 6.3(c) requires a demonstration of “significant” price suppression. It does not require that panels make a determination of “significance” for each of the factors examined in its price suppression analysis. We do not consider that the Panel erred by not determining the precise degree of market insulation, which is but one factor in the Panel’s overall analysis.

 

S.2.19B.4.7 US — Upland Cotton (Article 21.5 — Brazil), para. 437
(WT/DS267/AB/RW)

 

… the Panel’s finding of significant price suppression did not rest on the impact of the elimination of Step 2 payments. The Panel found significant price suppression based on the following: its examination of the structure, design, and operation of marketing loan and counter-cyclical payments; the existence of a gap between United States upland cotton producers’ costs of production and revenues; and the large magnitude of the subsidies and the substantial proportionate influence of the United States in the world market for upland cotton. Therefore, the Panel’s finding of significant price suppression stands independently of the impact of the elimination of Step 2 payments.

 

S.2.19B.4.8 US — Upland Cotton (Article 21.5 — Brazil), para. 441
(WT/DS267/AB/RW)

 

… The Panel set out to determine whether the effect of marketing loan and counter-cyclical payments was present serious prejudice in the form of significant price suppression, and for this purpose conducted an evaluation of several factors. There is no requirement in Article 6.3(c) of the SCM Agreement that a panel follow a particular methodology, much less a requirement that a panel adopt an approach that involves subtracting the price suppressing effects of the repealed measure (in this case, the Step 2 payments). We do not see why the Panel could not have analysed the price suppressing effects of the remaining marketing loan and counter cyclical payments instead of analysing the effects of the bundle of price-contingent subsidies at issue in the original proceedings and then subtracting the impact of the repeal of the Step 2 payments programme. In any event, even if the Panel did not precisely quantify the effect of the elimination of Step 2 payments, it did examine the amount of Step 2 payments before their elimination, the impact of the elimination upon export volumes, and the likely increase and decrease in marketing loan and counter-cyclical payments resulting from the elimination of Step 2 payments.

 

S.2.19B.5 EFFECT OF THE SUBSIDY — CAUSATION AND NON-ATTRIBUTION

 

S.2.19B.5.1 US — Upland Cotton, paras. 435-436
(WT/DS267/AB/R)

 

Turning to the Panel’s assessment of the “effect of the subsidy”, the Panel addressed the question whether there was a “causal link” between the price-contingent subsidies and the significant price suppression it had found. It then addressed the impact of “[o]ther alleged causal factors”. We observe that Article 6.3(c) does not use the word “cause”; rather, it states that “the effect of the subsidy is … significant price suppression”. However, the ordinary meaning of the noun “effect” is “[s]omething … caused or produced; a result, a consequence”. The “something” in this context is significant price suppression, and thus the question is whether significant price suppression is “caused” by or is a “result” or “consequence” of the challenged subsidy. The Panel’s conclusion that “[t]he text of the treaty requires the establishment of a causal link between the subsidy and the significant price suppression” is thus consistent with this ordinary meaning of the term “effect”. This is also confirmed by the context provided by Article 5(c) of the SCM Agreement

 

As the Panel pointed out, “Articles 5 and 6.3 …do not contain the more elaborate and precise ‘causation’ and non-attribution language” found in the trade remedy provisions of the SCM Agreement. Part V of the SCM Agreement, which relates to the imposition of countervailing duties, requires, inter alia, an examination of “any known factors other than the subsidized imports which at the same time are injuring the domestic industry”. However, such causation requirements have not been expressly prescribed for an examination of serious prejudice under Article 5(c) and Article 6.3(c) in Part III of the SCM Agreement. This suggests 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 under Article 6.3(c).

 

S.2.19B.5.2 US — Upland Cotton, para. 437
(WT/DS267/AB/R)

 

Nevertheless, we agree 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. 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”.

 

S.2.19B.5.3 US — Upland Cotton, para. 438
(WT/DS267/AB/R)

 

The Panel’s approach with respect to causation and non-attribution is similar to that reflected in Appellate Body decisions in the context of other WTO agreements. … It must be borne in mind that these provisions of the Agreement on Safeguards and the Anti-Dumping Agreement, as well as the provisions of Part V of the SCM Agreement, relate to a determination of “injury” rather than “serious prejudice”, and they apply in different contexts and with different purposes. Therefore, they must not be automatically transposed into Part III of the SCM Agreement. Nevertheless, they may suggest ways of assessing whether the effect of a subsidy is significant price suppression rather than it being the effect of other factors.

 

S.2.19B.5.4 US — Upland Cotton, para. 451
(WT/DS267/AB/R)

 

… in our view, one would normally expect a discernible correlation between significantly suppressed prices and the challenged subsidies if the effect of these subsidies is significant price suppression. Accordingly, this is an important factor in any analysis of whether the effect of a subsidy is significant price suppression within the meaning of Article 6.3(c). However, we recognize that mere correlation between payment of subsidies and significantly suppressed prices would be insufficient, without more, to prove that the effect of the subsidies is significant price suppression.

 

S.2.19B.5.5 US — Upland Cotton, para. 453
(WT/DS267/AB/R)

 

We agree with the general proposition of the United States that variable costs may play a role in farmers’ decision-making as to whether to plant upland cotton or some alternative crop, and how much of each crop to plant. From a short-term perspective, variable costs may be particularly important. However, from a longer-term perspective, total costs may be relevant. … In the circumstances of this dispute, we do not consider that the Panel’s reliance on total rather than variable costs of production amounts to an error vitiating the Panel’s analysis under Article 6.3(c).

 

S.2.19B.5.6 US — Upland Cotton, paras. 457-458
(WT/DS267/AB/R)

 

… In sum, the Panel Report shows that it examined the other factors raised by the United States. Although the Panel found that some of them had price-suppressive effects, it did not attribute those effects to the United States’ price-contingent subsidies.

 

Unlike in certain other instances under the WTO agreements, a panel conducting an analysis under Article 6.3(c) of the SCM Agreement is the first trier of facts, rather than a reviewer of factual determinations made by a domestic investigating authority. Bearing this in mind, we underline the responsibility of panels in gathering and analysing relevant factual data and information in assessing claims under Article 6.3(c) in order to arrive at reasoned conclusions. In this case, the voluminous evidentiary record before the Panel included several economic studies, and substantial data and information. For its part, the Panel posed a large number of questions to which the parties submitted detailed answers. Overall, the Panel evidently conducted an extensive analysis, but we believe that, in its reasoning, the Panel could have provided a more detailed explanation of its analysis of the complex facts and economic arguments arising in this dispute. The Panel could have done so in order to demonstrate precisely how it evaluated the different factors bearing on the relationship between the price-contingent subsidies and significant price suppression. Nevertheless, in the light of the Panel’s examination of the relevant evidence, coupled with its legal reasoning, we find no legal error in the Panel’s causation analysis.

 

S.2.19B.5.7 US — Upland Cotton (Article 21.5 — Brazil), paras. 369-371
(WT/DS267/AB/RW)

 

The approach to causation and non-attribution taken by the Panel in these Article 21.5 proceedings differs from the approach taken by the original panel. In the original proceedings, the panel’s approach consisted of “examin[ing] whether or not ‘the effect of the subsidy’ is significant price suppression which [it had] found to exist in the same world market”. The original panel then separately “consider[ed] the role of other alleged causal factors in the record before [it] which may [have] affect[ed] [the] analysis of the causal link between the United States subsidies and the significant price suppression”. The Panel in these Article 21.5 proceedings “adopted a ‘but for’ approach to the question of whether the effect of [United States] marketing loan and counter-cyclical subsidies to upland cotton producers is significant price suppression within the meaning of Article 6.3(c) of the SCM Agreement”. The Panel also considered that, having adopted a “but for” approach, “it is not necessary in this respect to undertake a comprehensive evaluation of factors affecting the world market price for upland cotton”.

 

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).

 

… The Panel’s choice of a “but for” approach…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.

 

S.2.19B.5.8 US — Upland Cotton (Article 21.5 — Brazil), para. 372
(WT/DS267/AB/RW)

 

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.

 

S.2.19B.5.9 US — Upland Cotton (Article 21.5 — Brazil), paras. 374-375
(WT/DS267/AB/RW)

 

The Panel does not clearly articulate the standard implicated in its “but for” approach. … 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.

 

S.2.19B.5.10 US — Upland Cotton (Article 21.5 — Brazil), paras. 378-379, 381
(WT/DS267/AB/RW)

 

As we review the United States’ arguments, we have considerable difficulty understanding how China’s increasing consumption and imports of cotton could have contributed to the suppression of the world price of cotton. To the contrary, the additional demand from China’s imports would have been likely to contribute positively to world prices. … uncertainty about China’s demand may cause price volatility in the world upland cotton market. However, we are not persuaded that the evidence of volatility demonstrates prima facie that Chinese consumption of cotton and policies have a suppressing effect on the price of upland cotton in the world market. The effects of volatility appear to be inconclusive. …

 

For these reasons, we find that the Panel did not err in finding that the role of China’s trade in cotton “does not attenuate the link between significant price suppression and the subsidies at issue in this proceeding”.

 

 

… Although its analysis of China’s role may be succinct, the Panel considered, “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 [United States] subsidies on the world price for upland cotton as a result of their effect on [United States] supply to the world market”. Moreover, we stated above that the evidence submitted by the United States on the role of China in the world cotton trade does not establish that China is a factor that contributes to the suppression of world upland cotton prices. We do not believe, therefore, that the Panel was required to conduct a more thorough analysis of the role of China in the light of the evidence… the Panel did take into account the evidence submitted by the United States on the role of China and properly reached the conclusion that China’s role in the world cotton trade did not impact negatively on world upland cotton prices. For the same reasons, we also do not believe that the Panel failed to provide a “reasoned and adequate explanation” for its conclusions in the light of “possible alternative explanations”, as alleged by the United States.

 

S.2.19B.6 MAGNITUDE OF SUBSIDIES

 

S.2.19B.6.1 US — Upland Cotton, para. 461
(WT/DS267/AB/R)

 

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.

 

S.2.19B.6.2 US — Upland Cotton, paras. 463-464
(WT/DS267/AB/R)

 

In order for a panel to find that a subsidy has the effect of significant price suppression, or some other effect mentioned in Article 6.3(c), the panel must determine that the payment is a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement. The Panel did so in this dispute, and we do not understand the United States to contest this conclusion. Rather, the United States argues that a panel needs to quantify the amount of the “benefit” conferred on the subsidized product by a challenged subsidy. However, the definitions of a specific subsidy in Articles 1 and 2 do not expressly require the quantification of the “benefit” conferred by the subsidy on any particular product.

 

Turning to the context of Article 6.3(c), we note that Article 6.1(a) — which has now expired — contains the only reference in Part III of the SCM Agreement to a calculation of ad valorem subsidization of a product. Footnote 14 to Article 6.1(a) explains that this calculation is to be performed in accordance with Annex IV on the “Calculation of the Total Ad Valorem Subsidization (Paragraph 1(a) of Article 6)”. No similar provisions are found in Article 6.3(c), which suggests that no precise quantification is envisaged in that provision.

 

S.2.19B.6.3 US — Upland Cotton, paras. 465-466
(WT/DS267/AB/R)

 

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).

 

Pursuant to Article 6.8, “the existence of serious prejudice” under Article 6.3(c) “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” of the SCM Agreement. The United States is correct that Annex V refers to “information… as necessary to establish the existence and amount of subsidization” (in paragraph 2) and “data concerning the amount of the subsidy in question” (in paragraph 5), but Annex V also refers to other information. This demonstrates that the amount of the subsidy, as well as other elements, are relevant for the assessment of whether price suppression exists. But we do not read Annex V as mandating the precise quantification of subsidies in order to determine their effect under Article 6.3(c).

 

S.2.19B.6.4 US — Upland Cotton, para. 467
(WT/DS267/AB/R)

 

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 analysing 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.

 

S.2.19B.6.5 US — Upland Cotton (Article 21.5 — Brazil), para. 443
(WT/DS267/AB/RW)

 

… the Panel linked the probative value of the magnitude of the subsidies, for purposes of the analysis of significant price suppression, to its findings on the structure, design, and operation of the subsidies and on the gap between costs of production and market revenues of United States upland cotton producers. We have already found that the Panel did not err in its findings on the structure, design, and operation of the marketing loan and counter-cyclical payments, including its findings on the market-insulating effects of those payments, and on the gap between producers’ revenues and costs. Therefore, given that the United States has not offered any additional arguments that could substantiate its challenge of the Panel’s findings on the magnitude of the subsidies, we see no reason to disturb these findings.

 

S.2.19B.7 “PASS-THROUGH” ANALYSIS

 

S.2.19B.7.1 US — Upland Cotton, para. 471
(WT/DS267/AB/R)

 

The United States contends that the Appellate Body’s reasoning in US — Softwood Lumber IV [Appellate Body Report, US — Softwood Lumber IV, paras. 140-142] 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.2.19B.7.2 US — Upland Cotton, para. 472
(WT/DS267/AB/R)

 

As we have already noted, the requirement in Article VI:3 of the GATT 1994 and Article 19.4 of the SCM Agreement that countervailing duties on a product be limited to the amount of the subsidy accruing to that product finds no parallel in the provisions on actionable subsidies and pertinent remedies under Part III of the SCM Agreement. Therefore, the need for a “pass-through” analysis under Part V of the SCM Agreement is not critical for an assessment of significant price suppression under Article 6.3(c) in Part III of the SCM Agreement. Nevertheless, we acknowledge that the “subsidized product” must be properly identified for purposes of significant price suppression under Article 6.3(c) of the SCM Agreement. And if the challenged payments do not, in fact, subsidize that product, this may undermine the conclusion that the effect of the subsidy is significant suppression of prices of that product in the relevant market.

 

S.2.19B.8 EFFECT OF SUBSIDIES OVER TIME

 

S.2.19B.8.1 US — Upland Cotton, para. 475
(WT/DS267/AB/R)

 

We observe that the United States’ contention that the effect of a subsidy must be “allocated” or “expensed” to the year in which it is paid is confined to “recurring” subsidies, that is, subsidies paid on an annual basis. The United States acknowledges that “non-recurring” subsidies could be “allocated” to subsequent years as well. Article 6.3(c) of the SCM Agreement applies to a subsidy whether it is “recurring” or “non-recurring”. This Article does not suggest that the effect of a subsidy is limited to or continues only for a specified period of time.

 

S.2.19B.8.2 US — Upland Cotton, para. 476
(WT/DS267/AB/R)

 

In this appeal, we are asked to address the limited question of whether the effect of a subsidy may continue beyond the year in which it was paid, in the context of a significant price suppression analysis under Article 6.3(c) of the SCM Agreement. Whether the effect of a subsidy begins and expires in the year in which it is paid or begins in one year and continues in any subsequent year, and how long a subsidy can be regarded as having effects, are fact-specific questions. The answers to these questions may depend on the nature of the subsidy and the product in question. We see nothing in the text of Article 6.3(c) that excludes a priori the possibility that the effect of a “recurring” subsidy may continue after the year in which it is paid. Article 6.3(c) deals with the “effect” of a subsidy, and not with the financial accounting of the amount of the subsidy.

 

S.2.19B.8.3 US — Upland Cotton, para. 477
(WT/DS267/AB/R)

 

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.

 

S.2.19B.8.4 US — Upland Cotton, para. 478
(WT/DS267/AB/R)

 

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”.

 

S.2.19B.8.5 US — Upland Cotton, para. 482
(WT/DS267/AB/R)

 

For these reasons, we are not persuaded by the United States’ contention that the effect of annually paid subsidies must be “allocated” or “expensed” solely to the year in which they are paid and that, therefore, the effect of such subsidies cannot be significant price suppression in any subsequent year. We do not agree with the proposition that, if subsidies are paid annually, their effects are also necessarily extinguished annually.

 

S.2.19B.8.6 US — Upland Cotton (Article 21.5 — Brazil), para. 392
(WT/DS267/AB/RW)

 

The United States’ argument appears to focus on the short-term impact of marketing loan payments, that is, on how they affect year-to-year planting decisions. However, nothing 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. The Panel considered, in this regard, that “the evidence on the record, notably the evidence regarding the role of marketing loan and counter-cyclical payments in covering the difference between the market revenue of [United States] upland cotton producers and their costs of production, supports the view that these subsidies have a long-term impact on acreage and production of upland cotton by affecting decisions of [United States] cotton farmers to enter or exit cotton farming”.

 

S.2.19B.8.7 US — Upland Cotton (Article 21.5 — Brazil), paras. 422-423
(WT/DS267/AB/RW)

 

In US — Softwood Lumber VI (Article 21.5 — Canada), the Appellate Body noted that “doubts could arise about the objective nature of an Article 21.5 panel’s assessment if, on a specific issue, that panel were to deviate from the reasoning in the original panel report in the absence of any change in the underlying evidence in the record”. The only relevant difference between the situation before the Panel and the original proceedings in this dispute is the length of the review period considered to establish whether significant price suppression exists: six years in the original proceedings (MY 1997-2002) as opposed to five years in the Article 21.5 proceedings (MY 2002-2006). In our view, this difference does not justify a departure from the costs and revenues methodology used by the original panel, or from the medium to long-term analysis contemplated in the original panel report, considering also that compliance measures subject to Article 21.5 proceedings by their very nature will be in force for a shorter period of time. Moreover, the marketing loan and counter-cyclical programmes remained unchanged since the original proceedings. Therefore, considering that relevant circumstances in the current proceedings have not changed since the original proceedings, it was proper for the Panel not to have deviated from the approach of the panel and the Appellate Body in the original proceedings, which relied on total costs of production, and did not to take into account off-farm income when comparing production cost with revenues.

 

The Panel’s decision to undertake an analysis over the medium- to long-term and, therefore, to compare market revenues with total costs, rather than with variable costs, is consistent with the approach adopted by the Appellate Body in Canada — Dairy (Article 21.5 — New Zealand and US). The Appellate Body explained, in that case, that “fixed and variable costs are the total amount which the producer must spend in order to produce [a commodity] and the total amount it must recoup, in the long-term, to avoid making losses”. The fact that a producer does not recover the total costs of production may indicate that it is covering its losses from some other source, such as subsidies. Consequently, we do not consider that the Panel erred in using total costs of production when calculating whether there was a gap between producers’ costs of production and revenues.

 

S.2.19B.9 THREAT OF SERIOUS PREJUDICE

 

S.2.19B.9.1 US — Upland Cotton (Article 21.5 — Brazil), para. 244
(WT/DS267/AB/RW)

 

… However, a claim of serious prejudice may relate to a different situation than a claim of threat of serious prejudice. A claim of present serious prejudice relates to the existence of prejudice in the past, and present, and that may continue in the future. By contrast, a claim of threat of serious prejudice relates to prejudice that does not yet exist, but is imminent such that it will materialize in the near future. Therefore, a threat of serious prejudice claim does not necessarily capture and provide a remedy with respect to the same scenario as a claim of present serious prejudice. A distinction between injury and threat of injury also exists in the context of countervailing duty measures. Once a determination of present material injury is made, a Member may impose countervailing duties on future imports without any obligation to demonstrate a threat of material injury.

 

S.2.19B.10 OTHER EFFECTS OF SUBSIDIES

 

S.2.19B.10.1 US — Upland Cotton (Article 21.5 — Brazil), paras. 395-396
(WT/DS267/AB/RW)

 

The Panel, like the original panel, considered that the marketing loan payments operate as a safety net, stabilizing producers’ revenue and influencing producers’ decisions regardless of the level of expected prices. This is so because, at the time of planting, upland cotton producers know they will receive a payment should the actual harvest price be below the loan rate. We find no flaws with this logic. Furthermore, we do not see why the Panel was required to establish whether producers, in fact, expected harvest prices to fall below the loan rate. In any event, the Panel observed that “in most recent years actual market prices have been lower than expected market prices at the time of planting and… the adjusted world price has been below the marketing loan rate”. In our view, it is not unreasonable to assume that producers were aware of these historical trends and that, on this basis, they would have expected to receive a payment in the event that the price fell below the loan rate, even when the expected price was above the loan rate.

 

We further observe that some of the United States’ arguments seem to be premised on a particular understanding of the Panel’s finding: that marketing loan and counter-cyclical payments completely insulate United States producers from other factors that may affect planting decisions. We do not consider that the Panel adopted such a rigid view of market insulation. Instead, we understand the Panel to have taken the position that marketing loan and counter-cyclical payments make United States upland cotton producers less responsive to other factors that affect planting decisions. This is evident from the Panel’s finding that “the degree of price insulation that the original panel found is now weaker”. Moreover, the Panel referred to the original panel’s description of price-contingent subsidies (which include marketing loan and counter-cyclical payments) as “numbing the response of United States producers to production adjustment decisions when prices are low”. The use of the term “numbing” also suggests that the Panel intended “market insulation” to mean “lower responsiveness” rather than complete insulation. While the Panel clearly took into account the new evidence submitted by the parties, it did not find that market insulation was reduced to such an extent that subsidies would no longer have an effect on the production and prices of upland cotton.

 

S.2.19B.10.2 US — Upland Cotton (Article 21.5 — Brazil), para. 414
(WT/DS267/AB/RW)

 

The difficulty in discerning a temporal coincidence between the United States subsidies, the increase in United States exports, and the drop in market prices, does not, in our view, necessarily undermine the Panel’s finding on market insulation. The Panel did take into account the fact that the share of United States production and exports was not increasing, but it did not consider that this fact undermined its conclusion regarding market insulation made on the basis of a number of factors, such as their mandatory and price-contingent nature and their revenue-stabilizing effect. Therefore, we do not consider that the Panel’s finding on the difficulty of discerning a temporal coincidence between the United States subsidies, upland cotton exports, and upland cotton prices necessarily contradicts its finding on market insulation.

 
S.2.19C Article 7.8 — Remedies. See also Implementation Recommendations — Article 19.1 of the DSU (I.0)     back to top

S.2.19C.1 US — Upland Cotton, para. 273
(WT/DS267/AB/R)

 

… Article 7.8 of the SCM Agreement provides that, where it has been determined that “any subsidy has resulted in adverse effects to the interests of another Member”, the subsidizing Member must “take appropriate steps to remove the adverse effects or… withdraw the subsidy” (emphasis added). The use of the word “resulted” suggests that there could be a time-lag between the payment of a subsidy and any consequential adverse effects. If expired measures underlying past payments could not be challenged in WTO dispute settlement proceedings, it would be difficult to seek a remedy for such adverse effects. Further — in contrast to Articles 3.7 and 19.1 of the DSU — the remedies under Article 7.8 of the SCM Agreement for adverse effects of a subsidy are (i) the withdrawal of the subsidy or (ii) the removal of adverse effects. Removal of adverse effects through actions other than the withdrawal of a subsidy could not occur if the expiration of a measure would automatically exclude it from a panel’s terms of reference.

 

S.2.19C.2 US — Upland Cotton (Article 21.5 — Brazil), paras. 235-240
(WT/DS267/AB/RW)

 

… Article 7.8 is one of the “special or additional rules and procedures on dispute settlement contained in the covered agreements” that are identified in Article 1.2 and Appendix 2 of the DSU, which prevail over the general DSU rules and procedures to the extent that there is a difference between them. As we see it, Article 7.8 specifies the actions that the respondent Member must take when a subsidy granted or maintained by that Member is found to have resulted in adverse effects to the interests of another Member. This means that, in order to determine whether there is compliance with the DSB’s recommendations and rulings in a case involving such actionable subsidies, a panel would have to assess whether the Member concerned has taken one of the actions foreseen in Article 7.8 of the SCM Agreement. We agree, therefore, with the Panel that we must also take into account Article 7.8 of the SCM Agreement in order to determine the proper scope of these Article 21.5 proceedings.

 

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.

 

… 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 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.

 

Our interpretation of Article 7.8 is also consistent with the approach taken under the SCM Agreement with respect to countervailing duty measures. A determination that the existence of a subsidy causes material injury provides a basis for the prospective application of countervailing duty measures. Thus, even though the basis for a countervailing duty determination is the injury determined to exist in the past, the remedial measures are prospective.

 

… Article 7.8 informs the meaning and scope of the DSB’s recommendations and rulings arising from the original proceedings. In our view, Article 7.8 specifies the actions that the United States had to take in order to comply with the DSB’s recommendations and rulings. To the extent a WTO Member fails to comply with the requirement in Article 7.8 that it take steps to remove the adverse effects or withdraw the subsidy, because it maintains the subsidy, it cannot be said to have achieved full compliance with these DSB recommendations and rulings.

 

Article 10 and footnote 36 — Application of Article VI of the GATT 1994. See 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)

 

Article 11 — Initiation and subsequent investigation. See SCM Agreement, Article 21.4 — Relationship with Articles 11 and 12 (S.2.33)

 
S.2.20 Article 11.4 — Initiation of an investigation     back to top

S.2.20.1 US — Offset Act (Byrd Amendment), para. 283
(WT/DS217/AB/R, WT/DS234/AB/R)

 

A textual examination of Article 5.4 of the Anti-Dumping Agreement and Article 11.4 of the SCM Agreement reveals that those provisions contain no requirement that an investigating authority examine the motives of domestic producers that elect to support an investigation. Nor do they contain any explicit requirement that support be based on certain motives, rather than on others. The use of the terms “expressing support” and “expressly supporting” clarify that Articles 5.4 and 11.4 require only that authorities “determine” that support has been “expressed” by a sufficient number of domestic producers. Thus, in our view, an “examination” of the “degree” of support, and not the “nature” of support is required. In other words, it is the “quantity”, rather than the “quality”, of support that is the issue.

 
S.2.21 Article 11.9 — Termination of an investigation     back to top

S.2.21.1 US — Carbon Steel, paras. 67-68 and footnote 58
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

[Paragraph 9] is one of the eleven paragraphs of Article 11. The various paragraphs set forth rules of a mainly procedural and evidentiary nature. All of them relate to the authorities’ initiation and conduct of a countervailing duty investigation, as would be expected given the overall title of Article 11 — “Initiation and Subsequent Investigation”. Paragraph 9 of Article 11 requires authorities to terminate immediately investigative action in three situations. One of these is when the authorities are satisfied that the amount of the subsidy is less than 1 per cent ad valorem.

 

Although the terms of Article 11.9 are detailed as regards the obligations imposed on authorities thereunder, none of the words in Article 11.9 suggests that the de minimis standard that it contains is applicable beyond the investigation phase of a countervailing duty proceeding.58 In particular, Article 11.9 does not refer to Article 21.3, nor to reviews that may follow the imposition of a countervailing duty.

 

S.2.21.2 US — Carbon Steel, para. 69
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

… the technique of cross-referencing is frequently used in the SCM Agreement… These cross-references suggest to us that, when the negotiators of the SCM Agreement intended that the disciplines set forth in one provision be applied in another context, they did so expressly. In the light of the many express cross-references made in the SCM Agreement, we attach significance to the absence of any textual link between Article 21.3 reviews and the de minimis standard set forth in Article 11.9. …

 

S.2.21.3 US — Carbon Steel, para. 83
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

To us, there is nothing in Article 11.9 to suggest that its de minimis standard was intended to create a special category of “non-injurious” subsidization, or that it reflects a concept that subsidization at less than a de minimis threshold can never cause injury. For us, the de minimis standard in Article 11.9 does no more than lay down an agreed rule that if de minimis subsidization is found to exist in an original investigation, authorities are obliged to terminate their investigation, with the result that no countervailing duty can be imposed in such cases.

 
S.2.21A Article 11.11 — Time-limit for investigation     back to top

S.2.21A.1 Mexico — Anti-Dumping Measures on Rice, para. 282
(WT/DS295/AB/R)

 

… the time-limits [set out in Article 5.10 of the Anti-Dumping Agreement and Article 11.11 of the SCM Agreement] for completing an investigation serve to circumscribe the obligation in Article 6.1.1 to provide all interested parties 30 days to reply to a questionnaire. In our view, the same may be said with respect to the identical obligation in Article 12.1.1 of the SCM Agreement. …

 

Article 12 — Evidence. See Evidence, Panel’s Review of Evidence (E.3.2); SCM Agreement, Article 21.4 — Relationship with Articles 11 and 12 (S.2.33)

 
S.2.21B Article 12.1 — Notice of information required and opportunity to present evidence. See also Anti-Dumping Agreement, Article 6.1 (A.3.30)     back to top

S.2.21B.1 Mexico — Anti-Dumping Measures on Rice, para. 280
(WT/DS295/AB/R)

 

These provisions explicitly require that an investigating authority provide at least 30 days for reply to all exporters and foreign producers receiving a questionnaire, to be counted, “[a]s a general rule”, from the date of receipt of the questionnaire. Article 6.1 of the Anti-Dumping Agreement provides for all interested parties in an antidumping investigation to receive a questionnaire from the investigating authority. As we observed above, this includes not only those referred to in the petition for anti-dumping duties, as Mexico argues, but also those that made themselves known to the investigating authority — further to the issuance of a public notice of initiation or otherwise — and those that the investigating authority might identify as a result of some inquiry of its own. We are of the view that the same understanding applies to Article 12.1 of the SCM Agreement. It follows, therefore, that the period of at least 30 days to reply to questionnaires, provided for in Article 6.1.1 of the Anti-Dumping Agreement and Article 12.1.1 of the SCM Agreement, must be extended to all such exporters and foreign producers, whether known to the investigating authority at the outset of the investigation or at some point thereafter.

 

S.2.21B.2 Mexico — Anti-Dumping Measures on Rice, para. 282
(WT/DS295/AB/R)

 

… the time-limits [set out in Article 5.10 of the Anti-Dumping Agreement and Article 11.11 of the SCM Agreement] for completing an investigation serve to circumscribe the obligation in Article 6.1.1 to provide all interested parties 30 days to reply to a questionnaire. In our view, the same may be said with respect to the identical obligation in Article 12.1.1 of the SCM Agreement. …

 
S.2.21C Article 12.7 — Determinations on the basis of the facts available. See also Anti-Dumping Agreement, Article 6.8 and Annex II (A.3.32 — 36)     back to top

S.2.21C.1 Mexico — Anti-Dumping Measures on Rice, paras. 293-294
(WT/DS295/AB/R)

 

… Article 12.7 is intended to ensure that the failure of an interested party to provide necessary information does not hinder an agency’s investigation. Thus, the provision permits the use of facts on record solely for the purpose of replacing information that may be missing, in order to arrive at an accurate subsidization or injury determination.

 

In view of the above, we understand that recourse to facts available does not permit an investigating authority to use any information in whatever way it chooses. First, such recourse is not a licence to rely on only part of the evidence provided. To the extent possible, an investigating authority using the “facts available” in a countervailing duty investigation must take into account all the substantiated facts provided by an interested party, even if those facts may not constitute the complete information requested of that party. Secondly, the “facts available” to the agency are generally limited to those that may reasonably replace the information that an interested party failed to provide. In certain circumstances, this may include information from secondary sources.

 
S.2.21D Article 12.8 and 12.9 — Interested parties     back to top

S.2.21D.1 Japan — DRAMs (Korea), paras. 237-243
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

As noted above, Korea’s contention is that the JIA erred by designating certain financial institutions as interested parties although they had no “interest in the outcome of the proceeding”. We observe that Article 12.9 of the SCM Agreement does not, by its explicit terms, require that an investigating authority must establish that a party has “an interest in the outcome of [a] proceeding”. Nor do we see any provision of the SCM Agreement that defines the nature of the interest required for an entity to be included as an interested party.

 

Korea argues that the parties listed in subparagraphs (i) and (ii) of Article 12.9, which are required to be included by an investigating authority as interested parties — that is, exporters, importers, foreign producers, domestic producers, and their associations — all have a clear and direct interest in the outcome of a countervailing duty investigation. For Korea, the types of entities included in the list provide a “strong indication” that an entity cannot be an interested party if it does not have such an interest. We agree that the entities specified in subparagraphs (i) and (ii) — which are all involved in the production, export, or import of the product under investigation, or in the production of the like product in the importing country — are likely to “have an interest in the outcome of the proceeding”, but we find nothing in Article 12.9 to suggest that interested parties are restricted to entities of this kind under the residual clause of Article 12.9. Although the term “interested party” by definition suggests that the party must have an interest related to the investigation, the mere fact that the lists in subparagraphs (i) and (ii) comprise entities that may be directly interested in the outcome of the investigation does not imply that parties that may have other forms of interest pertinent to the investigation are excluded.

 

The last sentence of Article 12.9 provides that Members are not precluded from allowing domestic or foreign parties other than those listed in subparagraphs (i) and (ii) to be included as interested parties. Korea takes issue with the Panel’s interpretation of the term “allowing” in that sentence. Korea claimed before the Panel that the term “allowing” had the meaning of “granting permission”. The Panel found that, while the term could refer to an investigating authority allowing an entity to be designated as an interested party following a request, it could also refer to a Member “allowing, through national legislation or implementing regulations, certain parties to participate in investigations as interested parties”. The Panel further explained that, since there are a number of provisions of the SCM Agreement, for instance Article 21.2, that provide specifically for the term “upon request” where such a requirement is contemplated, the absence of this phrase in Article 12.9 supports the interpretation that the inclusion of a party as an interested party is not predicated on a request.

 

We agree with the Panel’s interpretation of the term “allowing” in Article 12.9. While a response to a request is certainly one way by which an investigating authority may allow an entity to be recognized as an interested party, we do not believe this is the only way for a party to be included. In our view, the term “allowing” in the residual clause connotes the power or authority given to a Member to include other parties as interested parties, rather than a restriction on such power of inclusion to those parties that make a request.

 

Korea further argues that Articles 12.3 and 12.8 of the SCM Agreement indicate that interested parties must have a case to present and an interest to defend. We recognize that Articles 12.3 and 12.8 refer to rights that interested parties have in presenting their cases and defending their interests in investigations. However, we see differentiations in the nature of the interest that parties may have in participating in an investigation. As the Panel correctly noted, Articles 12.1 and 12.2 presuppose the existence of two groups of interested parties, that is, those that may be initially involved because they received questionnaires, but subsequently cease to participate; and those that decide to participate actively, and choose to present cases and defend interests, as provided for in Articles 12.3 and 12.8.We are therefore unable to accept Korea’s argument that Articles 12.3 and 12.8 — which relate to parties participating in an investigation — imply that entities must “have an interest in the outcome of a proceeding” to be designated as “interested parties”.

 

We do not suggest that investigating authorities enjoy an unfettered discretion in designating entities as interested parties regardless of the relevance of such entities to the conduct of an objective investigation. As we have observed, the term “interested party” by definition suggests that the party must have some “interest” related to the investigation. Although that interest may be in the outcome of the investigation, a consideration of the interest should also take account of the perspective of the investigating authority. An investigating authority needs to have some discretion to include as interested parties entities that are relevant for carrying out an objective investigation and for obtaining information or evidence relevant to the investigation at hand. Nonetheless, in designating entities as interested parties, an investigating authority must be mindful of the burden that such designation may entail for other interested parties.

 

In this case, we do not believe that the JIA erred in designating the 16 financial creditor institutions of Hynix as interested parties. As the JIA was investigating an allegation of entrustment or direction with respect to the Restructurings, we consider that it was reasonable for the JIA to seek information from Hynix’s creditor institutions. The Panel noted that “the JIA had information indicating that the relevant Other Creditors were, or had been, creditors of Hynix, and could possibly have become shareholders in Hynix through the debt-to-equity swaps in the two [R]estructurings at issue”. In these circumstances, we see no error in the Panel’s statement that “at the very least the JIA was entitled to treat these Other Creditors as interested parties for the purpose of distributing its questionnaire. The Other Creditors might then, in their responses, have provided the JIA with information indicating that they no longer had an interest in the outcome of the investigation.

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

S.2.22.1 US — Softwood Lumber IV, para. 91
(WT/DS257/AB/R)

 

… The chapeau of Article 14 requires that “any” method used by investigating authorities to calculate the benefit to the recipient shall be provided for in a WTO Member’s legislation or regulations, and it requires that its application be transparent and adequately explained. The reference to “any” method in the chapeau clearly implies that more than one method consistent with Article 14 is available to investigating authorities for purposes of calculating the benefit to the recipient. …

 

S.2.22.2 US — Softwood Lumber IV, para. 92
(WT/DS257/AB/R)

 

… We agree with the Panel that the term “shall” in the last sentence of the chapeau of Article 14 suggests that calculating benefit consistently with the guidelines is mandatory. We also agree that the term “guidelines” suggests that Article 14 provides the “framework within which this calculation is to be performed”, although the “precise detailed method of calculation is not determined”. Taken together, these terms establish mandatory parameters within which the benefit must be calculated, but they do not require using only one methodology for determining the adequacy of remuneration for the provision of goods by a government. …

 

S.2.22.3 Japan — DRAMs (Korea), paras. 173-174
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

Article 14 of the SCM Agreement, entitled “Calculation of the Amount of a Subsidy in Terms of the Benefit to the Recipient”, provides guidance as to how the relevant market shall be identified. Specifically, with respect to “government provision of equity capital”, Article 14(a) stipulates that such equity infusions “shall not be considered as conferring a benefit, unless the investment decision can be regarded as inconsistent with the usual investment practice of private investors in the territory of that Member”. In respect of loans, Article 14(b) provides that “a loan by a government shall not be considered as conferring a benefit, unless there is a difference between the amount that the firm receiving the loan 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”. In the latter case, “the benefit shall be the difference between these two amounts”. Thus, under Article 14(a), the benchmark is “the usual investment practice of private investors”, and under Article 14(b), the benchmark is “the amount the firm would pay on a comparable commercial loan which the firm could actually obtain on the market”. Neither of these benchmarks makes a distinction between “outside” or “inside” investors. Rather, they suggest that the investigating authority calculate the amount of benefit conferred on the recipient by comparing the terms of the financial contribution to the terms that the relevant market — consisting of rational investors, be they inside or outside investors or both — would have offered. As the Appellate Body has previously said:

 

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

 

We therefore disagree with the Panel’s approach in this case, which consisted only of examining “whether or not the JIA applied [the inside investor] standard in an appropriate manner”. As we see it, the Panel should have identified the appropriate benchmark to apply for the purpose of assessing whether the JIA calculated the amount of benefit for the October 2001 and December 2002 Restructurings consistently with Articles 1.1(b) and 14 of the SCM Agreement. Instead, the Panel held that, since the parties had agreed that the inside investor standard constituted a valid benchmark, “there [was] no need for [the Panel] to make any findings on whether or not the inside investor perspective constituted [the] valid market benchmark” for purposes of its analysis.

 

S.2.22.4 Japan — DRAMs (Korea), paras. 177-178
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

… with respect to [the issue of whether the JIA erred in treating the value of the equity that Hynix gave in return for the debt-to-equity swaps as zero] the Panel stated:

 

We note that the JIA did not explicitly treat the debt-to-equity swaps as grants. Nevertheless, the JIA did conclude that the value of the equity was zero. We recall that the JIA did so because “the major issue in the October 2001 Program and December 2002 Program was not to recover the equity infusion, but to maximize the recovery of the credit”. In doing so, the JIA addressed the issue from the perspective of Hynix’s creditors, rather than from the position of Hynix itself. … [W]e consider that such an approach erroneously overstates the amount of benefit conferred on the recipient, for it overlooks the perspective of the recipient, i.e., Hynix, which must dilute the ownership interest of existing shareholders in return. (footnote omitted)

 

We see no error in this reasoning by the Panel. The JIA did not sufficiently explain, in its determination, how it reached the conclusion that the value of the shares was zero from the perspective of Hynix, the recipient.

 

S.2.22.5 Japan — DRAMs (Korea), paras. 179-181
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

We turn next to the Panel’s statement regarding dilution of the ownership of existing shareholders. Japan submits that “dilution is irrelevant to this case”, given that the Panel did not indicate any evidence showing that dilution had in fact occurred, and that, even if dilution had occurred, it would have taken place at the level of shareholders, not at the level of Hynix.

 

By contrast, Korea submits that the Panel rightly found that the JIA failed to take account of the fact that the additional shares issued to creditors would dilute the ownership interest of existing shareholders. Further, Korea submits that characterizing dilution as a cost to shareholders but not to Hynix would mean that debt-to-equity swaps would be considered as two separate transactions: one involving the company, and the other involving existing shareholders.

 

Based on our reading of the Panel Report, we understand the Panel to have referred to the issue of dilution merely to support its finding that the JIA did not calculate the amount of benefit from the perspective of the recipient. The Panel’s finding was not based on whether or not dilution occurred in the circumstances of this case. Instead, the Panel found that the JIA did not calculate the amount of benefit from the perspective of either Hynix or its shareholders, and, thereby, addressed the issue solely from the perspective of Hynix’s creditors. As we see it, dilution of the rights of existing shareholders does not appear to be a relevant issue on the facts of this case. Having said this, we do not wish to exclude the possibility that there may be circumstances in other cases in which the relationship between a company and its shareholders might be relevant for calculating the amount of benefit to the recipient.

 

S.2.22.6 Japan — DRAMs (Korea), paras. 190-192
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

The chapeau of Article 14 sets out three requirements. The first is that “any method used” by an investigating authority to calculate the amount of a subsidy in terms of benefit to the recipient shall be provided for in the national legislation or implementing regulations of the Member concerned. The second requirement is that the “application” of that method in each particular case shall be transparent and adequately explained. The third requirement is that “any such method” shall be consistent with the guidelines contained in paragraphs (a)—(d) of Article 14.

 

The chapeau of Article 14 provides a WTO Member with some latitude as to the method it chooses to calculate the amount of benefit. Paragraphs (a)—(d) of Article 14 contain general guidelines for the calculation of benefit that allow for the method provided for in the national legislation or regulations to be adapted to different factual situations. As the Appellate Body said in US — Softwood Lumber IV:

 

The chapeau of Article 14 requires that “any” method used by investigating authorities to calculate the benefit to the recipient shall be provided for in a WTO Member’s legislation or regulations… The reference to “any” method in the chapeau clearly implies that more than one method consistent with Article 14 is available to investigating authorities for purposes of calculating the benefit to the recipient.

 

… We agree with the Panel that the term “shall” in the last sentence of the chapeau of Article 14 suggests that calculating benefit consistently with the guidelines is mandatory. We also agree that the term “guidelines” suggests that Article 14 provides the “framework within which this calculation is to be performed”, although the “precise detailed method of calculation is not determined”. Taken together, these terms establish mandatory parameters within which the benefit must be calculated, but they do not require using only one methodology for determining the adequacy of remuneration for the provision of goods by a government. (emphasis added)

 

We observe that the first requirement of the chapeau of Article 14 is that the method used be provided for in a WTO Member’s national legislation or implementing regulations. Although the chapeau of Article 14 states that the calculation of benefit must be consistent with the guidelines in paragraphs (a)—(d) of that provision, it does not, in our view, contemplate that the method be set out in detail. The requirement of the chapeau would be met if the method used in a particular case can be derived from, or is discernible from, the national legislation or implementing regulations. We believe that this view strikes an appropriate balance between the flexibility that is needed for adapting the benefit calculation (consistent, however, with the guidelines of paragraphs (a)—(d) of Article 14) to the particular factual situation of an investigation, and the need to ensure that other Members and interested parties are made aware of the method that will be used by the Member concerned, under Article 14 of the SCM Agreement.

 

S.2.22.7 Japan — DRAMs (Korea), paras. 194-195, 199-200
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

… In construing the ordinary meaning of the word “method”, the Panel accepted the definition suggested by Japan and not contested by Korea, that “method” means “a mode of procedure; a (defined or systematic) way of doing a thing”. The Panel found that Formula 1 and Formula 2 were “methods” within the meaning of the chapeau. The Panel then examined whether Formula 1 and Formula 2 were “provided for” in Japan’s Guidelines.

 

We are unable to agree with the Panel that Formula 1 and Formula 2, in and of themselves, constitute the “method[s] used” by the JIA to calculate the amount of subsidy in terms of benefit to the recipient within the meaning of Article 14. Formula 1 was used to calculate a benchmark interest rate; and Formula 2 was used to allocate benefit over time. In our view, Formula 1 and Formula 2 constitute components or elements of the methods used by the JIA to calculate the amount of benefit conferred on Hynix. Neither, in isolation, was the complete “method used” in calculating the amount of subsidy in the transaction involved.

 

 

We agree with the Panel that, in accordance with the definition of “method” accepted by the Panel, Formula 1 and Formula 2 can be considered “methods” in the sense of a “mode of procedure”. But it does not follow from this that they are the “method[s] used” for calculating the amount of benefit in this case. Rather, they are methods for allocating benefit once the amount of the benefit has been determined, and for calculating interest rates for loans to uncreditworthy companies where no comparable loans exist on the commercial market. The Panel should have gone further to determine the entire methodology used by the JIA in calculating the amount of benefit for each type of transaction. If it had done so, the Panel could then have properly proceeded to consider whether those methodologies, in their entirety, were “provided for” under Japan’s Guidelines. The Panel, however, treated Formula 1 and Formula 2 as if they were, by themselves, the “method[s] used” to calculate the amount of benefit. They were not.

 

We therefore find that the Panel erred in finding… that Formula 1 and Formula 2 were the “method[s] used” to calculate the amount of benefit conferred on Hynix, within the meaning of the chapeau of Article 14.

 
S.2.23 Article 14(d) — Calculation of adequacy of remuneration     back to top

S.2.23.1 US — Softwood Lumber IV, para. 84
(WT/DS257/AB/R)

 

… Article 14(d) establishes that the provision of goods by a government shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration. As the Panel observed, the term “adequate” in this context means “sufficient, satisfactory”. “Remuneration” is defined as “reward, recompense; payment, pay”. Thus, a benefit is conferred when a government provides goods to a recipient and, in return, receives insufficient payment or compensation for those goods.

 

S.2.23.2 US — Softwood Lumber IV, para. 87
(WT/DS257/AB/R)

 

Turning first to the text of Article 14(d), we consider the submission of the United States that the term “market conditions” necessarily implies a market undistorted by the government’s financial contribution … We agree with the Panel that “[t]he text of Article 14(d) [of the] SCM Agreement does not qualify in any way the ‘market’ conditions which are to be used as the benchmark … [a]s such, the text does not explicitly refer to a ‘pure’ market, to a market ‘undistorted by government intervention’, or to a ‘fair market value’.”…

 

S.2.23.3 US — Softwood Lumber IV, para. 89
(WT/DS257/AB/R)

 

As we see it, the phrase “in relation to” implies a comparative exercise, but its meaning is not limited to “in comparison with”. The phrase “in relation to” has a meaning similar to the phrases “as regards” and “with respect to”. These phrases do not denote the rigid comparison suggested by the Panel, but may imply a broader sense of “relation, connection, reference”. Thus, the use of the phrase “in relation to” in Article 14(d) suggests that, contrary to the Panel’s understanding, the drafters did not intend to exclude any possibility of using as a benchmark something other than private prices in the market of the country of provision. This is not to say, however, that private prices in the market of provision may be disregarded. Rather, it must be demonstrated that, based on the facts of the case, the benchmark chosen relates or refers to, or is connected with, the conditions prevailing in the market of the country of provision.

 

S.2.23.4 US — Softwood Lumber IV, para. 90
(WT/DS257/AB/R)

 

Although Article 14(d) does not dictate that private prices are to be used as the exclusive benchmark in all situations, it does emphasize by its terms that prices of similar goods sold by private suppliers in the country of provision are the primary benchmark that investigating authorities must use when determining whether goods have been provided by a government for less than adequate remuneration. In this case, both participants and the third participants agree that the starting-point, when determining adequacy of remuneration, is the prices at which the same or similar goods are sold by private suppliers in arm’s length transactions in the country of provision. This approach reflects the fact that private prices in the market of provision will generally represent an appropriate measure of the “adequacy of remuneration” for the provision of goods. However, this may not always be the case. As will be explained below, investigating authorities may use a benchmark other than private prices in the country of provision under Article 14(d), if it is first established that private prices in that country are distorted because of the government’s predominant role in providing those goods.

 

S.2.23.5 US — Softwood Lumber IV, para. 93
(WT/DS257/AB/R)

 

Furthermore, the Panel’s interpretation is not supported by the objective of Article 14… Under the approach advocated by the Panel (that is, private prices in the country of provision must be used whenever they exist), however, there may be situations in which there is no way of telling whether the recipient is “better off” absent the financial contribution. …

 
S.2.24 Article 14(d) — Alternative benchmark for calculating the adequacy of remuneration     back to top

S.2.24.1 US — Softwood Lumber IV, paras. 97-98
(WT/DS257/AB/R)

 

Having established that prices in the market of the country of provision are the primary, but not the exclusive, benchmark for calculating benefit, we come to the next question that arises in our analysis, namely, when an investigating authority may use a benchmark other than private prices in the country of provision for purposes of calculating the benefit under Article 14(d).

 

… the Panel … acknowledged that “it will in certain situations not be possible to use in-country prices” as a benchmark, and gave two examples of such situations… (i) where the government is the only supplier of the particular goods in the country; and, (ii) where the government administratively controls all of the prices for those goods in the country. …

 

S.2.24.2 US — Softwood Lumber IV, para. 100
(WT/DS257/AB/R)

 

In analysing this question, we have some difficulty with the Panel’s approach of treating a situation in which the government is the sole supplier of certain goods differently from a situation in which the government is the predominant supplier of those goods. In terms of market distortion and effect on prices, there may be little difference between situations where the government is the sole provider of certain goods and situations where the government has a predominant role in the market as a provider of those goods. …

 

S.2.24.3 US — Softwood Lumber IV, paras. 101-102
(WT/DS257/AB/R)

 

… When private prices are distorted because the government’s participation in the market as a provider of the same or similar goods is so predominant that private suppliers will align their prices with those of the government-provided goods, it will not be possible to calculate benefit having regard exclusively to such prices.

 

We emphasize … the possibility under Article 14(d) for investigating authorities to consider a benchmark other than private prices in the country of provision is very limited… an allegation that a government is a significant supplier would not, on its own, prove distortion and allow an investigating authority to choose a benchmark other than private prices in the country of provision. The determination of whether private prices are distorted because of the government’s predominant role in the market, as a provider of certain goods, must be made on a case-by-case basis, according to the particular facts underlying each countervailing duty investigation.

 

S.2.24.4 US — Softwood Lumber IV, para. 106
(WT/DS257/AB/R)

 

We agree with the submissions of the participants and third participants that alternative methods for determining the adequacy of remuneration could include proxies that take into account prices for similar goods quoted on world markets, or proxies constructed on the basis of production costs. We emphasize, however, that where an investigating authority proceeds in this manner, it is under an obligation to ensure that the resulting benchmark relates or refers to, or is connected with, prevailing market conditions in the country of provision, and must reflect price, quality, availability, marketability, transportation and other conditions of purchase or sale, as required by Article 14(d) … Nor are we required to determine the consistency with Article 14(d) of all the alternative methods mentioned by the participants and third participants; such assessment will depend on how any such method is applied in a particular case. We, therefore, make no findings on the WTO-consistency of any of these methods in the abstract.

 

S.2.24.5 US — Softwood Lumber IV, para. 108
(WT/DS257/AB/R)

 

… we observe that, when choosing an alternative method for determining the adequacy of remuneration, it has to be kept in mind that prices in the market of a WTO Member would be expected to reflect prevailing market conditions in that Member; they are unlikely to reflect conditions prevailing in another Member. Therefore, it cannot be presumed that market conditions prevailing in one Member, for instance the United States, relate or refer to, or are connected with, market conditions prevailing in another Member, such as Canada for example. Indeed, it seems to us that it would be difficult, from a practical point of view, for investigating authorities to replicate reliably market conditions prevailing in one country on the basis of market conditions prevailing in another country. First, there are numerous factors to be taken into account in making adjustments to market conditions prevailing in one country so as to replicate those prevailing in another country; secondly, it would be difficult to ensure that all necessary adjustments are made to prices in one country in order to develop a benchmark that relates or refers to, or is connected with, prevailing market conditions in another country, so as to reflect price, quality, availability, marketability, transportation and other conditions of purchase or sale in that other country.

 

S.2.24.6 US — Softwood Lumber IV, para. 109
(WT/DS257/AB/R)

 

It is clear, in the abstract, that different factors can result in one country having a comparative advantage over another with respect to the production of certain goods. In any event, any comparative advantage would be reflected in the market conditions prevailing in the country of provision and, therefore, would have to be taken into account and reflected in the adjustments made to any method used for the determination of adequacy of remuneration, if it is to relate or refer to, or be connected with, prevailing market conditions in the market of provision. 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.2.24.7 US — Softwood Lumber IV, paras. 119-120
(WT/DS257/AB/R)

 

… we … find … that an investigating authority may use a benchmark other than private prices in the country of provision, when it has been established that private prices of the goods in question in that country are distorted, because of the predominant role of the government in the market as a provider of the same or similar goods.

 

We emphasize, however, that when an investigating authority proceeds in this manner, it is obliged, pursuant to Article 14(d), to ensure that the alternative benchmark it uses relates or refers to, or is connected with, prevailing market conditions in the country of provision (including price, quality, availability, marketability, transportation and other conditions of purchase or sale), with a view to determining, ultimately, whether the goods at issue were provided by the government for less than adequate remuneration.

 
S.2.25 Article 15 — Determination of injury     back to top

S.2.25.1 US — Carbon Steel, paras. 79, 81
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

… Article 15 of the SCM Agreement, which deals with injury and how it is to be determined, refers, in its paragraph 3, to the de minimis standard in Article 11.9 only for the purpose of cumulation of imports. Moreover, …

 

… In defining the concept of injury, footnote 45 does not make any reference to the amount of subsidy involved.

 

 

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.2.25.2 US — Softwood Lumber VI (Article 21.5 — Canada), paras. 154-155
(WT/DS277/AB/RW, WT/DS277/AB/RW/Corr.1)

 

… The Appellate Body has considered the issue of whether the non-attribution requirement of Article 3.5 of the Anti-Dumping Agreement obliges investigating authorities to examine the collective effects of “other known factors”, or whether it is sufficient to look at the individual effects of several different “other known factors”. The Appellate Body held that “Article 3.5 does not compel, in every case, an assessment of the collective effects of other causal factors”. At the same time, the Appellate Body recognized that “there may be cases where, because of the specific factual circumstances therein, the failure to undertake an examination of the collective impact of other causal factors would result in the investigating authority improperly attributing the effects of other causal factors to dumped imports”.

 

Accordingly, answering the question whether the USITC was required to conduct a non-attribution analysis of cumulated third-country imports, or of the collective effect of cumulated third-country imports and United States oversupply, requires an examination of the particular facts of this case. It follows that this argument of Canada is also essentially directed at the appreciation of the evidence on the record.

 
S.2.25A Article 15.5 — Causation     back to top

S.2.25A.1 US — Softwood Lumber VI (Article 21.5 — Canada), paras. 131-132
(WT/DS277/AB/RW, WT/DS277/AB/RW/Corr.1)

 

… The Panel… seems to have assumed that … having found that one fundamental element (injury) of the causal analysis is consistent with the Agreements, … the entire causal analysis must also be consistent with the Agreements. This is not the case. The Panel had a duty to examine, first, whether the USITC’s finding, in the Section 129 Determination, of a likely imminent substantial increase in imports, was consistent with the requirements of Article 3.7 of the Anti-Dumping Agreement and Article 15.7 of the SCM Agreement; and, secondly, whether the USITC’s analysis of causation was consistent with the requirements of Article 3.5 of the Anti-Dumping Agreement and Article 15.5 of the SCM Agreement. That the USITC chose to conduct an “integrated” or “unitary” analysis of threat of injury and causation did not relieve the USITC of the need to comply with each of the requirements set out in these provisions, nor did it relieve the Panel of its duty to examine whether the Section 129 Determination demonstrated how compliance with these distinct sets of obligations had been achieved.

 

… this part of the Panel’s analysis makes no mention of the positive requirement, in Article 3.5 of the Anti-Dumping Agreement and Article 15.5 of the SCM Agreement, that an investigating authority demonstrate that further dumped/subsidized imports would cause injury. … In particular, the Panel did not examine whether the USITC identified and explained the positive evidence establishing a genuine and substantial relationship of cause and effect between imports and threat of injury. …

 

S.2.25A.2 Japan — DRAMs (Korea), paras. 262-266
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

Article 15.5 as a whole deals with the causal relationship between subsidized imports and injury to the domestic industry. The first sentence of Article 15.5 requires that an investigating authority demonstrate that “the subsidized imports are, through the effects of subsidies, causing injury” to the domestic industry. The second sentence emphasizes that the demonstration of the causal relationship between the subsidized imports and the injury shall be based on all relevant evidence before the investigating authority. In both sentences, the subject to which the phrase “are causing injury” applies, or in respect of which “a causal relationship” is to be established, is “the subsidized imports”.

 

By virtue of footnote 47 to Article 15.5, which forms an integral part of the first sentence, the demonstration of the causal relationship envisaged in the first two sentences of Article 15.5 is to be carried out by following the analysis set forth in Articles 15.2 and 15.4 for examining the “effects” of the subsidized imports. According to these paragraphs, such an examination will comprise of: (i) whether there has been a significant increase in subsidized imports; (ii) the effect of the subsidized imports on prices; and (iii) the consequent impact of the subsidized imports on the domestic industry.

 

It is clear from the architecture of Articles 15.2, 15.4, and 15.5 that, for determining whether the “subsidized imports are, through the effects of subsidies, causing injury” to the domestic industry, what is required is the examination of the effects of the subsidized imports as set forth in Articles 15.2 and 15.4. These paragraphs neither envisage nor require the two distinct types of examinations suggested by Korea, namely, an examination of the effects of the subsidized imports as per Articles 15.2 and 15.4; and, a second examination of the effects of the subsidies as distinguished from the effects of the subsidized imports on a case-by-case basis.

 

Korea’s argument that the effects of subsidies must be distinguished from the effects of the subsidized imports is based on the premise that the increase in the volume of subsidized imports or the price at which they are sold on the importing Member’s market may not have been caused by the subsidies received by the exporting company. To illustrate its point, Korea has suggested that the increased volumes of sales of the product may be due to better quality, design, innovation, or customer preference, rather than the subsidy.

 

We are not persuaded by these arguments of Korea. In our view, they would imply additional inquiry by an investigating authority into two matters: first, the use to which the subsidies were put by the exporting company; and, secondly, whether, absent the subsidies, the product would have been exported in the same volumes or at the same prices. Such additional examinations are not contemplated by Articles 15.2 and 15.4.

 

S.2.25A.3 Japan — DRAMs (Korea), paras. 267-268
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

Furthermore, the “non-attribution” provisions contained in the third sentence of Article 15.5 already address adequately the concern that the injurious effects of any known factors other than subsidized imports are not attributed to the subsidized imports. This ensures that injuries that may have been caused by other known factors are not attributed to the subsidized imports. The third sentence of Article 15.5 does not envisage the kind of additional enquiry implied in Korea’s arguments.

 

We are therefore of the view that, if an investigating authority carries out the examination required under Articles 15.2, 15.4, and 15.5, such examination suffices to demonstrate that “subsidized imports are, through the effects of subsidies, causing injury” within the meaning of the SCM Agreement.

 

S.2.25A.4 Japan — DRAMs (Korea), paras. 269-271
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

Article 11.2 of the SCM Agreement provides contextual support for our reading of the first sentence of Article 15.5. Article 11.2 sets forth guidance as to what may constitute “sufficient evidence” for purposes of an application for the initiation of a countervailing duty investigation and further describes the type of evidence that should be included in the application. …

 

 

We agree with the Panel that Article 11.2 thus indicates that information relating to the volume effects, the price effects, and the consequent impact of the subsidized imports on the domestic industry serves as evidence to demonstrate that injury is caused by the “subsidized imports through the effects of subsidies”. By its terms, Article 11.2 does not require an applicant to provide specific evidence regarding the effects that the subsidies may have on import volumes and prices so as to cause injury.

 

Korea argues that there is nothing in the SCM Agreement “that indicates that the standard for initiating an investigation under Article 11.2 is the same as the standard for making an affirmative injury determination under Article 15”. Korea further argues that Article 11.2 does not prohibit investigating authorities from requiring additional information “to satisfy the ‘through the effects of subsidies’ requirement” in the context of making an affirmative injury determination. We are not persuaded by this argument. If a demonstration of an additional causal link between the effect of the subsidy and injury is to be established as a prerequisite for an injury determination, as Korea contends, there is no reason why Article 11.2 would not have prescribed submission of evidence for that purpose.

 

S.2.25A.5 Japan — DRAMs (Korea), para. 272
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

Korea further argues that the “through the effects of subsidies” language in Article 15.5 should be interpreted as requiring the same type of causation analysis that has been developed in dispute settlement practice for the “effect of the subsidy” language in Article 6.3 of the SCM Agreement. However, in our view, the Panel rightly rejected Korea’s argument in this regard. Like the Panel, we do not see how the terms of Article 6.3 or prior panel reports interpreting this provision that relate to the different concepts of “serious prejudice” and “adverse effects” in Part III of the SCM Agreement support Korea’s interpretation of Article 15.5 in Part V on countervailing measures. In view of the difference between the text, context, rationale, and object of the provisions in Part III and Part V of the SCM Agreement, we see no basis for importing the specific obligations of Part III into the provisions of Part V of the SCM Agreement. Although both Articles 6.3 and 15.5 refer to effects of the subsidies, the meaning of this phrase must be interpreted in the light of the substantive obligations within which the phrase is located. Articles 6.3 and 15.5 deal with different subject matters and therefore it is not appropriate to accord an identical meaning to the common phrase in these Articles.

 

S.2.25A.6 Japan — DRAMs (Korea), para. 273
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

We turn next to address Korea’s argument that the Panel’s understanding of the context provided by Article VI:6(a) of the GATT 1994 effectively repeals the obligations under that Article. According to Korea, that Article allows a Member to levy a countervailing duty only if it determines that the effect of the subsidized imports is to cause injury to the domestic industry. As we have observed above, if an investigating authority carries out an examination as required under Articles 15.2, 15.4, and 15.5 of the SCM Agreement, this suffices to demonstrate that subsidized imports are, through the effects of subsidies, causing injury. We do not see any inconsistency between our interpretation of the first sentence of Article 15.5 and the provisions of Article VI:6.We therefore do not consider that the Panel’s reading of the first sentence of Article 15.5 repeals the obligations provided for in Article VI:6 of the GATT 1994.

 

S.2.25A.7 Japan — DRAMs (Korea), paras. 276-277
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

Korea submits, “more generally”, that the Panel’s interpretation of the “through the effects of subsidies” language of Articles 15.5 and 19.1 is also inconsistent with the object and purpose of the SCM Agreement. According to Korea, “the object and purpose of that Agreement is ‘to offset government subsidies that distort trade, thereby causing injury to competing industries in other countries’ ”. Therefore, for Korea, Article 15.5 does “not permit countervailing duties to be imposed unless the effect of the subsidies is to distort trade, by altering the volume or prices of the imports in a manner that causes injury”. We see our interpretation of the first sentence of Article 15.5 to be in harmony with the object and purpose of the SCM Agreement.

 

As we have found above, if an investigating authority carries out the examination required under Articles 15.2, 15.4, and 15.5 of the SCM Agreement, such examination suffices to demonstrate that “subsidized imports are, through the effects of subsidies, causing injury” within the meaning of that Agreement. We have also found that there is no additional requirement to examine the effects of the subsidies as distinguished from the effects of the subsidized imports on a case-by-case basis. In the light of our analysis, we uphold the Panel’s finding, in paragraphs 7.425 and 8.1(g) of the Panel Report, that the JIA did not act inconsistently with Articles 15.5 and 19.1 of the SCM Agreement by not demonstrating separately that the allegedly subsidized imports were, “through the effects of subsidies”, causing injury within the meaning of the SCM Agreement.

 
S.2.25B Article 15.7 — Threat of material injury. See also Anti-Dumping Agreement, Article 3.7 — Threat of material injury (A.3.27); and Safeguards Agreement, Article 4.1(b) — Threat of serious injury (S.1.24)     back to top

S.2.25B.1 US — Softwood Lumber VI (Article 21.5 — Canada), paras. 107, 109-110
(WT/DS277/AB/RW, WT/DS277/AB/RW/Corr.1)

 

According to Canada,… the Panel wrongly “held the investigating authority to a lower standard of care and explanation on the grounds that it made a determination of threat rather than a determination of current material injury” and… “the Panel’s own review was conducted according to a more deferential standard because it involved a threat of injury determination”. …

 

 

… we are not persuaded that the Panel’s statements amount to a denial of the high standard that applies to a threat of injury determination. In particular, the excerpt from the Panel Report relied upon by Canada does not seem, to us, to be inconsistent with the requirement that the reasoning set out by an investigating authority making a determination of threat of injury must clearly disclose the assumptions and extrapolations that were made, on the basis of the record evidence, regarding future occurrences. Nor are the Panel’s statements inconsistent with the requirements that the reasoning of the investigating authority demonstrate that such assumptions and extrapolations were based on positive evidence and not merely on allegation, conjecture, or remote possibility; and show a high degree of likelihood that projected occurrences will occur.

 

At the same time, the Panel’s reasoning does raise two concerns. First, the Panel stated that “predictions based on the observed facts may be less susceptible to being found, on review by a panel, to be outside the range of conclusions that might be reached by an unbiased and objective decision maker on the basis of the facts and in light of the explanations given”. Taken at face value, this could imply a greater likelihood of panels upholding a threat of injury determination, as compared to a determination of current material injury, when those determinations rest on the same level of evidence. Any such implication would be erroneous, but we do not view the Panel’s statement as having such an implication. Of somewhat greater concern, however, is the Panel’s statement that the “possible range of reasonable predictions of the future that may be drawn based on the observed events of the period of investigation may be broader than the range of reasonable conclusions concerning the present that might be drawn based on those same facts”. We are not persuaded that, in making this observation, the Panel intended to express the view that a threat of injury determination must be upheld if the investigating authority’s report discloses the occurrence of injury as one reasonable prediction within the possible range of future occurrences. If this were the Panel’s view, then it would be erroneous.

 

S.2.25B.2 US — Softwood Lumber VI (Article 21.5 — Canada), para. 137
(WT/DS277/AB/RW, WT/DS277/AB/RW/Corr.1)

 

… The Panel examined, separately, the various USITC findings challenged by Canada, but did not undertake any assessment of whether the totality of the factors and evidence considered supported the ultimate finding of a threat of material injury. In neglecting this aspect of its review, the Panel does not seem to have taken account of the express requirement in Article 3.7 of the Anti-Dumping Agreement and Article 15.7 of the SCM Agreement that “the totality of the factors considered must lead to the conclusion that further [dumped/subsidized] exports are imminent and that, unless protective action is taken, material injury would occur” (emphasis added). This neglect is particularly striking given that the original panel recognized the need to undertake such an analysis, and the Panel asked Canada a specific question in this regard.

 

S.2.25B.3 US — Softwood Lumber VI (Article 21.5 — Canada), paras. 146-147
(WT/DS277/AB/RW, WT/DS277/AB/RW/Corr.1)

 

Article 3.7(i) of the Anti-Dumping Agreement and Article 15.7(ii) of the SCM Agreement… lay emphasis on two aspects: first, that there is a “significant” rate of increase in imports; and secondly, that such a rate of increase reveals the likelihood of “substantially” increased importation in the near future. Taken together, they refer to the observed behaviour of the volume of imports.

 

Although the concept of a “rate” of increase implies measuring the increase with reference to some time period, neither of these provisions stipulates any specific time period or any specific methodology for measuring the rate of increase of imports. As for Canada’s argument at the oral hearing regarding market share, we observe that these provisions do not prescribe that the measurement be done with reference to market share of the imports or any other index. We, therefore, agree with the Panel that Article 3.7(i) of the Anti-Dumping Agreement and Article 15.7(ii) of the SCM Agreement do not prescribe a specific methodology for determining the rate of increase in imports. Whatever be the methodology followed by an investigating authority, its determination must show, on the basis of positive evidence and an objective examination, that the rate of increase of dumped/subsidized imports is “significant” so as to indicate the likelihood of “substantially” increased imports in the near future.

 

S.2.25B.4 US — Softwood Lumber VI (Article 21.5 — Canada), para. 151
(WT/DS277/AB/RW, WT/DS277/AB/RW/Corr.1)

 

Article 3.7(iii) of the Anti-Dumping Agreement and Article 15.7(iv) of the SCM Agreement… do not prescribe a particular methodology for the examination of the price effects of dumped/subsidized imports. Regardless of the methodology followed by an investigating authority, it is clear from the plain language of these provisions that the authority must examine: (i) the trends in the prices at which “imports are entering”; (ii) the “effect” of those prices on “domestic prices”; and (iii) the “demand for further imports”. Discerning the “effect” of prices of imports on domestic prices necessarily calls for an analysis of the interaction between the two. Otherwise, the links between the prices of imports and the depressing or suppressing effect on domestic prices, and the consequent likelihood of a “demand for further imports” may not be properly established.

 

S.2.25B.5 US — Softwood Lumber VI (Article 21.5 — Canada), footnote 221 to para. 152
(WT/DS277/AB/RW, WT/DS277/AB/RW/Corr.1)

 

… Canada stated that the “domestic prices” that should be examined under Article 3.7(iii) of the Anti-Dumping Agreement and Article 15.7(iv) of the SCM Agreement are exclusively the prices of domestically produced goods, and do not include the prices of the imported goods. In this case, the USITC relied on indexes of composite prices, and explained that the indexes distinguished between the species of trees used to produce softwood lumber and not by the country of production. In our view, whether an investigating authority may properly rely on a specific index in examining domestic prices will depend on the particular facts of the case.

 
S.2.26 Article 19.1 — Conditions for the imposition of countervailing duties     back to top

S.2.26.1 US — Countervailing Measures on Certain EC Products, para. 147
(WT/DS212/AB/R)

 

… In an original investigation, an investigating authority must establish all conditions set out in the SCM Agreement for the imposition of countervailing duties. Those obligations, identified in Article 19.1 of the SCM Agreement, read in conjunction with Article 1, include a determination of the existence of a “benefit”. …

 

S.2.26.2 US — Shrimp (Thailand) / US — Customs Bond Directive, paras. 280-281
(WT/DS343/AB/R, WT/DS345/AB/R)

 

India’s appeal raises the question of whether a bond is a “duty” within the meaning of Article 9 of the Anti-Dumping Agreement (or Article 19 of the SCM Agreement). A bond under the Amended CBD secures the payment of a duty. A bond, by itself, is not a duty as it does not entail any transfer of money from the importer to the government. Therefore, the [enhanced continuous bond requirement] imposed pursuant to the Amended CBD cannot be characterized as a “duty” within the meaning of Article 9 of the Anti-Dumping Agreement and Article 19 of the SCM Agreement.

 

Accordingly, we agree with the Panel that bonds provided under the Amended CBD are not anti-dumping duties or countervailing duties and that, therefore, they fall outside the scope of Articles 9.1, 9.2, 9.3, and 9.3.1 of the Anti-Dumping Agreement, as well as Article 19.2, 19.3, and 19.4 of the SCM Agreement. …

 
S.2.27 Article 19.3 — Imposition of countervailing duties on a non-discriminatory basis after aggregate investigation     back to top

S.2.27.1 US — Softwood Lumber IV, para. 152 and footnote 189
(WT/DS257/AB/R)

 

We agree with the United States that Article 19 of the SCM Agreement authorizes Members to perform an investigation on an aggregate basis. Article 19.3 requires that countervailing duties “shall be levied, in the appropriate amounts in each case, on a non-discriminatory basis on imports of such product from all sources found to be subsidized and causing injury” (emphasis added). Article 19.3 further provides that “[a]ny exporter whose exports are subject to a definitive countervailing duty but who was not actually investigated… shall be entitled to an expedited review in order that the investigating authorities promptly establish an individual countervailing duty rate for that exporter” (emphasis added). Accordingly, countervailing duties shall be imposed, on a non-discriminatory basis, on all sources found to be subsidized, although no prior investigation of all individual exporters or producers is required by Article 19. This implies that countervailing duties may be imposed on imports of products subject to the investigation, even though specific shipments from exporters or producers that were not investigated individually might not at all be subsidized, or not subsidized to an extent equal to a countervailing duty rate calculated on an aggregate (country-wide) basis.189

 

S.2.27.2 US — Softwood Lumber IV, para. 154
(WT/DS257/AB/R)

 

We note, however, that country-wide or company-specific countervailing duty rates may be imposed under Part V of the SCM Agreement only after the investigating authority has determined the existence of subsidization, injury to the domestic industry, and a causal link between them. In other words, the fact that Article 19 permits the imposition of countervailing duties on imports from producers or exporters not investigated individually, does not exonerate a Member from the obligation to determine the total amount of subsidy and the countervailing duty rate consistently with the provisions of the SCM Agreement and Article VI of the GATT 1994. In this respect, as the panel in US — Countervailing Measures on Certain EC Products correctly stated, the “determination of a benefit (as a component of subsidization) must be made before countervailing duties can be imposed”. Therefore, turning to the issue in this case, before being entitled to impose countervailing duties on a processed product, for the purpose of offsetting an input subsidy, a Member must first determine, in accordance with Article 1.1, that a financial contribution exists, and that the benefit conferred directly on the input producer has been passed through, at least in part, to the producer of the processed product. …

 

S.2.27.3 Mexico — Anti-Dumping Measures on Rice, para. 322
(WT/DS295/AB/R)

 

… Article 19.3 requires that an investigating authority carry out an expedited review for an exporter that (i) is subject to a definitive countervailing duty; and (ii) was not examined during the original investigation for reasons other than a refusal to cooperate.

 
S.2.28 Article 19.4 — Calculation of countervailing duty rates on per unit basis     back to top

S.2.28.1 US — Softwood Lumber IV, para. 153
(WT/DS257/AB/R)

 

We also observe that Article 19.4 requires the calculation of countervailing duties in terms of “subsidization per unit of the subsidized and exported product” (emphasis added). In our view, the reference to calculation of countervailing duty rates on a per unit basis under Article 19.4 supports the interpretation that an investigating authority is permitted to calculate the total amount and the rate of subsidization on an aggregate basis.

 

S.2.28.2 Japan — DRAMs (Korea), paras. 207, 210
(WT/DS336/AB/R, WT/DS336/AB/R/Corr.1)

 

… this issue relates to the question of whether countervailing duties can be imposed, in the case of non-recurring subsidies, when the determination made by the investigating authority indicates that the subsidy will no longer exist at the time of imposition.

 

 

By its terms, Article 19.4 refers to a subsidy “found to exist”. We see no requirement in Article 19.4 for an investigating authority to conduct a new investigation or to “update” the determination at the time of imposition of a countervailing duty in order to confirm the continued existence of the subsidy. However, in the case of a non-recurring subsidy, a countervailing duty cannot be imposed if the investigating authority has made a finding in the course of its investigation as to the duration of the subsidy and, according to that finding, the subsidy is no longer in existence at the time that the Member makes a final determination to impose a countervailing duty. This is because, in such a situation, the countervailing duty, if imposed, would be in excess of the amount of subsidy found to exist, contrary to the provisions of Article 19.4.

 
S.2.29 Article 21 — Duration and review of countervailing duties     back to top

S.2.29.1 US — Countervailing Measures on Certain EC Products, para. 139
(WT/DS212/AB/R)

 

In considering these arguments, we begin by recalling that, under Article 1.1 of the SCM Agreement, a “subsidy” is “deemed to exist” only if a “financial contribution” confers a “benefit”. Also, under Article VI:3 of the GATT 1994, investigating authorities, before imposing countervailing duties, must ascertain the precise amount of a subsidy attributed to the imported products under investigation. In furtherance of this obligation, Article 10 of the SCM Agreement provides that Members must “ensure” that duties levied for the purpose of offsetting a subsidy are imposed only “in accordance with” the provisions of Article VI:3 of the GATT 1994 and the SCM Agreement. Moreover, Article 19.4 of the SCM Agreement, consistent with the language of Article VI:3 of the GATT 1994, requires that “[n]o countervailing duty shall be levied on any imported product in excess of the amount of the subsidy found to exist” (emphasis added). Finally, Article 21.1 of the SCM Agreement provides that “[a] countervailing duty shall remain in force only as long as and to the extent necessary to counteract subsidization which is causing injury” (emphasis added). In sum, these provisions set out the obligation of Members to limit countervailing duties to the amount and duration of the subsidy found to exist by the investigating authority. These obligations apply to original investigations as well as to administrative and sunset reviews covered under Article 21 of the SCM Agreement.

 

S.2.29.2 US — Softwood Lumber IV (Article 21.5 — Canada), para. 82
(WT/DS257/AB/RW)

 

… We also note the argument of the United States that the SCM Agreement recognizes that original countervailing duty investigations are proceedings distinct from duty assessment reviews. This does not, in our view, answer the question of whether the Panel was entitled, in these proceedings under Article 21.5 of the DSU, to examine the pass-through analysis conducted by the USDOC in the First Assessment Review.

 

S.2.29.3 US — Softwood Lumber IV (Article 21.5 — Canada), footnote 149 to para. 93
(WT/DS257/AB/RW)

 

This dispute does not raise the issue of whether or to what extent the obligations that apply in the context of an assessment review are the same as the obligations that apply in an original countervailing duty investigation. The United States did not argue before the Panel, or before us, that it had no obligation, under the covered agreements, to conduct the same pass-through analysis in an assessment review as it must conduct in an original countervailing duty investigation.

 
S.2.30 Article 21.1 — “only as long and to the extent necessary”     back to top

S.2.30.1 US — Carbon Steel, para. 70
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

… The first paragraph of Article 21 stipulates that a countervailing duty “shall remain in force only as long as and to the extent necessary to counteract subsidization which is causing injury”. We see this as a general rule that, after the imposition of a countervailing duty, the continued application of that duty is subject to certain disciplines. These disciplines relate to the duration of the countervailing duty (“only as long as… necessary”), its magnitude (“only… to the extent necessary”), and its purpose (“to counteract subsidization which is causing injury”). Thus, the general rule of Article 21.1 underlines the requirement for periodic review of countervailing duties and highlights the factors that must inform such reviews. …

 
S.2.31 Article 21.2 — Review of the need for continued imposition     back to top

S.2.31.1 US — Lead and Bismuth II, paras. 53-54
(WT/DS138/AB/R)

 

… Pursuant to [paragraph 2 of Article 21], the authorities of a Member applying a countervailing duty must, where warranted, “review the need for the continued imposition of the duty”. In carrying out such a review, the authorities must “examine whether the continued imposition of the duty is necessary to offset subsidization” and/or “whether the injury would be likely to continue or recur if the duty were removed or varied”. Article 21.2 provides a review mechanism to ensure that Members comply with the rule set out in Article 21.1 of the SCM Agreement, which stipulates:

 

A countervailing duty shall remain in force only as long as and to the extent necessary to counteract subsidization which is causing injury.

 

Setting aside the issue of injury, which does not arise in this case, we note that in order to establish the continued need for countervailing duties, an investigating authority will have to make a finding on subsidization, i.e., whether or not the subsidy continues to exist. If there is no longer a subsidy, there would no longer be any need for a countervailing duty.

 

S.2.31.2 US — Lead and Bismuth II, paras. 61-62
(WT/DS138/AB/R)

 

… In an administrative review pursuant to Article 21.2, the investigating authority may be presented with “positive information” that the “financial contribution” has been repaid or withdrawn and/or that the “benefit” no longer accrues. On the basis of its assessment of the information presented to it by interested parties, as well as of other evidence before it relating to the period of review, the investigating authority must determine whether there is a continuing need for the application of countervailing duties. The investigating authority is not free to ignore such information. If it were free to ignore this information, the review mechanism under Article 21.2 would have no purpose.

 

Therefore, we agree with the Panel that while an investigating authority may presume, in the context of an administrative review under Article 21.2, that a “benefit” continues to flow from an untied, non-recurring “financial contribution”, this presumption can never be “irrebuttable”. …

 

S.2.31.3 US — Lead and Bismuth II, para. 63
(WT/DS138/AB/R)

 

… We do not agree with the Panel’s implied view that, in the context of an administrative review under Article 21.2, an investigating authority must always establish the existence of a “benefit” during the period of review in the same way as an investigating authority must establish a “benefit” in an original investigation. We believe that it is important to distinguish between the original investigation leading to the imposition of countervailing duties and the administrative review. In an original investigation, the investigating authority must establish that all conditions set out in the SCM Agreement for the imposition of countervailing duties are fulfilled. In an administrative review, however, the investigating authority must address those issues which have been raised before it by the interested parties or, in the case of an investigation conducted on its own initiative, those issues which warranted the examination.

 

S.2.31.4 US — Carbon Steel, para. 71
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

… the last sentence of Article 21.2 emphasizes the principle that the countervailing duty must be terminated “immediately” when “the authorities determine that the countervailing duty is no longer warranted”. As we explained in our Report in US — Lead and Bismuth II, the determination made in a review under Article 21.2 must be a meaningful one…

 

… the requirement of a rigorous review cannot be denied …

 

S.2.31.5 US — Carbon Steel, para. 108
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

Article 21.2 differs from Article 21.3 in that the former identifies certain circumstances in which the authorities are under an obligation to review (“shall review”) whether the continued imposition of the countervailing duty is necessary. In contrast, the principal obligation in Article 21.3 is not, per se, to conduct a review, but rather to terminate a countervailing duty unless a specific determination is made in a review. We note that Article 21.2 sets down an explicit evidentiary standard for requests by interested parties for a review under that provision. In order to trigger the authorities’ obligation to conduct a review, such requests must, inter alia, include “positive information substantiating the need for review”. Article 21.2 does not, on its face, apply this same standard to the initiation by authorities “on their own initiative” of a review carried out under that provision. Thus, Article 21.2 contemplates that, for reviews carried out pursuant to that provision, the self-initiation by the authorities of a review is not governed by the same standards that apply to initiation upon request by other parties.

 

S.2.31.6 US — Countervailing Measures on Certain EC Products, paras. 144, 146
(WT/DS212/AB/R)

 

… we reaffirm our finding in [US — Lead and Bismuth II] that an investigating authority, in an administrative review, when presented with information directed at proving that a “benefit” no longer exists following a privatization, must determine whether the continued imposition of countervailing duties is warranted in the light of that information. This obligation is premised, not on the creation of a new legal person, as the United States insists, but on the possibility that such a change in ownership has affected the continued existence of a benefit.

 

 

… under the “same person” method, when the USDOC determines that no new legal person is created as a result of privatization, the USDOC will conclude from this determination, without any further analysis, and irrespective of the price paid by the new owners for the newly privatized enterprise, that the newly privatized enterprise continues to receive the benefit of a previous financial contribution. This approach is contrary to the obligation in Article 21.2 of the SCM Agreement that the investigating authority must take into account in an administrative review “positive information substantiating the need for a review”. Such information could relate to developments with respect to the subsidy, privatization at arm’s length and for fair market value, or some other information. …

 

S.2.31.7 US — Countervailing Measures on Certain EC Products, para. 149
(WT/DS212/AB/R)

 

… [Article 21.2 of the SCM Agreement] requires an investigating authority in an administrative review, upon receiving information of a privatization resulting in a change in ownership, to determine whether a “benefit” continues to exist. In our view, the SCM Agreement, by virtue of Articles 10, 19.4, and 21.1, also imposes an obligation to conduct such a determination on an investigating authority conducting a sunset review. As we observed earlier, the interplay of GATT Article VI:3 and Articles 10, 19.4 and 21.1 of the SCM Agreement prescribes an obligation applicable to original investigations as well as to reviews covered under Article 21 of the SCM Agreement to limit countervailing duties to the amount and duration of the subsidy found to exist by the investigating authority. …

 

S.2.31.8 Mexico — Anti-Dumping Measures on Rice, para. 314
(WT/DS295/AB/R)

 

Article 11.2 requires an agency to conduct a review, inter alia, at the request of an interested party, and to terminate the anti-dumping duty where the agency determines that the duty “is no longer warranted”. The interested party has the right to request the authority to examine whether the continued imposition of the duty is necessary to offset dumping, whether the injury would be likely to continue or recur if the duty were removed or varied, or both. Article 11.2 conditions this obligation on (i) the passage of a reasonable period of time since imposition of the definitive duty; and (ii) the submission by the interested party of “positive information” substantiating the need for a review. As the Panel correctly observed, this latter condition may be satisfied in a particular case with information not related to export volumes. Where the conditions in Article 11.2 have been met, the plain words of the provision make it clear that the agency has no discretion to refuse to complete a review, including consideration of whether the duty should be terminated in the light of the results of the review. We see no reason why the same understanding does not apply in the context of countervailing duty investigations, in particular given the identical language in Article 21.2 of the SCM Agreement.

 

S.2.31.9 Mexico — Anti-Dumping Measures on Rice, paras. 344, 348
(WT/DS295/AB/R)

 

… Articles 9.3.2 and 11.2 of the Anti-Dumping Agreement, and Article 21.2 of the SCM Agreement, place certain conditions — stated in those provisions themselves — on an agency’s granting of refunds requested by importers for duties paid in excess of dumping margins, and on an agency’s review of anti-dumping and countervailing duties when requested by interested parties. If those conditions are met, the investigating authority must undertake a duty assessment review and refund the excess duties paid, or carry out a review on the need for continued imposition of the duty. …

 

 

… Articles 9.3.2 and 11.2 of the Anti-Dumping Agreement, and Article 21.2 of the SCM Agreement, permit agencies to require that duties be imposed on a product — in the sense that a final determination be made, following an original investigation, with respect to the anti-dumping/countervailing duty liability for entries of such product — as a condition of the right to a refund or review of duties. This condition is permitted by virtue of the proviso in Article 9.3.2 of the Anti-Dumping Agreement that the product at issue be “subject to [an] anti-dumping duty”, and the proviso in Article 11.2 of the Anti-Dumping Agreement and Article 21.2 of the SCM Agreement that a reasonable period of time elapse since the imposition of the “definitive [anti-dumping or countervailing] duty”. Where duties have been imposed, however, and the remaining conditions of these treaty provisions have been satisfied, an investigating authority is not permitted to decline a request for a duty assessment or changed circumstances review.

 
S.2.32 Article 21.3 — Termination of countervailing duties unless continued or recurrent subsidization and injury likely     back to top

S.2.32.1 US — Carbon Steel, para. 63
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

Article 21.3 imposes an explicit temporal limit on the maintenance of countervailing duties. For countervailing duties that have been in place for five years, the terms of Article 21.3 require their termination unless certain specified conditions are met. Specifically, a Member is permitted not to terminate such duties only if it conducts a review and, in that review, determines that the prescribed conditions for the continued application of the duty are satisfied. The prescribed conditions are “that the expiry of the duty would be likely to lead to continuation or recurrence of subsidization and injury”. If, in a sunset review, a Member makes an affirmative determination that these conditions are satisfied, it may continue to apply countervailing duties beyond the five-year period set forth in Article 21.3. If it does not conduct a sunset review, or, having conducted such a review, it does not make such a positive determination, the duties must be terminated.

 

S.2.32.2 US — Carbon Steel, para. 69
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

… the technique of cross-referencing is frequently used in the SCM Agreement. … These cross-references suggest to us that, when the negotiators of the SCM Agreement intended that the disciplines set forth in one provision be applied in another context, they did so expressly. In the light of the many express cross-references made in the SCM Agreement, we attach significance to the absence of any textual link between Article 21.3 reviews and the de minimis standard set forth in Article 11.9. …

 

S.2.32.3 US — Carbon Steel, para. 87
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

… original investigations and sunset reviews are distinct processes with different purposes. The nature of the determination to be made in a sunset review differs in certain essential respects from the nature of the determination to be made in an original investigation. For example, in a sunset review, the authorities are called upon to focus their inquiry on what would happen if an existing countervailing duty were to be removed. In contrast, in an original investigation, the authorities must investigate the existence, degree and effect of any alleged subsidy in order to determine whether a subsidy exists and whether such subsidy is causing injury to the domestic industry so as to warrant the imposition of a countervailing duty. …

 

S.2.32.4 US — Carbon Steel, para. 88
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

… we wish to underline the thrust of Article 21.3 of the SCM Agreement. An automatic time-bound termination of countervailing duties that have been in place for five years from the original investigation or a subsequent comprehensive review is at the heart of this provision. Termination of a countervailing duty is the rule and its continuation is the exception. The continuation of a countervailing duty must therefore be based on a properly conducted review and a positive determination that the revocation of the countervailing duty would “be likely to lead to continuation or recurrence of subsidization and injury”. Where the level of subsidization at the time of the review is very low, there must be persuasive evidence that revocation of the duty would nevertheless lead to injury to the domestic industry. Mere reliance by the authorities on the injury determination made in the original investigation will not be sufficient. Rather, a fresh determination, based on credible evidence, will be necessary to establish that the continuation of the countervailing duty is warranted to remove the injury to the domestic industry.

 

S.2.32.5 US — Carbon Steel, para. 92
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

… we are unable to conclude that the de minimis standard set forth in Article 11.9 of the SCM Agreement is implied in Article 21.3 of the Agreement. …

 

S.2.32.6 US — Carbon Steel, para. 103
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

… Article 21.3 requires the termination of countervailing duties within five years unless the prescribed determination is made in a review. Article 21.3 contemplates initiation of this review in one of two alternative ways, as is made clear through the use of the word “or”. Either the authorities may make their determination “in a review initiated… on their own initiative”; or, alternatively, the authorities may make the determination “in a review initiated… upon a duly substantiated request made by or on behalf of the domestic industry… ”. The words “duly substantiated” qualify only the authorization to initiate a review upon request made by or on behalf of the domestic industry. No such language qualifies the first method for initiating a sunset review, namely self-initiation of a review by the authorities.

 

S.2.32.7 US — Carbon Steel, paras. 116-117
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

In sum, our review of the context of Article 21.3 of the SCM Agreement reveals no indication that the ability of authorities to self-initiate a sunset review under that provision is conditioned on compliance with the evidentiary standards set forth in Article 11 of the SCM Agreement relating to initiation of investigations. Nor do we consider that any other evidentiary standard is prescribed for the self-initiation of a sunset review under Article 21.3.

 

This is not to say that authorities may continue the countervailing duties after five years in the absence of evidence that the expiry of the duty would be likely to lead to continuation or recurrence of subsidization and injury. Article 21.3 prohibits the continuation of countervailing duties unless a review is undertaken and the prescribed determination, based on adequate evidence, is made.

 
S.2.33 Article 21.4 — Relationship with Articles 11 and 12     back to top

S.2.33.1 US — Carbon Steel, para. 72
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

… Article 12 sets out obligations, primarily of an evidentiary and procedural nature, that apply to the conduct of an investigation. It comes immediately after Article 11, which sets forth a number of procedural, evidentiary as well as substantive rules related to the initiation and conduct of an investigation. Given that the requirements of Articles 11 and 12 are placed consecutively in the Agreement, and the fact that both Articles expressly set out obligations in relation to investigations, we read the express reference in Article 21.4 to Article 12, but not to Article 11, as an indication that the drafters intended that the obligations in Article 12, but not those in Article 11, would apply to reviews carried out under Article 21.3.

 
S.2.34 Article 22 — Public notice and explanation of determinations     back to top

S.2.34.1 US — Carbon Steel, paras. 111-112
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

Article 22.1 imposes notification and public notice obligations upon Members that have decided, in accordance with all the requirements of Article 11, that the initiation of a countervailing duty investigation is justified. Article 22.1 does not itself establish any evidentiary rule, but only refers to a standard established in Article 11.9.

 

Article 22.7 applies the provisions of Article 22 “mutatis mutandis to the initiation and completion of reviews pursuant to Article 21”. To us, in the same way that Article 22.1 imposes notification and public notice requirements on investigating authorities that have decided, in accordance with the standards set out in Article 11, to initiate an investigation, Article 22.1 (by virtue of Article 22.7) also operates to impose notification and public notice requirements on investigating authorities that have decided, in accordance with Article 21, to initiate a review. Similarly, in the same way that Article 22.1 does not itself establish evidentiary standards applicable to the initiation of an investigation, it does not itself establish evidentiary standards applicable to the initiation of sunset reviews. Such standards, if they exist, must be found elsewhere.

 

S.2.34.2 US — Countervailing Duty Investigation on DRAMS, paras. 163-164
(WT/DS296/AB/R)

 

… We note, first, that the Panel itself did not seek to justify its treatment of the United States’ evidence on the basis of Article 22.5. Moreover, Korea does not allege that the facts for which the evidence at issue here was introduced were not set out in the USDOC’s final determination. Nor does Korea allege that those facts set out in the final determination were asserted without citation of any supporting evidence. Indeed, Korea could not so allege because the USDOC’s final determination did set out those facts and did seek to support those facts by referring to record evidence, even if not the precise evidence the Panel refused to consider. Thus, insofar as it relates to the evidence at issue here, the USDOC’s final determination provided Korea with notice of the factual bases of the finding of entrustment or direction, as well as notice of certain record evidence underlying each of those facts.

 

In these circumstances, we are of the view that Article 22.5 does not require the agency to cite or discuss every piece of supporting record evidence for each fact in the final determination. …

 
S.2.35 Article 27 — Special and differential treatment for developing country Members     back to top

S.2.35.1 PARAGRAPH 4 — PHASE-OUT OR STANDSTILL OF EXPORT SUBSIDIES

 

S.2.35.1.1 Brazil — Aircraft, para. 140
(WT/DS46/AB/R)

 

The title of Article 27 is “Special and Differential Treatment of Developing Country Members”. Paragraph 1 of that Article provides that “Members recognize that subsidies may play an important role in economic development programmes of developing country Members.” Both from its title and from its terms, it is clear that Article 27 is intended to provide special and differential treatment for developing country Members, under certain specified conditions. In our view, too, paragraph 4 of Article 27 provides certain obligations that developing country Members must fulfil if they are to benefit from this special and differential treatment during the transitional period. On reading paragraphs 2(b) and 4 of Article 27 together, it is clear that the conditions set forth in paragraph 4 are positive obligations for developing country Members, not affirmative defences. If a developing country Member complies with the obligations in Article 27.4, the prohibition on export subsidies in Article 3.1(a) simply does not apply. However, if that developing country Member does not comply with those obligations, Article 3.1(a) does apply.

 

S.2.35.1.2 Brazil — Aircraft, para. 150
(WT/DS46/AB/R)

 

… we uphold the finding of the Panel that the “proper point of reference” in determining whether a Member has increased the level of its export subsidies under Article 27.4 is actual expenditures, rather than budgeted amounts or appropriations.

 

S.2.35.1.3 Brazil — Aircraft, para. 156
(WT/DS46/AB/R)

 

… It is pursuant to the provisions of Article 27.4 that Brazil is obliged not to increase “the level of its export subsidies”. And, to ascertain the meaning of this phrase, it is necessary to look, again, at footnote 55, which is affixed to Article 27.4 and which speaks of “the level of export subsidies granted” (emphasis added) by a developing country Member. …

 

S.2.35.1.4 Brazil — Aircraft, para. 163
(WT/DS46/AB/R)

 

… in our view, to take no account of inflation in assessing the level of export subsidies granted by a developing country Member would render the special and differential treatment provisions of Article 27 meaningless. …

 

S.2.35.2 PARAGRAPHS 10 AND 11 — HIGHER DE MINIMIS SUBSIDIZATION THRESHOLD

 

S.2.35.2.1 US — Carbon Steel, para. 82
(WT/DS213/AB/R, WT/DS213/AB/R/Corr.1)

 

… Articles 27.10 and 27.11 of the SCM Agreement… require authorities, in a countervailing duty investigation, to apply a higher de minimis subsidization threshold to imports from developing country Members. To accept the Panel’s reasoning — that de minimis subsidization is non-injurious subsidization — would imply that, for the same product, imported into the same country, and affecting the same domestic industry, the SCM Agreement establishes different thresholds at which the same industry can be said to suffer injury, depending on the origin of the product. …

 
S.2.36 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)     back to top

S.2.36.1 US — Offset Act (Byrd Amendment), para. 236
(WT/DS217/AB/R, WT/DS234/AB/R)

 

Looking to the ordinary meaning of the words used in these provisions, we read them as establishing two conditions precedent that must be met in order for a measure to be governed by them. The first is that a measure must be “specific” to dumping or subsidization. The second is that a measure must be “against” dumping or subsidization. These two conditions operate together and complement each other. If they are not met, the measure will not be governed by Article 18.1 of the Anti- Dumping Agreement or by Article 32.1 of the SCM Agreement. If, however, it is established that a measure meets these two conditions, and thus falls within the scope of the prohibitions in those provisions, it would then be necessary to move to a further step in the analysis and to determine whether the measure has been “taken in accordance with the provisions of GATT 1994”, as interpreted by the Anti-Dumping Agreement or the SCM Agreement. If it is determined that this is not the case, the measure would be inconsistent with Article 18.1 of the Anti-Dumping Agreement or Article 32.1 of the SCM Agreement.

 

S.2.36.2 US — Offset Act (Byrd Amendment), para. 237
(WT/DS217/AB/R, WT/DS234/AB/R)

 

… The Panel analysed the terms “specific” and “against” in Article 18.1 in the same manner as it did with respect to their use in Article 32.1. We agree with the Panel’s approach. …

 

S.2.36.3 US — Offset Act (Byrd Amendment), para. 239
(WT/DS217/AB/R, WT/DS234/AB/R)

 

… a measure that may be taken only when the constituent elements of dumping or a subsidy are present, is a “specific action” in response to dumping within the meaning of Article 18.1 of the Anti-Dumping Agreement or a “specific action” in response to subsidization within the meaning of Article 32.1 of the SCM Agreement. In other words, the measure must be inextricably linked to, or have a strong correlation with, the constituent elements of dumping or of a subsidy. Such link or correlation may, as in the 1916 Act, be derived from the text of the measure itself.

 

S.2.36.4 US — Offset Act (Byrd Amendment), para. 240
(WT/DS217/AB/R, WT/DS234/AB/R)

 

… We recall that, in US — 1916 Act, we said the constituent elements of dumping are found in the definition of dumping in Article VI:1 of the GATT 1994, as elaborated in Article 2 of the Anti-Dumping Agreement. As regards the constituent elements of a subsidy, we are of the view that they are set out in the definition of a subsidy found in Article 1 of the SCM Agreement.

 

S.2.36.5 US — Offset Act (Byrd Amendment), para. 253
(WT/DS217/AB/R, WT/DS234/AB/R)

 

… in Article 18.1 of the Anti-Dumping Agreement and Article 32.1 of the SCM Agreement, there is no requirement that the measure must come into direct contact with the imported product, or entities connected to, or responsible for, the imported good such as the importer, exporter, or foreign producer. …

 

S.2.36.6 US — Offset Act (Byrd Amendment), para. 254
(WT/DS217/AB/R, WT/DS234/AB/R)

 

Recalling the other two elements of the definition of “against” from the New Shorter Oxford Dictionary relied upon by the United States, namely “of motion or action in opposition” and “in hostility or active opposition to”, to determine whether a measure is “against” dumping or a subsidy, we believe it is necessary to assess whether the design and structure of a measure is such that the measure is “opposed to”, has an adverse bearing on, or, more specifically, has the effect of dissuading the practice of dumping or the practice of subsidization, or creates an incentive to terminate such practices. In our view, the CDSOA has exactly those effects because of its design and structure.

 

S.2.36.7 US — Offset Act (Byrd Amendment), para. 257
(WT/DS217/AB/R, WT/DS234/AB/R)

 

… in order to determine whether the CDSOA is “against” dumping or subsidization, it was not necessary, nor relevant, for the Panel to examine the conditions of competition under which domestic products and dumped/subsidized imports compete, and to assess the impact of the measure on the competitive relationship between them. An analysis of the term “against”, in our view, is more appropriately centred on the design and structure of the measure; such an analysis does not mandate an economic assessment of the implications of the measure on the conditions of competition under which domestic product and dumped/subsidized imports compete.

 

S.2.36.8 US — Offset Act (Byrd Amendment), para. 258
(WT/DS217/AB/R, WT/DS234/AB/R)

 

… a measure cannot be against dumping or a subsidy simply because it facilitates or induces the exercise of rights that are WTO-consistent. …

 

S.2.36.9 US — Offset Act (Byrd Amendment), para. 262
(WT/DS217/AB/R, WT/DS234/AB/R)

 

… Footnotes 24 and 56 are clarifications of the main provisions, added to avoid ambiguity; they confirm what is implicit in Article 18.1 of the Anti-Dumping Agreement and in Article 32.1 of the SCM Agreement, namely, that an action that is not “specific” within the meaning of Article 18.1 of the Anti-Dumping Agreement and of Article 32.1 of the SCM Agreement, but is nevertheless related to dumping or subsidization, is not prohibited by Article 18.1 of the Anti-Dumping Agreement or Article 32.1 of the SCM Agreement.

 

S.2.36.10 US — Offset Act (Byrd Amendment), para. 269
(WT/DS217/AB/R, WT/DS234/AB/R)

 

… The GATT 1994 and the SCM Agreement provide four responses to a countervailable subsidy: (i) definitive countervailing duties; (ii) provisional measures; (iii) price undertakings; and (iv) multilaterally sanctioned countermeasures under the dispute settlement system. No other response to subsidization is envisaged in the text of the GATT 1994, or in the text of the SCM Agreement. Therefore, to be “in accordance with the GATT 1994, as interpreted by” the SCM Agreement, a response to subsidization must be in one of those four forms.

 

S.2.36.11 US — Offset Act (Byrd Amendment), para. 273
(WT/DS217/AB/R, WT/DS234/AB/R)

 

In our view, Article VI:3 of the GATT 1994 and Part V of the SCM Agreement encompass all measures taken against subsidization. To be in accordance with the GATT 1994, as interpreted by the SCM Agreement, a response to subsidization must be either in the form of definitive countervailing duties, provisional measures or price undertakings, or in the form of multilaterally sanctioned countermeasures resulting from resort to the dispute settlement system. …

 

Article 32.3 — Temporal Scope of Application. See SCM Agreement, Relationship between the SCM Agreement and the GATT 1994 (S.2.41); Temporal Application of Rights and Obligations, SCM Agreement (T.5.1)

 

Illustrative List of Export Subsidies: Items (c) and (d). See Agreement on Agriculture, Article 9.1(c) — Governmental action vs. Private action (A.1.25)

 
S.2.37 Illustrative List of Export Subsidies: Item (e), footnote 59, first sentence — “remission or deferral of direct taxes”     back to top

S.2.37.1 US — FSC, para. 97
(WT/DS108/AB/R)

 

… The first sentence of footnote 59 is specifically related to the statement in item (e) of the Illustrative List that the “full or partial exemption remission, or deferral specifically related to exports, of direct taxes” is an export subsidy. The first sentence of footnote 59 qualifies this by stating that “deferral need not amount to an export subsidy where, for example, appropriate interest charges are collected”. …

 
S.2.38 Illustrative List of Export Subsidies: Item (e), footnote 59, fifth sentence — “double taxation”     back to top

S.2.38.1 US — FSC (Article 21.5 — EC), para. 132
(WT/DS108/AB/RW)

 

The import of the fifth sentence of footnote 59 is that Members are entitled to “take”, or “adopt” measures to avoid double taxation of foreign-source income, notwithstanding that they may be, in principle, export subsidies within the meaning of Article 3.1(a). The fifth sentence of footnote 59, therefore, constitutes an exception to the legal regime applicable to export subsidies under Article 3.1(a) by explicitly providing that when a measure is taken to avoid the double taxation of foreign-source income, a Member is entitled to adopt it.

 

S.2.38.2 US — FSC (Article 21.5 — EC), para. 133
(WT/DS108/AB/RW)

 

Accordingly, as we indicated in US — FSC [Appellate Body Report, para. 101], the fifth sentence of footnote 59 constitutes an affirmative defence that justifies a prohibited export subsidy when the measure in question is taken “to avoid the double taxation of foreign-source income”. In such a situation, the burden of proving that a measure is justified by falling within the scope of the fifth sentence of footnote 59 rests upon the responding party.

 

S.2.38.3 US — FSC (Article 21.5 — EC), para. 137
(WT/DS108/AB/RW)

 

We note at the outset that “double taxation” occurs when the same income, in the hands of the same taxpayer, is liable to tax in different States. The fifth sentence of footnote 59 applies to a measure taken by a Member to avoid such double taxation of “foreign-source income”. In examining the phrase “foreign-source income”, we observe that, in ordinary usage, the word “source” can refer to the place where a thing originates, and that the words “source” and “origin” can be synonyms. We consider, therefore, that the word “source”, in the context of the fifth sentence of footnote 59, has a meaning akin to “origin” and refers to the place where the income is earned. This reading is supported by the combination of the words “foreign” and “source” as “foreign” also refers to the place where the income is earned. Used in this way, the word “foreign” indicates a source which is external to the Member adopting the measure at stake. Footnote 59, therefore, applies to measures taken by a Member to avoid the double taxation of income earned by a taxpayer of that Member in a “foreign” State.

 

S.2.38.4 US — FSC (Article 21.5 — EC), para. 138
(WT/DS108/AB/RW)

 

… the term “foreign-source income” in footnote 59 refers to income which is susceptible of being taxed in two States. …

 

S.2.38.5 US — FSC (Article 21.5 — EC), paras. 139-140
(WT/DS108/AB/RW)

 

… We have emphasized in previous appeals that Members have the sovereign authority to determine their own rules of taxation, provided that they respect their WTO obligations. Thus, subject to this important proviso, each Member is free to determine the rules it will use to identify the source of income and the fiscal consequences — to tax or not to tax the income — flowing from the identification of source. We see nothing in footnote 59 to the SCM Agreement which is intended to alter this situation. We, therefore, agree with the Panel that footnote 59 does not oblige Members to adopt any particular legal standard to determine whether income is foreign-source for the purposes of their double taxation-avoidance measures.

 

… however, footnote 59 does not give Members an unfettered discretion to avoid double taxation of “foreign-source income” through the grant of export subsidies. As the fifth sentence of footnote 59 to the SCM Agreement constitutes an exception to the prohibition on export subsidies, great care must be taken in defining its scope. …

 

S.2.38.6 US — FSC (Article 21.5 — EC), para. 142
(WT/DS108/AB/RW)

 

… In seeking to give meaning to the term “foreign-source income” in footnote 59 to the SCM Agreement, which is a tax-related provision in an international trade treaty, we believe that it is appropriate for us to derive assistance from these widely recognized principles which many States generally apply in the field of taxation. …

 

S.2.38.7 US — FSC (Article 21.5 — EC), para. 143
(WT/DS108/AB/RW)

 

We recognize, of course, that the detailed rules on taxation of non-residents differ considerably from State to State, with some States applying rules which may be more likely to tax the income of non-residents than the rules applied by other States. However, despite the differences, there seems to us to be a widely accepted common element to these rules. The common element is that a “foreign” State will tax a non-resident on income which is generated by activities of the non-resident that have some link with that State. Thus, whether a “foreign” State decides to tax non-residents on income generated by a permanent establishment or whether, absent such an establishment, it decides to tax a non-resident on income generated by the conduct of a trade or business on its territory, the “foreign” State taxes a non-resident only on income generated by activities linked to the territory of that State. As a result of this link, the “foreign” State treats the income in question as domestic-source, under its source rules, and taxes it. Conversely, where the income of a non-resident does not have any links with a “foreign” State, it is widely accepted that the income will be subject to tax only in the taxpayer’s State of residence, and that this income will not be subject to taxation by a “foreign” State.

 

S.2.38.8 US — FSC (Article 21.5 — EC), para. 145
(WT/DS108/AB/RW)

 

Accordingly, in our view, “foreign-source income”, in footnote 59 to the SCM Agreement, refers to income generated by activities of a non-resident taxpayer in a “foreign” State which have such links with that State so that the income could properly be subject to tax in that State.

 

S.2.38.9 US — FSC (Article 21.5 — EC), para. 146
(WT/DS108/AB/RW)

 

… The avoidance of double taxation is not an exact science. Indeed, the income exempted from taxation in the State of residence of the taxpayer might not be subject to a corresponding, or any, tax in a “foreign” State. Yet, this does not necessarily mean that the measure is not taken to avoid double taxation of foreign source income. Thus, we agree with the Panel, and the United States, that measures falling under footnote 59 are not required to be perfectly tailored to the actual double tax burden.

 

S.2.38.10 US — FSC (Article 21.5 — EC), para. 148
(WT/DS108/AB/RW)

 

We also recognize that Members are not obliged by the covered agreements to provide relief from double taxation. Footnote 59 to the SCM Agreement simply preserves the prerogative of Members to grant such relief, at their discretion, for “foreign-source income”. Accordingly, we do not believe that measures falling under footnote 59 must grant relief from all double tax burdens. Rather, Members retain the sovereign authority to determine for themselves whether, and to what extent, they will grant such relief.

 

S.2.38.11 US — FSC (Article 21.5 — EC), para. 175
(WT/DS108/AB/RW)

 

… However, in the absence of an established link between the income of such taxpayers and their activities in a “foreign” State, we do not believe that there is “foreign-source income” within the meaning of footnote 59 of the SCM Agreement.

 

S.2.38.12 US — FSC (Article 21.5 — EC), para. 176
(WT/DS108/AB/RW)

 

… In our view, however, sales income cannot be regarded as “foreign-source income”, under footnote 59, for the sole reason that the property, subject-matter of the sale, is exported to another State, for use there. The mere fact that the buyer uses property outside the United States does not mean that the seller undertook activities in a “foreign” State generating income there. Such an interpretation of footnote 59 would, in effect, allow Members to grant a tax exemption in favour of export-related income on the ground that the exportation by itself of the property renders the income “foreign-source”. In our view, this reading would allow Members easily to evade the prohibition on export subsidies in Article 3.1(a) of the SCM Agreement and render this prohibition meaningless.

 

S.2.38.13 US — FSC (Article 21.5 — EC), para. 185
(WT/DS108/AB/RW)

 

Certainly, if the ETI measure were confined to those aspects which grant a tax exemption for “foreign-source income”, it would fall within footnote 59. However, the ETI measure is not so confined… We have said that avoiding double taxation is not an exact science and we recognize that Members must have a degree of flexibility in tackling double taxation. However, in our view, the flexibility under footnote 59 to the SCM Agreement does not properly extend to allowing Members to adopt allocation rules that systematically result in a tax exemption for income that has no link with a “foreign” State and that would not be regarded as foreign-source under any of the widely accepted principles of taxation we have reviewed.

 
S.2.39 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)     back to top

S.2.39.1 Canada — Dairy (Article 21.5 — New Zealand and US), para. 93
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

Our approach is supported by the standards used in items (j) and (k) of the Illustrative List of the SCM Agreement. Item (j) is concerned with export subsidies that arise through the provision by the government of a variety of export credit guarantee and insurance programmes. Under item (j), the provision of such services by the government involves export subsidies when the premium rates charged do not “cover the long-term operating costs and losses of the programmes” (emphasis added). Thus, the measure of value under item (j) is the overall cost to the government, as the service provider, of providing the service. Likewise, in item (k), where the government provides export credits, the measure of the value of the service provided by the government is the amount “which [governments] actually have to pay for the funds so employed (or would have to pay if they borrowed on international capital markets… )”. Again, the measure of value is by reference to the cost to the government, as the service provider, of providing the service. Therefore, items (j) and (k) give contextual support and rationale, for using the cost of production as a standard for determining whether there are “payments” under Article 9.1(c) of the Agreement on Agriculture in these proceedings.

 

S.2.39.2 US — Upland Cotton, para. 647
(WT/DS267/AB/R)

 

We agree with the United States that Article 10.3 of the Agreement on Agriculture does not apply to claims brought under the SCM Agreement. However, the Panel did not make the error attributed to it by the United States. The Panel made the statement relied on by the United States in the context of its assessment of the United States’ export credit guarantee programme under the Agreement on Agriculture. Although the Panel made use of the criteria set out in item (j) of the Illustrative List of Export Subsidies annexed to the SCM Agreement (providing these programmes at premium rates inadequate to cover long-term operating costs and losses) it did so as contextual guidance for its analysis under the Agreement on Agriculture, and both the United States and Brazil appear to have agreed with the appropriateness of this approach. Thus, the Panel’s reference to Article 10.3 did not relate to its assessment of the United States’ export credit guarantee programmes under the SCM Agreement.

 

S.2.39.3 US — Upland Cotton, para. 648
(WT/DS267/AB/R)

 

… It is clear from this paragraph that the Panel placed the burden of proof on Brazil and determined that Brazil met its burden of proving that the United States’ export credit guarantees are provided at premium rates that are inadequate to cover long-term operating costs and losses. … The reference to Article 10.3 does not, by itself, change the fact that the Panel ultimately placed the burden of proof on Brazil.

 

S.2.39.4 US — Upland Cotton, para. 656
(WT/DS267/AB/R)

 

In our view, none of these statements demonstrates that the Panel improperly applied the rules on burden of proof. The United States is selecting statements made by the Panel within its broader analysis of how the United States’ export credit guarantee programmes operate, reading them in isolation, and disregarding the context in which they were made. As indicated earlier, it is clear that the Panel imposed on Brazil the overall burden of proving that the premiums charged under the United States’ export credit guarantee programmes are inadequate to cover long-term operating costs and losses. This approach is consistent with the usual rules on the allocation of the burden of proof whereby the complaining party is responsible for proving its claim. …

 

S.2.39.5 US — Upland Cotton, para. 663
(WT/DS267/AB/R)

 

The United States has styled its claim as related to the interpretation and application of item (j) of the Illustrative List of Export Subsidies annexed to the SCM Agreement. According to the United States, the Panel could not have reached a legal conclusion under item (j) without having necessarily determined what were the long-term operating costs and losses of the United States’ export credit guarantee programmes, and more specifically, made a determination in respect of the treatment of rescheduled debt. We find no difficulty with the United States’ approach. Its claim relates to the Panel’s application of item (j) to the specific facts of the case. The United States is not asking us to review the Panel’s factual findings, nor is it arguing that the Panel’s assessment of the matter was not objective. Instead, the United States’ claim relates to the application of the legal standard set out in item (j) of the Illustrative List of Export Subsidies to the specific facts of this case. It is an issue of legal characterization. …

 

S.2.39.6 US — Upland Cotton, paras. 665-666
(WT/DS267/AB/R)

 

The Panel provided the following explanation of the examination that is required under item (j) of the Illustrative List of Export Subsidies:

 

… item (j) calls for an examination of whether the premium rates of the export credit guarantee programme at issue are inadequate to cover the long-term operating costs and losses of the programmes. Beyond that, item (j) does not set forth, or require us to use, any one particular methodological approach nor accounting philosophy in conducting our examination. Nor are we required to quantify precisely the amount by which costs and losses exceeded premiums paid. [Panel Report, para. 7.804]

 

We agree with the Panel’s approach. The text of item (j) does not suggest that this provision requires a Panel to choose one particular basis for the calculation and then to make a precise quantification of the difference between premiums and long-term operating costs and losses on that basis. Indeed, at the oral hearing, the United States acknowledged that the text of item (j) does not, by its own terms, require precise quantification, but asserted that the Panel should have precisely quantified the long-term operating costs and losses “in this particular case”.

 

In our view, the focus of item (j) is on the inadequacy of the premiums. To us, this focus suggests that what is required is a finding on whether the premiums are insufficient and thus whether the specific export credit guarantee programme at issue constitutes an export subsidy, and not a finding of the precise difference between premiums and long-term operating costs and losses.

 

S.2.39.7 US — Upland Cotton, para. 672
(WT/DS267/AB/R)

 

In the light of the above, it is clear that the Panel undertook a sufficiently detailed examination of the financial performance of the United States’ export credit guarantee programmes. Its analysis showed that none of the methods proposed by the parties indicated that the premiums charged under the United States’ export credit guarantee programmes are adequate to cover long-term costs and losses. In these circumstances, we agree with the Panel that, in this particular case, it was not necessary to choose a particular method nor determine the precise amount by which long-term operating costs and losses exceeded premiums. Although it did not provide a final figure for the long-term operating costs and losses of the United States’ export credit guarantee programmes, as the United States suggests it should have, the Panel found that the various methods put forward by the parties led to the same conclusion, namely, that the premiums for the United States’ export credit guarantee programmes are inadequate to cover the programmes’ long-term operating costs and losses. The Panel’s decision not to choose between methods or make a finding on the precise difference between premiums and long-term costs and losses does not, in our view, invalidate the Panel’s ultimate findings under Articles 3.1(a) and 3.2 of the SCM Agreement.

 

S.2.39.8 US — Upland Cotton, para. 731
(WT/DS267/AB/R)

 

We need not decide, in this case, whether an export credit guarantee programme 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.2.39.9 US — Upland Cotton (Article 21.5 — Brazil), para. 278
(WT/DS267/AB/RW)

 

Thus, to the extent relevant data is available, an analysis under item (j) will primarily involve a quantitative evaluation of the financial performance of a programme. Such an analysis will focus on the difference, if any, between the revenues derived from the premiums charged under the programme and its long-term operating costs and losses. An analysis under item (j) may examine both retrospective data relating to a programme’s historical performance and projections of its future performance. Evidence concerning a programme’s structure, design, and operation may be relevant in situations where financial data is not available. It may also serve as a supplementary means for assessing the adequacy of premiums where relevant data are available. We note that the Panel was presented with various financial data relating to the performance of the revised GSM 102 programme. Thus, as a general matter, we consider it appropriate for the Panel to have first examined the evidence of a quantitative nature submitted by the parties before evaluating evidence concerning the structure, design, and operation of the programme as additional elements for appraisal.

 

S.2.39.10 US — Upland Cotton (Article 21.5 — Brazil), para. 301
(WT/DS267/AB/RW)

 

Thus, the quantitative evidence submitted by Brazil and the United States support two plausible conclusions that one could draw regarding the profitability of the revised GSM 102 programme: (i) the CCC’s Financial Statements indicate that the programme is making losses; and (ii) the re-estimates data indicate that the programme is making profits. Therefore, the critical quantitative data before the Panel give rise to conflicting conclusions. The data also give rise to similar probabilities that point to opposite conclusions as to the binary outcome in item (j), that is, whether a programme is making a loss or not. We recall, however, that the Panel also examined other evidence adduced by Brazil, “which further convince[ d]” the Panel that the premiums under the revised GSM 102 programme are inadequate to cover its long-term operating costs and losses, within the meaning of item (j). This evidence includes a comparison between fees under the revised GSM 102 programme and the OECD MPRs, and various elements relating to the structure, design, and operation of the programme. We now turn to examine the United States’ arguments regarding the Panel’s consideration of this evidence in order to determine whether the evidence as assessed by the Panel makes one of the two probable outcomes that emerge from the quantitative evidence more likely than not.

 

S.2.39.11 US — Upland Cotton (Article 21.5 — Brazil), paras. 303-306
(WT/DS267/AB/RW)

 

In our view, the United States exaggerates the importance the Panel attached to the fee comparison of GSM 102 fees with the MPRs in its overall analysis under item (j). … At the outset, the Panel made clear that it did not consider the MPRs to be directly applicable in determining whether an export credit guarantee programme falls within the scope of item (j). The Panel emphasized that item (j) makes no reference to the OECD Arrangement and that the MPRs do not provide a legally binding benchmark for purposes of an analysis under item (j). …

 

 

The Panel further noted that the OECD Arrangement does not cover exports of agricultural commodities and applies only to government support for credit terms of two years or more. Thus, the Panel did not consider that the OECD MPRs constituted a valid benchmark under item (j).

 

Although the Panel recognized that MPRs have no legal status in the context of an analysis under item (j), it did consider them relevant “from an evidentiary point of view”. In particular, what the Panel found relevant was the magnitude of the difference between the MPRs and the GSM 102 fees. … The magnitude of the difference in the fees is repeatedly emphasized by the Panel in its reasoning. … The Panel immediately cautioned that it was “not suggest[ing] that any difference in this respect could be relied upon as an indication that an export guarantee programme meets the criteria of item (j) of the Illustrative List”.

 

S.2.39.12 US — Upland Cotton (Article 21.5 — Brazil), paras. 310-314
(WT/DS267/AB/RW)

 

The United States further claims that the Panel erred in relying on the comparison of “scaling” of fees under the revised GSM 102 programme and the Ex-Im Bank programmes for its analysis under item (j). …

 

The United States submits that the Ex-Im Bank programmes are “fundamentally dissimilar” to the GSM 102 programme. According to the United States, “[i]n addition to the fact that [LCI and MTI] are subject to MPRs, and that MTI is not available for agricultural goods, [LCI and MTI] differ significantly in terms of interest and principal cover, as well as the availability of recourse to a third party for uninsured amounts.” Despite these dissimilarities, the United States argues, the Panel “acceded to Brazil’s proffered adjustments to take into account these differences and force a scaling comparison”.

 

We note that, rather than “forcing a comparison” despite the dissimilarities between the programmes, the Panel specifically addressed the dissimilarities by reviewing various adjustments made in the evidence submitted by Brazil to render the LCI and the MTI more analogous to the GSM 102 programme, and considered them to be “appropriate”. Furthermore, the Panel did not focus on the differences between the amount of fees charged under the GSM 102 programme and under the Ex-Im Bank programmes. Rather, the comparisons were intended to show that, due to the limitation placed by the one per cent fee cap, the revised GSM 102 fees increase much slower, in response to the increased risk, than the rate of increase of the fees charged under the Ex-Im Bank programmes. We therefore do not consider that it was improper for the Panel to conclude that “[t]he fact that the financial products being compared are not identical” did not fundamentally undermine the evidentiary value of the comparisons regarding scaling of fees under the programmes.

 

… We agree that the analysis of risk is not expressly required by the text of item (j) in assessing the adequacy of premiums of an export credit guarantee programme. However, an export credit guarantee programme exposed to risk of default is more likely to incur costs and losses if its design and structure do not adequately safeguard against such risk. Therefore, we consider that risk is a relevant factor in the assessment of a programme’s structure, design, and operation under item (j).

 

… We concur that item (j) does not impose a standard as to scaling. The Panel did not impose such a standard. Rather, the Panel reviewed the scaling comparison with the Ex-Im Bank programmes to appraise the effect of the one per cent fee cap under the revised GSM 102 programme. The Panel noted that the scaling comparisons “convincingly demonstrated that the GSM 102 fees only minimally respond to increased country risk and increased risk in the form of longer tenors”, as compared to the LCI and the MTI fees. In particular, the Panel found that, “while the fees for lowest country risk categories are relatively similar between GSM 102 and the LCI and MTI, there is a sharp difference between the fees charged by the Ex-Im Bank and the CCC for the highest risk categories”.

 

S.2.39.13 US — Upland Cotton (Article 21.5 — Brazil), paras. 319, 321
(WT/DS267/AB/RW)

 

… The United States maintains that, according to the Panel’s “overly-broad approach, a government-backed export credit… program could never satisfy the item (j) test because… the unlimited access to government funds discourages the design of a programme that meets long-term operating costs and losses”. We share the view that access to government funds, alone, is not a significant factor for purposes of determining profitability under item (j). The Panel, however, did not seem to place much emphasis on this factor. Rather, the Panel recalled that this was a factor taken into account by the original panel and confirmed that the CCC still has the same access to government funds.

 

 

… we stated our view that the analysis under item (j) should proceed primarily on the basis of quantitative evidence, where such evidence is available. We have recognized, however, that evidence relating to the structure, design, and operation has a supplementary role to play in an assessment conducted under item (j). The Panel, in this case, relied on several elements relating to the structure, design, and operation of the revised GSM 102 programme, and we have not found flaws in the Panel’s analysis of this evidence. The Panel recognized that these elements are not in and of themselves dispositive. Nonetheless, according to the Panel, the evidence on the structure, design, and operation supports the proposition that the revised GSM 102 programme operates at a loss. We recall that we have found that the quantitative data give rise to opposite conclusions with similar probabilities as to the binary outcome in item (j). The Panel’s finding on the structure, design, and operation, in the light of the two plausible outcomes with similar probabilities that emerge from the quantitative evidence, provides a sufficient evidentiary basis for the conclusion that it is more likely than not that the revised GSM 102 programme operates at a loss. Therefore, we consider that Brazil has succeeded in establishing that the revised GSM 102 programme is provided at premiums that are inadequate to cover its long-term operating costs and losses.

 
S.2.40 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)     back to top

S.2.40.1 Brazil — Aircraft, para. 181
(WT/DS46/AB/R)

 

… the issue here is whether the export subsidies for regional aircraft under PROEX “are used to secure” for Brazil “a material advantage in the field of export credit terms”… the OECD Arrangement can be appropriately viewed as one example of an international undertaking providing a specific market benchmark by which to assess whether payments by governments, coming within the provisions of item (k), are “used to secure a material advantage in the field of export credit terms”… in our view, the appropriate comparison to be made in determining whether a payment is “used to secure a material advantage”, within the meaning of item (k), is between the actual interest rate applicable in a particular export sales transaction after deduction of the government payment (the “net interest rate”) and the relevant CIRR [Commercial Interest Reference Rate].

 

S.2.40.2 Brazil — Aircraft (Article 21.5 — Canada), para. 64
(WT/DS46/AB/RW)

 

… the CIRR is “one example” of a “market benchmark” that may be used to determine whether a “payment” is used to “secure a material advantage” (emphasis added). The CIRR is a constructed interest rate for a particular currency, at a particular time, that does not always necessarily reflect the actual state of the credit markets. Where the CIRR does not, in fact, reflect the rates available in the marketplace, we believe that a Member should be able, in principle, to rely on evidence from the marketplace itself in order to establish an alternative “market benchmark”, on which it might rely in one or more transactions. Thus, the CIRR is not, necessarily, the sole “market benchmark” that may be used to determine whether a payment “is used to secure a material advantage in the field of export credit terms”, within the meaning of item (k) of the Illustrative List.

 

S.2.40.3 Brazil — Aircraft (Article 21.5 — Canada), paras. 68-69
(WT/DS46/AB/RW)

 

… Brazil contends, on this basis, that the revised PROEX is not “used to secure a material advantage in the field of export credit terms” within the meaning of the first paragraph of item (k) of the Illustrative List.

 

To prove this argument, Brazil must establish both of two elements: first, Brazil must prove that it has identified an appropriate “market benchmark”; and, second, Brazil must prove that the net interest rates under the revised PROEX are at or above that benchmark.

 

S.2.40.4 Brazil — Aircraft (Article 21.5 — Canada), para. 80
(WT/DS46/AB/RW)

 

If Brazil had demonstrated that the payments made under the revised PROEX were not “used to secure a material advantage in the field of export credit terms”, and that such payments were “payments” by Brazil of “all or part of the costs incurred by exporters or financial institutions in obtaining credits”, then we would have been prepared to find that the payments made under the revised PROEX are justified under item (k) of the Illustrative List. However, Brazil has not demonstrated that those conditions of item (k) are met in this case. In making this observation, we wish to emphasize that we are not interpreting footnote 5 of the SCM Agreement, and we do not opine on the scope of footnote 5, or on the meaning of any other items in the Illustrative List.

 

Relationship between the SCM Agreement and the Anti-Dumping Agreement. See Anti-Dumping Agreement, Relationship between the Anti-Dumping Agreement and the SCM Agreement (A.3.63)

 
S.2.41 Relationship between the SCM Agreement and the GATT 1994     back to top

S.2.41.1 Brazil — Desiccated Coconut, p. 16, DSR 1997:I, p. 167 at 181
(WT/DS22/AB/R)

 

… The ordinary meaning of these provisions taken in their context leads us to the conclusion that the negotiators of the SCM Agreement clearly intended that, under the integrated WTO Agreement, countervailing duties may only be imposed in accordance with the provisions of Part V of the SCM Agreement and Article VI of the GATT 1994, taken together. If there is a conflict between the provisions of the SCM Agreement and Article VI of the GATT 1994, furthermore, the provisions of the SCM Agreement would prevail as a result of the general interpretative note to Annex 1A.

 

S.2.41.2 Brazil — Desiccated Coconut, pp. 18-19, DSR 1997:I, p. 167 at 182-183
(WT/DS22/AB/R)

 

The fact that Article VI of the GATT 1947 could be invoked independently of the Tokyo Round SCM Code under the previous GATT system does not mean that Article VI of GATT 1994 can be applied independently of the SCM Agreement in the context of the WTO. The authors of the new WTO regime intended to put an end to the fragmentation that had characterized the previous system. This can be seen from the preamble to the WTO Agreement which states, in pertinent part:

 

Resolved, therefore, to develop an integrated, more viable and durable multilateral trading system encompassing the General Agreement on Tariffs and Trade, the results of past trade liberalization efforts, and all of the results of the Uruguay Round of Multilateral Trade Negotiations.

 

Article II:2 of the WTO Agreement also provides that the Multilateral Trade Agreements are “integral parts” of the WTO Agreement, “binding on all Members”. The single undertaking is further reflected in the Articles of the WTO Agreement on original membership, accession, non-application, acceptance and withdrawal. Furthermore, the DSU establishes an integrated dispute settlement system which applies to all the “covered agreements”, allowing all the provisions of the WTO Agreement relevant to a particular dispute to be examined in one proceeding.

 

The Appellate Body sees Article 32.3 of the SCM Agreement as a clear statement that for countervailing duty investigations or reviews, the dividing line between the application of the GATT 1947 system of agreements and the WTO Agreement is to be determined by the date on which the application was made for the countervailing duty investigation or review. Article 32.3 has limited application only in specific circumstances where a countervailing duty proceeding, either an investigation or a review, was underway at the time of entry into force of the WTO Agreement. This does not mean that the WTO Agreement does not apply as of 1 January 1995 to all other acts, facts and situations which come within the provisions of the SCM Agreement and Article VI of the GATT 1994. However, the Uruguay Round negotiators expressed an explicit intention to draw the line of application of the new WTO Agreement to countervailing duty investigations and reviews at a different point in time from that for other general measures. …

 

S.2.41.3 US — FSC, para. 117
(WT/DS108/AB/R)

 

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

 

S.2.41.4 US — Softwood Lumber IV, para. 134
(WT/DS257/AB/R)

 

… we observe that provisions in both the GATT 1994 and the SCM Agreement are relevant to this dispute. We note the Appellate Body’s earlier ruling that a provision of an agreement included in Annex 1A of the WTO Agreement (including the SCM Agreement), and a provision of the GATT 1994, that have identical coverage, both apply, but that the provision of the agreement that “deals specifically, and in detail” with a question should be examined first. … No conflict between Articles 10 and 32.1 of the SCM Agreement on the one hand, and Article VI:3 of the GATT 1994 on the other hand, is alleged in this appeal, nor do we see any such conflict. Therefore, the requirements of these provisions of the SCM Agreement and the GATT 1994 apply on a cumulative basis.

 

S.2.41.5 US — Softwood Lumber IV, para. 138
(WT/DS257/AB/R)

 

We note that, if we were to find that USDOC’s final determination and the imposition of countervailing duties on Canadian imports of softwood lumber products contravene the requirements of Article VI:3 of the GATT 1994, the United States necessarily would not have “take[n] all necessary steps to ensure that the imposition of a countervailing duty… is in accordance with the provisions of Article VI of GATT 1994”, as required by Article 10 of the SCM Agreement. The “specific action against a subsidy” taken by the United States would also not, as required by Article 32.1 of the SCM Agreement, be “in accordance with the provisions of GATT 1994, as interpreted by the [SCM] Agreement”. Consequently, any inconsistency of the United States’ imposition of countervailing duties on Canadian imports of softwood lumber products with Article VI:3 of the GATT 1994, would necessarily render this measure inconsistent also with Articles 10 and 32.1 of the SCM Agreement.

 
S.2.42 Article III:8 of the GATT 1994 — Subsidies     back to top

S.2.42.1 Canada — Periodicals, p. 34, DSR 1997:I, p. 449 at 478
(WT/DS31/AB/R)

 

… Indeed, an examination of the text, context, and object and purpose of Article III:8(b) suggests that it was intended to exempt from the obligations of Article III only the payment of subsidies which involves the expenditure of revenue by a government.

 
S.2.43 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)     back to top

S.2.43.1 US — Softwood Lumber IV, para. 139
(WT/DS257/AB/R)

 

The Panel described the pass-through problem as follows: “[w]here the subsidies at issue are received by someone other than the producer of the investigated product, the question arises whether there is subsidization in respect of that product.” In addressing this question, we note that Article VI:3 prohibits levying countervailing duties on an imported product “in excess of an amount equal to the estimated… subsidy determined to have been granted, directly or indirectly, on the manufacture, production or export of such product” (emphasis added). According to Article VI:3, countervailing duties are “levied for the purpose of offsetting… subsid[ies] bestowed, directly or indirectly, upon the manufacture, production or export of any merchandise” (emphasis added). The definition of the term “countervailing duties” in footnote 36 to Article 10 of the SCM Agreement is along the same lines.

 

S.2.43.2 US — Softwood Lumber IV, para. 140
(WT/DS257/AB/R)

 

The phrase “subsid[ies] bestowed… indirectly”, as used in Article VI:3, 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. Where the producer of the input is not the same entity as the producer of the processed product, it cannot be presumed, however, that the subsidy bestowed on the input passes through to the processed product. In such case, it is necessary to analyse to what extent subsidies on inputs may be included in the determination of the total amount of subsidies bestowed upon processed products. For it is only the subsidies determined to have been granted upon the processed products that may be offset by levying countervailing duties on those products.

 

S.2.43.3 US — Softwood Lumber IV, para. 141
(WT/DS257/AB/R)

 

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 offsetting, through countervailing duties, no more than the “subsidy determined to have been granted… directly or indirectly, on the manufacture [or] production… of such product”, 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. It 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. The definition of “countervailing duties” in footnote 36 to Article 10 of the SCM Agreement supports this interpretation of the requirements of Article VI:3 of the GATT 1994.

 

35. We note, however, that not all government measures capable of conferring benefits would necessarily fall within Article 1.1(a). If that were the case, there would be no need for Article 1.1(a), because all government measures conferring benefits, per se, would be subsidies. In this regard, we find informative the discussion of the negotiating history of the SCM Agreement contained in the panel report in US — Export Restraints, which was not appealed. That panel, at paragraph 8.65 of the panel report, said that the:

… negotiating history demonstrates … that the requirement of a financial contribution from the outset was intended by its proponents precisely to ensure that not all government measures that conferred benefits could be deemed to be subsidies. This point was extensively discussed during the negotiations, with many participants consistently maintaining that only government actions constituting financial contributions should be subject to the multilateral rules on subsidies and countervailing measures. (footnote omitted)     back to text

113. Article 9.1(c) of the Agreement on Agriculture may be contrasted with Article 9.1(e) of the Agreement on Agriculture, as well as with Article 1.1(a)(1)(iv) of the SCM Agreement, and items (c), (d), (j), and (k) of the Illustrative List of Export Subsidies (the “Illustrative List”) of the SCM Agreement. In these provisions, some kind of government mandate, direction, or control is an element of a subsidy provided through a third party.     back to text

377. Because we have reversed the Panel’s findings of inconsistency with Article 1.1(a)(1)(iv) and 1.1(b), we do not address whether a Member may be found to be acting inconsistently with a definitional provision, such as Article 1 of the SCM Agreement [Appellate Body Report, US — FSC (Article 21.5 — EC), para. 85].     back to text

1355. The New Shorter Oxford English Dictionary (1993).     back to text

1356. Merriam-Webster Dictionary online.     back to text

1388. In the remainder of our analysis, we use the term “price suppression” to refer both to an actual decline (which otherwise would not have declined, or would have done so to a lesser degree) and an increase in prices (which otherwise would have increased to a greater degree). (emphasis added)     back to text

58. We do not subscribe to the view, expressed by Japan, that the use of the word “cases” (rather than the word “investigation”) in the second sentence of Article 11.9 means that the application of the de minimis standard set forth in that provision must be applied in all phases of countervailing duty proceedings — not only in investigations. The use of the word “cases” does not alter the fact that the terms of Article 11.9 apply the de minimis standard only to the investigation phase. We note further that the panel in US DRAMS rejected a similar argument with respect to the meaning of the word “cases” in Article 5.8 of the Anti-Dumping Agreement, a provision almost identical to Article 11.9 of the SCM Agreement. (Panel Report, US — DRAMS, para. 6.87)     back to text

189. We note, in this respect, as pointed out by the European Communities, that the first sentence of Article 6.10 of the Anti-Dumping Agreement requires, as a rule, a determination of an individual margin of dumping for each known producer or exporter of the product under investigation, unless this is rendered impracticable due to the high number of producers and exporters or of the types of products involved. If that is the case, the second sentence of Article 6.10 permits investigating authorities to limit the investigation to a statistically valid sample, or the largest percentage of the volume of exports that can reasonably be investigated. By contrast, the SCM Agreement does not contain a similar rule requiring Members, in principle, to determine an individual margin of subsidization for each known producer or exporter of the subsidized good.…     back to text


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.