Agreement on Subsidies and Countervailing Measures

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I. General 

A. Object and Purpose of the SCM Agreement

1.   In Brazil — Aircraft, the Panel considered that the object and purpose of the SCM Agreement is to impose multilateral disciplines on subsidies that distort international trade:

“In our view, the object and purpose of the SCM Agreement is to impose multilateral disciplines on subsidies which distort international trade. It is for this reason that the SCM Agreement prohibits two categories of subsidies — subsidies contingent upon exportation and upon the use of domestic over imported goods — that are specifically designed to affect trade.”⁽¹⁾

2.   In Canada — Aircraft, the Panel noted that the SCM Agreement “does not contain any express statement of its object and purpose”, and stated that “[w]e therefore consider it unwise to attach undue importance to arguments concerning the object and purpose of the SCM Agreement”. However, the Panel considered that the object and purpose of the SCM Agreement could appropriately be summarized “as the establishment of multilateral disciplines ‘on the premise that some forms of government intervention distort international trade, [or] have the potential to distort [international trade]’”.⁽²⁾

3.   In US — Export Restraints, the Panel indicated its agreement with the Panels in Brazil — Aircraft and Canada — Aircraft with regard to their statements on the object and purpose of the SCM Agreement.⁽³⁾ The Panel concluded, however, that not every government action or intervention is to be considered as a subsidy that may distort trade and that, accordingly, the object and purpose of the SCM Agreement can only be in respect of ‘subsidies’ as defined in the Agreement:

“It does not follow from those statements, however, that every government intervention that might in economic theory be deemed a subsidy with the potential to distort trade is a subsidy within the meaning of the SCM Agreement. Such an approach would mean that the ‘financial contribution’ requirement would effectively be replaced by a requirement that the government action in question be commonly understood to be a subsidy that distorts trade… .

 

… [W]hile the object and purpose of the Agreement clearly is to discipline subsidies that distort trade, this object and purpose can only be in respect of ‘subsidies’ as defined in the Agreement. This definition, which incorporates the notions of ‘financial contribution’, ‘benefit’, and ‘specificity’, was drafted with the express purpose of ensuring that not every government intervention in the market would fall within the coverage of the Agreement”.⁽⁴⁾

4.   In US — Carbon Steel, the Appellate Body offered the following observations on the object and purpose of the SCM Agreement:

“[W]e turn to the object and purpose of the SCM Agreement. We note, first, that the Agreement contains no preamble to guide us in the task of ascertaining its object and purpose. In Brazil — Desiccated Coconut, we observed that the ‘SCM Agreement contains a set of rights and obligations that go well beyond merely applying and interpreting Articles VI, XVI and XXIII of the GATT 1947.’⁽⁵⁾ The SCM Agreement defines the concept of ‘subsidy’, as well as the conditions under which Members may not employ subsidies. It establishes remedies when Members employ prohibited subsidies, and sets out additional remedies available to Members whose trading interests are harmed by another Member’s subsidization practices. Part V of the SCM Agreement deals with one such remedy, permitting Members to levy countervailing duties on imported products to offset the benefits of specific subsidies bestowed on the manufacture, production or export of those goods. However, Part V also conditions the right to apply such duties on the demonstrated existence of three substantive conditions (subsidization, injury, and a causal link between the two) and on compliance with its procedural and substantive rules, notably the requirement that the countervailing duty cannot exceed the amount of the subsidy. Taken as a whole, the main object and purpose of the SCM Agreement is to increase and improve GATT disciplines relating to the use of both subsidies and countervailing measures.

 

We thus believe that the Panel properly identified, as among the objectives of the SCM Agreement, the establishment of a framework of rights and obligations relating to countervailing duties⁽⁶⁾, and the creation of a set of rules which WTO Members must respect in the use of such duties.⁽⁷⁾ Part V of the Agreement is aimed at striking a balance between the right to impose countervailing duties to offset subsidization that is causing injury, and the obligations that Members must respect in order to do so.”⁽⁸⁾

5.   The Panel in US — FSC (Article 21.5 — EC) rejected an interpretation of Article 1.1(a)(1)(ii) on the grounds that this interpretation would lead to a result that was “inherently contradictory to what may be viewed as the object and purpose of the SCM Agreement in terms of disciplining trade-distorting subsidies in a way that provides legally binding security of expectations to Members”.⁽⁹⁾ The Panel stated that:

“In this regard, it is evident that the interpretation advanced by the United States would be irreconcilable with that object and purpose, given that it would offer governments ‘carte-blanche’ to evade any effective disciplines, thereby creating fundamental uncertainty and unpredictability. In short, such an approach would eviscerate the subsidies disciplines in the SCM Agreement.”⁽¹⁰⁾

6.   In US — Softwood Lumber IV, the Appellate Body upheld the Panel’s finding and rejected a narrow interpretation of the term “goods” in Article 1.1(a)(1)(iii). In the course of its analysis, the Appellate Body stated that:

“[T]o accept Canada’s interpretation of the term ‘goods’ would, in our view, undermine the object and purpose of the SCM Agreement, which is to strengthen and improve GATT disciplines relating to the use of both subsidies and countervailing measures, while, recognizing at the same time, the right of Members to impose such measures under certain conditions. It is in furtherance of this object and purpose that Article 1.1(a)(1)(iii) recognizes that subsidies may be conferred, not only through monetary transfers, but also by the provision of non-monetary inputs. Thus, to interpret the term ‘goods’ in Article 1.1(a)(1)(iii) narrowly, as Canada would have us do, would permit the circumvention of subsidy disciplines in cases of financial contributions granted in a form other than money, such as through the provision of standing timber for the sole purpose of severing it from land and processing it.”⁽¹¹⁾

7.   The Panel in Japan — DRAMs (Korea) observed that “one of the purposes of the SCM Agreement is to interpret and clarify concepts in Article VI of the GATT 1994,” and noted that:

“We note that the full title of the Tokyo Round Subsidies Code was the “Agreement on Interpretation and Application of Articles VI, XVI and XXIII of the General Agreement on Tariffs and Trade”. The preamble to the Code clarified that the parties to the Code had agreed to its terms desiring, inter alia, “to apply fully and to interpret the provisions of Articles VI, XVI and XXIII” of the GATT, and to “elaborate rules for their application in order to provide greater uniformity and certainty in their implementation”. The full title of the SCM Agreement was shortened from the “Agreement on Interpretation and Application of Articles VI, XVI and XXIII of the General Agreement on Tariffs and Trade” to the “Agreement on Subsidies and Countervailing Measures”. As the Appellate Body explained in Brazil — Desiccated Coconut, the reason for the change was that the SCM Agreement “contains a set of rights and obligations that go well beyond merely applying and interpreting Articles VI, XVI and XXIII of the GATT 1947” (Appellate Body Report, Brazil — Desiccated Coconut, page 17). We note that Article 11.2 of the SCM Agreement refers to injury “within the meaning of Article VI of GATT 1994 as interpreted by this Agreement”, (emphasis supplied) and that Article 32.1 of the SCM Agreement refers to the provisions of GATT 1994 “as interpreted by this Agreement”. (emphasis supplied)”⁽¹²⁾

8.   In US — Anti-Dumping and Countervailing Duties (China), the Appellate Body discussed the object and purpose of the SCM Agreement in the context of interpreting the scope of the term “public body” in Article 1.1(a)(1):

“We note, first, that the SCM Agreement does not contain a preamble or an explicit indication of its object and purpose. However, the Appellate Body has stated that the object and purpose of the SCM Agreement is “to increase and improve GATT disciplines relating to the use of both subsidies and countervailing measures”.⁽¹³⁾ Furthermore, in US — Softwood Lumber IV, the Appellate Body noted that the object and purpose of the SCM Agreement is to “strengthen and improve GATT disciplines relating to the use of both subsidies and countervailing measures, while, recognizing at the same time, the right of Members to impose such measures under certain conditions”.⁽¹⁴⁾ Finally, we note that, with respect to the object and purpose of the SCM Agreement, the Appellate Body stated in US — Countervailing Duty Investigation on DRAMS that the SCM Agreement “reflects a delicate balance between the Members that sought to impose more disciplines on the use of subsidies and those that sought to impose more disciplines on the application of countervailing measures”.⁽¹⁵⁾

 

As we see it, considerations of object and purpose are of limited use in delimiting the scope of the term “public body” in Article 1.1(a)(1). This is so because the question of whether an entity constitutes a public body is not tantamount to the question of whether measures taken by that entity fall within the ambit of the SCM Agreement. A finding that a particular entity does not constitute a public body does not, without more, exclude that entity’s conduct from the scope of the SCM Agreement. Such measures may still be attributed to a government and thus fall within the ambit of the SCM Agreement pursuant to Article 1.1(a)(1)(iv) if the entity is a private entity entrusted or directed by a government or by a public body.⁽¹⁶⁾

 

We consider that the Panel’s object and purpose analysis did not take full account of the SCM Agreement’s disciplines. It is important to keep in mind that entities that are considered not to be public bodies are not, thereby, immediately excluded from the SCM Agreement’s disciplines or from the reach of investigating authorities in a countervailing duty investigation. The Panel was concerned with what it saw as the implications of too narrow an interpretation. As we see it, however, too broad an interpretation of the term “public body” could equally risk upsetting the delicate balance embodied in the SCM Agreement because it could serve as a license for investigating authorities to dispense with an analysis of entrustment and direction and instead find entities with any connection to government to be public bodies. Thus, in our view, considerations of the object and purpose of the SCM Agreement do not favour either a broad or a narrow interpretation of the term “public body”. We therefore disagree with the Panel’s finding that interpreting “any public body” to mean any entity that is controlled by the government best serves the object and purpose of the SCM Agreement.”⁽¹⁷⁾

 

Part I: General Provisions

 

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II. Article 1  

A. Text of Article 1

Article 1: Definition of a Subsidy

1.1   For the purpose of this Agreement, a subsidy shall be deemed to exist if:

 

(a)(1)   there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as “government”), i.e. where:

 

(i)   a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);

 

(ii)   government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits)(1);

 

(footnote original) 1 In accordance with the provisions of Article XVI of GATT 1994 (Note to Article XVI) and the provisions of Annexes I through III of this Agreement, the exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued, shall not be deemed to be a subsidy.

(iii)   a government provides goods or services other than general infrastructure, or purchases goods;

 

(iv)   a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments;

or

(a) (2)   there is any form of income or price support in the sense of Article XVI of GATT 1994;

and

(b)   a benefit is thereby conferred.

 

1.2   A subsidy as defined in paragraph 1 shall be subject to the provisions of Part II or shall be subject to the provisions of Part III or V only if such a subsidy is specific in accordance with the provisions of Article 2.

B. Interpretation and Application of Article 1

1. General

(a) Distinction between “financial contribution” and “benefit”

9.   In Brazil — Aircraft, the Appellate Body emphasized that “a ‘financial contribution’ and a ‘benefit’ [are] two separate legal elements in Article 1.1 of the SCM Agreement, which together determine whether a subsidy exists”.⁽¹⁸⁾

10.   Along the same lines, the Panel in US — Export Restraints, emphasized the distinction between “financial contribution” and “benefit”:

“Article 1.1 makes clear that the definition of a subsidy has two distinct elements (i) a financial contribution (or income or price support), (ii) which confers a benefit. The Appellate Body emphasised this point in Brazil — Aircraft, stating that financial contribution and benefit are ‘separate legal elements in Article 1.1 … which together determine whether a ‘subsidy’ exists’⁽¹⁹⁾, which the panel in that case had erroneously blended together by importing the concept of benefit into the definition of financial contribution.”⁽²⁰⁾

11.   In US — Softwood Lumber IV, the Appellate Body referred again to the two distinct elements:

“The concept of subsidy defined in Article 1 of the SCM Agreement captures situations in which something of economic value is transferred by a government to the advantage of a recipient. A subsidy is deemed to exist where two distinct elements are present.⁽²¹⁾ First, there must be a financial contribution by a government, or income or price support. Secondly, any financial contribution, or income or price support, must confer a benefit.”⁽²²⁾

2. Article 1.1(a)(1): “financial contribution”

(a) General

12.   In US — Export Restraints, the Panel considered the negotiating history of Article 1 and found that the inclusion of “financial contribution” in the text of the provision was meant to guarantee that not all government measures that confer benefits would be considered to be subsidies:

“The negotiating history of Article 1 confirms our interpretation of the term ‘financial contribution’. This negotiating history demonstrates, in the first place, that the requirement of a financial contribution from the outset was intended by its proponents precisely to ensure that not all government measures that conferred benefits could be deemed to be subsidies. This point was extensively discussed during the negotiations, with many participants consistently maintaining that only government actions constituting financial contributions should be subject to the multilateral rules on subsidies and countervailing measures.

 

[T]he negotiating history confirms that the introduction of the two-part definition of subsidy, consisting of ‘financial contribution’ and ‘benefit’, was intended specifically to prevent the countervailing of benefits from any sort of (formal, enforceable) government measures, by restricting to a finite list the kinds of government measures that would, if they conferred benefits, constitute subsidies. The negotiating history confirms that items (i)–(iii) of that list limit these kinds of measures to the transfer of economic resources from a government to a private entity. Under subparagraphs (i)–(iii), the government acting on its own behalf is effecting that transfer by directly providing something of value — either money, goods, or services — to a private entity. Subparagraph (iv) ensures that the same kinds of government transfers of economic resources, when undertaken through explicit delegation of those functions to a private entity, do not thereby escape disciplines.”⁽²³⁾

13.   In US — Softwood Lumber IV, the Appellate Body stated that:

“An evaluation of the existence of a financial contribution involves consideration of the nature of the transaction through which something of economic value is transferred by a government. A wide range of transactions falls within the meaning of “financial contribution” in Article 1.1(a)(1). According to paragraphs (i) and (ii) of Article 1.1(a)(1), a financial contribution may be made through a direct transfer of funds by a government, or the foregoing of government revenue that is otherwise due. Paragraph (iii) of Article 1.1(a)(1) recognizes that, in addition to such monetary contributions, a contribution having financial value can also be made in kind through governments providing goods or services, or through government purchases. Paragraph (iv) of Article 1.1(a)(1) recognizes that paragraphs (i)–(iii) could be circumvented by a government making payments to a funding mechanism or through entrusting or directing a private body to make a financial contribution. It accordingly specifies that these kinds of actions are financial contributions as well. This range of government measures capable of providing subsidies is broadened still further by the concept of “income or price support” in paragraph (2) of Article 1.1(a).”⁽²⁴⁾

14.   However, in US — Softwood Lumber IV the Appellate Body also noted its agreement with the Panel in US — Export Restraints that:

“[N]ot all government measures capable of conferring benefits would necessarily fall within Article 1.1(a). If that were the case, there would be no need for Article 1.1(a), because all government measures conferring benefits, per se, would be subsidies. In this regard, we find informative the discussion of the negotiating history of the SCM Agreement contained in the panel report in US — Export Restraints.”⁽²⁵⁾

15.   In US — Large Civil Aircraft (2^nd complaint), the Panel observed that “Article 1.1(a)(1) is a definitional provision that sets forth an exhaustive, closed list (“… i.e. where …”) of the types of transactions that constitute financial contributions under the SCM Agreement.”⁽²⁶⁾

(b) “by a government or any public body”

(i) “Public body”

16.   In Korea — Commercial Vessels, the European Communities argued that the Export-Import Bank of Korea (KEXIM) was a public body on the grounds that, inter alia, it was created and operated on the basis of a public statute giving the GOK control over its decisionmaking. The Panel agreed with the EC that KEXIM was a public body because it was controlled by government (or other public bodies), and that KAMCO, KDB and IBK were public bodies also, because they were controlled by the Korean government:

“[A]n entity will constitute a ‘public body’ if it is controlled by the government (or other public bodies). If an entity is controlled by the government (or other public bodies), then any action by that entity is attributable to the government, and should therefore fall within the scope of Article 1.1(a)(1) of the SCM Agreement.”⁽²⁷⁾

17.   In US — Anti-Dumping and Countervailing Duties (China), the Appellate Body reversed the Panel’s finding that the term “public body” in Article 1.1(a)(1) of the SCM Agreement means “any entity controlled by a government”, and found instead that the term “public body” in the context of Article 1.1.(a)(1) of the SCM Agreement covers only those entities that possesses, exercise or are vested with governmental authority:

“Having completed our analysis of the interpretative elements prescribed by Article 31 of the Vienna Convention, we reach the following conclusions. We see the concept of “public body” as sharing certain attributes with the concept of “government”. A public body within the meaning of Article 1.1.(a)(1) of the SCM Agreement must be an entity that possesses, exercises or is vested with governmental authority. Yet, just as no two governments are exactly alike, the precise contours and characteristics of a public body are bound to differ from entity to entity, State to State, and case to case. Panels or investigating authorities confronted with the question of whether conduct falling within the scope of Article 1.1.(a)(1) is that of a public body will be in a position to answer that question only by conducting a proper evaluation of the core features of the entity concerned, and its relationship with government in the narrow sense.

 

In some cases, such as when a statute or other legal instrument expressly vests authority in the entity concerned, determining that such entity is a public body may be a straightforward exercise. In others, the picture may be more mixed, and the challenge more complex. The same entity may possess certain features suggesting it is a public body, and others that suggest that it is a private body.⁽²⁸⁾ We do not, for example, consider that the absence of an express statutory delegation of authority necessarily precludes a determination that a particular entity is a public body. What matters is whether an entity is vested with authority to exercise governmental functions, rather than how that is achieved. There are many different ways in which government in the narrow sense could provide entities with authority. Accordingly, different types of evidence may be relevant to showing that such authority has been bestowed on a particular entity. Evidence that an entity is, in fact, exercising governmental functions may serve as evidence that it possesses or has been vested with governmental authority, particularly where such evidence points to a sustained and systematic practice. It follows, in our view, that evidence that a government exercises meaningful control over an entity and its conduct may serve, in certain circumstances, as evidence that the relevant entity possesses governmental authority and exercises such authority in the performance of governmental functions. We stress, however, that, apart from an express delegation of authority in a legal instrument, the existence of mere formal links between an entity and government in the narrow sense is unlikely to suffice to establish the necessary possession of governmental authority. Thus, for example, the mere fact that a government is the majority shareholder of an entity does not demonstrate that the government exercises meaningful control over the conduct of that entity, much less that the government has bestowed it with governmental authority. In some instances, however, where the evidence shows that the formal indicia of government control are manifold, and there is also evidence that such control has been exercised in a meaningful way, then such evidence may permit an inference that the entity concerned is exercising governmental authority.”⁽²⁹⁾

(ii) Financial contribution “by” individual public entities or private bodies

18.   In Korea — Commercial Vessels, the Panel rejected Korea’s argument that there were no financial contributions “by” individual public bodies or private bodies in the restructuring of the Korean shipyards because those restructurings were effected collectively, either by the creditors’ councils, meetings of interested parties, or court decisions. The Panel concluded that where a public body participates in a loan agreed by a creditors’ council, the part of the loan attributable to the public body constitutes an individual financial contribution by that public body under Article 1.1(a) of the SCM Agreement. The Panel considered that:

“[E]ntities participating in a financial contribution must assume responsibility for that participation. Thus, to the extent that a public body participates in a loan agreed by a creditors’ council, that part of the loan attributable to the public body may be treated as an individual financial contribution by that public body falling within the scope of Article 1.1(a) of the SCM Agreement. Otherwise the disciplines of the SCM Agreement could be easily circumvented by groups of public bodies deciding collectively, or under court approval, to provide financial contributions”.⁽³⁰⁾

(c) Article 1.1(a)(1)(i): transfer of funds

(i) “a government practice”

19.   The Panel in Korea — Commercial Vessels found that the loans and loan guarantees at issue fell under Article 1.1 (a)(1)(i), rejecting Korea’s argument that “financial contribution” exists only if a public body is engaged in “government practice,” such as regulation or taxation:

“Article 1.1(a)(1) states in relevant part that the term ‘government’ refers to both ‘government’ and ‘public body’. Since the phrase ‘government practice’ in Article 1.1(a)(1)(i) therefore refers to the practice of both governments and public bodies, the practice at issue need not necessarily be purely “governmental” in the narrow sense advocated by Korea. In this regard, we consider that the concept of ‘financial contribution’ is writ broadly to cover government and public body actions that might involve subsidization. Whether the government or public body action in fact gives rise to subsidization will depend on whether it gives rise to a ‘benefit’. Since the concept of ‘benefit’ acts as a screen to filter out commercial conduct, it is not necessary to introduce such a screen into the concept of ‘financial contribution’.”⁽³¹⁾

20.   The Panel in Korea — Commercial Vessels concluded that the phrase “government practice” is used to denote the author of the action, rather than the nature of the action and that “‘[g]overnment practice’ therefore covers all acts of governments or public bodies, irrespective of whether or not they involve the exercise of regulatory powers or taxation authority.”⁽³²⁾

(ii) “direct transfer of funds”

21.   In Korea — Commercial Vessels, Korea argued that transactions involving debt-for-equity swaps and modifications of loan repayment terms are not covered by Article 1.1(a)(1)(i) because they do not involve any transfer of (new) funds. The Panel was not persuaded:

“We are not persuaded by Korea’s arguments that debt-for-equity swaps and interest reductions and deferrals are not financial contributions. In the first place, we recall that there is a financial contribution in the sense of Article 1.1(a)(1)(i) of the SCM Agreement if there is a “direct transfer of funds”, and that grants, loans and equity infusions are listed only as three possible examples of such transfers. Thus, we view Article 1.1(a)(1) as identifying in its respective subparagraphs the kinds of instruments or transactions that could be considered to be “financial contributions”. Of course these instruments would only be covered by the Agreement if they were made “by a government or public body”, and they would only be subsidies covered by the Agreement if they both conferred a benefit and were specific. Thus, the concept of financial contribution is but one in a set of cumulative, and independent, elements all of which must be present for a measure to be regulated by the SCM Agreement.

 

We find the examples listed in Article 1.1(a)(1)(i) to be illuminating in respect of the scope of the term “direct transfer of funds”. Most importantly, considering the “medium of exchange” in the listed examples, we note that all of the examples involve transfers of money (“funds”), as opposed to in-kind transfers (of goods or services, in the sense of Article 1.1(a)(1)(iii)). The fact that the listed kinds of direct transfers of funds (grants, loans and equity infusions) are identified as only examples clearly indicates that there may well be other types of instruments that would equally constitute direct transfers of funds in the sense of Article 1.1(a)(1)(i).

 

Turning to the particular cases of the transactions involved in the restructuring, we find that all of them are of the same nature as those explicitly listed in Article 1.1(a)(1)(i). First we note that interest reductions and deferrals are similar to new loans, as they involve a renegotiation / extension of the terms of the original loan. We see no reason why loans would constitute financial contributions while interest reductions and deferrals would not. Further, we consider that interest / debt forgiveness is comparable to a cash grant, as funds that were previously provided as a loan, against interest, are now provided for free, given the removal of the repayment obligation. All of these transactions therefore constitute direct transfers of funds in the sense of Article 1.1(a)(1)(i) of the SCM Agreement. Regarding debt-for-equity swaps, we note that equity infusions are explicitly listed as a type of direct transfer of funds in Article 1.1(a)(1)(i). Since we have also found that debt forgiveness constitutes a direct transfer of funds, we see no reason why a combination of equity infusion and debt forgiveness should fall outside the scope of that provision. The reason why creditors agree to such transactions (i.e., whether or not it is in order to preserve going concern value) is not relevant to the issue of whether or not the transactions constitute financial contributions. Rather, it relates to the issue of benefit (in the sense of whether or not creditors operating on market principles would have undertaken such transactions on the same terms).

….

… Equity infusions and debt-for-equity swaps have the same effect, in the sense that equity changes hands against consideration in both cases (and subsidization arises if the amount of consideration is less than the market would have provided). Also, a debt/equity swap comprises an element of equity infusion.”⁽³³⁾

22.   Korea advanced a similar argument in Japan — DRAMs (Korea), but that Panel was also not persuaded:

“We do not accept that the relinquishment or modification of claims may not, in certain circumstances, be treated as the transfer of new claims, giving rise to new rights and obligations. For example, once one analyses what actually occurs in the transaction, the modification of an existing loan may properly be treated as the transfer of new rights to the recipient of the modified loan. The borrower’s old rights no longer exist. They have been replaced by new rights. In this sense, the modified loan may properly be treated as a new loan. Thus, the modification of a loan through debt forgiveness involves the transfer of new rights to the borrower, who is now liberated of the obligation to repay the debt, and instead has the right to use the money for free. Similarly, the modification of a loan through an extension of the loan maturity involves the transfer of new rights to the borrower, who is now entitled to borrow the money for a longer period of time. Since the new rights that are transferred in such transactions have monetary value, and may be counted in a (legal or natural) person’s capital, we consider that such transactions may properly be treated as “direct transfers of funds” in the meaning of Article 1.1 (a)(1)(i) of the SCM Agreement. We apply the same analysis to debt-to-equity swaps, for the relinquishment and modification of claims inherent in such transactions similarly results in new rights, or claims, being transferred to the former debtor.”⁽³⁴⁾

23.   The Panel continued:

“Furthermore, we note that in Korea-Commercial Vessels, Korea advanced essentially the same argument that it advances here. In that case, Korea argued that the debt-to-equity swaps, interest rate reductions, interest forgiveness and interest deferral at issue did not constitute “financial contributions” because there was “no transfer of pecuniary value” to the companies under workout or corporate reorganization. The panel rejected Korea’s argument, and found that all of those transactions involved a “direct transfer of funds” within the meaning of Article 1.1(a)(1)(i): …

…

We agree with this analysis by the panel in Korea — Commercial Vessels. We agree in particular that it is appropriate to look beyond the simple form of a transaction, and analyze its effects, in determining whether or not a transaction constitutes a “direct transfer of funds”.”⁽³⁵⁾

24.   The Appellate Body upheld the findings of the Panel in Japan — DRAMs (Korea). The Appellate Body reasoned that:

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

 

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

 

With respect to Korea’s argument that debt-to-equity swaps cannot be considered as direct transfers of funds given that no money is transferred thereby to the recipient, the Panel reasoned that “the relinquishment and modification of claims inherent in such transactions similarly result[] in new rights, or claims, being transferred to the former debtor.” Again, we see no error in the Panel’s analysis. Debt-to-equity swaps replace debt with equity, and in a case such as this, when the debt-to-equity swap is intended to address the deteriorating financial condition of the recipient company, the cancellation of the debt amounts to a direct transfer of funds to the company.”⁽³⁶⁾

25.   Along the same lines, the Panel in EC and certain member States — Large Civil Aircraft concluded that a share transfer involved a “direct transfer of funds” within the meaning of Article 1.1(a)(1)(i):

“We now turn to the United States’ claim that the 1992 acquisition by MBB of KfW’s 20 percent equity interest in Deutsche Airbus was also a subsidy. We first consider whether the transfer by KfW of its shares in Deutsche Airbus to MBB is a “financial contribution” in the sense of Article 1.1(a)(1)(i) of the SCM Agreement. The Appellate Body has indicated that the term “funds” in Article 1.1(a)(1)(i) encompasses not only “money” but also financial resources and other financial claims more generally.⁽³⁷⁾ We regard shares in a company as financial claims to a stream of income (in the form of dividends paid out of a company’s profits) and to a share in the capital of the company on its liquidation. Therefore, we consider that shares in a company fall within the scope of the term “funds” in Article 1.1(a)(1)(i), and that a transfer of shares falls within the scope of the term “direct transfer of funds”. We thus conclude that the transfer by KfW of its 20 percent equity interest in Deutsche Airbus to MBB was a “financial contribution” within the meaning of Article 1.1(a)(1)(i).”⁽³⁸⁾

26.   Applying similar reasoning, the Panel in EC and certain member States — Large Civil Aircraft also found that the relinquishment of a government-held debt may also constitute a “direct transfer of funds” within the meaning of Article 1.1(a)(1)(i):

“The United States characterizes the financial contribution arising out of the 1998 debt settlement as “debt forgiveness”. Our approach is, rather, to determine first, whether the 1998 debt settlement involves a financial contribution within the meaning of Article 1.1(a)(1) of the SCM Agreement, and second, whether that financial contribution confers a benefit on Deutsche Airbus within the meaning of Article 1.1(b) of the SCM Agreement. If we conclude that the financial contribution confers a “benefit” on Deutsche Airbus, then it may be that the subsidy in question could be described as “debt forgiveness” in an amount equal to the amount of benefit found to have been conferred. However, the first issue for us to determine is whether the 1998 debt settlement constitutes one of the forms of financial contribution set forth in Article 1.1(a)(1). We conclude that the 1998 debt settlement constitutes a financial contribution in the form of a “direct transfer of funds” within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement. We note that, in Japan — DRAMS, the Appellate Body interpreted the term “funds” in Article 1.1(a)(1)(i) broadly, as encompassing not only “money” but also “financial resources and other financial claims more generally.”⁽³⁹⁾ Debt owed to the government is an asset held by the government consisting of certain financial claims (i.e., rights to payment of money or equivalents) that the government has against a debtor. A settlement of government-held debt essentially involves the transfer to the debtor of the government’s financial claims against that debtor, resulting in the cancellation of the debt. We therefore regard a settlement of debt as a “direct transfer of funds” by a government, and thus a “financial contribution” within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement.”⁽⁴⁰⁾

27.   In US — Large Civil Aircraft (2^nd complaint), the Panel found that transactions involving purchases of services are excluded from the scope of Article 1.1(a)(1). The Panel recognized that the plain meaning of “transfer of funds” is broad, but considered it necessary to interpret the terms of Article 1.1(a)(1)(i) in their context:

“Article 1.1(a)(1)(i) provides in relevant part that a financial contribution exists where “a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion)”. We accept that if the terms of Article 1.1(a)(1)(i) of the SCM Agreement are read in isolation, the ordinary meaning of the words “a government practice involves a direct transfer of funds” might be broad enough to cover purchases of services. First, there is nothing in the dictionary definitions of these terms to suggest that transactions properly characterized as purchases of services fall outside of their scope: the definition of “transfer” is “a conveyance from one person to another”⁽⁴¹⁾, and the definition of “funds” is “a stock or sum of money, esp. one set apart for a particular purpose” or “financial resources”.⁽⁴²⁾ Second, there is no qualifying or limiting language in the text of this provision. Third, one of the examples of a “direct transfer of funds” given in Article 1.1(a)(1)(i) is that of “equity infusion”, which refers to a situation in which a government “purchases” something (i.e. shares in a company).⁽⁴³⁾ Fourth, previous panels and the Appellate Body have not given a restrictive interpretation to these terms.⁽⁴⁴⁾ However, the terms of Article 1.1(a)(1)(i) must be read in their context.”⁽⁴⁵⁾

(iii) “potential direct transfers of funds”

28.   In Brazil — Aircraft, the Panel had found that “a ‘potential direct transfer of funds’ exists only where the action in question gives rise to a benefit and thus confers a subsidy irrespective of whether any payment occurs”, and that “the existence of a ‘potential direct transfer of funds’ does not depend upon the probability that a payment will subsequently occur”.⁽⁴⁶⁾ The Appellate Body considered that the Panel did not have to determine whether the export subsidies at issue constituted a “direct transfer of funds” or a “potential direct transfer of funds” within the meaning of Article 1.1(a)(i) in that case, and declared the Panel findings on this point to be moot.⁽⁴⁷⁾

29.   The Panel in Brazil — Aircraft rejected the argument that a subsidy exists only when the transfer of funds has actually been effectuated:

“[A]ccording to Article 1:1(i) a subsidy exists if a government practice involves a direct transfer of funds or a potential direct transfer of funds and not only when a government actually effectuates such a transfer or potential transfer (otherwise the text of (i) would read: ‘a government directly transfers funds … or engages in potential direct transfers of funds or liabilities’) … As soon as there is such a practice, a subsidy exists, and the question whether the practice involves a direct transfer of funds or a potential direct transfer of funds is not relevant to the existence of a subsidy. One or the other is sufficient. If subsidies were deemed to exist only once a direct or potential direct transfer of funds had actually been effectuated, the Agreement would be rendered totally ineffective and even the typical WTO remedy (i.e. the cessation of the violation) would not be possible.”⁽⁴⁸⁾

30.   In EC and certain member States — Large Civil Aircraft, the Panel set forth the following interpretation of the concept of a “potential direct transfer of funds”:

“The explicit identification of “loan guarantees” as an example of “potential direct transfers of funds or liabilities” is instructive for the purpose of understanding the types of measures that may constitute “potential direct transfers of funds or liabilities”. A loan guarantee may be described as a legally binding promise to repay the outstanding balance of a loan when the loan recipient defaults on its repayments. Thus, it is the promise to repay an outstanding loan in the event of default that is the financial contribution (i.e., the potential direct transfer of funds), not the funds that may be transferred in the future in the event of default.

…

In our view, the fact that a loan guarantee will confer a benefit on a recipient when it enables that recipient to obtain the guaranteed loan at a below market price implies that the benefit of a potential direct transfer of funds arises from the mere existence of an obligation to make a direct transfer of funds in the event of default. Thus, when assessing whether a transaction involves a “potential direct transfer{ } of funds”, the focus should be on the existence of a government practice that involves an obligation to make a direct transfer of funds which, in and of itself, is claimed and capable of conferring a benefit on the recipient that is separate and independent from the benefit that might be conferred from any future transfer of funds. This can be contrasted with financial contributions in the form of direct transfers of funds, which will result in a benefit being conferred on a recipient when there is a government practice that involves a direct transfer of funds.

…

As we have previously explained, the explicit identification of “loan guarantees” as an example of a “potential direct transfers of funds or liabilities” is instructive for the purpose of understanding the types of measures that may constitute “potential direct transfers of funds or liabilities”. A loan guarantee may be described as a legally binding promise to repay the outstanding balance of a loan when the loan recipient defaults on its repayments. Thus, it is the promise to repay an outstanding loan in the event of default that is the financial contribution (i.e., the potential direct transfer of funds), not the funds that may be transferred in the future in the event of default.

…

In respect of the funding that was committed, but not disbursed under LuFo III as of 1 July 2005, the European Communities’ principal argument in response to the United States’ claims amounts to the submission that a government commitment of funds, without any actual disbursement of those funds, cannot amount to a “financial contribution”. However, as we have noted elsewhere in this Report, a commitment to provide funds may well be a “financial contribution” if in the form of a “potential direct transfer of funds”. As we understand it, the United States argues that the funds that were committed but not disbursed to Airbus under the LuFo III programme represent precisely this form of “financial contribution”. We agree. Just as the disbursement of funds is a “direct transfer of funds”, a commitment — or a promise — to disburse funds may be properly characterized as a “potential direct transfer of funds” falling within the definition of a “financial contribution” set out in Article 1.1(a)(1)(i) of the SCM Agreement. Thus, on the basis of the parties’ submissions and the evidence that has been presented, we find that as of 1 July 2005, the German Federal government provided Airbus with a “potential direct transfer of funds” in the form of a commitment to transfer approximately EUR [***] to Airbus under the LuFo III programme.”⁽⁴⁹⁾

31.   The Panel in US — Large Civil Aircraft (2^nd complaint) also considered the meaning of “potential direct transfer of funds”. The principal point of contention between the parties was whether a “potential direct transfer of funds” can only exist when a direct transfer of funds is required upon the occurrence of a “triggering event” or condition, or whether it can be found to exist where a potential direct transfer of funds is one of a number of possible consequences following the fulfilment of a predefined condition. The Panel considered that the “mere possibility that a government may transfer funds” upon the fulfilment of a pre-defined condition will not be enough to satisfy the definition of a financial contribution:

“In this regard, we note that the definition of “potential” is “possible as opposed to actual, capable of coming into being or action; latent”.⁽⁵⁰⁾ On its face, this definition does not appear to exclude from the reach of Article 1.1(a)(1)(i) of the SCM Agreement the possible transfer of funds identified by the European Communities. However, accepting the European Communities’ submissions on this issue would require a broad interpretation of potential direct transfer of funds. The European Communities’ position is essentially that any time there is a possibility that the government will transfer funds in the future, upon the occurrence of a defined triggering event, this is a financial contribution. The contextual guidance provided by the example of a “potential direct transfer” in Article 1.1(a)(1)(i), namely a loan guarantee, suggests that this was not intended to be the case. A loan guarantee is a commitment by the government to assume responsibility for a loan when a defined set of circumstances arise. Therefore, the example chosen in Article 1.1(a)(1)(i) suggests that the mere possibility that a government may transfer funds upon the fulfilment of a pre-defined condition will not be enough to satisfy the definition of a financial contribution. In our view, a potential direct transfer of funds is a “possibility” due to uncertainty about whether the triggering event will occur, rather than uncertainty about whether the transfer of funds will follow once the pre-defined event has transpired.”⁽⁵¹⁾

(d) Article 1.1(a)(1)(ii): “government revenue otherwise due is foregone or not collected”

32.   In US — FSC, the Appellate Body held that in determining if revenue “otherwise due” has been foregone, a comparison must be made between the revenue actually raised and the revenue that would have been raised “otherwise”. The Panel and the Appellate Body agreed that the basis of comparison in determining what would otherwise have been due “must be the tax rules applied by the Member in question”.⁽⁵²⁾

33.   In US — FSC, the Panel applied a “but for” test in determining whether revenue had been foregone that was “otherwise due”. This involved examining the situation that would have existed but for the measure in question and determining whether there would have been a higher tax liability in the absence of the measure.⁽⁵³⁾ In US — FSC, the Appellate Body expressed some reservations about whether the “but for” test is an appropriate general test that should apply in all situations.⁽⁵⁴⁾ The Appellate Body reasoned:

“[T]he word ‘foregone’ suggests that the government has given up an entitlement to raise revenue that it could otherwise have raised. This cannot, however, be an entitlement in the abstract, because governments, in theory, could tax all revenues. There must, therefore, be some defined normative benchmark against which a comparison can be made between the revenue actually raised and the revenue that would have been raised ‘otherwise’…

 

The Panel found that the term ‘otherwise due’ establishes a ‘but for’ test in terms of which the appropriate basis of comparison for determining whether revenues are ‘otherwise due’ is ‘the situation that would prevail but for the measures in question’. In the present case, this legal standard provides a sound basis for comparison because it is not difficult to establish in what way the … income … would be taxed ‘but for’ the contested measure. However, we have certain abiding reservations about applying any legal standard, such as this ‘but for’ test, in the place of the actual treaty language … It would, we believe, not be difficult to circumvent such a test … We observe, therefore, that, although the Panel’s ‘but for’ test works in this case, it may not work in other cases.”⁽⁵⁵⁾

34.   In US — FSC (Article 21.5 — EC), the Appellate Body clarified that there may be situations where it is possible to apply a “but for” test, namely where the measure at issue is an “exception” to a “general” rule of taxation.⁽⁵⁶⁾ However, a panel is not always required to identify the “general” rule of taxation. In many situations, it may be difficult to do so.⁽⁵⁷⁾ In such circumstances:

“Panels should seek to compare the fiscal treatment of legitimately comparable income to determine whether the contested measure involves the foregoing of revenue which is “otherwise due”, in relation to the income in question …

 

[T]he normative benchmark for determining whether revenue foregone is otherwise due must allow a comparison of the fiscal treatment of comparable income, in the hands of taxpayers in similar situations.”⁽⁵⁸⁾

35.   In Canada — Autos, the Appellate Body found a foregoing of revenue “otherwise due” by comparing Canada’s “normal MFN duty rate” for imports of motor vehicles with the import duty exemption at issue in that case:

“We note, once more, that Canada has established a normal MFN duty rate for imports of motor vehicles of 6.1 per cent. Absent the import duty exemption, this duty would be paid on imports of motor vehicles. Thus, through the measure in dispute, the Government of Canada has, in the words of United States — FSC, “given up an entitlement to raise revenue that it could ‘otherwise’ have raised.” More specifically, through the import duty exemption, Canada has ignored the “defined, normative benchmark” that it established for itself for import duties on motor vehicles under its normal MFN rate and, in so doing, has foregone “government revenue that is otherwise due”.”⁽⁵⁹⁾

36.   The measure at issue in Canada — Autos consisted of the exemption of import duties for motor vehicles imported into Canada by Canadian car manufacturers who fulfilled certain conditions. The Appellate Body rejected the argument that the Canadian measure was “‘analogous’ to the situation described in footnote 1”.⁽⁶⁰⁾ The Appellate Body stated: “footnote 1 … deals with duty and tax exemptions or remissions for exported products. The measure at issue applies, in contrast, to imports … . For this reason, we do not consider that footnote 1 bears upon the import duty exemption at issue in this case.”⁽⁶¹⁾

37. In US — Large Civil Aircraft (2^nd complaint), the Panel found that certain measures involved a foregoing of revenue otherwise due within the meaning of Article 1.1(a)(1)(ii). The Panel recalled the Appellate Body’s guidance in US — FSC and US — FSC (Article 21.5 — EC), which it summarized as follows:

“Therefore, the Appellate Body’s analysis suggests that where it is possible to identify a general rule of taxation applied by the Member in question, a “but for” test can be applied. In other situations, the challenged taxation measure should be compared to the treatment applied to comparable income, for taxpayers in comparable circumstances in the jurisdiction in issue.”⁽⁶²⁾

38.   The Panel in US — Large Civil Aircraft (2^nd complaint) then found that “[a]pplying the guidance from the Appellate Body to the Washington B&O tax reduction, a review of the evidence before the Panel reveals that there is indeed a general rate of taxation applicable to manufacturing activities in the State of Washington and that the tax reduction provided to aircraft manufacturing activities constitutes an exception to this rule”.⁽⁶³⁾ The Panel explained that:

“In these circumstances, where it is not difficult to identify a general rule of taxation and exceptions to it, the guidance provided by the Appellate Body suggests that a “but for” test can be applied. The relevant question is whether, “but for” the challenged tax reduction, a higher B&O tax rate would otherwise apply to manufacturers of commercial aircraft and their components. The answer to this question is in the affirmative. The standard rate for manufacturing and wholesaling activities is 0.484 per cent and for retailing activities is 0.471 per cent. Were it not for the “preferential rate” introduced by HB 2294, aircraft manufacturers would be subject to the rates of 0.484 per cent for manufacturing and wholesaling and 0.471 per cent for retail sales. For these reasons, the Panel finds that the reductions in the B&O tax rates constitute the foregoing of revenue otherwise due and, as a result, are a financial contribution under Article 1.1(a)(1)(ii) of the SCM Agreement.”⁽⁶⁴⁾

(e) Article 1.1(a)(1)(iii): a government provides goods or services other than general infrastructure, or purchases goods

(i) General

39.   In US — Softwood Lumber IV, the Appellate Body, after noting that “[a]n evaluation of the existence of a financial contribution involves consideration of the nature of the transaction through which something of economic value is transferred by a government,”⁽⁶⁵⁾ explained that this provision foresees two types of transaction, and made the following general remarks on the scope of Article 1(a)(1)(iii) in this regard:

“As such, the Article contemplates two distinct types of transaction. The first is where a government provides goods or services other than general infrastructure. Such transactions have the potential to lower artificially the cost of producing a product by providing, to an enterprise, inputs having a financial value. The second type of transaction falling within Article 1.1(a)(1)(iii) is where a government purchases goods from an enterprise. This type of transaction has the potential to increase artificially the revenues gained from selling the product.”⁽⁶⁶⁾

(ii) “provides”

40.   In US — Softwood Lumber IV, the Appellate Body upheld the Panel’s finding that the stumpage arrangements at issue “provide” goods within the meaning of Article 1.1(a)(1)(iii):

“[W]e begin with the ordinary meaning of the term. Before the Panel, the United States pointed to a definition of the term “provides”, which suggested that the term means, inter alia, to “supply or furnish for use; make available”.⁽⁶⁷⁾ This definition is the same as that relied upon by USDOC in making its determination that “regardless of whether the Provinces are supplying timber or making it available through a right of access, they are providing timber” within the meaning of the provision of United States countervailing duty law that corresponds to Article 1.1(a)(1)(iii) of the SCM Agreement. We note that another definition of “provides” is “to put at the disposal of”.⁽⁶⁸⁾

…

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

…

In any event, in our view, it does not make a difference, for purposes of applying the requirements of Article 1.1(a)(1)(iii) of the SCM Agreement to the facts of this case, if “provides” is interpreted as “supplies”, “makes available” or “puts at the disposal of”… .

 

With respect to Canada’s second argument regarding the Agreement on Agriculture and the GATS, the articles cited by Canada involve the provision of “subsidies” or “support”. We note that in Article 1.1(a)(1)(iii) of the SCM Agreement, the term “provides” relates to the provision of “goods” and “services” in the context of describing a certain type of financial contribution. The different context of these provisions means that it is not necessarily appropriate to equate, precisely, the scope of the term “provide” or “provides” as they are used in these different agreements.”⁽⁶⁹⁾

41.   Turning to the facts of that case, the Appellate Body explained that:

“[W]e note that the Panel found that stumpage arrangements give tenure holders a right to enter onto government lands, cut standing timber, and enjoy exclusive rights over the timber that is harvested. Like the Panel, we conclude that such arrangements represent a situation in which provincial governments provide standing timber. Thus, we disagree with Canada’s submission that the granting of an intangible right to harvest standing timber cannot be equated with the act of providing that standing timber. By granting a right to harvest, the provincial governments put particular stands of timber at the disposal of timber harvesters and allow those enterprises, exclusively, to make use of those resources. Canada asserts that governments do not supply felled trees, logs, or lumber through stumpage transactions. In our view, this assertion misses the point, because felled trees, logs and lumber are all distinct from the “standing timber” on which the Panel based its conclusions. Moreover, what matters, for purposes of determining whether a government “provides goods” in the sense of Article 1.1(a)(1)(iii), is the consequence of the transaction. Rights over felled trees or logs crystallize as a natural and inevitable consequence of the harvesters’ exercise of their harvesting rights. Indeed, as the Panel indicated, the evidence suggests that making available timber is the raison d’être of the stumpage arrangements. Accordingly, like the Panel, we believe that, by granting a right to harvest standing timber, governments provide that standing timber to timber harvesters. We therefore agree with the Panel that, through stumpage arrangements, the provincial governments “provide” such goods, within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.”⁽⁷⁰⁾

42.   In EC and certain member States — Large Civil Aircraft, the Appellate Body found that the Panel erred in its interpretation and application of Article 1.1(a)(1)(iii) by failing to recognize that the relevant transaction for purposes of its analysis under Article 1.1(a)(1)(iii) was the provision of goods or services in the form of infrastructure to Airbus, not the creation of that infrastructure.⁽⁷¹⁾ The Appellate Body began by noting that the ordinary meaning of the verb “provide” is to “[s]upply or furnish for use; make available”.⁽⁷²⁾ The Appellate Body confirmed that “when a good or service has not been provided by a government, there cannot be a financial contribution cognizable under Article 1.1(a)(1)(iii)”.⁽⁷³⁾ However, the Appellate Body clarified that:

“While government action concerning the creation of a good or service may not be relevant if that good or service is not ultimately provided to a recipient, we do not understand on what basis such actions would necessarily be excluded in assessing what has been provided. Recalling the meaning of the term “provide” set out above — supply or furnish for use; make available — we consider that this term permits taking into account what was involved in supplying or furnishing that infrastructure. The creation of infrastructure is a precondition, and thus necessary, for the provision of that infrastructure. We therefore do not view the use of the term “provision” in Article 1.1(a)(1)(iii) as excluding the possibility that circumstances of the creation of infrastructure may be relevant to a proper characterization of what it is that is provided.”⁽⁷⁴⁾

(iii) “goods”

43.   In US — Softwood Lumber IV, the Appellate Body upheld the Panel’s finding that nothing in the text of Article 1.1(a)(1)(iii), its context, or the object and purpose of the SCM Agreement supported the conclusion that standing timber is not covered by the term “goods” in Article 1.1(a)(1)(iii). The Panel began by analyzing the ordinary meaning of the term “goods”:

“The meaning of a treaty provision, properly construed, is rooted in the ordinary meaning of the terms used.⁽⁷⁵⁾ The Panel adopted a definition of the term “goods”, drawn from Black’s Law Dictionary, put forward in the submissions of both Canada and the United States, that the term “goods” includes “tangible or movable personal property other than money”.⁽⁷⁶⁾ In particular, the Panel noted that this definition set out in Black’s Law Dictionary contemplates that the term “goods” could include “growing crops, and other identified things to be severed from real property”.⁽⁷⁷⁾ We observe that the Shorter Oxford English Dictionary offers a more general definition of the term “goods” as including “property or possessions” especially — but not exclusively — ”movable property”.⁽⁷⁸⁾

 

These definitions offer a useful starting point for discerning the ordinary meaning of the word “goods”. In particular, we agree with the Panel that the ordinary meaning of the term “goods”, as used in Article 1.1(a)(1)(iii), includes items that are tangible and capable of being possessed. We note, however, as we have done on previous occasions, that dictionary definitions have their limitations in revealing the ordinary meaning of a term.⁽⁷⁹⁾ This is especially true where the meanings of terms used in the different authentic texts of the WTO Agreement are susceptible to differences in scope. We note that the European Communities, in its third participant’s submission, observed that in the French version of the SCM Agreement, Article 1.1(a)(1)(iii) addresses, inter alia, the provision of “biens”.⁽⁸⁰⁾ In the Spanish version, the term used is “bienes”.⁽⁸¹⁾ The ordinary meanings of these terms include a wide range of property, including immovable property. As such, they correspond more closely to a broad definition of “goods” that includes “property or possessions” generally, than with the more limited definition adopted by the Panel. As we have observed previously, in accordance with the customary rule of treaty interpretation reflected in Article 33(3) of the Vienna Convention on the Law of Treaties (the “Vienna Convention”), the terms of a treaty authenticated in more than one language — like the WTO Agreement — are presumed to have the same meaning in each authentic text. It follows that the treaty interpreter should seek the meaning that gives effect, simultaneously, to all the terms of the treaty, as they are used in each authentic language. With this in mind, we find that the ordinary meaning of the term “goods” in the English version of Article 1.1(a)(1)(iii) of the SCM Agreement should not be read so as to exclude tangible items of property, like trees, that are severable from land.”⁽⁸²⁾

44.   After considering the context of the term “goods” in Article 1.1(a)(1)(iii), the Appellate Body considered the consequences of adopting a restrictive interpretation of the scope of Article 1.1(a)(1)(iii):

“[T]o accept Canada’s interpretation of the term “goods” would, in our view, undermine the object and purpose of the SCM Agreement, which is to strengthen and improve GATT disciplines relating to the use of both subsidies and countervailing measures, while, recognizing at the same time, the right of Members to impose such measures under certain conditions.⁽⁸³⁾ It is in furtherance of this object and purpose that Article 1.1(a)(1)(iii) recognizes that subsidies may be conferred, not only through monetary transfers, but also by the provision of non-monetary inputs. Thus, to interpret the term “goods” in Article 1.1 (a)(1)(iii) narrowly, as Canada would have us do, would permit the circumvention of subsidy disciplines in cases of financial contributions granted in a form other than money, such as through the provision of standing timber for the sole purpose of severing it from land and processing it.”⁽⁸⁴⁾

(iv) “other than general infrastructure”

45.   In EC and certain member States — Large Civil Aircraft, the Panel developed an interpretation of the concept of “general infrastructure”:

“Dictionaries define the term “infrastructure” as, inter alia, “installations and services (power stations, sewers, roads, housing, etc.) regarded as the economic foundation of a country,” the “underlying foundation or basic framework (as of a system or organization),” and the “system of public works of a country, state, or region.” The term “general” is defined as “including, involving, or affecting all or nearly all the parts of a (specified or implied) whole as a territory, community, organization, etc.; completely or nearly universal; not partial, particular, local, or sectional” and “involving, applicable to, or affecting the whole; involving, relating to, or applicable to every member of a class, kind, or group”. We consider that the term “general infrastructure”, taken in its ordinary and natural meaning, refers to infrastructure that is not provided to or for the advantage of only a single entity or limited group of entities, but rather is available to all or nearly all entities. In our view, this interpretation is consistent with the ordinary meaning of the term “general” when used to modify the word “infrastructure.” However, we consider that it is difficult if not impossible to define the concept of “general infrastructure” in the abstract.

 

For us, the existence of limitations on access to or use of infrastructure, whether de jure or de facto, is highly relevant in determining whether that infrastructure is “general infrastructure”. However, we are not persuaded by the United States’ argument that the existence of de jure or de facto limitations on access or use is the only legally relevant consideration, and one that will always be determinative. We find no support for such a test in the words of Article 1.1(a)(1)(iii), and we see no reason why other considerations concerning the provision of the infrastructure in question should be categorically excluded from the analysis. In our view, such additional factors could include, inter alia, the circumstances under which the infrastructure in question was created and the nature and type of infrastructure in question.”⁽⁸⁵⁾

46.   The Panel emphasized the need for a case-by-case analysis:

“Thus, we do not consider that there is any form or type of infrastructure which is inherently “general” per se. For instance, in our view, such things as railroads or electrical distribution systems do not necessarily constitute “general infrastructure”.⁽⁸⁶⁾ Rather, the determination whether the provision of the good or service in question is “general infrastructure” or not must be made on a case-by-case basis, taking into account the existence or absence of de jure or de facto limitations on access or use, and any other factors that tend to demonstrate that the infrastructure was or was not provided to or for the use of only a single entity or a limited group of entities. Such factors may relate to the circumstances surrounding the creation of the infrastructure in question, consideration of the type of infrastructure, the conditions and circumstances of the provision of the infrastructure, the recipients or beneficiaries of the infrastructure, and the legal regime applicable to such infrastructure, including the terms and conditions of access to and/or limitations on use of the infrastructure. If an evaluation of relevant facts concerning such factors demonstrates that the infrastructure was provided to a single entity or a limited group of entities, then we believe it cannot properly be considered “general” infrastructure, and consequently falls within the scope of Article 1.1(a)(1) of the SCM Agreement, necessitating further analysis to determine whether a subsidy exists.”⁽⁸⁷⁾

47.   In US — Large Civil Aircraft (2^nd complaint), the key question of interpretation arising out of the arguments advanced by the parties on the issue of “general infrastructure” was whether the existence of limitations on use or access by the public at large is determinative of whether or not an infrastructure improvement measure is general.⁽⁸⁸⁾ The Panel did not consider it necessary to provide a definitive interpretation of the terms “general infrastructure” in Article 1.1(a)(1)(iii) in order to resolve the issues before it.⁽⁸⁹⁾ However, the Panel noted that it had “some doubts” regarding the argument that even if there are “no limitations on the use of or access to an infrastructure improvement measure by the public”, such a measure could nevertheless be found to be something other than “general infrastructure”.⁽⁹⁰⁾

(v) Purchases of services

48.   In US — Large Civil Aircraft (2^nd complaint), the Panel found that purchases of services are excluded from the definition of “financial contribution” in Article 1.1(a). Following an analysis of the terms, context, object and purpose, drafting history, and circumstances of the conclusion of the SCM Agreement⁽⁹¹⁾, the Panel concluded that:

“The Panel is not entitled to assume that the disappearance of certain terms from the text of Article 1 of the SCM Agreement “wasmerely accidental or an inadvertent oversight on the part of either harassed negotiators or inattentive draftsmen”.⁽⁹²⁾ The Panel must “read and interpret the words actually used” in Article 1, not the words that the Panel “may feel should have been used”.⁽⁹³⁾ It is not open to the Panel to impute into Article 1 “words that are not there”.⁽⁹⁴⁾ Having considered the ordinary meaning of the terms of Article 1.1(a)(1)(i), their context, the object and purpose of the SCM Agreement, and the preparatory work and circumstances of the conclusion of the SCM Agreement, the Panel finds that transactions properly characterized as purchases of services are excluded from the scope of Article 1.1(a)(1)(i) of the SCM Agreement.”⁽⁹⁵⁾

(f) Article 1.1(a)(1)(iv): entrustment or direction of private bodies

49.   Article 1.1(a)(1)(iv) was interpreted and applied by the Panels in US — Export Restraints⁽⁹⁶⁾, Korea — Commercial Vessels⁽⁹⁷⁾, US — Anti-Dumping and Countervailing Duties (China)⁽⁹⁸⁾, and in three cases on separate countervailing duty investigations of the same Korean support and restructuring programmes and loan guarantees for a Korean DRAM producer: US — Countervailing Duty Investigation on DRAMS⁽⁹⁹⁾, EC — Countervailing Measures on DRAM Chips⁽¹⁰⁰⁾, and Japan — DRAMs (Korea).⁽¹⁰¹⁾

50.   In US — Softwood Lumber IV, the Appellate Body observed that “Paragraph (iv) of Article 1.1(a)(1) recognizes that paragraphs (i) — (iii) could be circumvented by a government making payments to a funding mechanism or through entrusting or directing a private body to make a financial contribution”.⁽¹⁰²⁾

51.   The Appellate Body examined Article 1.1(a)(1)(iv) in detail in US — Countervailing Duty Investigation on DRAMs. The Appellate Body began by noting that “situations involving exclusively private conduct — that is, conduct that is not in some way attributable to a government or public body — cannot constitute a “financial contribution” for purposes of determining the existence of a subsidy under the SCM Agreement”.⁽¹⁰³⁾ The Appellate Body then explained that Article 1.1(a)(1)(iv) cover situations in which a private body is being used as a “proxy” by the government:

“Paragraphs (i) through (iv) of Article 1.1(a)(1) set forth the situations where there is a financial contribution by a government or public body. The situations listed in paragraphs (i) through (iii) refer to a financial contribution that is provided directly by the government through the direct transfer of funds, the foregoing of revenue, the provision of goods or services, or the purchase of goods.166 By virtue of paragraph (iv), a financial contribution may also be provided indirectly by a government where it “makes payments to a funding mechanism”, or, as alleged in this case, where a government “entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) … which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments”. Thus, paragraphs (i) through (iii) identify the types of actions that, when taken by private bodies that have been so “entrusted” or “directed” by the government, fall within the scope of paragraph (iv). In other words, paragraph (iv) covers situations where a private body is being used as a proxy by the government to carry out one of the types of functions listed in paragraphs (i) through (iii). Seen in this light, the terms “entrusts” and “directs” in paragraph (iv) identify the instances where seemingly private conduct may be attributable to a government for purposes of determining whether there has been a financial contribution within the meaning of the SCM Agreement.”⁽¹⁰⁴⁾

52.   In US — Countervailing Duty Investigation on DRAMs, the Appellate Body also clarified that “entrustment” occurs where a government gives responsibility to a private body, and “direction” refers to situations where the government exercises its authority over a private body:

“The term ‘entrusts’ connotes the action of giving responsibility to someone for a task or an object.⁽¹⁰⁵⁾ … Delegation is usually achieved by formal means, but delegation also could be informal … Therefore, an interpretation of the term “entrusts” that is limited to acts of “delegation” is too narrow.

 

As for the term ‘directs’ … in our view, that the private body under paragraph (iv) is directed ‘to carry out’ a function underscores the notion of authority that is included in some of the definitions of the term ‘direct’ … A ‘command’ (the word used by the Panel) is certainly one way in which a government can exercise authority over a private body in the sense foreseen by Article 1.1(a)(1)(iv), but governments are likely to have other means at their disposal to exercise authority over a private body. Some of these means may be more subtle than a ‘command’ or may not involve the same degree of compulsion. Thus, an interpretation of the term ‘directs’ that is limited to acts of ‘command’ is also too narrow.

 

In most cases, one would expect entrustment or direction of a private body to involve some form of threat or inducement, which could, in turn, serve as evidence of entrustment or direction.”⁽¹⁰⁶⁾

53.   In US — Countervailing Duty Investigation on DRAMs, the Appellate Body further observed that Article 1.1(a)(1)(iv) “is intended to ensure that governments do not evade their obligations under the SCM Agreement by using private bodies to take actions that would otherwise fall within Article 1.1(a)(1), were they to be taken by the government itself. In other words, Article 1.1(a)(1)(iv) is, in essence, an anti-circumvention provision”.⁽¹⁰⁷⁾

54.   In US — Countervailing Duty Investigation on DRAMs, the Appellate Body agreed with Korea that there must be a demonstrable link between the government and the conduct of the private body. It further said that “mere policy pronouncements” are insufficient, and that “entrustment and direction” “imply a more active role than mere acts of encouragement” and cannot be “inadvertent or a mere by-product of government regulation”:

“It follows, therefore, that not all government acts necessarily amount to entrustment or direction. We note that both the United States and Korea agree that ‘mere policy pronouncements’ by a government would not, by themselves, constitute entrustment or direction for purposes of Article 1.1(a)(1)(iv). Furthermore, entrustment and direction — through the giving of responsibility to or exercise of authority over a private body — imply a more active role than mere acts of encouragement. Additionally, we agree with the panel in US — Export Restraints that entrustment and direction do not cover ‘the situation in which the government intervenes in the market in some way, which may or may not have a particular result simply based on the given factual circumstances and the exercise of free choice by the actors in that market’. Thus, government “entrustment” or “direction” cannot be inadvertent or a mere by-product of governmental regulation. This is consistent with the Appellate Body’s statement in US — Softwood Lumber IV that ‘not all government measures capable of conferring benefits would necessarily fall within Article 1.1(a)’; otherwise paragraphs (i) through (iv) of Article 1.1(a) would not be necessary ‘because all government measures conferring benefits, per se, would be subsidies.’” ⁽¹⁰⁸⁾

55.   In Japan — DRAMs (Korea), the Appellate Body recognized that the “commercial unreasonableness” of a financial transaction is a relevant factor in determining the existence of entrustment or direction under Article 1.1(a)(1)(iv):

“We recognize that the commercial unreasonableness of the financial transactions is a relevant factor in determining government entrustment or direction under Article 1.1(a) (1)(iv) of the SCM Agreement, particularly where an investigating authority seeks to establish government intervention based on circumstantial evidence. However, this does not mean that a finding of entrustment or direction can never be made unless it is established that the financial transactions were on non-commercial terms. A finding that creditors acted on the basis of commercial reasonableness, while relevant, is not conclusive of the issue of entrustment or direction. A government could entrust or direct a creditor to make a loan, which that creditor then does on commercial terms. In other words, as a conceptual matter, there could be entrustment or direction by the government, even where the financial contribution is made on commercially reasonable terms.⁽¹⁰⁹⁾

56.   In US — Anti-Dumping and Countervailing Duties (China), the Appellate Body reversed the Panel’s finding that the term “public body” in Article 1.1(a)(1) of the SCM Agreement means “any entity controlled by a government”, and found instead that the term “public body” in the context of Article 1.1(a)(1) of the SCM Agreement covers only those entities that possess, exercise or are vested with governmental authority. The Appellate Body found support for this interpretation in Article 1.1(a)(1)(iv):

“In seeking to refine our understanding of the concept of “public body” in Article 1.1(a)(1) of the SCM Agreement, and, in particular, of the core characteristics that such an entity must share with government in the narrow sense, we consider next the context provided by Article 1.1(a)(1) (iv). As noted above, this provision introduces the concept of “private body”. The meaning of the term “private body” may be helpful in illuminating the essential characteristics of public bodies, because the term “private body” describes something that is not “a government or any public body”. The panel in US — Export Restraints made a similar point when it observed that the term “private body” is used in Article 1.1(a)(1)(iv) as a counterpoint to government or any public body, that is, any entity that is neither a government in the narrow sense nor a public body would be a private body.⁽¹¹⁰⁾

 

The definition of the word “private” includes “of a service, business, etc: provided or owned by an individual rather than the state or a public body” and “of a person: not holding public office or an official position”. We note that both the definition of “public” and of “private” encompass notions of authority as well as of control. The definitions differ, most notably, with regard to the subject exercising authority or control.

 

We also consider that, because the word “government” in Article 1.1(a)(1)(iv) is used in the sense of the collective term “government”, that provision covers financial contributions provided by a government or any public body where “a government or any public body” entrusts or directs a private body to carry out one or more of the type of functions or conduct illustrated in subparagraphs (i)–(iii). Accordingly, subparagraph (iv) envisages that a public body may “entrust” or “direct” a private body to carry out the type of functions or conduct illustrated in subparagraphs (i)–(iii).

 

The verb “direct” is defined as to give authoritative instructions to, to order the performance of something, to command, to control, or to govern an action. The verb “entrust” means giving a person responsibility for a task. The Appellate Body has interpreted “direction” as referring to situations where a government exercises its authority, including some degree of compulsion, over a private body, and “entrustment” as referring to situations in which a government gives responsibility to a private body.⁽¹¹¹⁾ Thus, pursuant to subparagraph (iv), a public body may exercise its authority in order to compel or command a private body, or govern a private body’s actions (direction), and may be responsible for certain tasks to a private body (entrustment). As we see it, for a public body to be able to exercise its authority over a private body (direction), a public body must itself possess such authority, or ability to compel or command. Similarly, in order to be able to give responsibility to a private body (entrustment), it must itself be vested with such responsibility. If a public body did not itself dispose of the relevant authority or responsibility, it could not effectively control or govern the actions of a private body or delegate such responsibility to a private body. This, in turn, suggests that the requisite attributes to be able to entrust or direct a private body, namely, authority in the case of direction and responsibility in the case of entrustment, are common characteristics of both government in the narrow sense and a public body.”⁽¹¹²⁾

57.   In US — Anti-Dumping and Countervailing Duties (China), the Appellate Body also considered the phrase “which would normally be vested in the government” in Article 1.1(a)(1)(iv):

“This brings us to the next contextual element, namely, the phrase “which would normally be vested in the government” in subparagraph (iv). As we see it, the reference to “normally” in this phrase incorporates the notion of what would ordinarily be considered part of governmental practice in the legal order of the relevant Member. This suggests that whether the functions or conduct are of a kind that are ordinarily classified as governmental in the legal order of the relevant Member may be a relevant consideration for determining whether or not a specific entity is a public body. The next part of that provision, which refers to a practice that, “in no real sense, differs from practices normally followed by governments”, further suggests that the classification and functions of entities within WTO Members generally may also bear on the question of what features are normally exhibited by public bodies.”⁽¹¹³⁾

58.   In US — Anti-Dumping and Countervailing Duties (China), the Appellate Body also emphasized that:

“[T]he question of whether an entity constitutes a public body is not tantamount to the question of whether measures taken by that entity fall within the ambit of the SCM Agreement. A finding that a particular entity does not constitute a public body does not, without more, exclude that entity’s conduct from the scope of the SCM Agreement. Such measures may still be attributed to a government and thus fall within the ambit of the SCM Agreement pursuant to Article 1.1(a)(1)(iv) if the entity is a private entity entrusted or directed by a government or by a public body.”⁽¹¹⁴⁾

3. Article 1.1(b): “benefit is thereby conferred”

(a) “benefit”

(i) benefit to recipient vs. cost to government

59.   In Canada — Aircraft, Canada argued that a financial contribution only conferred a “benefit” to the extent that it resulted in a net cost to the government. The Panel rejected Canada’s argument, finding that the ordinary meaning of “benefit” does not include any notion of net “cost to the government”.⁽¹¹⁵⁾ According to the Panel, the ordinary meaning of “benefit” instead “clearly encompasses some form of advantage.”⁽¹¹⁶⁾ In order to establish the existence of that advantage, the Panel found that “it is necessary to determine whether the financial contribution places the recipient in a more advantageous position than would have been the case but for the financial contribution.”⁽¹¹⁷⁾ The Panel’s finding that benefit is determined by reference to the situation of the recipient, rather than any cost to the government, was upheld by the Appellate Body:

“A ‘benefit’ does not exist in the abstract, but must be received and enjoyed by a beneficiary or a recipient. Logically, a ‘benefit’ can be said to arise only if a person, natural or legal, or a group of persons, has in fact received something. The term ‘benefit’, therefore, implies that there must be a recipient. This provides textual support for the view that the focus of the inquiry under Article 1.1 (b) of the SCM Agreement should be on the recipient and not on the granting authority. The ordinary meaning of the word ‘confer’, as used in Article 1.1(b), bears this out. ‘Confer’ means, inter alia, ‘give’, ‘grant’ or ‘bestow’. The use of the past participle ‘conferred’ in the passive form, in conjunction with the word ‘thereby’, naturally calls for an inquiry into what was conferred on the recipient. Accordingly, we believe that Canada’s argument that ‘cost to government’ is one way of conceiving of ‘benefit’ is at odds with the ordinary meaning of Article 1.1(b), which focuses on the recipient and not on the government providing the ‘financial contribution’.”⁽¹¹⁸⁾

(ii) Advantage vis-a-vis the market

60.   The Panel in Canada — Aircraft found that “the only logical basis” for determining whether the financial contribution places the recipient in a more advantageous position than it otherwise would have been “is the market”.⁽¹¹⁹⁾ According to the Panel:

“[A] financial contribution will only confer a ‘benefit’, i.e., an advantage, if it is provided on terms that are more advantageous than those that would have been available to the recipient on the market.”⁽¹²⁰⁾

61.   The Appellate Body upheld the Panel’s finding that “benefit” must be established by determining whether the financial contribution makes the recipient better off vis-à-vis the market than it would have been absent that financial contribution:

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

 

Article 14, which we have said is relevant context in interpreting Article 1.1(b), supports our view that the marketplace is an appropriate basis for comparison.”⁽¹²¹⁾

62.   Numerous dispute settlement reports confirm that a financial contribution confers a “benefit” if it is provided to the recipient on terms more favourable than the recipient could have obtained from the market.⁽¹²²⁾ The Panel in US — Large Civil Aircraft (2^nd complaint) observed that it is now “well established” that a financial contribution confers a benefit within the meaning of Article 1.1(b) of the SCM Agreement if the terms of the financial contribution are more favourable than the terms available to the recipient in the market.⁽¹²³⁾

(iii) The relevant recipient — scope of the SCM Agreement

63.   In Brazil — Aircraft (Article 21.5 — Canada II), the underlying subsidy took the form of government payments to lenders in support of export credit transactions, i.e. financial services. The Panel found that without such support, export credit would likely not have been made available to purchasers of regional aircraft. The Panel provided the following clarification regarding the scope of the SCM Agreement:

“In considering whether PROEX III payments confer a benefit, the Panel notes that the financial contribution in this case is in the form of a (non-refundable) payment, rather than in the form of a loan. As a usual matter, of course, a non-refundable payment will confer a benefit. Thus, there would be no need for complex benefit analysis if PROEX III payments were made directly to producers or to purchasers of Brazilian regional aircraft. In this case, however, the payment is not provided to a producer of regional aircraft. Rather, PROEX III payments are provided to a lender in support of an export credit transaction relating to Brazilian regional aircraft. Thus, while there can be no doubt that PROEX III payments confer a benefit, we consider that the question remains whether PROEX III payments confer a benefit to producers of regional aircraft… . whether the financial contribution has conferred a benefit to producers of regional aircraft — as opposed merely to a benefit to suppliers of financial services — depends upon the impact of PROEX III payments on the terms and conditions of the export credit financing available to purchasers of Brazilian regional aircraft.”⁽¹²⁴⁾

64.   The Panel further clarified its reasoning in two footnotes:

“As the SCM Agreement is an Annex 1A agreement on trade in goods, and as this case relates to alleged export subsidies in respect of a particular good — Brazilian regional aircraft — it is incumbent upon Canada to establish that the benefit derived from PROEX III payments is not retained exclusively by the lender but rather is passed through in some way to producers of regional aircraft.”⁽¹²⁵⁾

65.   In terms of the burden of proof on the complaining party in such cases, the Panel explained that proof of subsidized financial services to the customer would constitute prima facie proof of benefit to the producer:

“We note that PROEX III payments are made in support of export credits extended to the purchaser, and not to the producer, of Brazilian regional aircraft. In our view, however, to the extent Canada can establish that PROEX III payments allow the purchasers of a product to obtain export credits on terms more favourable than those available to them in the market, this will, at a minimum, represent a prima facie case that the payments confer a benefit on the producers of that product as well, as it lowers the cost of the product to their purchasers and thus makes their product more attractive relative to competing products.”⁽¹²⁶⁾

66.   The Panel in Canada — Aircraft Credits and Guarantees endorsed the approach taken in Brazil — Aircraft (Article 21.5 — Canada II).⁽¹²⁷⁾

(iv) Evidence establishing the existence of benefit

67.   The Panel in Japan — DRAMs (Korea) acknowledged the evidentiary problems that may arise in seeking to establish “benefit” by reference to the market, particularly where no “market” benchmark exists:

“As noted above, it is now well established that the concept of benefit is defined by reference to the market, such that a financial contribution confers a ‘benefit’ within the meaning of Article 1.1(b) of the SCM Agreement when it is made available on terms that are more favourable than the recipient could have obtained on the market. While an investigating authority must apply this standard on the basis of relevant evidence, there are no provisions in the SCM Agreement regarding the precise nature of the evidence on which an investigating authority must rely. The guidelines set forth in Article 14 of the SCM Agreement offer some guidance on the types of evidence that might be relevant. However, the Article 14 guidelines do not cover all eventualities. For example, Article 14(b) does not indicate how an investigating authority should establish the existence of benefit conferred by a loan in the event that there are no ‘comparable commercial loans which the firm could actually obtain on the market’.

 

In certain circumstances, an investigating authority might examine the existence of benefit by gathering available evidence of the terms that the market would have offered, and by comparing those terms with those of the financial contribution at issue. This is the approach advocated by Korea in the present case. In other circumstances, an investigating authority might rely on evidence of whether or not the financial contribution was provided on the basis of commercial considerations. This is the approach adopted by the JIA in the present case. In our view, both types of evidence are relevant in determining the existence of benefit. The first, because such evidence provides a market benchmark against which to determine whether or not the terms on offer were more favourable than those available from the market. The second, because evidence of reliance on non-commercial considerations indicates terms more favourable than those available from the market (as the market is presumed to operate on the basis of commercial considerations).⁽¹²⁸⁾ Depending on the particular circumstances of a case, an investigating authority might also rely on other types of evidence that could be equally relevant.”⁽¹²⁹⁾

68.   The Panel went on to note that:

“An investigating authority might also be confronted with both types of evidence described above, and one type of evidence might not support the conclusion suggested by the other. For example, there might be evidence that, although the financial contribution was not provided on the basis of commercial considerations, it would in fact have been provided by “creditors acting in accordance with the ‘usual practice’ in the relevant market”. In such cases, the investigating authority would need to weigh the probative value of one type of evidence against the probative value of the other.”⁽¹³⁰⁾

69.   On appeal from this finding, Korea argued that an entity’s failure to undertake an analysis based on commercial considerations does not necessarily mean that a benefit is conferred. According to Korea, an entity might arrive at a market result without applying market considerations. Without specifically addressing Korea’s argument, the Appellate Body upheld the Panel’s reliance on evidence regarding reliance on non-commercial considerations.⁽¹³¹⁾

(b) “is … conferred”

(i) General

70.   In US — Lead and Bismuth II, the United States argued that the present tense of the verb “is conferred” in Article 1.1 of the SCM Agreement shows that an investigating authority must demonstrate the existence of “benefit” only at the time the “financial contribution” was made. The consequence of this argument was that an investigating authority would not be required to make a finding of benefit in a (subsequent) review of the countervailing measure. The United States asserted that “if WTO Members were required to conduct an ‘ongoing demonstration’ that the original benefit still constitutes an advantage to the relevant company, it would become “nearly impossible” to administer countervailing duty laws.”⁽¹³²⁾ The Appellate Body in US — Lead and Bismuth II rejected the United States’ argument, holding that “Article 1.1 does not address the time at which the ‘financial contribution’ and/or the ‘benefit’ must be shown to exist.”⁽¹³³⁾ On this basis, the Appellate Body found that an investigating authority may, in certain circumstances, be required to confirm the continued existence of benefit, even after countervailing duties have been imposed.⁽¹³⁴⁾

(ii) Mandatory/discretionary conferral of a benefit

Challenging subsidy programmes “as such”

Relevance of the mandatory/discretionary distinction

71.   In Canada — Aircraft Credits and Guarantees, Brazil claimed that certain Canadian programmes were “as such” prohibited export subsidies contrary to Article 3.1(a) of the SCM Agreement. The Panel considered that, as Brazil’s claims regarded programmes as such, the mandatory/discretionary distinction “would traditionally apply”, i.e. that only legislation that requires a violation of GATT/WTO rules could be found to be inconsistent with those rules:

“We recall that Brazil claims that the EDC Canada and Corporate Accounts and IQ are ‘as such’ prohibited export subsidies contrary to Article 3.1(a) of the SCM Agreement. Given that Brazil’s claims are in respect of the programmes as such, the mandatory/discretionary distinction would traditionally apply. Under that distinction — employed in both GATT and WTO cases over the years⁽¹³⁵⁾ — only legislation that requires a violation of GATT/WTO rules could be found to be inconsistent with those rules.

 

In this regard, we recall that the panel in United States — Export Restraints stated:

 

There is a considerable body of dispute settlement practice under both GATT and WTO standing for the principle that only legislation that mandates a violation of GATT/WTO obligations can be found as such to be inconsistent with those obligations. This principle was recently noted and applied by the Appellate Body in United States — Anti-Dumping Act of 1916 (‘1916 Act’):

 

[T]he concept of mandatory as distinguished from discretionary legislation was developed by a number of GATT panels as a threshold consideration in determining when legislation as such — rather than a specific application of that legislation — was inconsistent with a Contracting Party’s GATT 1947 obligations.

…

[P]anels developed the concept that mandatory and discretionary legislation should be distinguished from each other, reasoning that only legislation that mandates a violation of GATT obligations can be found as such to be inconsistent with those obligations.”⁽¹³⁶⁾,⁽¹³⁷⁾

Order of analysis when applying the mandatory/ discretionary distinction

72.   The Panel in Canada — Aircraft Credits and Guarantees further explained that it would examine each of the programmes at issue to see if they mandated a benefit within the meaning of Article 1, and, if so, it would then examine whether that subsidy was contingent upon export performance:⁽¹³⁸⁾

“[W]e shall apply the mandatory/discretionary distinction in this dispute in determining whether the Canadian programmes at issue are as such inconsistent with WTO obligations, i. e., whether the legal texts governing the establishment and operation of these programmes are mandatory in respect of the violations alleged by Brazil. In other words, to assess Brazil’s claim against the EDC as such, we must determine whether the EDC programme mandates the grant of prohibited export subsidies in manner inconsistent with Article 3.1(a) of the SCM Agreement.”⁽¹³⁹⁾

 

“Substantive context” in the application of the mandatory/discretionary distinction

73.   In Canada — Aircraft Credits and Guarantees, Brazil argued that the mandatory/discretionary distinction should be applied in the “substantive context” of the Canadian programme at issue further to the Panel report in US — Export Restraints.⁽¹⁴⁰⁾ The Panel disagreed with Brazil’s interpretation of the Panel report in that case and considered that the relevant “substantive context” in applying the mandatory/discretionary distinction would be the obligations set forth in Article 3.1(a) of the SCM Agreement, and not the programmes under review:

“We note … that the Panel in [United States — Export Restraints] was primarily addressing the issue of whether the mandatory/discretionary distinction had to be addressed by a panel as a threshold matter as argued by the United States in that case, or whether a panel could address this distinction after considering the legal requirements of the applicable provisions of the WTO Agreement. In other words, the phrase ‘substantive context’ refers to Articles 1 and 3 of the SCM Agreement⁽¹⁴¹⁾, and not the measure under review. The point made by the panel in United States — Export Restraints is simply that it may be difficult to determine whether non-conforming conduct is mandated, without first determining what the obligations are against which conformity is measured. In the present case, the relevant ‘substantive context’ in applying the mandatory/discretionary distinction would be the obligations set forth in Article 3.1(a) of the SCM Agreement, and not the programmes under review.

 

We shall therefore apply the mandatory/discretionary distinction in light of Article 3.1(a) of the SCM Agreement. In other words, the question we must address is whether the EDC — the EDC Canada Account and the EDC Corporate Account — or IQ requires Canada to provide subsidies contingent upon export performance within the meaning of Article 3.1(a) of the SCM Agreement.”⁽¹⁴²⁾

Extent of the complainant’s burden of proof

74.   The Panel in Canada — Aircraft Credits and Guarantees considered that, to prove that a given programme “as such” provides export subsidies, the complainant must establish, on the basis of the pertinent legal instruments, that the programmes at issue “mandate subsidisation, in particular, the conferral of a benefit”:

“Whatever the reason for the existence of export credit agencies, to prove that the EDC as such provides export subsidies, Brazil would have to establish that to be the case on the basis of the various legal texts regarding the establishment and operation of the EDC (i. e., both its Canada and its Corporate Accounts).

 

We consider that, despite the fact that Brazil has the burden of proof, it has not pointed to any specific provision in those legal texts that suggests that these programmes mandate subsidisation, in particular, the conferral of a benefit within the meaning of Article 1 of the SCM Agreement. We have nonetheless examined the various legal texts submitted by Brazil and found nothing that points to mandatory subsidisation on the part of the EDC.”⁽¹⁴³⁾

75.   The Panel in Canada — Aircraft Credits and Guarantees clarified that “[t]o satisfy the ‘benefit’ element of Article 1.1 of the SCM Agreement for purposes of a challenge to [the programme at issue] as such, [the complainant] must show that the programme requires conferral of a benefit, not that it could be used to do so, or even that it is used to do so.”⁽¹⁴⁴⁾

76.   The Panel in Korea — Commercial Vessels considered whether the KEXIM legal regime confers a “benefit” as such because the KEXIM Act imposes no obligation on KEXIM to take market conditions into account when disbursing funds. The Panel concluded that it does not:

“We do not consider that a legal instrument may be found to mandate subsidization simply because it neither prohibits subsidization nor requires market conditions to be taken into account. The fact that a legal instrument is silent on subsidization should not lead to a conclusion that the resultant discretion will of necessity be exercised in a manner that results in subsidization. As stated by the Appellate Body in US — Section 211 Appropriations Act, “where discretionary authority is vested in the executive branch of a WTO Member, it cannot be assumed that the WTO Member will fail to implement its obligations under the WTO Agreement in good faith”.⁽¹⁴⁵⁾”⁽¹⁴⁶⁾

77.   The Panel in Korea — Commercial Vessels explained that although certain provisions of a legal instrument might indicate that it was intended as a means of providing subsidies “a conclusion that the [KLR] could be applied in a manner that confers a benefit would not be a sufficient basis to conclude that the KLR as such is mandatory legislation susceptible of inconsistency with Article 3.1(a) of the SCM Agreement.⁽¹⁴⁷⁾,⁽¹⁴⁸⁾

Fiscal advantages

78.   The Panel in Canada — Aircraft Credits and Guarantees clarified that the granting of fiscal advantages per se does not prove that the entity is required to pass on those advantages to its clients in the form of Article 1 subsidies and that even if the programme may have provided subsidies in the past, it does not then follow that the programme under consideration is required to provide such subsidies:

“Brazil submits that ECAs benefit from a competitive advantage over their private sector competitors (because ECAs do not pay taxes, for example), and this enables them to offer more favourable terms than those available in the private sector. According to Brazil, ‘not paying taxes is illustrative of, and an essential prerequisite to, an ECA’s capability to perform its normal mission — to provide export subsidies’. Brazil also implies that there would be no need for the EDC if it did not provide support on terms more favourable than those available on the market. Whether or not these arguments are factually correct, however, we do not see how they establish mandatory subsidization. That an entity enjoys certain fiscal advantages does not in and of itself prove that that entity is required to pass on those advantages to its clients in the form of subsidies within the meaning of Article 1 of the SCM Agreement.⁽¹⁴⁹⁾

 

In our opinion, the fact that ECAs may have a competitive advantage that allows them to undercut private sector competitors does not mean that they are necessarily required to do so. Furthermore, although the EDC may have provided subsidies in the form of loan guarantees, financial services or debt financing in specific transactions⁽¹⁵⁰⁾, it does not follow from this that the EDC is required to provide such subsidies.”⁽¹⁵¹⁾

Compliance with the OECD Arrangement

79.   The Panel in Canada — Aircraft Credits and Guarantees further considered that “[w]hile it may be true that even when a programme complies with the OECD Arrangement, it may — pursuant to the findings of the Panel in Canada — Aircraft (Article 21.5 — Brazil) involve the grant of prohibited export subsidies contrary to Article 3.1(a) of the SCM Agreement, that is not necessarily the case.”⁽¹⁵²⁾

Provision of services not available in the market

80.   The Panel in Canada — Aircraft Credits and Guarantees rejected the complainant’s argument that the programme provided a subsidy by providing services that were not available on the market and clarified that, even if the particular programme had the potential to offer such other services, that fact did not necessarily mean that it was required to do so:

“Even assuming that the provision of services not available on the market necessarily confers a benefit, the fact that the EDC Corporate Account has the ‘ability’ to provide such services does not necessarily mean that it is required to do so. As noted above, to satisfy the ‘benefit’ element of Article 1.1 of the SCM Agreement for purposes of a challenge to the EDC Corporate Account as such, Brazil would have to show that the program requires conferral of a benefit, not that it could be used to do so, or even that it is used to do so.⁽¹⁵³⁾,⁽¹⁵⁴⁾

Challenging subsidy programmes “as applied”

81.   The Panel in Canada — Aircraft Credits and Guarantees considered it inappropriate to make a finding on the subsidies programmes under consideration “as applied” because the complainant’s “as applied” claims were based on evidence from specific transactions, and these claims were not independent from claims regarding specific transactions for which the Panel did make findings. The Panel considered that “findings regarding a programme ‘as applied’ would undermine the utility of the mandatory/discretionary distinction”:

“In our view, there are a number of reasons why it would not be appropriate for us to make separate findings regarding the EDC and IQ programmes ‘as applied’. First, we do not consider that Brazil’s ‘as applied’ claims are independent of its claims regarding ‘specific transactions’. Indeed, Brazil itself acknowledges that ‘[i]n order for Brazil to prevail on its ‘as applied’ claims, the Panel must find that the challenged programmes have been applied in specific transactions in a manner that is inconsistent with the SCM Agreement’. Since Brazil’s ‘as applied’ claims are not independent of its claims against ‘specific transactions’, and since we make findings regarding ‘specific transactions’, we see no practical purpose in making ‘as applied’ findings.

 

… [W]e recall our earlier remarks regarding the application of the mandatory / discretionary distinction. Further, we recall the statement of the panel in United States — Export Restraints that ‘the distinction between mandatory and discretionary legislation has a rational objective in ensuring predictability of conditions for trade. It allows parties to challenge measures that will necessarily result in action inconsistent with GATT/WTO obligations, before such action is actually taken’⁽¹⁵⁵⁾. The conclusion by a panel that a programme is discretionary and therefore is not inconsistent with the WTO Agreement and a subsequent conclusion, by the same panel, that the programme ‘as applied’ (i.e. the manner in which the discretion inherent in that programme has been applied) is inconsistent with the WTO Agreement would be of little value. In our view, findings regarding a programme ‘as applied’ would undermine the utility of the mandatory / discretionary distinction.”⁽¹⁵⁶⁾

(c) Pass-through of benefit: changes in ownership

82.   In US — Lead and Bismuth II, the European Communities challenged the administrative review of the imposition of countervailing duties by US authorities. The US investigating authorities had imposed countervailing duties on products of a company which had received subsidized equity infusions from the UK Government while still under state control, but for which a fair market value price had been paid in a subsequent privatization by the buyers. Both the equity infusion and the privatization had occurred prior to the initiation of the investigation of the US authorities. The applicable US statutory provisions contained an “‘irrebuttable presumption that nonrecurring subsidies benefit merchandise produced by the recipient over time’, without requiring any re-evaluation of those subsidies based on the use or effect of those subsidies or subsequent events in the marketplace.”⁽¹⁵⁷⁾ As a consequence, the competent US authority examined whether “potentially allocable subsidies … could have travelled with the productive unit” following a change in ownership and concluded that a benefit indeed still existed, accruing to the new owners of the privatized corporation. In its report, the Panel first found that, in general, there could not be an irrebuttable presumption that a benefit “continues to flow from untied, non-recurring ‘financial contributions’, even after changes in ownership.”⁽¹⁵⁸⁾ The Panel then stated that it also failed to see how, in the specific case at hand, the new owners of the producing facility could be deemed to have obtained a benefit by previous subsidies bestowed upon the enterprise, if a fair market value had been paid for all productive assets in the course of the privatization.⁽¹⁵⁹⁾ Upon appeal, the Appellate Body held that it saw “no error in the Panel’s conclusion”.⁽¹⁶⁰⁾

83.   Discussing the payment of value by owners of companies, rather than the companies themselves, the Panel in US — Lead and Bismuth II held that “[i]n the context of privatizations negotiated at arm’s length, for fair market value, and consistent with commercial principles, the distinction between a company and its owners is redundant for the purpose of establishing ‘benefit’.”⁽¹⁶¹⁾

84.   In EC and certain member States — Large Civil Aircraft, the Appellate Body reversed the Panel’s finding that the sales transactions at issue did not “extinguish” a portion of past subsidies, because the Panel failed to assess whether the partial privatizations and private-to-private sales transactions were at arm’s-length terms and for fair market value, and to what extent they involved a transfer in ownership and control to new owners. The Appellate Body found that there were insufficient factual findings by the Panel or undisputed facts on the Panel record to complete the legal analysis and determine whether these transactions “extinguished” a portion of past subsidies. The Appellate Body did not a priori exclude the possibility that all or part of a subsidy may be “extracted” by the removal of cash or cash equivalents, but upheld the Panel’s ultimate finding that the “cash extractions” at issue in that case did not remove a portion of past subsidies. The Appellate Body upheld the Panel’s ultimate finding that the “cash extractions” did not result in the “withdrawal” of subsidies within the meaning of Articles 4.7 and 7.8 of the SCM Agreement; and had no basis on which to make a finding that the sales transactions at issue resulted in the “withdrawal” of subsidies within the meaning of Articles 4.7 and 7.8 of the SCM Agreement.⁽¹⁶²⁾

(d) Pass-through of benefit: subsidized inputs

85.   In US — Softwood Lumber III, the Panel, basing itself on the findings of the Appellate Body in US — Lead and Bismuth II,⁽¹⁶³⁾ examined whether considering the facts of this case, the Member conducting a countervailing duty investigation was required to examine if the alleged benefit to the tenure holders from the stumpage programmes were “passed through” to the softwood lumber producers.⁽¹⁶⁴⁾ In the Panel’s view, an authority “may not assume that a subsidy provided to producers of the ‘upstream’ input product automatically benefits unrelated producers of downstream products, especially if there is evidence on the record of arm’s-length transactions between the two.” For the Panel, in such circumstances the investigating authority should “examine whether and to what extent the subsidies bestowed on the upstream producers benefited the downstream producers.”⁽¹⁶⁵⁾

86.   The Panel in US — Softwood Lumber III concluded that where there is “complete identity between the tenure holder/logger and the lumber producer, no pass-through analysis is required.” The Panel found that “where a downstream producer of subject merchandise is unrelated to the allegedly subsidized upstream producer of the input, an authority is not allowed to simply assume that a benefit has passed through.” The Panel concluded that by “not examining whether the independent lumber producers “paid arm’s-length prices” for the logs that they purchased”, the Member defined the benefit to the producers of the subject merchandise inconsistently with the SCM Agreement.⁽¹⁶⁶⁾ There was no appeal in this case.

87.   Pass-through in respect of subsidized inputs was also examined in United States — Softwood Lumber IV. Although the claims in that case were not brought under Article 1.1(b) of the SCM Agreement, the Appellate Body made the following remarks regarding the relevance of that provision to the broader issue at hand:

“This interpretation is also borne out by the general definition of a “subsidy” in Article 1 of the SCM Agreement. According to that definition, a subsidy shall be deemed to exist only if there is both a financial contribution by a government within the meaning of Article 1.1(a)(1),⁽¹⁶⁷⁾ and a benefit is thereby conferred within the meaning of Article 1.1(b).⁽¹⁶⁸⁾ If countervailing duties are intended to offset a subsidy granted to the producer of an input product, but the duties are to be imposed on the processed product (and not the input product), it is not sufficient for an investigating authority to establish only for the input product the existence of a financial contribution and the conferral of a benefit to the input producer. In such a case, the cumulative conditions set out in Article 1 must be established with respect to the processed product, especially when the producers of the input and the processed product are not the same entity. The investigating authority must establish that a financial contribution exists; and it must also establish that the benefit resulting from the subsidy has passed through, at least in part, from the input downstream, so as to benefit indirectly the processed product to be countervailed.

 

In this respect, the Appellate Body’s interpretation of the term “benefit” in Canada — Aircraft is useful:

 

A “benefit” does not exist in the abstract, but must be received and enjoyed by a beneficiary or a recipient. Logically, a “benefit” can be said to arise only if a person, natural or legal, or a group of persons, has in fact received something. The term “benefit”, therefore, implies that there must be a recipient.⁽¹⁶⁹⁾

 

Thus, for a potentially countervailable subsidy to exist, there must be a financial contribution by the government that confers a benefit to a recipient. Where a subsidy is conferred on input products, and the countervailing duty is imposed on processed products, the initial recipient of the subsidy and the producer of the eventually countervailed product, may not be the same. In such a case, there is a direct recipient of the benefit — the producer of the input product. When the input is subsequently processed, the producer of the processed product is an indirect recipient of the benefit — provided it can be established that the benefit flowing from the input subsidy is passed through, at least in part, to the processed product. Where the input producers and producers of the processed products operate at arm’s length, the pass-through of input subsidy benefits from the direct recipients to the indirect recipients downstream cannot simply be presumed; it must be established by the investigating authority. In the absence of such analysis, it cannot be shown that the essential elements of the subsidy definition in Article 1 are present in respect of the processed product. In turn, the right to impose a countervailing duty on the processed product for the purpose of offsetting an input subsidy, would not have been established in accordance with Article VI:3 of the GATT 1994, and, consequently, would also not have been in accordance with Articles 10 and 32.1 of the SCM Agreement.”⁽¹⁷⁰⁾

(e) Pass-through: sales of the subsidized product to unrelated buyers

88.   In Mexico — Olive Oil, the European Communities relied on the findings of the Appellate Body in US — Softwood Lumber IV regarding “pass-through” (see preceding sub-section above) to claim that, pursuant to Article 1.1(b), Mexico should have conducted a pass-through analysis to determine whether any of the subsidy benefit conferred on olive growers was transmitted to the unrelated exporters of olive oil to Mexico. The Panel rejected the European Communities’ claim. The Panel distinguished US — Softwood Lumber IV, since the case before the Panel did not involve the use of inputs (e.g. olives) not covered by the investigation in the production of the product subject to the investigation (i.e. olive oil). Rather, the transactions referred to by the European Communities all involved the investigated product (i.e. olive oil). The Panel found that a pass-through analysis was not required when the product under investigation was sold prior to exportation, even if the sale involved unrelated parties:

“The US — Softwood Lumber IV and US — Canadian Pork jurisprudence does not support the European Communities’ argument that whenever there is any arm’s-length transaction between unrelated companies in the chain of the production of an imported product subject to a countervail investigation, a pass-through analysis must be conducted. To the contrary, as discussed above, in US — Softwood Lumber IV, the Appellate Body found that where an input product and a further manufactured product both are covered by the definition of the product subject to the countervailing duty investigation, a pass-through analysis is not required even if the producers of the respective products are unrelated and operating at arm’s length. If this is the case for certain arm’s length sales of inputs between unrelated firms, then a fortiori the mere existence of an arms’-length transaction between firms involving the product under investigation somewhere between the receipt of the subsidy and the export of the merchandise should not, by itself, give rise to an obligation to conduct a pass-through analysis under Article VI:3 of the GATT 1994 and Article 10 of the SCM Agreement.

 

In this respect, we recall that the SCM Agreement and Article VI:3 of the GATT 1994 both explicitly permit the application of countervailing measures to “offset” subsidies “bestowed upon […] the manufacture, production or export” of a product (emphasis added). Taking the simplest hypothetical example, where a subsidy is provided directly to a producer of a product coming within the scope of a countervailing duty investigation, we do not see how that company’s eventual sale of the product to an unrelated firm (e.g., a distributor) would have a bearing on the fact that a subsidy has been bestowed in respect of the “production” of that product. Taken to its logical conclusion, the argument by the European Communities, that a pass-through analysis must be conducted in every case in which there are transactions between unrelated firms relating to the product under investigation, would mean that a pass-through analysis would be required in almost every countervail investigation, even when the subsidy was provided directly on the investigated product.”⁽¹⁷¹⁾

89.   Turning to the specifics of the European Communities’ claim, the Panel first noted that, whereas the findings of the Appellate Body in US — Softwood Lumber IV were based on Article 10 of the SCM Agreement and Article VI:3 of the GATT 1994, the European Communities’ claim was based inter alia on Article 1.1(b) of the SCM Agreement. The Panel then noted that the European Communities did not argue that a benefit was not conferred in respect of exports of olive oil to Mexico. Rather, the European Communities argued that Mexico did not properly calculate the amount of the benefit that was directly attached to the exports of olive oil. The Panel rejected the European Communities’ argument on the basis that Article 1.1(b) “in itself does not establish a requirement to calculate precisely the amount of the benefit accruing to a particular recipient in a countervail investigation”.⁽¹⁷²⁾

(f) Rebuttal of a prima facie case of benefit

90.   Considering whether a party has rebutted a prima facie case of subsidization established against it, the Panel in Canada — Aircraft stated:

“In order to rebut the prima facie case of ‘benefit’, we consider that Canada must do more than simply demonstrate that the amount of specific ‘benefit’ estimated by Brazil may be incorrect, or that TPC’s rate of return covers Canada’s cost of funds. Rather, Canada must demonstrate that no ‘benefit’ is conferred, in the sense that the terms of the contribution provide for a commercial rate of return.”⁽¹⁷³⁾

91.   In Canada — Aircraft Credits and Guarantees, the Panel noted the statements made by a Member’s government official that the programme financing under consideration would be at a “better rate” than loans available commercially. For the Panel, these statements were an indication that the financing confers a “benefit”:

“We recall that a ‘benefit’ is conferred when a recipient receives a ‘financial contribution’ on terms more favourable than those available to the recipient in the market In our view, Minister Tobin’s statements indicate that the Canada Account financing to Air Wisconsin, which will take the form of a loan, will confer a ‘benefit’ because it will be on terms more favourable than those available to the recipient in the market. This is confirmed by the fact that, in these proceedings, Canada itself initially considered the terms of the Canada Account financing to Air Wisconsin to be more favourable than those available in the market.”⁽¹⁷⁴⁾

(g) Relationship with other Articles

(i) Article 14

92.   Both the Panel and the Appellate Body in Canada — Aircraft held that Article 14 was relevant context for interpretation of the term “benefit”. The Appellate Body considered the explicit reference to Article 1.1 contained in Article 14:

“Although the opening words of Article 14 state that the guidelines it establishes apply ‘[f]or the purposes of Part V’ of the SCM Agreement, which relates to ‘countervailing measures’, our view is that Article 14, nonetheless, constitutes relevant context for the interpretation of ‘benefit’ in Article 1.1(b). The guidelines set forth in Article 14 apply to the calculation of the ‘benefit to the recipient conferred pursuant to paragraph 1 of Article 1.’ (emphasis added) This explicit textual reference to Article 1.1 in Article 14 indicates to us that ‘benefit’ is used in the same sense in Article 14 as it is in Article 1.1. Therefore, the reference to ‘benefit to the recipient’ in Article 14 also implies that the word ‘benefit’, as used in Article 1.1, is concerned with the ‘benefit to the recipient’ and not with the ‘cost to government’ …

…

Article 14, which we have said is relevant context in interpreting Article 1.1(b), supports our view that the marketplace is an appropriate basis for comparison. The guidelines set forth in Article 14 relate to equity investments, loans, loan guarantees, the provision of goods or services by a government, and the purchase of goods by a government. A ‘benefit’ arises under each of the guidelines if the recipient has received a ‘financial contribution’ on terms more favourable than those available to the recipient in the market.”⁽¹⁷⁵⁾

(ii) Article 14(c)

93.   With regard to establishing the existence of a benefit relating to equity guarantees in the framework of the SCM Agreement, the Panel in Canada — Aircraft Credits and Guarantees, noted the relevance of Article 14(c). Accordingly, it considered that a “benefit” could arise if there is a difference between the cost of equity with and without an equity guarantee programme, provided that such difference is not topped by the fees charged by the programme for providing the equity guarantee.⁽¹⁷⁶⁾

(iii) Annex I, item (k)

94.   The Panel in Canada — Aircraft rejected the use of item (k) in the interpretation of the term “benefit”. The Panel noted:

“[W]e are unable to accept … [the] argument that item(k) of the Illustrative List of Annex I of the SCM Agreement constitutes contextual guidance for determining the existence of ‘benefit’ in the specific context of government credit under Article 1. In our view, item (k) of the Illustrative List applies in determining whether or not a prohibited export subsidy exists. We do not consider … that item (k) determines whether or not a ‘subsidy’ exists within the meaning of Article 1 of the SCM Agreement.”⁽¹⁷⁷⁾

95.   In Brazil — Aircraft, the Appellate Body rejected the Panel’s interpretation of the “material advantage” clause in item (k) of the Illustrative List of Export Subsidies as effectively the same interpretation of the term “benefit” in Article 1.1(b) adopted by the Panel in Canada — Aircraft.⁽¹⁷⁸⁾

(iv) Annex IV

96.   The Appellate Body in Canada — Aircraft agreed with the Panel “that Annex IV is not a useful context for interpreting Article 1.1(b)”,⁽¹⁷⁹⁾ stating:

“We fail to see the relevance of this provision to the interpretation of ‘benefit’ in Article 1.1(b) of the SCM Agreement. Annex IV provides a method for calculating the total ad valorem subsidization of a product under the ‘serious prejudice’ provisions of Article 6 of the SCM Agreement, with a view to determining whether a subsidy is used in such a manner as to have ‘adverse effects’. Annex IV, therefore, has nothing to do with whether a ‘benefit’ has been conferred, nor with whether a measure constitutes a subsidy within the meaning of Article 1.1.”⁽¹⁸⁰⁾

4. Relationship of Article 1.1 with other Articles

(i) Footnote 1 and Footnote 59

97.   The Appellate Body in US — FSC rejected the argument that footnote 59 to the SCM Agreement, rather than Article 1.1, was the “controlling legal provision” for the definition of the term “subsidy”. In doing so, the Appellate Body distinguished between the general definition of the term “subsidy” under Article 1.1 and the specific regime which footnote 59 establishes with respect to a certain type of export subsidies:

“Article 1.1 sets forth the general definition of the term ‘subsidy’ which applies ‘for the purpose of this Agreement’. This definition, therefore, applies wherever the word ‘subsidy’ occurs throughout the SCM Agreement and conditions the application of the provisions of that Agreement regarding prohibited subsidies in Part II, actionable subsidies in Part III, non-actionable subsidies in Part IV and countervailing measures in Part V. By contrast, footnote 59 relates to one item in the Illustrative List of Export Subsidies. Even if footnote 59 means — as the United States also argues — that a measure, such as the FSC measure, is not a prohibited export subsidy, footnote 59 does not purport to establish an exception to the general definition of a ‘subsidy’ otherwise applicable throughout the entire SCM Agreement. Under footnote 5 of the SCM Agreement, where the Illustrative List indicates that a measure is not a prohibited export subsidy, that measure is not deemed, for that reason alone, not to be a ‘subsidy’. Rather, the measure is simply not prohibited under the Agreement. Other provisions of the SCM Agreement may, however, still apply to such a ‘subsidy’.”⁽¹⁸¹⁾

98.   After distinguishing between the general definition of a subsidy under Article 1.1 and the special regime applicable to a particular type of export subsidy pursuant to footnote 59, the Appellate Body in US — FSC opined that footnote 1 of the SCM Agreement was equally not relevant in the case at hand, given that the United States’ measure at issue provided for exemptions from corporate income taxes:

“We note, moreover, that, under footnote 1 of the SCM Agreement, ‘the exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption … shall not be deemed to be a subsidy’. (emphasis added) The tax measures identified in footnote 1 as not constituting a ‘subsidy’ involve the exemption of exported products from product-based consumption taxes. The tax exemptions under the FSC measure relate to the taxation of corporations and not products. Footnote 1, therefore, does not cover measures such as the FSC measure.”⁽¹⁸²⁾

5. Relationship with other WTO Agreements

(a) Article XVI of the WTO Agreement

99.   The Appellate Body in US — FSC upheld the Panel’s finding on whether the term “otherwise due” must be interpreted in accordance with the 1981 Understanding adopted by the GATT Council in conjunction with four panel reports on tax legislation, but modified the reasoning.⁽¹⁸³⁾ First, the Appellate Body examined and confirmed the Panel’s finding that the 1981 Council action is not part of the GATT 1994; in so doing, the Appellate Body considered whether the Council action is “another decision” within the meaning of paragraph 1(b)(iv) of the language incorporating the GATT 1994 into the WTO Agreement. The Appellate Body rejected this claim, recalling its holding in Japan — Alcoholic Beverages that GATT Panel reports are only binding as between the parties to the dispute; nevertheless, in the specific case at hand, it noted a certain ambiguity in this regard:

“The opening clause of the 1981 Council action states: ‘The Council adopts these reports on the understanding that with respect to these cases, and in general …’. The 1981 Council action is, therefore, somewhat equivocal in tenor. On the one hand, it is clear from the text that the 1981 Council action relates specifically to the Tax Legislation Cases and is an integral part of the resolution of those disputes. This would suggest that, consistently with our Report in Japan — Alcoholic Beverages, the Council action is binding only on the parties to those disputes, and only for the purposes of those disputes.

 

On the other hand, we note that the opening clause of the 1981 Council action also prefaces the substance of the statement with the words ‘in general’. The United States argues that these words indicate that the 1981 Council action was an ‘authoritative interpretation’ of Article XVI:4 of the GATT 1947 that has ‘general’ application and that, therefore, bound all the contracting parties …

…

[However,] [w]hen the 1981 Council action was adopted, the Chairman of the GATT 1947 Council stated, inter alia, that ‘the adoption of these reports together with the understanding does not affect the rights and obligations of contracting parties under the General Agreement.’ In our view, if the contracting parties had intended to make an authoritative interpretation of Article XVI:4 of the GATT 1947, binding on all contracting parties, they would have said so in reasonably recognizable terms … Thus, we are of the view that the statement of the GATT 1947 Council Chairman is consistent with a reading of the 1981 Council action which views that action as an integral part of the resolution of the Tax Legislation Cases, binding only the parties to those disputes.”⁽¹⁸⁴⁾

100.   After upholding the Panel’s finding that the 1981 Council action did not represent another decision within the meaning of Article 1(b)(iv) of the language incorporating GATT 1994 into the WTO Agreements, the Appellate Body in US — FSC proceeded to examine the status of the 1981 Council action as a “decision” within the meaning of Article XVI:1 of the WTO Agreement. In doing so, the Appellate Body addressed the relationship between Article XVI:4 of the GATT 1994 and Articles 1.1(a)(1) and 3.1(a) of the SCM Agreement:

“We recognize that, as ‘decisions’ within the meaning of Article XVI:1 of the WTO Agreement, the adopted panel reports in the Tax Legislation Cases, together with the 1981 Council action, could provide ‘guidance’ to the WTO … .

…

[T]he provisions of the SCM Agreement do not provide explicit assistance as to the relationship between the export subsidy provisions of the SCM Agreement and Article XVI:4 of the GATT 1994. In the absence of any such specific textual guidance, we must determine the relationship between Articles 1.1(a)(1) and 3.1(a) of the SCM Agreement and Article XVI:4 of the GATT 1994 on the basis of the texts of the relevant provisions as a whole. It is clear from even a cursory examination of Article XVI:4 of the GATT 1994 that it differs very substantially from the subsidy provisions of the SCM Agreement, and, in particular, from the export subsidy provisions of both the SCM Agreement and the Agreement on Agriculture. First of all, the SCM Agreement contains an express definition of the term ‘subsidy’ which is not contained in Article XVI:4. In fact, as we have observed previously, the SCM Agreement contains a broad package of new export subsidy disciplines that ‘go well beyond merely applying and interpreting Articles VI, XVI and XXIII of the GATT 1947’.⁽¹⁸⁵⁾ Next, Article XVI:4 prohibits export subsidies only when they result in the export sale of a product at a price lower than the ‘comparable price charged for the like product to buyers in the domestic market.’ In contrast, the SCM Agreement establishes a much broader prohibition against any subsidy which is ‘contingent upon export performance’. To say the least, the rule contained in Article 3.1(a) of the SCM Agreement that all subsidies which are ‘contingent upon export performance’ are prohibited is significantly different from a rule that prohibits only those subsidies which result in a lower price for the exported product than the comparable price for that product when sold in the domestic market. Thus, whether or not a measure is an export subsidy under Article XVI:4 of the GATT 1947 provides no guidance in determining whether that measure is a prohibited export subsidy under Article 3.1(a) of the SCM Agreement. Also, and significantly, Article XVI:4 of the GATT 1994 does not apply to ‘primary products’, which include agricultural products. Unquestionably, the explicit export subsidy disciplines, relating to agricultural products, contained in Articles 3, 8, 9 and 10 of the Agreement on Agriculture must clearly take precedence over the exemption of primary products from export subsidy disciplines in Article XVI:4 of the GATT 1994.

 

Furthermore, as the Panel observed, the text of the 1981 Council action itself contains reference only to Article XVI:4, and the Chairman of the GATT 1947 Council stated expressly that the 1981 Council action did not affect the Tokyo Round Subsidies Code. We share the Panel’s view that, in these circumstances, it would be incongruous to extend the scope of the action, beyond that intended, to the SCM Agreement. If the 1981 Council action did not affect the Tokyo Round Subsidies Code, which existed in 1981, it is difficult to see how that action could be seen to affect the SCM Agreement, which did not.”⁽¹⁸⁶⁾

 

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III. Article 2  

A. Text of Article 2

Article 2: Specificity

2.1   In order to determine whether a subsidy, as defined in paragraph 1 of Article 1, is specific to an enterprise or industry or group of enterprises or industries (referred to in this Agreement as “certain enterprises”) within the jurisdiction of the granting authority, the following principles shall apply:

 

(a)   Where the granting authority, or the legislation pursuant to which the granting authority operates, explicitly limits access to a subsidy to certain enterprises, such subsidy shall be specific.

 

(b)   Where the granting authority, or the legislation pursuant to which the granting authority operates, establishes objective criteria or conditions(2) governing the eligibility for, and the amount of, a subsidy, specificity shall not exist, provided that the eligibility is automatic and that such criteria and conditions are strictly adhered to. The criteria or conditions must be clearly spelled out in law, regulation, or other official document, so as to be capable of verification.

 

(footnote original) 2 Objective criteria or conditions, as used herein, mean criteria or conditions which are neutral, which do not favour certain enterprises over others, and which are economic in nature and horizontal in application, such as number of employees or size of enterprise.

(c)   If, notwithstanding any appearance of nonspecificity resulting from the application of the principles laid down in subparagraphs (a) and (b), there are reasons to believe that the subsidy may in fact be specific, other factors may be considered. Such factors are: use of a subsidy programme by a limited number of certain enterprises, predominant use by certain enterprises, the granting of disproportionately large amounts of subsidy to certain enterprises, and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy.(3) In applying this subparagraph, account shall be taken of the extent of diversification of economic activities within the jurisdiction of the granting authority, as well as of the length of time during which the subsidy programme has been in operation.

 

(footnote original) 3 In this regard, in particular, information on the frequency with which applications for a subsidy are refused or approved and the reasons for such decisions shall be considered.

2.2   A subsidy which is limited to certain enterprises located within a designated geographical region within the jurisdiction of the granting authority shall be specific. It is understood that the setting or change of generally applicable tax rates by all levels of government entitled to do so shall not be deemed to be a specific subsidy for the purposes of this Agreement.

 

2.3   Any subsidy falling under the provisions of Article 3 shall be deemed to be specific.

 

2.4   Any determination of specificity under the provisions of this Article shall be clearly substantiated on the basis of positive evidence.

B. Interpretation and Application of Article 2

1. Article 2

(a) General

101.   The Appellate Body addressed Article 2 for the first time in US — Anti-Dumping and Countervailing Duties (China). In that case, the Appellate Body provided general guidance on the interpretation of Article 2 in general, its sub-paragraphs, and the relationship between its sub-paragraphs:

“The chapeau of Article 2.1 offers interpretative guidance with regard to the scope and meaning of the subparagraphs that follow. The chapeau frames the central inquiry as a determination as to whether a subsidy is specific to “certain enterprises” within the jurisdiction of the granting authority and provides that, in an examination of whether this is so, the “principles” set out in subparagraphs (a) through (c) “shall apply”. We consider that the use of the term “principles” — instead of, for instance, “rules” — suggests that subparagraphs (a) through (c) are to be considered within an analytical framework that recognizes and accords appropriate weight to each principle. Consequently, the application of one of the subparagraphs of Article 2.1 may not by itself be determinative in arriving at a conclusion that a particular subsidy is or is not specific.

 

Article 2.1(a) establishes that a subsidy is specific if the granting authority, or the legislation pursuant to which the granting authority operates, explicitly limits access to that subsidy to eligible enterprises or industries. Article 2.1(b) in turn sets out that specificity “shall not exist” if the granting authority, or the legislation pursuant to which the granting authority operates, establishes objective criteria or conditions governing the eligibility for, and the amount of, the subsidy, provided that eligibility is automatic, that such criteria or conditions are strictly adhered to, and that they are clearly spelled out in an official document so as to be capable of verification.⁽¹⁸⁷⁾ These provisions thus set out indicators as to whether the conduct or instruments of the granting authority discriminate or not: Article 2.1(a) describes limitations on eligibility that favour certain enterprises, whereas Article 2.1 (b) describes criteria or conditions that guard against selective eligibility. Finally, Article 2.1(c) sets out that, notwithstanding any appearance of non-specificity resulting from the principles laid down in subparagraphs (a) and (b), other factors may be considered if there are reasons to believe that a subsidy may, in fact, be specific in a particular case.⁽¹⁸⁸⁾

 

We observe that Article 2.1(a) and (b) identify certain common elements in the analysis of the specificity of a subsidy. For instance, these principles direct scrutiny to the eligibility requirements imposed by “the granting authority, or the legislation pursuant to which the granting authority operates”. This is a critical feature of both provisions as it situates the analysis for assessing any limitations on eligibility in the particular legal instrument or government conduct effecting such limitations. We also note that both provisions turn on indicators of eligibility for a subsidy. Article 2.1(a) thus focuses not on whether a subsidy has been granted to certain enterprises, but on whether access to that subsidy has been explicitly limited. This suggests that the focus of the inquiry is on whether certain enterprises are eligible for the subsidy, not on whether they in fact receive it. Similarly, Article 2.1(b) points the inquiry towards “objective criteria or conditions governing the eligibility for, and the amount of, a subsidy”. Article 2.1(b) also indicates other legal and practical considerations relevant to the analysis, all of which centre on the manner in which the criteria or conditions of eligibility are prescribed and adhered to.

 

Notwithstanding the fact that the principles under subparagraphs (a) and (b) may point to opposite results, there may be situations in which assessing the eligibility for a subsidy will give rise to indications of specificity and nonspecificity as a result of the application of Article 2.1(a) and (b). This is because Article 2.1(a) identifies circumstances in which a subsidy is specific, whereas Article 2.1(b) establishes circumstances in which a subsidy shall be regarded as non-specific. We can conceive, for example, of situations in which an initial indication of specificity under Article 2.1(a) may need to be considered further if additional evidence demonstrates that the subsidy in question is available on the basis of objective criteria or conditions within the meaning of Article 2.1(b). This therefore suggests that, where the eligibility requirements of a measure present some indications pointing to subparagraph (a) and certain others pointing to subparagraph (b), the specificity analysis must accord appropriate consideration to both principles.

 

Furthermore, the introductory sentence of Article 2.1(c) establishes that “notwithstanding any appearance of non-specificity” resulting from the application of Article 2.1(a) and (b), a subsidy may nevertheless be found to be “in fact” specific. The reference in Article 2.1(c) to “any appearance of non-specificity” resulting from the application of Article 2.1(a) and (b) supports the view that the conduct or instruments of a granting authority may not clearly satisfy the eligibility requirements of Article 2.1(a) or (b), but may nevertheless give rise to specificity in fact. In such circumstances, application of the factors under Article 2.1(c) to factual features of a challenged subsidy is warranted. Since an “appearance of non-specificity” under Article 2.1(a) and (b) may still result in specificity in fact under Article 2.1(c) of the SCM Agreement, this reinforces our view that the principles in Article 2.1 are to be interpreted together.

 

Accordingly, we consider that a proper understanding of specificity under Article 2.1 must allow for the concurrent application of these principles to the various legal and factual aspects of a subsidy in any given case. Yet, we recognize that there may be instances in which the evidence under consideration unequivocally indicates specificity or non-specificity by reason of law, or by reason of fact, under one of the subparagraphs, and that in such circumstances further consideration under the other subparagraphs of Article 2.1 may be unnecessary. For instance, Article 2.1(c) applies only when there is an “appearance” of non-specificity. Likewise, a granting authority or authorizing legislation may explicitly limit access to a subsidy to certain enterprises within the meaning of Article 2.1(a), but not provide objective criteria or conditions that could be scrutinized under Article 2.1(b). We do, however, caution against examining specificity on the basis of the application of a particular subparagraph of Article 2.1, when the potential for application of other subparagraphs is warranted in the light of the nature and content of measures challenged in a particular case.”⁽¹⁸⁹⁾

(b) “certain enterprises”

102.   The Panel in US — Upland Cotton considered that an “industry” or “group of industries”, for the purposes of the chapeau of Article 2, may generally be understood in terms of producers of particular types of product, although the breadth of this concept of “industry” may depend on several factors in a given context. Hence, the specificity of a subsidy can only be assessed on a case-by-case basis:

“According to the text of Article 2 of the SCM Agreement, a subsidy is ‘specific’ if it is specific to an enterprise or industry or group of enterprises or industries (referred to in the SCM Agreement as “certain enterprises”) within the jurisdiction of the granting authority. This is one way in which the SCM Agreement serves to define requirements as to the ‘recipients’ of the benefit bestowed by a subsidy. Beyond setting out this rather general principle, Article 2 of the SCM Agreement does not speak with precision about when ‘specificity’ may be found.

 

Looking more closely at the textual terms used in the chapeau of Article 2 of the SCM Agreement, the term ‘industry’ may be defined as ‘a particular form or branch of productive labour; a trade; a manufacture’. ‘Specificity’ extends to a group of industries because the words ‘certain enterprise’ are defined broadly in the opening terms of Article 2.1, as an enterprise or industry or group of enterprises or industries.

…

We nevertheless believe that an industry, or group of ‘industries’, may be generally referred to by the type of products they produce. To us, the concept of an ‘industry’ relates to producers of certain products. The breadth of this concept of ‘industry’ may depend on several factors in a given case. At some point that is not made precise in the text of the agreement, and which may modulate according to the particular circumstances of a given case, a subsidy would cease to be specific because it is sufficiently broadly available throughout an economy as not to benefit a particular limited group of producers of certain products. The plain words of Article 2.1 indicate that specificity is a general concept, and the breadth or narrowness of specificity is not susceptible to rigid quantitative definition. Whether a subsidy is specific can only be assessed on a case-by-case basis.

 

We see merit in the shared view of the parties that the concept of “specificity” in Article 2 of the SCM Agreement serves to acknowledge that some subsidies are broadly available and widely used throughout an economy and are therefore not subject to the Agreement’s subsidy disciplines. The footnote to Article 2.1 defines the nature of ‘objective criteria or conditions’ which, if used to determine eligibility, would preclude an affirmative conclusion of specificity. Such criteria are ‘neutral, which do not favour certain enterprises over others, and which are economic in nature and horizontal in application, such as number of employees or size of enterprise.’”⁽¹⁹⁰⁾

103.   The Appellate Body in US — Anti-Dumping and Countervailing Duties (China) considered the meaning of “certain enterprises” in Article 2:

“Furthermore, a subsidy is specific under Article 2.1(a) of the SCM Agreement when the explicit limitation reserves access to that subsidy to “certain enterprises”. The chapeau of Article 2.1 establishes that the term “certain enterprises” refers to “an enterprise or industry or group of enterprises or industries”. We first note that the word “certain” is defined as “[k]nown and particularized but not explicitly identified: (with sing. noun) a particular, (with pl. noun) some particular, some definite”. The word “group”, in turn, is commonly defined as “[a] number of people or things regarded as forming a unity or whole on the grounds of some mutual or common relation or purpose, or classed together because of a degree of similarity”. Turning to the nouns qualified by “certain” and “group”, we see that “enterprise” may be defined as “[a] business firm, a company”, whereas “industry” signifies “[a] particular form or branch of productive labour; a trade, a manufacture”. We note that the panel in US — Upland Cotton considered that “an industry, or group of ‘industries’, may be generally referred to by the type of products they produce”; that “the concept of an ‘industry’ relates to producers of certain products”; and that the “breadth of this concept of ‘industry’ may depend on several factors in a given case”.⁽¹⁹¹⁾ The above suggests that the term “certain enterprises” refers to a single enterprise or industry or a class of enterprises or industries that are known and particularized. We nonetheless agree with China that this concept involves “a certain amount of indeterminacy at the edges”, and with the panel in US — Upland Cotton that any determination of whether a number of enterprises or industries constitute “certain enterprises” can only be made on a case-by-case basis.⁽¹⁹²⁾,⁽¹⁹³⁾

104.   In EC and certain member States — Large Civil Aircraft, the Appellate Body addressed a subsidy programme in which separate groupings of entities had access to separate funding pools:

“[W]e do not consider that explicit limitations on access to a subsidy to entities active in one sector of the economy will produce a different result under Article 2.1(a) by virtue of the fact that separate groupings of entities have access to other pools of funding under that programme. Certainly, if access to the same subsidy is limited to some grouping of enterprises or industries, an investigating authority or panel would be required to assess whether the eligible recipients can be collectively defined as “certain enterprises”. Where access to certain funding under a subsidy programme is explicitly limited to a grouping of enterprises or industries that qualify as “certain enterprises”, this in our view leads to a provisional indication of specificity within the meaning of Article 2.1(a), irrespective of how other funding under that programme is distributed. The European Union does not challenge the Panel’s conclusion that the entities eligible for R&TD grants in the aeronautics sector may be considered to constitute “certain enterprises”. We also consider that, on the basis of the evidence before it, the Panel could properly have concluded that those eligible to receive funding allocated to research in the aeronautics sector qualified as “certain enterprises”. For these reasons, we see no grounds to disturb the Panel’s conclusion that the evidence before it “indicate[d] that amounts of subsidization were explicitly set aside under each of the relevant Framework Programmes for the research efforts of ‘certain enterprises’.”⁽¹⁹⁴⁾

(c) Individual payments under a generalized programme necessarily specific?

105.   In the context of a dispute regarding an investigating authority’s determination of de jure specificity, the Panel in Japan — DRAMs (Korea) addressed the concern that, if an investigating authority were to focus on individual payments made under a subsidy programme, rather than the subsidy programme per se, a finding of specificity would always ensue:

“In reviewing Korea’s claim, we have given careful consideration to Korea’s argument that the JIA’s approach to specificity would mean that investigating authorities would no longer need to show that programmes were specific, but could focus instead on specific transactions under those programmes. As a general matter, though, if an investigating authority were to focus on an individual transaction, and that transaction flowed from a generally available support programme whose normal operation would generally result in financial contributions on predetermined terms (that are therefore not tailored to the recipient company), that individual transaction would not, in our view, become “specific” in the meaning of Article 2.1 simply because it was provided to a specific company. An individual transaction would be “specific”, though, if it resulted from a framework programme whose normal operation (1) does not generally result in financial contributions, and (2) does not pre-determine the terms on which any resultant financial contributions might be provided, but rather requires (a) conscious decisions as to whether or not to provide the financial contribution (to one applicant or another), and (b) conscious decisions as to how the terms of the financial contribution should be tailored to the needs of the recipient company.”⁽¹⁹⁵⁾

106.   The Panel in Japan — DRAMs (Korea) also observed that the relevant restructuring subsidies were provided pursuant to government entrustment or direction, evidenced in part by the government’s intent to save the recipient company. This led the Panel to conclude:

“In general, subsidies which are provided pursuant to government entrustment or direction motivated by an intent to save a single company from insolvency might reasonably be found to be specific to that company.”⁽¹⁹⁶⁾

2. Article 2.1(a): “explicitly limits”

107.   The Panel in EC and certain member States — Large Civil Aircraft defined the term “explicitly limits” in Article 2.1(a) as follows:

“The specificity principle set out in Article 2.1(a) focuses on whether the granting authority, or the legislation pursuant to which the granting authority operates, explicitly limits access to a subsidy to certain enterprises. It follows from the ordinary meaning of the word “explicit” that it is not any limitation on access to a subsidy to certain enterprises that will make it specific within the meaning of Article 2.1(a), but only a limitation that “[d]istinctly express[es] all that is meant; leaving nothing merely implied or suggested”; a limitation that is “unambiguous” and “clear”. In US — Upland Cotton, the panel observed that the concept of specificity under Article 2.1 of the SCM Agreement has to do with whether a subsidy is “sufficiently broadly available throughout an economy as not to benefit a particular limited group of producers of certain products”.⁽¹⁹⁷⁾ While we can broadly agree with this statement (particularly in the context of the facts at issue in US — Upland Cotton), we would add that it is not only a limitation to a “group of producers of certain products” that is the focus of the concept of specificity. In our view, the notion of specificity extends to understanding whether a subsidy is sufficiently broadly available throughout an economy so as not to benefit “certain enterprises” as defined in Article 2.1 — that is, a particular enterprise or industry or a particular group of enterprises or industries. Thus, a finding of specificity under Article 2.1(a) requires the establishment of the existence of a limitation that expressly and unambiguously restricts the availability of a subsidy to “certain enterprises”, and thereby does not make the subsidy “sufficiently broadly available throughout an economy”.”⁽¹⁹⁸⁾

108.   Along the same lines, the Panel in US — Large Civil Aircraft (2^nd complaint) stated that:

“Article 2.1(a) focuses on whether the granting authority, or the legislation pursuant to which the granting authority operates, explicitly limits access to a subsidy to “certain enterprises”, as defined in the chapeau to Article 2. According to the ordinary meaning of the term “explicit”, not just any limit on access to a subsidy will render it specific within the meaning of Article 2.1(a). Rather, the limitation must “distinctly express all that is meant; leaving nothing merely implied or suggested”. The limitation must be “unambiguous” and “clear”.⁽¹⁹⁹⁾ In other sections of the SCM Agreement, such as Article 3, which refers to “in law or in fact” export contingency, panels and the Appellate Body have distinguished between de jure and de facto analyses by stating that a de jure analysis should be confined to the text of the relevant legislation or instrument in issue.⁽²⁰⁰⁾ Although Article 2.1(a) of the SCM Agreement does not specifically refer to “in law” or “de jure” specificity, we note that Article 2.1(c) refers to “in fact” specificity, perhaps as a means of distinguishing the analysis required under Article 2.1(c) from that required under Article 2.1(a). However, given that Article 2.1(a) provides that “where the granting authority, or the legislation pursuant to which the granting authority operates, explicitly limits access to a subsidy”, it is clear that the express limitation can be found either in the legislation by which the granting authority operates, or in other statements or means by which the granting authority expresses its will.”⁽²⁰¹⁾

3. Article 2.1(c): de facto specificity

(a) General

109.   In US — Softwood Lumber IV, Canada argued that a subsidy is “specific” only when the government “deliberately limits” access to certain enterprises. This argument was rejected by the Panel on the grounds that Article 2 of the SCM Agreement is concerned with the distortion that is created by a subsidy which, either in law or in fact, is not broadly available. Furthermore, in the view of the Panel, there is:

“[N]o basis in the text of Article 2, and 2.1 (c) SCM Agreement in particular, for Canada’s argument that if the inherent characteristics of the good provided limit the possible use of the subsidy to a certain industry, the subsidy will not be specific unless access to this subsidy is limited to a sub-set of this industry, i.e. to certain enterprises within the potential users of the subsidy engaged in the manufacture of similar products.”⁽²⁰²⁾

110.   The Panel in EC — Countervailing Measures on DRAM Chips discussed factors which an investigating authority may consider when it has reasons to believe that the subsidy is de facto specific in the sense of Article 2.1(c) of the SCM Agreement:

“[A]n authority … may consider such other factors as the use of a subsidy programme by a limited number of certain enterprises, predominant use by certain enterprises, the granting of disproportionately large amounts of subsidy to certain enterprises, and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy.”⁽²⁰³⁾

(b) “other factors may be considered”

111.   On the argument by Canada that an investigating authority is required to examine all four factors mentioned in Article 2.1(c) in order to determine de facto specificity, the Panel in US — Softwood Lumber IV stated that Article 2.1(c) provides that if there are reasons to believe that the subsidy may in fact be specific, other factors “may” be considered. In the view of the Panel, the use of the verb “may,” rather than “shall” indicates that if there are reasons to believe that the subsidy may in fact be specific, an authority may want to look at any of the four factors or indicators of specificity.⁽²⁰⁴⁾

(c) “account be taken of”

112.   In EC and certain member States — Large Civil Aircraft, the Panel stated that:

“The last sentence of Article 2.1(c) provides that: “In applying this subparagraph, account shall be taken of … the length of time during which the subsidy programme has been in operation”. To take something into account means to take something into reckoning or consideration; to take something on notice. Therefore, in the context of the third specificity factor, the last sentence of Article 2.1(c) requires that the length of time during which the relevant subsidy programme has been in operation must form part of the consideration or reckoning of whether the amount of a subsidy granted to certain enterprises pursuant to that same subsidy programme is disproportionately large.”⁽²⁰⁵⁾

(d) “disproportionately large”

113.   In EC and certain member States — Large Civil Aircraft, the Panel discussed the meaning of a “disproportionately large” amount of a subsidy in the context of Article 2.1(c). Among other things, the Panel considered that:

“Something may be said to be “disproportionate” when it is “lacking proportion”. The ordinary meaning of the word “proportion” includes “a portion, a part, a share, esp. in relation to a whole”, “a relative amount or number”, “a comparative relation or ratio between things in size, quantity, number, etc.”. These meanings suggest that the inquiry that must be undertaken when assessing whether the amount of a subsidy is “disproportionately large” will involve identifying the relationship between the amount of the subsidy at issue and something else that is “a whole”, and determining whether that relationship demonstrates that the amount of subsidy is greater than the amount it would need to be in order to be proportionate — i.e., not lacking proportion… .

…

In our view, the language of Article 2.1(c), when interpreted in its proper context and in the light of its object and purpose, suggests that where the subsidy at issue has been granted pursuant to a subsidy programme, that programme should normally be used for the purpose of identifying the “baseline” or “reference data” needed to perform a disproportionality analysis. However, as the United States points out, the absence of any explicit reference to “a subsidy programme” in the language of Article 2.1(c) suggests that it does not require that a subsidy programme be used for this purpose in each and every factual circumstance.”⁽²⁰⁶⁾

(e) “predominant use”

114.   In EC and certain member States — Large Civil Aircraft, the Panel discussed the meaning of a “predominant use” in the context of Article 2.1(c). Among other things, the Panel considered that:

“The second specificity factor identified in Article 2.1(c) is “predominant use by certain enterprises”. As we have already noted, when read in the light of the first specificity factor (“use of a subsidy programme by a limited number of certain enterprises”), it is clear that this factor indirectly refers to “predominant use” of “a subsidy programme”. The ordinary meaning of the word “predominant” includes “constituting the main or strongest element; prevailing”. Thus,” predominant use [of a subsidy programme] by certain enterprises” may be simply understood to be a situation where a subsidy programme is mainly, or for the most part, used by certain enterprises.

 

In considering whether there is “predominant use [of a subsidy programme] by certain enterprises” for the purpose of making a finding of specificity, the last sentence of Article 2.1(c) requires that account be taken of: (i) “the extent of diversification of economic activities within the jurisdiction of the granting authority”; and (ii) “the length of time during which the subsidy programme has been in operation”. As with determining whether a subsidy has been granted in “disproportionately large amounts”, the relevance of these two factors to understanding whether there has been “predominant use [of a subsidy programme] by certain enterprises” will depend upon the particular facts. Thus, for example, where a subsidy programme operates in an economy made up of only a few industries, the fact that those industries may have been the main beneficiaries of a subsidy programme may not necessarily demonstrate “predominant use”. Rather, use of the subsidy programme by those industries may simply reflect the limited diversification of economic activities within the jurisdiction of the granting authority. On the other hand, the same subsidy programme operating in the context of a highly diversified economy that is used mainly, or for the most part, by only a few industries would tend to indicate “predominant use”.

 

Likewise, when taking into account “the length of time during which the subsidy programme has been in operation”, the use of a subsidy programme by certain enterprises may not necessarily indicate “predominant use” in the context of a relatively new subsidy programme that has not yet operated for enough time to understand its full impact on an economy. Moreover, it may not always make sense to determine whether there has been “predominant use” over the entire life of a subsidy programme, where that programme has operated for decades that have witnessed a material change in the importance of the subsidized activities in the wider economy and/or the granting authority’s economic priorities. As with determining whether a subsidy has been granted under a long-standing subsidy programme in “disproportionately large amounts”, a determination of whether there has been “predominant use” of a long-standing subsidy programme should involve taking into account the extent to which it would be reasonable and appropriate to determine whether the subsidy at issue is in fact sufficiently broadly available throughout an economy so as not to benefit “certain enterprises” on the basis of the entire duration of the subsidy programme or some shorter period of time.”⁽²⁰⁷⁾

4. Article 2.2: regional specificity

115.   In EC and certain member States — Large Civil Aircraft, the Panel addressed the question whether a subsidy granted by a regional authority must, to be specific within the meaning of Article 2.2, not only be limited to a designated region within the territory of the granting authority, but must in addition be limited to only a subset of enterprises within that region. The Panel concluded that Article 2.2 is properly understood to provide that a subsidy available in a designated region within the territory of the granting authority is specific, even if it is available to all enterprises in that designated region:

“Article 2.2 is not particularly clearly drafted. It could be understood, based on the text alone, as establishing specificity on the basis of a geographical limitation on the recipients (“within a designated region”), which is the United States’ position. It could also be understood to establish specificity on the double basis posited by the European Communities — “certain”, i.e., not all, enterprises, “within a designated region”. While the text, standing alone, is not unambiguous in this respect, when the text is considered in its context and in light of its object and purpose, it is clear to us that Article 2.2 is properly understood to provide that a subsidy available in a designated region within the territory of the granting authority is specific, even if it is available to all enterprises in that designated region.”⁽²⁰⁸⁾

116.   Likewise, the Panel in US — Anti-Dumping and Countervailing Duties (China) also considered the question whether the term “certain enterprises” in Article 2.2 covers all enterprises located within the designated geographical region within the jurisdiction of the granting authority, or is limited to some subset thereof; the Panel reached the same conclusion as the Panel in EC and certain member States — Large Civil Aircraft. The Panel stated that the term “certain enterprises” in Article 2.2 “refers to those enterprises located within, as opposed to outside, the designated geographical region in question, with no further limitation within the region being required”.⁽²⁰⁹⁾

117.   The Panel in US — Anti-Dumping and Countervailing Duties (China) also addressed the question whether a “designated geographical region” in the sense of Article 2.2 must necessarily have some sort of formal administrative or economic identity, or whether any identified tract of land within the territory of a granting authority can be a “designated geographical region” for the purposes of a specificity finding pursuant to Article 2.2. The Panel concluded that a “designated geographic region” in the sense of Article 2.2 “can encompass any identified tract of land within the jurisdiction of a granting authority”.⁽²¹⁰⁾

5. Article 2.3: subsidies falling under Article 3 deemed to be specific

118.   The Panel in Indonesia — Autos was called upon to decide whether the Indonesian subsidies contingent upon the use of domestic over imported goods were specific:

“As with any analysis under the SCM Agreement, the first issue to be resolved is whether the measures in question are subsidies within the meaning of Article 1 that are specific to an enterprise or industry or group of enterprises or industries within the meaning of Article 2 … In this case, the European Communities, the United States and Indonesia agree that these measures are specific subsidies within the meaning of those articles … Further, the European Communities, the United States and Indonesia agree that these subsidies are contingent upon the use of domestic over imported goods within the meaning of Article 3.1(b), and that they are therefore deemed to be specific pursuant to Article 2.3 of the Agreement. In light of the views of the parties, and given that nothing in the record would compel a different conclusion, we find that the measures in question are specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement”⁽²¹¹⁾

119.   The Panel in Canada — Autos quoted Article 2.3 of the SCM Agreement and stated that “[g]iven that the central issue of the claims under the SCM Agreement in this dispute is whether the import duty exemption falls within the provisions of Article 3, we need not, and do not, address the question of specificity separately.⁽²¹²⁾

120.   In US — FSC, the Panel found that the measure at issue was a subsidy within the meaning of Article 1, and then explained that:

“A subsidy is subject to the provisions of the SCM Agreement only if it is specific within the meaning of Article 2. Article 2.3 provides, however, that “[a]ny subsidy falling under the provisions of Article 3 shall be deemed to be specific”. Thus, we proceed directly to our analysis of whether the Act is contingent upon export performance and upon the use of domestic over imported goods within the meaning of Article 3 of the SCM Agreement.”⁽²¹³⁾

121.   The Panel in US — Upland Cotton applied Article 2.3 after finding that certain payments were prohibited subsidies under Articles 3.1(a) and 3.1(b):

“We recall our findings that user marketing (Step 2) payments to domestic users and exporters under section 1207(a) of the FSRI Act of 2002 are prohibited subsidies under Articles 3.1(a) and (b) of the SCM Agreement. As we have found that user marketing (Step 2) payments to domestic users and exporters under section 1207(a) of the FSRI Act of 2002 ‘fall within the provisions of Article 3’,we consequently find that these are ‘specific’ subsidies within the meaning of Article 2.3 of the SCM Agreement. Furthermore, because of the substantial similarities between user marketing (Step 2) payments to domestic users and exporters under section 1207(a) of the FSRI Act of 2002 and under section 136 of the FAIR Act of 1996, we find that the latter are also specific within the meaning of Article 2.3 of the SCM Agreement.”⁽²¹⁴⁾

122.   The Panel in Korea — Commercial Vessels concluded that the effect of Article 2.3 is not restricted to prohibited export subsidy claims, and that Article 2.3 applies in respect of the entirety of the SCM Agreement. Thus “a subsidy that is specific under Article 2.3 (as a result of export contingency) is specific for the purpose of both Part II (prohibited export subsidy) and Part III (actionable subsidy) claims.”⁽²¹⁵⁾

123.   In US — Large Civil Aircraft (2^nd complaint), the Panel concluded that certain export subsidies were specific by virtue of Article 2.3.⁽²¹⁶⁾

 

Part II: Prohibited Subsidies

 

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IV. Article 3  

A. Text of Article 3

Article 3: Prohibition

3.1   Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited:

 

(a)   subsidies contingent, in lawor in fact(4),whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I(5);

 

(footnote original) 4 This standard is met when the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings. The mere fact that a subsidy is granted to enterprises which export shall not for that reason alone be considered to be an export subsidy within the meaning of this provision.

(footnote original) 5 Measures referred to in Annex I as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement.

(b)   subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.

 

3.2   A Member shall neither grant nor maintain subsidies referred to in paragraph 1.

B. Interpretation and Application of Article 3

1. “Except as provided in the Agreement on Agriculture”

124.   In US — Upland Cotton, the Appellate Body noted that the introductory phrase “[e]xcept as provided in the Agreement on Agriculture” applies to both paragraphs (a) and (b) of paragraph 1 of Article 3, which deal with both export subsidies and import substitution subsidies, respectively. However, the Appellate Body found no provision in the Agreement on Agriculture that dealt specifically with import substitution subsidies (see also paragraphs 184–187 below):

“We are mindful that the introductory language of Article 3.1 of the SCM Agreement clarifies that this provision applies ‘[e]xcept as provided in the Agreement on Agriculture’. Furthermore, as the United States has pointed out, this introductory language applies to both the export subsidy prohibition in paragraph (a) and to the prohibition on import substitution subsidies in paragraph (b) of Article 3.1. As we explained previously, in our review of the provisions of the Agreement on Agriculture relied on by the United States, we did not find a provision that deals specifically with subsidies that have an import substitution component. By contrast, the prohibition on the provision of subsidies contingent upon the use of domestic over imported goods in Article 3.1(b) of the SCM Agreement is explicit and clear. Because Article 3.1(b) treats subsidies contingent on the use of domestic over imported products as prohibited subsidies, it would be expected that the drafters would have included an equally explicit and clear provision in the Agreement on Agriculture if they had indeed intended to authorize such prohibited subsidies provided in connection with agricultural goods. We find no provision in the Agreement on Agriculture dealing specifically with subsidies contingent upon the use of domestic over imported agricultural goods.”⁽²¹⁷⁾

2. Article 3.1(a)

(a) General

125.   In Canada — Aircraft Credits and Guarantees, the Panel first recalled the text of Article 3.1(a) and found that to “prove the existence of an export subsidy within the meaning of this provision, a Member must … establish (i) the existence of a subsidy within the meaning of Article 1 of the SCM Agreement and (ii) contingency of that subsidy upon export performance”.⁽²¹⁸⁾

126.   The Appellate Body in US — FSC (Article 21.5 — EC) noted that Article 3.1(a) provides that “subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance” are prohibited. The Appellate Body referred also to its statement in Canada — Aircraft that “contingent” means “conditional” or “dependent for its existence on something else” and said that the grant of the subsidy must be conditional or dependent upon export performance.⁽²¹⁹⁾ The Appellate Body stated:

“We start with the text of Article 3.1(a) of the SCM Agreement, which provides that ‘subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance’ are prohibited. We have considered this provision in several previous appeals.⁽²²⁰⁾ In Canada — Aircraft, we said that the key word in Article 3.1(a) is ‘contingent’, which means ‘conditional’ or ‘dependent for its existence on something else’.⁽²²¹⁾ The grant of the subsidy must be conditional or dependent upon export performance. Footnote 4 of the SCM Agreement, attached to Article 3.1(a), describes the relationship of contingency by stating that the grant of a subsidy must be ‘tied to’ export performance. Article 3.1(a) further provides that such export contingency may be the ‘sole []’ condition governing the grant of a prohibited subsidy or it may be ‘one of several other conditions’.”⁽²²²⁾

(b) “contingent in law … upon export performance”

127.   In Canada — Autos, the Appellate Body addressed the distinction between a de jure and a de facto export subsidy with reference to the wording of a particular measure:

“In our view, a subsidy is contingent ‘in law’ upon export performance when the existence of that condition can be demonstrated on the basis of the very words of the relevant legislation, regulation or other legal instrument constituting the measure. The simplest, and hence, perhaps, the uncommon, case is one in which the condition of exportation is set out expressly, in so many words, on the face of the law, regulation or other legal instrument. We believe, however, that a subsidy is also properly held to be de jure export contingent where the condition to export is clearly, though implicitly, in the instrument comprising the measure. Thus, for a subsidy to be de jure export contingent, the underlying legal instrument does not always have to provide expressis verbis that the subsidy is available only upon fulfillment of the condition of export performance. Such conditionality can also be derived by necessary implication from the words actually used in the measure.”⁽²²³⁾

128.   The Appellate Body in Canada — Autos concluded that “as the import duty exemption is simply not available to a manufacturer unless it exports motor vehicles, the import duty exemption is clearly conditional, or dependent upon, exportation and, therefore, is contrary to Article 3.1(a) … ”.⁽²²⁴⁾

129.   Before the Panel in Canada — Aircraft, Canada stated that the mandate of one of its agencies was “to offer a full range of risk management services and financing products ‘for the purpose of supporting and developing, directly or indirectly, Canada’s export trade’”.⁽²²⁵⁾ Basing itself on this statement by Canada, the Panel held that “export credits granted ‘for the purpose of supporting and developing, directly or indirectly, Canada’s export trade’ are expressly contingent in law on export performance.”⁽²²⁶⁾

130.   In examining whether a subsidy is contingent “in law” upon export performance, the Appellate Body in Canada — Autos noted that “footnote 4 … uses the words ‘tied to’ as a synonym for ‘contingent’ or ‘conditional’. As the legal standard is the same for de facto and de jure export contingency, we believe that a ‘tie’, amounting to the relationship of contingency, between the granting of the subsidy and actual or anticipated exportation meets the legal standard of ‘contingent’ in Article 3.1(a) … .”⁽²²⁷⁾

131.   In US — Upland Cotton, the Appellate Body considered that a payment made on proof of exportation was export-contingent even though the payments under different conditions were also available, without exportation, on proof of sale to a domestic consumer:

“In sum, we agree with the Panel’s view that Step 2 payments are export-contingent and, therefore, an export subsidy for purposes of Article 9 of the Agreement on Agriculture and Article 3.1(a) of the SCM Agreement. The statute and regulations pursuant to which Step 2 payments are granted, on their face, condition payments to exporters on exportation. In order to claim payment, an exporter must show proof of exportation. If an exporter does not provide proof of exportation, the exporter will not receive a payment. This is sufficient to establish that Step 2 payments to exporters of United States upland cotton are ‘conditional upon export performance’ or ‘dependent for their existence on export performance’. That domestic users may also be eligible to receive payments under different conditions does not eliminate the fact that an exporter will receive payment only upon proof of exportation.”⁽²²⁸⁾

(c) “contingent … in fact … upon export performance”

(i) De facto contingency

132.   Regarding the interpretation of the term “contingent … in fact”, the Panel in Australia — Automotive Leather II established a standard of “close connection” between the grant or maintenance of a subsidy and export performance. It added that a subsidy, in order to be export contingent in fact, must be “conditioned” upon export performance:

“An inquiry into the meaning of the term ‘contingent … in fact’ in Article 3.1(a) of the SCM Agreement must, therefore, begin with an examination of the ordinary meaning of the word ‘contingent’. The ordinary meaning of ‘contingent’ is ‘dependent for its existence on something else’, ‘conditional; dependent on, upon’. The text of Article 3.1(a) also includes footnote 4, which states that the standard of ‘in fact’ contingency is met if the facts demonstrate that the subsidy is ‘in fact tied to actual or anticipated exportation or export earnings’. The ordinary meaning of ‘tied to’ is ‘restrain or constrain to or from an action; limit or restrict as to behaviour, location, conditions, etc.’. Both of the terms used — ‘contingent … in fact’ and ‘in fact tied to’ — suggest an interpretation that requires a close connection between the grant or maintenance of a subsidy and export performance.”⁽²²⁹⁾

133.   In Canada — Aircraft, the Panel also considered the “tied to” language of footnote 4 to be equivalent to a relationship of “conditionality” between the grant of a subsidy and export performance.⁽²³⁰⁾ The Appellate Body agreed with the term “conditioned” and linked it to the concept of contingency under Article 3.1(a):

“The ordinary meaning of ‘tied to’ confirms the linkage of ‘contingency’ with ‘conditionality’ in Article 3.1(a). Among the many meanings of the verb ‘tie’, we believe that, in this instance, because the word ‘tie’ is immediately followed by the word ‘to’ in footnote 4, the relevant ordinary meaning of ‘tie’ must be to ‘limit or restrict as to … conditions’. This element of the standard set forth in footnote 4, therefore, emphasizes that a relationship of conditionality or dependence must be demonstrated. The second substantive element is at the very heart of the legal standard in footnote 4 and cannot be overlooked. In any given case, the facts must ‘demonstrate’ that the granting of a subsidy is tied to or contingent upon actual or anticipated exports. It does not suffice to demonstrate solely that a government granting a subsidy anticipated that exports would result. The prohibition in Article 3.1(a) applies to subsidies that are contingent upon export performance.”⁽²³¹⁾

134.   While the Appellate Body in Canada — Aircraft largely agreed with the findings of the Panel on the interpretation of the term “contingency”, it nevertheless cautioned the use of the “but for” test established by the Panel on the basis of the term “tied to”:

“We note that the Panel considered that the most effective means of demonstrating whether a subsidy is contingent in fact upon export performance is to examine whether the subsidy would have been granted but for the anticipated exportation or export earnings … . While we consider that the Panel did not err in its overall approach to de facto export contingency, we, and panels as well, must interpret and apply the language actually used in the treaty.”⁽²³²⁾

135.   The Appellate Body in Canada — Aircraft provided its own reasoning with respect to the ordinary meaning of the text “contingent … in fact … on export performance”. In doing so, it first emphasized the term “contingent” as a “key word”, held that the legal standard encapsulated by this term is the same for both de jure or de facto contingency and framed the distinction between these two types of contingency in terms of the evidence upon which such determination would rest:

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

 

… In our view, the legal standard expressed by the word ‘contingent’ is the same for both de jure or de facto contingency. There is a difference, however, in what evidence may be employed to prove that a subsidy is export contingent. De jure export contingency is demonstrated on the basis of the words of the relevant legislation, regulation or other legal instrument. Proving de facto export contingency is a much more difficult task. There is no single legal document which will demonstrate, on its face, that a subsidy is ‘contingent … in fact … upon export performance’. Instead, the existence of the relationship of contingency, between the subsidy and export performance, must be inferred from the total configuration of the facts constituting and surrounding the granting of the subsidy, none of which on its own is likely to be decisive in any given case.”⁽²³³⁾

136.   The Appellate Body in Canada — Aircraft examined footnote 4 more closely as “a standard … for determining when a subsidy is ‘contingent … in fact … upon export performance’”. It identified three elements, i.e. “granting of a subsidy”, “tied to” and “anticipated”:

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

 

The first element of the standard for determining de facto export contingency is the ‘granting of a subsidy’. In our view, the initial inquiry must be on whether the granting authority imposed a condition based on export performance in providing the subsidy. In the words of Article 3.2 and footnote 4, the prohibition is on the ‘granting of a subsidy’, and not on receiving it. The treaty obligation is imposed on the granting Member, and not on the recipient. Consequently, we do not agree … that an analysis of ‘contingent … in fact … upon export performance’ should focus on the reasonable knowledge of the recipient.⁽²³⁴⁾

 

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

 

We turn now to the third substantive element provided in footnote 4. The dictionary meaning of the word ‘anticipated’ is ‘expected’. The use of this word, however, does not transform the standard for ‘contingent … in fact’ into a standard merely for ascertaining ‘expectations’ of exports on the part of the granting authority. Whether exports were anticipated or ‘expected’ is to be gleaned from an examination of objective evidence. This examination is quite separate from, and should not be confused with, the examination of whether a subsidy is ‘tied to’ actual or anticipated exports. A subsidy may well be granted in the knowledge, or with the anticipation, that exports will result. Yet, that alone is not sufficient, because that alone is not proof that the granting of the subsidy is tied to the anticipation of exportation.”⁽²³⁵⁾

137.   The Panel in Canada — Aircraft, in a statement not specifically addressed by the Appellate Body, also noted that “the nature of the required conditionality [is] that ‘one of the conditions for the grant of the subsidy is the expectation that exports will flow thereby’”.⁽²³⁶⁾ In the case at hand, the Panel came to the conclusion that “the facts available demonstrate that one of the conditions of the grant of … contributions to the … industry is indeed such an expectation, in the form of projected export sales anticipated to ‘flow’ directly from these contributions.”⁽²³⁷⁾

138.   The Panel in Canada — Aircraft Credits and Guarantees considered that a Member’s awareness that its domestic market is too small to absorb its domestic production of a subsidized product “may indicate” that the subsidy is granted upon export performance (see paragraph 147 below). However, after referring to statements by the Appellate Body in Canada — Aircraft,⁽²³⁸⁾ the Panel clarified that even if a Member was to anticipate that exports would result from the grant of a subsidy, such anticipation “alone is not proof that the granting of the subsidy is tied to the anticipation of exportation” within the meaning of the footnote 4 to Article 3.1(a).⁽²³⁹⁾

139.   In EC and certain member States — Large Civil Aircraft, the Appellate Body established the following test for determining whether a subsidy is de facto contingent on export performance:

“The existence of de facto export contingency, as set out above, “must be inferred from the total configuration of the facts constituting and surrounding the granting of the subsidy”, which may include the following factors: (i) the design and structure of the measure granting the subsidy; (ii) the modalities of operation set out in such a measure; and (iii) the relevant factual circumstances surrounding the granting of the subsidy that provide the context for understanding the measure’s design, structure, and modalities of operation.

 

Moreover, where relevant evidence exists, the assessment could be based on a comparison between, on the one hand, the ratio of anticipated export and domestic sales of the subsidized product that would come about in consequence of the granting of the subsidy, and, on the other hand, the situation in the absence of the subsidy. The situation in the absence of the subsidy may be understood on the basis of historical sales of the same product by the recipient in the domestic and export markets before the subsidy was granted. In the event that there are no historical data untainted by the subsidy, or the subsidized product is a new product for which no historical data exists, the comparison could be made with the performance that a profit-maximizing firm would hypothetically be expected to achieve in the export and domestic markets in the absence of the subsidy. Where the evidence shows, all other things being equal, that the granting of the subsidy provides an incentive to skew anticipated sales towards exports, in comparison with the historical performance of the recipient or the hypothetical performance of a profit maximizing firm in the absence of the subsidy, this would be an indication that the granting of the subsidy is in fact tied to anticipated exportation within the meaning of Article 3.1(a) and footnote 4 of the SCM Agreement.

 

The following numerical examples illustrate when the granting of a subsidy may, or may not, be geared to induce promotion of future export performance by a recipient. Assume that a subsidy is designed to allow a recipient to increase its future production by five units. Assume further that the existing ratio of the recipient’s export sales to domestic sales, at the time the subsidy is granted, is 2:3. The granting of the subsidy will not be tied to anticipated exportation if, all other things being equal, the anticipated ratio of export sales to domestic sales is not greater than the existing ratio. In other words, if, under the measure granting the subsidy, the recipient would not be expected to export more than two of the additional five units to be produced, then this is indicative of the absence of a tie. By contrast, the granting of the subsidy would be tied to anticipated exportation if, all other things equal, the recipient is expected to export at least three of the five additional units to be produced. In other words, the subsidy is designed in such a way that it is expected to skew the recipient’s future sales in favour of export sales, even though the recipient may also be expected to increase its domestic sales.”⁽²⁴⁰⁾

140.   The Appellate Body emphasized that the test for determining whether a subsidy is de facto contingent on export performance is an objective one, and addressed the relevance of a government’s reasons for granting a subsidy:

“The standard for determining whether the granting of a subsidy is “in fact tied to … anticipated exportation” is an objective standard, to be established on the basis of the total configuration of facts constituting and surrounding the granting of the subsidy, including the design, structure, and modalities of operation of the measure granting the subsidy. Indeed, the conditional relationship between the granting of the subsidy and export performance must be objectively observable on the basis of such evidence in order for the subsidy to be geared to induce the promotion of future export performance by the recipient. The standard for de facto export contingency is therefore not satisfied by the subjective motivation of the granting government to promote the future export performance of the recipient. In this respect, we note that the Appellate Body and panels have, on several occasions, cautioned against undue reliance on the intent of a government behind a measure to determine the WTO consistency of that measure. The Appellate Body has found that “the intent, stated or otherwise, of the legislators is not conclusive” as to whether a measure is consistent with the covered agreement. In our view, the same understanding applies in the context of a determination on export contingency, where the requisite conditionality between the subsidy and anticipated exportation under Article 3.1(a) and footnote 4 of the SCM Agreement must be established on the basis of objective evidence, rather than subjective intent. We note, however, that while the standard for de facto export contingency cannot be satisfied by the subjective motivation of the granting government, objectively reviewable expressions of a government’s policy objectives for granting a subsidy may, however, constitute relevant evidence in an inquiry into whether a subsidy is geared to induce the promotion of future export performance by the recipient.

 

Similarly, the standard does not require a panel to ascertain a government’s reason(s) for granting a subsidy. The government’s reason for granting a subsidy only explains why the subsidy is granted. It does not necessarily answer the question as to what the government did, in terms of the design, structure, and modalities of operation of the subsidy, in order to induce the promotion of future export performance by the recipient. Indeed, whether the granting of a subsidy is conditional on future export performance must be determined by assessing the subsidy itself, in the light of the relevant factual circumstances, rather than by reference to the granting authority’s reasons for the measure. This is not to say, however, that evidence regarding the policy reasons of a subsidy is necessarily excluded from the inquiry into whether a subsidy is geared to induce the promotion of future export performance by the recipient.”⁽²⁴¹⁾

(ii) Treatment of facts in the determination of de facto export contingency

Case-by-case approach

141.   The Panel in Australia — Automotive Leather II held that the language of footnote 4 of the SCM Agreement required it “to examine all the facts concerning the grant or maintenance of the challenged subsidy”, emphasizing that the Panel was not precluded from considering any particular fact. The Panel also held that the specific facts to be considered will vary on a case-by-case basis:

“In our view, the concept of ‘contingent … in fact … upon export performance’, and the language of footnote 4 of the SCM Agreement, require us to examine all of the facts that actually surround the granting or maintenance of the subsidy in question, including the terms and structure of the subsidy, and the circumstances under which it was granted or maintained. A determination whether a subsidy is in fact contingent upon export performance cannot, in our view, be limited to an examination of the terms of the legal instruments or the administrative arrangements providing for the granting or maintenance of the subsidy in question. Such a determination would leave wide open the possibility of evasion of the prohibition of Article 3.1(a), and render meaningless the distinction between ‘in fact’ and ‘in law’ contingency. Moreover, while the second sentence of footnote 4 makes clear that the mere fact that a subsidy is granted to enterprises which export cannot be the sole basis for concluding that a subsidy is ‘in fact’ contingent upon export performance, it does not preclude the consideration of that fact in a panel’s analysis. Nor does it preclude consideration of the level of a particular company’s exports. This suggests to us that factors other than the specific legal or administrative arrangements governing the granting or maintenance of the subsidy in question must be considered in determining whether a subsidy is ‘in fact’ contingent upon export performance.

 

Based on the explicit language of Article 3.1(a) and footnote 4 of the SCM Agreement, in our view the determination of whether a subsidy is ‘contingent … in fact’ upon export performance requires us to examine all the facts concerning the grant or maintenance of the challenged subsidy, including the nature of the subsidy, its structure and operation, and the circumstances in which it was provided. In this context, Article 11 of the DSU requires a panel to make an objective assessment of the facts of the case. Obviously, the facts to be considered will depend on the specific circumstances of the subsidy in question, and will vary from case to case. In our view, all facts surrounding the grant and/or maintenance of the subsidy in question may be taken into consideration in the analysis. However, taken together, the facts considered must demonstrate that the grant or maintenance of the subsidy is conditioned upon actual or anticipated exportation or export earnings. The outcome of this analysis will obviously turn on the specific facts relating to each subsidy examined.”⁽²⁴²⁾

142.   The Panel in Australia — Automotive Leather II drew a temporal limit to this broad standard of factual analysis. It opined that “the pertinent consideration is the facts at the time the conditions for the grant payments were established, and not possible subsequent developments.”⁽²⁴³⁾

143.   The Panel in Canada — Aircraft, in a finding expressly endorsed by the Appellate Body,⁽²⁴⁴⁾ confirmed this broad and case-by-case approach to the factual analysis of the Panel in Australia — Automotive Leather II. While it also emphasized that no factual considerations should automatically prevail over others, it pointed out that its finding that a broad range of facts should be considered as relevant did not mean that the de facto export contingency standard is easily met:

“In our view, no fact should automatically be rejected when considering whether the facts demonstrate that a subsidy would not have been granted but for anticipated exportation or export earnings. We note that footnote 4 provides that the ‘facts’ must demonstrate de facto export contingency. footnote 4 therefore refers to ‘facts’ in general, without any suggestion that certain factual considerations should prevail over others. In our opinion, it is clear from the ordinary meaning of footnote 4 that any fact could be relevant, provided it ‘demonstrates’ (either individually or in conjunction with other facts) whether or not a subsidy would have been granted but for anticipated exportation or export earnings. We consider that this is true of the export-orientation of the recipient, or of the reason for the grant of the subsidy, just as it is true of a host of other facts potentially surrounding the grant of the subsidy in question. In any given case, the relative importance of each fact can only be determined in the context of that case, and not on the basis of generalities.

 

We would emphasise, however, that our finding that a broad range of facts could be relevant in this context does not mean that the de facto export contingency standard is easily met. On the contrary, footnote 4 of the SCM Agreement makes it clear that the facts must ‘demonstrate’ de facto export contingency. That is, de facto export contingency must be demonstrable on the basis of the factual evidence adduced.”⁽²⁴⁵⁾

144.   The Appellate Body in Canada — Aircraft agreed with the Panel that the fact that a subsidy is granted to enterprises which export may be considered in a determination whether or not a subsidy is de facto export contingent, but that this does not mean that export orientation alone can necessarily be determinative:⁽²⁴⁶⁾

“There is a logical relationship between the second sentence of footnote 4 and the ‘tied to’ requirement set forth in the first sentence of that footnote. The second sentence of footnote 4 precludes a panel from making a finding of de facto export contingency for the sole reason that the subsidy is ‘granted to enterprises which export’. In our view, merely knowing that a recipient’s sales are export-oriented does not demonstrate, without more, that the granting of a subsidy is tied to actual or anticipated exports. The second sentence of footnote 4 is, therefore, a specific expression of the requirement in the first sentence to demonstrate the ‘tied to’ requirement. We agree with the Panel that, under the second sentence of footnote 4, the export orientation of a recipient may be taken into account as a relevant fact, provided that it is one of several facts which are considered and is not the only fact supporting a finding.”⁽²⁴⁷⁾

Which facts to consider

145.   The Panel in Australia — Automotive Leather II held that “the fact of expectation cannot be the sole determinative fact on the evaluation”.⁽²⁴⁸⁾ The Panel also considered the extent to which circumstances surrounding a loan contract can be facts on the basis of which the determination of an export contingent subsidy can be made:

“[T]he mere fact that one possible source of funds to pay off the loan is potential export earnings is insufficient to conclude that the loan was contingent in fact upon anticipated exportation or export earnings… . We recognize that other facts are relevant to our consideration of the nature of the loan contract. Included among these is the significance of exports in Howe’s business, and the fact that loan was part of the overall ‘assistance package’ given to Howe, which Australia acknowledged would probably not have occurred if Howe had not been removed from eligibility under the … programmes… . Moreover, there is nothing in the terms of the loan contract itself which suggests a specific link to actual or anticipated exportation or export earnings … These factors persuade us that there is not a sufficiently close tie between the loan and anticipated exportation or export earnings.”⁽²⁴⁹⁾

146.   While the Panel in Canada — Aircraft found that no one factual consideration should automatically prevail over others in the determination of de facto export contingency, it nevertheless held that “the closer a subsidy brings a product to sale on the export market, the greater the possibility that the facts may demonstrate that the subsidy would not have been granted but for anticipated exportation or export earnings.” In this respect, the Panel noted that subsidies for “pure research” or “for general purposes such as improving efficiency or adopting new technology” would be less likely to give rise to de facto export contingency than “subsidies that directly assist companies in bringing specific products to the (export) market.”⁽²⁵⁰⁾ The Appellate Body did not object to the consideration of this factor by the Panel, but cautioned that “the mere presence … of this factor” will not create “a presumption” that a subsidy is de facto contingent upon export performance:

“We recall that the Panel added that ‘the further removed a subsidy is from sales on the export market, the less the possibility that the facts may demonstrate that the subsidy’ is ‘contingent … in fact … upon export performance’. (emphasis added) By these statements, the Panel appears to us to apply what could be read to be a legal presumption. While we agree that this nearness-to-the export- market factor may, in certain circumstances, be a relevant fact, we do not believe that it should be regarded as a legal presumption. It is, for instance, no ‘less … possible’ that the facts, taken together, may demonstrate that a pre-production subsidy for research and development is ‘contingent … in fact … upon export performance’. If a panel takes this factor into account, it should treat it with considerable caution. In our opinion, the mere presence or absence of this factor in any given case does not give rise to a presumption that a subsidy is or is not de facto contingent upon export performance. The legal standard to be applied remains the same: it is necessary to establish each of the three substantive elements in footnote 4.”⁽²⁵¹⁾

Relevance of the size of the domestic industry

147.   The Panel in Canada — Aircraft Credits and Guarantees referred to the findings of the Panel in Australia — Automotive Leather II⁽²⁵²⁾ (see paragraph 142 above) and noted that a Member’s awareness that its domestic market is too small to absorb the domestic production of a subsidized product may “indicate”, although not prove that the subsidy is granted on the condition that it be exported:

“In addressing Brazil’s de facto export contingency claim, we shall be guided by note 4 to Article 3.1(a) of the SCM Agreement, whereby a subsidy is ‘contingent … in fact … upon export performance’ when:

 

the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings. The mere fact that a subsidy is granted to enterprises which export shall not for that reason alone be considered to be an export subsidy within the meaning of this provision.

 

… a Member’s awareness that its domestic market is too small to absorb domestic production of a subsidised product may indicate that the subsidy is granted on the condition that it be exported.”⁽²⁵³⁾

(d) “Export performance”

(i) General

148.   The Panel in Canada — Aircraft (Article 21.5 — Brazil), in a finding not specifically addressed by the Appellate Body, drew a distinction between “general technological or economic benefits” on the one hand and “export performance” on the other:

“Thus, whereas TPC assistance is conditional on a project having certain technological or net economic benefits … , in our view this simply cannot be assumed to be synonymous with export performance, and therefore it does not mean ipso facto that such assistance is contingent on export performance. This remains true even though TPC administrators know that fulfilment of net economic benefits in certain cases may be likely to result in increased exports. The fact that they will have no concrete quantifiable information on exports in our view will act in practical terms to limit their discretion to select projects on the basis of export performance.”⁽²⁵⁴⁾

149.   The Panel in Canada — Aircraft rejected the argument that the subsidy programme at issue was not conditional on exports taking place on the grounds that “there are no penalties if export sales are not realised.” ⁽²⁵⁵⁾ The Panel supported its rejection of this argument with the following statement:

“While this argument may be relevant in determining whether a subsidy would not have been granted but for actual exportation or export earnings, we find this argument insufficient to rebut a prima facie case that a subsidy would not have been granted but for anticipated exportation or export earnings.”⁽²⁵⁶⁾

(ii) “produced within or outside the Member”

150.   The Appellate Body in US — FSC (Article 21.5 — EC), upholding the findings of the Panel, observed that there are two different factual situations, one involving property produced within the Member and the other involving property produced outside it, which are subject to distinct conditions for receipt of the subsidy. The Appellate Body considered it appropriate to examine these two situations separately:

“In respect of property produced within the United States, the taxpayer can obtain the subsidy only by satisfying the conditions in the measure relating to this property and, for this property, the measure provides only one set of conditions governing the grant of subsidy. The conditions for the grant of subsidy with respect to property produced outside the United States are distinct from those governing the grant of subsidy in respect of property produced within the United States.

 

In our view, it is hence appropriate, indeed necessary, under Article 3.1(a) of the SCM Agreement, to examine separately the conditions pertaining to the grant of the subsidy in the two different situations addressed by the measure.”⁽²⁵⁷⁾

151.   Examining the measure with respect to property produced within the Member, the Appellate Body in US — FSC (Article 21.5 — EC) noted that in order to obtain the subsidy, the goods must be sold, leased or rented for direct use, consumption or disposition “outside the United States”. Thus to be eligible for the subsidy, “the property must be exported”. In this way, the requirement of use outside the Member state makes the subsidy contingent upon export. Accordingly, the Appellate Body held that since property produced within the United States must be exported to satisfy this condition, “then, the requirement of use outside the United States makes the grant of the tax benefit contingent upon export”.⁽²⁵⁸⁾

152.   The Appellate Body in US — FSC (Article 21.5 — EC) noted that its conclusion was not affected by the fact that the subsidy could also be obtained through production abroad, and that there was no export contingency in this second situation. The Appellate Body recalled:

“[T]he measure at issue in the original proceedings in US — FSC contained an almost identical condition relating to ‘direct use … outside the United States’ for property produced in the United States. In that appeal, we upheld the panel’s finding that the combination of the requirements to produce property in the United States and use it outside the United States gave rise to export contingency under Article 3.1(a) of the SCM Agreement. We see no reason, in this appeal, to reach a conclusion different from our conclusion in the original proceedings, namely that there is export contingency, under Article 3.1(a), where the grant of a subsidy is conditioned upon a requirement that property produced in the United States be used outside the United States.

 

We recall that the ETI measure grants a tax exemption in two different sets of circumstances: (a) where property is produced within the United States and held for use outside the United States; and (b) where property is produced outside the United States and held for use outside the United States. Our conclusion that the ETI measure grants subsidies that are export contingent in the first set of circumstances is not affected by the fact that the subsidy can also be obtained in the second set of circumstances. The fact that the subsidies granted in the second set of circumstances might not be export contingent does not dissolve the export contingency arising in the first set of circumstances. Conversely, the export contingency arising in these circumstances has no bearing on whether there is an export contingent subsidy in the second set of circumstances. Where a United States taxpayer is simultaneously producing property within and outside the United States, for direct use outside the United States, subsidies may be granted under the ETI measure in respect of both sets of property. The subsidy granted with respect to the property produced within the United States, and exported from there, is export contingent within the meaning of Article 3.1(a) of the SCM Agreement, irrespective of whether the subsidy given in respect of property produced outside the United States is also export contingent.”

(e) Relationship with other Articles

(i) Article 4.7

153.   In Canada — Dairy (Article 21.5 — New Zealand and US), the Panel noted that a finding of violation with respect to Article 3.1 would affect the specificity of the recommendation to be made by the Panel, due to the more precise implementation requirements under Article 4.7 of the SCM Agreement, providing that an export subsidy be withdrawn without delay. However, the Panel observed that because of the context of the case, it would not be able to recommend that Canada “withdraw” measures constituting an export subsidy exclusively in respect of agricultural products. The Panel stated:

“Since the Panel, in case it would make an affirmative finding in respect of Article 3.1 of the SCM Agreement, would not be able to make the withdrawal recommendation provided for in the first sentence of Article 4.7 of the SCM Agreement, the Panel does not need to consider the first sentence of Article 4.7 to determine whether or not it should exercise judicial economy. Having found that it would not be able make a recommendation to withdraw the subsidy, in accordance with the first sentence of Article 4.7, the Panel considers that, a fortiori, it would not be able to specify a time-period for withdrawal, in accordance with the second sentence of Article 4.7.”⁽²⁵⁹⁾

(ii) Article 27

154.   The Panel in Brazil — Aircraft addressed the relationship between Articles 3.1(a), 27.2(b) and 27.4. More specifically, the Panel was called upon to determine the allocation of burden of proof applicable to the special provision of Article 27.2, which establishes that the prohibition contained in Article 3.1(a) shall not apply to developing country Members, provided that the requirements of Article 27.4 are met. The Panel in a finding upheld by the Appellate Body considered that “until non-compliance with the conditions set out in Article 27.4 is demonstrated, there is also, on the part of a developing country Member within the meaning of Article 27.2(b), no inconsistency with Article 3.1(a).”⁽²⁶⁰⁾

155.   The Appellate Body in Brazil — Aircraft emphasized that “the conditions set forth in paragraph 4 are positive obligations for developing country Members, not affirmative defenses. If a developing country Member complies with the obligations in Article 27.4, the prohibition on export subsidies in Article 3.1(a) simply does not apply”.⁽²⁶¹⁾

156.   The Appellate Body in Brazil — Aircraft agreed with the Panel “that the burden [of proof] is on the complaining party (in casu Canada) to demonstrate that the developing country Member (in casu Brazil) is not in compliance with at least one of the elements set forth in Article 27.4. If such non-compliance is demonstrated, then, and only then, does the prohibition of Article 3.1(a) apply to that developing country Member.”⁽²⁶²⁾

157.   As regards the extension of the Article 27.4 transition period for developing and least-developed countries of the export subsidy prohibition, see paragraphs 530 and 555–560 below. With regard to the graduation methodology from Annex VII(b), see paragraphs 681–685 below.

(iii) Footnote 59

158.   In US — FSC, the Appellate Body addressed the United States’ claim that footnote 59 exempts a measure from being an export subsidy within the meaning of Article 3.1(a) and that the 1981 Council Action serves as a confirmation for this exemption. In rejecting this argument, the Appellate Body proceeded to examine footnote 59 sentence by sentence:

“The first sentence of footnote 59 is specifically related to the statement in item (e) of the Illustrative List that the ‘full or partial exemption remission, or deferral specifically related to exports, of direct taxes’ is an export subsidy. The first sentence of footnote 59 qualifies this by stating that ‘deferral need not amount to an export subsidy where, for example, appropriate interest charges are collected.’ Since the FSC measure does not involve the deferral of direct taxes, we do not believe that this sentence of footnote 59 bears upon the characterization of the FSC measure as constituting, or not, an ‘export subsidy’.

 

The second sentence of footnote 59 ‘reaffirms’ that, in allocating export sales revenues, for tax purposes, between exporting enterprises and controlled foreign buyers, the price for the goods shall be determined according to the ‘arm’s length’ principle to which that sentence of the footnote refers. Like the Panel, we are willing to accept, for the sake of argument, the United States’ position that it is ‘implicit’ in the requirement to use the arm’s length principle that Members of the WTO are not obliged to tax foreign-source income, and also that Members may tax such income less than they tax domestic-source income. We would add that, even in the absence of footnote 59, Members of the WTO are not obliged, by WTO rules, to tax any categories of income, whether foreign- or domestic-source income. The United States argues that, since there is no requirement to tax export-related foreign-source income, a government cannot be said to have ‘foregone’ revenue if it elects not to tax that income. It seems to us that, taken to its logical conclusion, this argument by the United States would mean that there could never be a foregoing of revenue ‘otherwise due’ because, in principle, under WTO law generally, no revenues are ever due and no revenue would, in this view, ever be ‘foregone’. That cannot be the appropriate implication to draw from the requirement to use the arm’s length principle.”⁽²⁶³⁾

159.   The Appellate Body further found that the arm’s length principle contained in the second sentence of footnote 59 could not shed light on the issue before the Panel, namely whether the United States’ tax measure was a prohibited export subsidy:

“Furthermore, we do not believe that the requirement to use the arm’s length principle resolves the issue that arises here. That issue is not, as the United States suggests, whether a Member is or is not obliged to tax a particular category of foreign-source income. As we have said, a Member is not, in general, under any such obligation. Rather, the issue in dispute is whether, having decided to tax a particular category of foreign-source income, namely foreign-source income that is ‘effectively connected with a trade or business within the United States’, the United States is permitted to carve out an export contingent exemption from the category of foreign-source income that is taxed under its other rules of taxation. Unlike the United States, we do not believe that the second sentence of footnote 59 addresses this question. It plainly does not do so expressly; neither, as far as we can see, does it do so by necessary implication. As the United States indicates, the arm’s length principle operates when a Member chooses not to tax, or to tax less, certain categories of foreign source income. However, the operation of the arm’s length principle is unaffected by the choice a Member makes as to which categories of foreign-source income, if any, it will not tax, or will tax less. Likewise, the operation of the arm’s length principle is unaffected by the choice a Member might make to grant exemptions from the generally applicable rules of taxation of foreign-source income that it has selected for itself. In short, the requirement to use the arm’s length principle does not address the issue that arises here, nor does it authorize the type of export contingent tax exemption that we have just described. Thus, this sentence of footnote 59 does not mean that the FSC subsidies are not export subsidies within the meaning of Article 3.1(a) of the SCM Agreement.

 

The third and fourth sentences of footnote 59 set forth rules that relate to remedies. In our view, these rules have no bearing on the substantive obligations of Members under Articles 1.1 and 3.1 of the SCM Agreement.”⁽²⁶⁴⁾

160.   The Appellate Body in US — FSC then declined to examine the United States’ claim under the fifth sentence of footnote 59, namely that the United States’ measure was one taken to avoid double taxation of foreign-source income. The Appellate Body noted that the issue had not been properly litigated before the Panel and therefore declined to address the United States’ claim.⁽²⁶⁵⁾

(f) Annex VII(b)

161.   With regard to the graduation methodology from Annex VII(b), see paragraphs 681–685 below.

(g) Footnote 4

162.   With respect to the relationship between “tied to” in footnote 4 and “contingent … in law”, see paragraphs 130–133 above.

163.   With respect to the three substantive elements in footnote 4 as identified by the Appellate Body in Canada — Aircraft, see paragraph 136 above.

164.   With respect to the requirement to examine all facts concerning the grant or maintenance of a subsidy, see paragraph 141 above. As regards the significance of the phrase “enterprises which export” within the de facto export contingency analysis, see paragraphs 141, 144 and 147 above.

3. Article 3.1(b)

(a) “subsidies contingent … upon the use of domestic over imported goods”

(i) Contingency

165.   Referring to its Report on Canada — Aircraft where it had held that “the ordinary connotation of ‘contingent’ is ‘conditional’ or ‘dependent for its existence on something else’⁽²⁶⁶⁾,” the Appellate Body in Canada — Autos opined that “this legal standard applies not only to ‘contingency’ under Article 3.1(a), but also to ‘contingency’ under Article 3.1(b)”.⁽²⁶⁷⁾

(ii) De facto contingency

166.   In Canada — Autos, the Panel had found that “contingency” under Article 3.1(b) extended only to de jure contingency and not also to de facto contingency. In making this finding, the Panel relied on the fact that Article 3.1(a) referred explicitly to both subsidies contingent “in law or in fact”, while Article 3.1(b) did not contain such an explicit reference.⁽²⁶⁸⁾ The Appellate Body reversed this finding and held that “contingency” under Article 3.1(b) includes both contingency in law and contingency in fact. In its analysis, the Appellate Body first agreed with the Panel that an omission (of an express provision) must have some meaning, but emphasized that the significance of such omission can vary from one case to another:

“In examining this issue, the Panel appears to have taken the view that the terms of Article 3.1(b), on their own, do not answer the question, and, therefore, it turned to the context provided by Article 3.1(a). In this respect, the Panel relied on the fact that, in Article 3.1(a), there is explicit language applying to subsidies contingent ‘in law or in fact’ while in Article 3.1(b) there is not. In the view of the Panel, the absence of such an explicit reference in the adjacent and closely-related provision of Article 3.1(b) indicates that the drafters intended Article 3.1(b) to apply only to those subsidies which are contingent ‘in law’ upon the use of domestic over imported goods.

 

In our view, the Panel’s analysis was incomplete. As we have said, and as the Panel recalled, ‘omission must have some meaning.’ Yet omissions in different contexts may have different meanings, and omission, in and of itself, is not necessarily dispositive. Moreover, while the Panel rightly looked to Article 3.1(a) as relevant context in interpreting Article 3.1(b), the Panel failed to examine other contextual elements for Article 3.1(b) and to consider the object and purpose of the SCM Agreement.”⁽²⁶⁹⁾

167.   Having found that the omission of an explicit reference to de facto contingency in Article 3.1(b) was not dispositive of the question whether Article 3.1(b) actually extended to de facto contingency, the Appellate Body in Canada — Autos then considered the ordinary meaning and the context of this provision. While the Appellate Body agreed with the Panel that Article 3.1(a) was relevant context for Article 3.1(b), it held that “other contextual aspects should also be examined”:

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

 

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

 

… The fact that Article 3.1(a) refers to ‘in law or in fact’, while those words are absent from Article 3.1(b), does not necessarily mean that Article 3.1(b) extends only to de jure contingency.

 

Finally, we believe that a finding that Article 3.1(b) extends only to contingency ‘in law’ upon the use of domestic over imported goods would be contrary to the object and purpose of the SCM Agreement because it would make circumvention of obligations by Members too easy.

…

For all these reasons, we believe that the Panel erred in finding that Article 3.1(b) does not extend to subsidies contingent ‘in fact’ upon the use of domestic over imported goods. We, therefore, reverse the Panel’s broad conclusion that ‘Article 3.1(b) extends only to contingency in law.’”⁽²⁷⁰⁾

(b) Relationship with other Articles

(i) Chapeau of Article 3.1

168.   As regards the relationship between Article 3.1(b) and the introductory phrase “[e]xcept as provided in the Agreement on Agriculture” in the chapeau of Article 3.1, see paragraph 124 above.

(ii) Article 3.1(a)

169.   As regards the use of Article 3.1(a) as context for the interpretation of Article 3.1(b), see paragraphs 166–167 above.

(iii) Article 27

170.   As regards the transition period exemptions for developing and least developed countries, see paragraph 536 below.

(c) Relationship with other Agreements

(i) Agreement on Agriculture

171.   As regards the relationship of Article 3.1(b) of the SCM Agreement with the Agreement on Agriculture, in particular, Articles 6.3 and 21.1 and paragraph 7 of Annex 3, see the relevant Sections of the Chapter on the Agreement on Agriculture.

4. Article 3.2

(a) “grant”

172.   As the Canada — Aircraft dispute illustrates, under the SCM Agreement a Member may challenge a subsidy programme of another Member “as such” or, alternatively, “as applied”. In addressing Brazil’s challenge of certain Canadian subsidies “as such”, the Panel in Canada — Aircraft recalled the distinction between mandatory and discretionary legislation. In so doing, the Panel invoked what it considered consistent GATT/WTO practice and emphasized that it “must first determine whether the … programme per se mandates the grant of prohibited export subsidies in a manner inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.”⁽²⁷¹⁾ The Panel continued as follows:

“In this regard, we recall the distinction that GATT/WTO panels have consistently drawn between discretionary legislation and mandatory legislation. For example, in United States — Tobacco the panel ‘recalled that panels had consistently ruled that legislation which mandated action inconsistent with the General Agreement could be challenged as such, whereas legislation which merely gave the discretion to the executive authority … to act inconsistently with the General Agreement could not be challenged as such; only the actual application of such legislation inconsistent with the General Agreement could be subject to challenge’.”⁽²⁷²⁾

173.   In applying this standard to the facts of the case before it, the Panel in Canada — Aircraft concluded that “a mandate to support and develop Canada’s export trade does not amount to a mandate to grant subsidies, since such support and development could be provided in a broad variety of ways.”⁽²⁷³⁾ As a consequence, the Panel in Canada — Aircraft held that it “may not make any findings on the EDC programme per se”.⁽²⁷⁴⁾

174.   The Panel in Brazil — Aircraft was called upon to decide whether Brazil had increased its level of export subsidies within the meaning of Article 27.4. Because footnote 55 to Article 27.4 refers to the “grant” of export subsidies, the Panel addressed the question concerning at which particular point in time Brazil had actually been “granting” the disputed subsidies. Under the part of the Brazilian PROEX programme relating to interest equalization payments, the Brazilian Government would first approve a particular export transaction (between the Brazilian manufacturer and a foreign buyer) and issue a “letter of commitment” to the manufacturer; this letter would commit the Government to providing support, on the condition that the contract would indeed be concluded under the terms previously approved by the Government and entered into within a specific period of time. If these conditions were not fulfilled, the letter of commitment would expire. The actual interest equalization payments began after the aircraft had been exported and paid for under the relevant contract. The Brazilian Government, acting through the Brazilian National Treasury, would then issue bonds in the name of the bank financing the transaction; the bonds could be redeemed on a semi-annual basis for the duration of financing or sold for a discount in the securities market. In its analysis, the Panel began by comparing the term “grant” under Articles 3.2 and 27.4:

“We note that Article 3.2 and Article 27.4 are provisions of the same Agreement. Further, both provisions relate to the prohibition on export subsidies set out under that Agreement. We do not perceive any basis to attribute to the term ‘grant’ as used in Article 3.2 of the SCM Agreement a meaning different from that attributed to that term by this Panel and the Appellate Body as used in Article 27.4 of the SCM Agreement.”⁽²⁷⁵⁾

175.   The Panel in Brazil — Aircraft, in a finding subsequently upheld by the Appellate Body,⁽²⁷⁶⁾ then found that the “granting” of the subsidy at issue occurred when the bonds were issued by the Brazilian National Treasury to the bank financing the export transaction:

“It is clear to us, however, that PROEX payments have not yet been ‘granted’ at the time a letter of commitment is issued. We note that the issuance of a letter of commitment, even if legally binding on the Government of Brazil in the event certain conditions are fulfilled, provides no assurance that PROEX payments will actually be made … [T]he right to receive the PROEX payments only arises after the conditions relating to receipt of PROEX payments, and specifically the condition that the product in question actually be exported, has been fulfilled …

 

The question remains whether PROEX payments are ‘granted’ when the bonds are issued or whether they are granted only when the bonds are redeemed on a semi-annual basis. In our view, PROEX payments should be considered to be ‘granted’ when bonds are issued and title to those bonds is transferred to the lender financial institution … [W]e note that, while the bonds cannot be immediately redeemed, they are freely negotiable. The parties agree that lenders may exercise their right to sell these bonds — albeit at a discount as determined by the market — to other entities rather than waiting until maturity to redeem the bonds themselves. Thus, at the point that title to the bonds is passed to the lenders, those lenders are the holders of a property right with a market value which is immediately realisable. Accordingly, we conclude that PROEX payments are ‘granted’ at that point, and we will calculate the Brazil’s PROEX expenditures on that basis.”⁽²⁷⁷⁾

176.   In Brazil — Aircraft, while agreeing with the Panel on when the subsidy in question was granted, the Appellate Body criticized the Panel for making findings on whether a subsidy existed. More specifically, the Appellate Body held that in the case at hand, the Panel, in its findings on Article 27.4, did not have to make findings on the existence of a subsidy within the meaning of Article 1 of the SCM Agreement, because the export subsidies in that case were already deemed to “exist”.⁽²⁷⁸⁾

177.   The Panel in Brazil — Aircraft (Article 21.5 — Canada II) built on this distinction made by the Appellate Body in Brazil — Aircraft between the question of the existence of a subsidy and the question of the precise moment of the “granting” of such subsidy and held that this distinction, drawn by the Appellate Body in the context of Article 27.4, applied equally with respect to Article 3.2 of the SCM Agreement:

“We recognize that the distinction made by the Appellate Body was between the existence of a subsidy and when a subsidy is granted related to when a subsidy is granted for the purposes of Article 27.4 of the SCM Agreement, and not when it was granted for the purposes of Article 3.2. As a matter of logic, however, we cannot perceive … any basis for us to conclude that, while the existence of a subsidy is a legally distinct issue from when it is granted for the purposes of Article 27.4, it is not a legally distinct issue from when it is granted for the purposes of Article 3.2. In other words, if the issue of when a subsidy is ‘granted’ for the purposes of Article 27.4 is legally distinct from when it ‘exists’ for the purposes of Article 1, then it follows that the issue of when a subsidy is granted for the purposes of Article 3.2 is also legally distinct from the issue when it is exists for the purposes of Article 1.”⁽²⁷⁹⁾

(b) Relationship with other Articles

(i) Article 3.1

178.   In US — FSC (Article 21.5 — EC), the Panel concluded that by maintaining prohibited export subsidies, the defendant also acted inconsistently with Article 3.2 of the SCM Agreement. The Panel stated:

“We therefore view this claim as wholly dependent upon our resolution of the claims under Article 3.1 of the SCM Agreement. Recalling our finding that the Act involves prohibited export subsidies in breach of Article 3.1(a) of the SCM Agreement by reason of the requirement of ‘use outside the United States’, we find that by maintaining the subsidies under the Act, the United States has acted inconsistently with its obligation under Article 3.2 of the SCM Agreement not to maintain subsidies referred to in paragraph 1 of Article 3 of the SCM Agreement.”⁽²⁸⁰⁾

(ii) Article 27.4

179.   With respect to the relationship with Article 27.4, see paragraphs 174–176 above.

5. Relationship with other WTO Agreements

(a) GATT 1994

180.   In Canada — Autos, the Panel, after finding violations of Article III:4 of the GATT 1994 and Article XVII of the GATS, exercised judicial economy with respect to alternative claims under Article 3.1(a). The Appellate Body upheld this exercise of judicial economy:

“In our view, it was not necessary for the Panel to make a determination on the … alternative claim relating to the CVA requirements under Article 3.1(a) … in order ‘to secure a positive solution’ to this dispute. The Panel had already found that the CVA requirements violated both Article III:4 of the GATT 1994 and Article XVII of the GATS. Having made these findings, the Panel, in our view, exercising the discretion implicit in the principle of judicial economy, could properly decide not to examine the alternative claim … that the CVA requirements are inconsistent with Article 3.1(a) of the SCM Agreement.”⁽²⁸¹⁾

(b) Agreement on Agriculture

181.   In Canada — Dairy (Article 21.5 — New Zealand and US), the Panel considered that Article 9.1 of the Agreement on Agriculture and Articles 1.1 and 3.1 of the SCM Agreement can be said to be “closely related” and “part of a logical continuum.” Thus, the Panel considered that its reasoning regarding the claims made under Article 10.1 of the Agreement of Agriculture was equally relevant for the claims made under Articles 1.1 and 3.1 of the SCM Agreement. The Panel noted that:

“[T]he facts underlying the Article 9.1(c) and Article 10.1 claims are, in this case, fully co-extensive. The Panel believes that this conclusion also applies to the facts underlying the claims made under the Agreement on Agriculture, on the one hand, and those made under Articles 1.1 and 3.1 of the SCM Agreement, on the other. In addition, the Panel considers that Article 9.1 of the Agreement on Agriculture and Articles 1.1 and 3.1 of the SCM Agreement can be said to be ‘closely related’ and ‘part of a logical continuum’. Thus, the Panel’s reasoning set forth supra regarding the claims made under Article 10.1 of the Agreement on Agriculture is equally relevant for the claims made under Articles 1.1 and 3.1 of the SCM Agreement.”⁽²⁸²⁾

182.   The Appellate Body in Canada — Dairy (Article 21.5 — New Zealand and US), noted that with regard to agricultural products, the WTO-consistency of an export subsidy has to be determined, in the first place, under the Agriculture Agreement. In this case, the Appellate Body recalled that it was unable to determine whether the measures at issue “conform[] fully” to Articles 9.1(c) or 10.1 of the Agreement on Agriculture. Therefore, the Appellate Body “decline[d] to examine” the claim under Article 3.1(a) of the SCM Agreement.⁽²⁸³⁾ The Appellate Body held:

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

 

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

 

In this appeal, we are unable to determine whether the measure at issue ‘conforms fully’ to Articles 9.1(c) or 10.1 of Part V of the Agreement on Agriculture. In these circumstances, we decline to examine the claim made by the United States that the measure is inconsistent with Article 3.1 of the SCM Agreement.”⁽²⁸⁴⁾

183.   In Canada — Dairy (Article 21.5 — New Zealand and US), the Panel considered that when a Member exceeded its quantity commitment levels, the Panel could only recommend that the Member bring its measures into conformity with its obligations under the Agreement on Agriculture, and it could not require “withdrawal”. Alternatively, assuming for the sake of argument that it could make a recommendation to the Member to “withdraw” the export subsidy, the Panel considered that, pursuant to Article 21.1 of the Agreement on Agriculture and Article 3.1 of the SCM Agreement, the Panel could only do so with respect to that portion of the subsidized exports that exceeded the Member’s reduction commitment levels under the Agreement on Agriculture.⁽²⁸⁵⁾

184.   In upholding the Panel’s findings that Step 2 payments to domestic users of United States upland cotton pursuant to a specific provision of US legislation are subsidies contingent on the use of domestic over imported goods inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement, the Appellate Body in US — Upland Cotton rejected the United States’ argument on appeal that Article 3.1(b) is inapplicable to Step 2 payments to domestic users because such payments are consistent with the United States’ domestic support reduction commitments under the Agreement on Agriculture.⁽²⁸⁶⁾

185.   In finding that Article 3.1(b) of the SCM Agreement is applicable to agricultural products, the Appellate Body examined the relevant provisions of the Agreement on Agriculture in order to determine whether it contains specific provisions that deal specifically with subsidies contingent upon the use of domestic over imported goods in light of the introductory language in Article 3 of the SCM Agreement, which provides “[e]xcept as provided in the Agreement on Agriculture, as well as Article 21 of Agreement on Agriculture, which provides that the covered agreements on goods apply subject to the provisions of the Agriculture Agreement”.⁽²⁸⁷⁾

186.   The Appellate Body in US — Upland Cotton found that both paragraph 7 of Annex 3 and Article 6.3 of the Agreement on Agriculture do not deal specifically with subsidies contingent upon the use of domestic over imported goods as set forth in Article 3.1(b) of the SCM Agreement:

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

 

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

…

Like paragraph 7 of Annex 3, Article 6.3 does not explicitly refer to import substitution subsidies. Article 6.3 deals with domestic support. It establishes only a quantitative limitation on the amount of domestic support that a WTO Member can provide in a given year. The quantitative limitation in Article 6.3 applies generally to all domestic support measures that are included in a WTO Member’s AMS. Article 3.1(b) of the SCM Agreement prohibits subsidies that are contingent — that is, “conditional” — on the use of domestic over imported goods.

 

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

 

Article 6.3 does not provide that compliance with such ‘domestic support reduction commitments’ shall necessarily be considered to be in compliance with other applicable WTO obligations. Nor does it contain an explicit textual indication that otherwise prohibited measures are necessarily justified by virtue of compliance with the domestic support reduction commitments.”⁽²⁸⁸⁾,⁽²⁸⁹⁾

187.   The Appellate Body in US — Upland Cotton also found that since the introductory phrase “[e]xcept as provided in the Agreement on Agriculture” in Article 3.1 of the SCM Agreement applies to both the export subsidy prohibition in Article 3.1(a) and the import substitution subsidy prohibition in Article 3.1(b) it is reasonable to conclude that the drafters would have also included an explicit and clear provision in the Agreement on Agriculture if it was their intention to authorize these prohibited subsidies in respect of agricultural products.⁽²⁹⁰⁾ Moreover, in looking at the introductory phrase, the Appellate Body agreed with the Panel that Article 3.1(b) of the SCM Agreement can be read together with provisions of the Agreement on Agriculture pertaining to domestic support coherently and consistently that gives effective meaning to the relevant terms of both agreements.⁽²⁹¹⁾