DS: European Communities and Certain member States — Measures Affecting Trade in Large Civil Aircraft

The Appellate Body today upheld the Panel's finding that certain subsidies provided by the European Union and certain Member state governments to Airbus are incompatible with Article 5(c) of the SCM Agreement because they have caused serious prejudice to the interests of the United States.  The principal subsidies covered by the ruling include financing arrangements (known as “Launch Aid” or “Member state financing”) provided by France, Germany, Spain, and the UK for the development of the A300, A310, A320, A330/A340, A330-200, A340-500/600, and A380 LCA projects.  The ruling also covers certain equity infusions provided by the French and German governments to companies that formed part of the Airbus consortium.  Additionally, it covers certain infrastructure measures provided to Airbus, namely, the lease of land at the Mühlenberger Loch industrial site in Hamburg, the right to exclusive use of an extended runway at Bremen airport, regional grants by the German authorities in Nordenham, and Spanish government grants and regional grants by Andalucia and Castilla-La Mancha in Sevilla, La Rinconada, Toledo, Puerto Santa Maria, and Puerto Real.  The Appellate Body  found that the effect of the subsidies was to displace exports of Boeing single-aisle and twin-aisle LCA from the European Union, Chinese, and Korean markets and Boeing single-aisle LCA from the Australian market.  Moreover, the Appellate Body confirmed the Panel's determination that the subsidies caused Boeing to lose sales of LCA in the campaigns involving the A320 (Air Asia, Air Berlin, Czech Airlines, and easyJet), A340 (Iberia, South African Airways, and Thai Airways International), and A380 (Emirates, Qantas, and Singapore Airlines) aircraft.

However, for different reasons, the Appellate Body excluded certain measures from the scope of the finding of serious prejudice.  In particular, the finding under Article 5(c) of the SCM Agreement no longer includes the 1998 transfer of a 45.76% interest in Dassault Aviation to Aérospatiale; the special purpose facilities at the Mühlenberger Loch industrial site in Hamburg, Aéroconstellation industrial site and associated facilities (taxiways, parking, etc.) in Toulouse, or the various research and technology development (R&TD) measures that had been challenged by the United States (Spanish PROFIT Programme, grants under Second, Third, Fourth, Fifth, and Sixth EC Framework Programmes; 1986-1993 R&TD grants by French government; Luftfahrtforschungsprogramm I, II, and III German grants; grants by Bavarian, Bremen, and Hamburg authorities; civil aircraft research and development and aeronautics research programmes by the UK government).  The Appellate Body also reversed the Panel's findings of displacement in Brazil, Mexico, Singapore, and Chinese Taipei, and of threat of displacement in India.

Moreover, the Appellate Body disagreed with the Panel’s views on when subsidies can be considered as being de facto contingent upon anticipated export performance.  Consequently, the Appellate Body reversed the Panel's findings that the financing provided by Germany, Spain and the UK to develop the A380 was contingent upon anticipated exportation and thus a prohibited export subsidy under Article 3.1(a) and footnote 4 of the SCM Agreement.  The Appellate Body also rejected the United States’ cross-appeal of the Panel finding that it had not been established that certain other member State financing contracts constituted prohibited export subsidies.  As a consequence, the Appellate Body reversed the Panel's recommendation that the European Union withdraw prohibited subsidies within 90 days.  The Appellate Body also found that the United States' claims regarding an alleged unwritten launch aid/member State financing programme were outside its jurisdiction.  In addition, the Appellate Body reversed the Panel’s findings regarding the rate of return that a market lender would have demanded for launch aid/member State financing loans because they were not based on an objective assessment; but found that a benefit was conferred even on the basis of the European Union's calculations.  Finally, with respect to the actionable subsidies that have been found to cause adverse effects to the interests of the United States, the Panel's recommendation that the European Union “take appropriate steps to remove the adverse effects or … withdraw the subsidy” stands.

The Panel in this case was established in July 2005.  The Panel circulated its Report to WTO Members on 30 June 2010;  and the European Union filed a Notice of Appeal on 21 July 2010.  

A separate dispute brought by the European Union against the United States for subsidies allegedly provided to Boeing is currently before the Appellate Body.  The panel report in that dispute was circulated to WTO Members on 31 March 2011.  Both the European Union and the United States have appealed aspects of that panel report. 

Introduction

1. The United States' complaint in this compliance dispute concerns the alleged failure on the part of the European Union and certain member States to implement the recommendations and rulings adopted by the Dispute Settlement Body (DSB) in the original proceeding EC and certain member States – Large Civil Aircraft.
    
2. The United States maintained that the European Union and certain member States failed to comply with the DSB recommendations and rulings for two main reasons. First, the United States claimed that the European Union and certain member States failed to act in conformity with the obligation in Article 7.8 of the SCM Agreement to “take appropriate steps to remove the adverse effects” or “withdraw the subsidy” because not only do the subsidies found to have caused adverse effects in the original proceeding continue to cause adverse effects today, but also because by agreeing to provide Airbus with LA/MSF for Airbus' latest model of LCA, the A350XWB, France, Germany, Spain and the United Kingdom “continued and even expanded” the subsidization of Airbus' LCA activities, thereby causing “additional adverse effects” to the United States' interests, within the meaning of Articles 5(c) and 6.3 of the SCM Agreement. Second, the United States claimed that France, Germany, Spain and the United Kingdom failed to comply with the recommendations and rulings adopted by the DSB because, according to the United States, the A350XWB LA/MSF measures are prohibited export and/or import substitution subsidies, within the meaning of Articles 3.1 and 3.2 of the SCM Agreement, claims that the United States also made in relation to the A380 LA/MSF subsidies.
    
3. The European Union rejected the entirety of the United States' claims. In particular, the European Union maintained that the subsidies found to cause adverse effects in the original proceeding had either been “withdrawn” or were no longer a “genuine and substantial” cause of “adverse effects”. Moreover, the European Union argued that the United States' claims against the A350XWB LA/MSF measures and the prohibited subsidy claims the United States raised against the A380 LA/MSF subsidies were outside of the scope of the compliance proceeding or, in any case, without merit.
    
4. The Panel addressed the parties' submissions in four main parts: First, the Panel reviewed the European Union's compliance communication of 1 December 2011, in which the European Union had identified 36 alleged compliance “steps”; second, the Panel evaluated the merits of the European Union's contention that the A350XWB LA/MSF measures and certain claims made by the United States did not fall within the scope of the compliance proceeding; third, the Panel considered whether the United States had established that the LA/MSF measures for the A350XWB and the A380 constituted prohibited subsidies, within the meaning of Articles 3.1 and 3.2 of the SCM Agreement; and fourth, the Panel determined the merits of the United States' claim that the European Union and certain member States failed to “withdraw” the subsidies or “take appropriate steps to remove the adverse effects”, within the meaning of Article 7.8 of the SCM Agreement. 

The European Union's Compliance Communication

5. The Panel considered that of the 36 alleged compliance “steps” listed by the European Union in its communication to the DSB of 1 December 2011, only two could be properly characterized as actions relating to the degree of ongoing subsidization of Airbus LCA. The Panel considered that the remaining 34 alleged compliance “steps” notified by the European Union represented the assertion of facts or presentation of arguments for the purpose of supporting the European Union's theory of compliance based on the following main contentions: (a) the adopted rulings and recommendations give rise to no compliance obligation at all, under the terms of Article 7.8 of the SCM Agreement, with respect to “expired” subsidies; (b) an “expired” subsidy means that it has been “withdrawn” for the purpose of Article 7.8 of the SCM Agreement; (c) an “expired” subsidy cannot cause adverse effects in the context of a proceeding initiated under Article 21.5 of the DSU; and (d) the passage of time, and events that have taken place over the passage of time, have diluted the causal link established in the original proceeding such that the challenged subsidies are no longer a “genuine and substantial” cause of adverse effects in the post-implementation period. Thus, the Panel found that apart from the two “actions” identified above, the European Union's affirmation of compliance was not grounded in any specific conduct on the part of the European Union and certain member States with respect to the subsidies provided to Airbus or the adverse effects those subsidies were found to have caused in the original proceeding. The Panel concluded that, fundamentally, the European Union's view that it had achieved full compliance was, rather, based on its understanding of the scope and nature of the obligations arising out of the adopted recommendations and rulings as well as its own interpretation of the applicable law and legal provisions, including Article 7.8 of the SCM Agreement.

Whether the A350XWB LA/MSF Measures Fell within the Scope of the Compliance Proceeding

6. Drawing from established WTO jurisprudence concerning the extent to which measures that are not “declared” “measures taken to comply” may be challenged in a compliance proceeding, the Panel found that the nature, effect and timing of the A350XWB LA/MSF measures evidenced the existence of a “particularly close relationship” (a “close nexus”) between the A350XWB LA/MSF measures, the “declared” “measures taken to comply” and the adopted recommendations and rulings from the original proceeding. In particular, the Panel found that the A350XWB LA/MSF measures had a similar nature to the pre-A350XWB LA/MSF measures because they were all: (a) loan agreements; (b) containing the same four “core” repayment terms; (c) entered into by essentially the same parties (Airbus and the Airbus governments); and (d) for the purpose of financing part of the development costs of Airbus LCA (in particular, a new model of Airbus twin-aisle LCA). The Panel also determined that the effects of the A350XWB LA/MSF measures could undermine the European Union's compliance with the adopted rulings and recommendations because it was anticipated that the A350XWB would replace the A330 and A340 (both of which had been: (a) launched, developed and brought to market with the assistance of pre-A350XWB LA/MSF; and (b) sold into a customer space in which the United States' LCA industry was found to have suffered serious prejudice in the original proceeding). Finally, the Panel concluded that the fact that the A350XWB LA/MSF measures were concluded before the recommendations and rulings were adopted by the DSB (and, therefore, before the European Union incurred a compliance obligation) did not sever the link it had found to exist in terms of the nature and effects of the A350XWB LA/MSF measures, the adopted recommendations and rulings, and the European Union's alleged compliance “actions”.
    
7. Accordingly, the Panel found that the United States had established that the A350XWB LA/MSF measures satisfied the “close nexus” test and, therefore, that they were “closely connected” with the adopted DSB recommendations and rulings and the European Union's alleged compliance “actions”, such that they should be brought within the scope of the proceeding.

Prohibited subsidy claims

8. The first part of the Panel's evaluation of the United States' prohibited subsidy claims against the A350XWB LA/MSF measures was focused on determining the merits of the United States' claim that each measure amounted to a specific subsidy, within the meaning of Articles 1 and 2 of the SCM Agreement.
    
9. The United States argued that each of the A350XWB LA/MSF measures entered into by Airbus and France, Germany, Spain and the United Kingdom, was a “financial contribution” in the form of a “loan”, within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement, that conferred a “benefit” on Airbus, within the meaning of Article 1.1(b) of the SCM Agreement, by virtue of the below-market interest rates Airbus was charged for the financing. The European Union did not contest the United States' characterization of the LA/MSF measures as “financial contributions”. However, according to the European Union, the A350XWB LA/MSF measures did not confer a “benefit” upon Airbus because the United States could not show that the financing was provided at below-market interest rates.
    
10. After constructing the relevant market interest rate benchmarks, the Panel compared the results with the internal rates of return determined for each of the relevant LA/MSF contracts and found that, in each case, the rates of return were, to differing degrees, below the market interest rate benchmark. Thus, the Panel found that the A350XWB LA/MSF measures were provided at below-market interest rates. Accordingly, the Panel concluded that the terms of the A350XWB LA/MSF measures conferred a “benefit” upon Airbus, making them subsidies, within the meaning of Article 1 of the SCM Agreement.
     
11. The Panel next turned to evaluate the merits of the United States' prohibited subsidy claims against the A380 LA/MSF measures and the A350XWB LA/MSF measures. The Panel dismissed the United States' claims.
     
12. Although the compliance Panel found that the United States had demonstrated that the challenged measures were subsidiesgranted in anticipation of export performance, the Panel found that the United States had not demonstrated that the granting of those subsidies was, in fact, contingent upon export performance. Accordingly, the Panel found that the United States failed to demonstrate that the A380 and A350XWB LA/MSF measures constitute prohibited export subsidies within the meaning of Article 3.1(a) and footnote 4 of the SCM Agreement.
     
13. The Panel also rejected the United States' claim that the A350XWB LA/MSF measures are prohibited import substitution subsidies, to the extent that they explicitly provide for the granting of subsidies contingent upon Airbus producing certain domestic LCA-related goods, which are subsequently assembled or used to make Airbus LCA. The Panel found that even if the A350XWB LA/MSF contracts were contingent on the domestic production of certain LCA-related goods that were then used in the production of Airbus LCA, as the United States claimed, this fact alone could not establish that the subsidy measures were contingent, whether in law or in fact, on the use of domestic over imported goods. The Panel noted that all domestic production subsidies could in one way or another increase the consumption of domestically produced goods by downstream entities. In this context, the Panel considered that the United States' theory of contingency could result in many domestic production subsidies being considered prohibited import substitution subsidies. The Panel considered such a result to be particularly questionable given that Article III:8(b) of the GATT 1994 explicitly provides that the practice of a WTO member granting subsidies exclusively to domestic producers (i.e. domestic production subsidies) should not be disciplined under Article III:4 of the GATT 1994, which, like Article 3.1(b) of the SCM Agreement, also prohibits import substitution subsidies.
     
14. Accordingly, the Panel concluded that the United States failed to demonstrate that the A350XWB LA/MSF measures were prohibited import substitution subsidies within the meaning of Article 3.1(b) of the SCM Agreement.  

Whether the European Union complied with the obligation to “take appropriate steps to remove the adverse effects” or “withdraw the subsidy”, pursuant to Article 7.8 of the SCM Agreement

15. Article 7.8 of the SCM Agreement specifies what an implementing Member must do following the adoption of a panel and/or Appellate Body report in which it is determined that any specific subsidy has caused adverse effects to the interests of another Member, within the meaning of Article 5 of the SCM Agreement. In particular, Article 7.8 calls upon the “Member granting or maintaining such subsidy” to “take appropriate steps to remove the adverse effects or withdraw the subsidy”. The difficult interpretative question that was at the centre of the United States' claims of non-compliance in this dispute was how to give meaning to this requirement in the context of the substantive disciplines of Article 5 of the SCM Agreement, which focus not on the existence of a particular type of measure (as other disciplines found in the covered agreements), but rather on the trade effects that may be attributed to a measure, whether or not it continues to exist.

Whether the United States demonstrated that the European Union and certain member States had failed to “withdraw the subsidy”

16. The Panel concluded that the European Union had established that the anticipated (ex ante) “lives” of the French, German and Spanish LA/MSF subsidies for the A300B/B2/B4, A300-600, A310, A320, A330/A340, and the UK LA/MSF subsidies for the A320 and A330/A340, all came to an end before the end of the implementation period. Furthermore, the Panel also found that the European Union had demonstrated that the ex ante “lives” of the French and German government capital contribution subsidies came to an end before the end of the implementation period. The Panel was satisfied that the European Union had shown that the ex ante “lives” of these subsidies had “expired” not because they were somehow brought to a premature end by, for example, having been repaid or because of the alignment of their terms with a market benchmark, but rather because the total period of time over which their “projected value” was expected to “materialize” had passively transpired in the absence of any “intervening event”. In other words, the Panel found that the ex ante “lives” of the relevant subsidies had "expired" simply because they had been fully provided to Airbus as originally planned and expected. With respect to all other subsidies at issue in this dispute, the Panel found that the European Union had failed to demonstrate that they “expired”, or were “extinguished” or “extracted”, before the end of the implementation period.
     
17. The Panel recalled that, in dismissing the European Union's contention that Article 7.8 imposed no compliance obligation on the European Union and certain member States in relation to subsidies that ceased to exist prior to 1 June 2011, it had found that one of the fundamental objectives of Article 7.8 is to bring an implementing Member into conformity with its obligations under Article 5 of the SCM Agreement. According to the Panel, the logical implication of this finding was that it cannot be concluded on the sole basis of the “expiry” of the relevant LA/MSF and capital contribution subsidies that the European Union and certain member States had ipso facto complied with the obligation to “withdraw the subsidy” with respect to those measures. Rather, in the light of the effects-based nature of the subsidy disciplines of Article 5, the Panel was of the view that the extent to which the passive “expiry” events may be found to amount to the “withdrawal” of subsidies for the purpose of Article 7.8 will depend upon the extent to which they bring the European Union and certain member States into conformity with Article 5 of the SCM Agreement.
     
18. Accordingly, the Panel found that the European Union had failed to demonstrate that the mere fact that the “lives” of certain subsidies had expired before the end of the implementation period ipso facto implied that the European Union and certain member States had complied with the obligation to “withdraw the subsidy” for the purpose of Article 7.8. Thus, the Panel found that the United States had established that the European Union and certain member States had failed to “withdraw” the subsidies, for the purpose of Article 7.8.

Whether the United States demonstrated that the European Union and certain member States had failed to “take appropriate steps to remove the adverse effects”

19. The Panel found the United States to have demonstrated that the European Union and certain member States failed to “take appropriate steps to remove the adverse effects” because:
     
1. the “product effects” of the challenged LA/MSF subsidies are a “genuine and substantial” cause of displacement and/or impedance of United States LCA from the markets for single-aisle, twin-aisle and very large LCA in the European Union, within the meaning of Article 6.3(a) of the SCM Agreement, constituting serious prejudice to the interests of the United States within the meaning of Article 5(c) of the SCM Agreement;
    
2. the “product effects” of the challenged LA/MSF subsidies are a “genuine and substantial” cause of displacement and/or impedance of exports of United States LCA to the market for single-aisle LCA in Australia, China and India, the market for twin-aisle LCA in China, Korea and Singapore and the market for very large LCA in Australia, China, Korea, Singapore and the United Arab Emirates, within the meaning of Article 6.3(b) of the SCM Agreement, constituting serious prejudice to the interests of the United States within the meaning of Article 5(c) of the SCM Agreement;
    
3. the “product effects” of the challenged LA/MSF subsidies are a “genuine and substantial” cause of significant lost sales of United States LCA in the global markets for single-aisle, twin-aisle and very large LCA, within the meaning of Article 6.3(c) of the SCM Agreement, constituting serious prejudice to the interests of the United States within the meaning of Article 5(c) of the SCM Agreement; and
    
4. the effects of the aggregated capital-contribution subsidies and certain infrastructure-related grants “complement and supplement” the relevant effects of the aggregated LA/MSF subsidies and, therefore, are a “genuine” cause of serious prejudice to the interests of the United States within the meaning of Article 5(c) of the SCM Agreement.

Overall conclusion

20. In summary, the Panel found that:
     
1. The United States failed to demonstrate that the French, German, Spanish and UK A80 and A350XWB LA/MSF measures constituted prohibited export subsidies within the meaning of Article 3.1(a) and footnote 4 of the SCM Agreement;
    
2. The United States failed to demonstrate that the French, German, Spanish and UK A350XWB LA/MSF measures constituted prohibited import substitution subsidies within the meaning of Article 3.1(b) of the SCM Agreement; and
    
3. The United States demonstrated that the European Union and certain member States failed to comply with the adopted DSB recommendations and rulings and, in particular, the obligation under Article 7.8 of the SCM Agreement “to take appropriate steps to remove the adverse effects or … withdraw the subsidy”, to the extent that the effects of the challenged LA/MSF subsidies and the non-LA/MSF subsidies continue to be, respectively, a “genuine and substantial” and “genuine”, cause of serious prejudice to the United States' interests in the post-implementation period, within the meaning of Articles 5(c) and 6.3(a), (b) and (c) of the SCM Agreement.
    
21. The Panel therefore concluded that the European Union and certain member States failed to implement the recommendations and rulings of the DSB to bring its measures into conformity with its obligations under the SCM Agreement, and to this extent, that the adopted recommendations and rulings remained operative.

A350XWB subsidies: The Appellate Body upheld the Panel's finding that Airbus paid a lower interest rate for the A350XWB LA/MSF than would have been available to it on the market and, consequently, a benefit was thereby conferred within the meaning of Article 1.1(b) of the SCM Agreement. The Appellate Body also upheld the Panel's finding that each of the French, German, Spanish, and UK A350XWB LA/MSF contracts constitutes a subsidy within the meaning of the SCM Agreement.

Prohibited (import substitution) subsidies: The Appellate Body agreed with the Panel that the fact that a subsidy results in the use of domestic over imported goods cannot by itself demonstrate that that subsidy is contingent on the use of domestic over imported goods, whether in law or in fact.The Appellate Body dealt with a similar claim in United States — Conditional Tax Incentives for Large Civil Aircraft. Based on its analysis, the Appellate Body upheld the Panel's finding that the United States had failed to establish that the subsidies at issue are prohibited import substitution subsidies. The Panel finding rejecting the claim alleging prohibited subsidies contingent on export performance was not appealed.

Compliance obligation under Article 7.8 of the SCM Agreement with respect to expired subsidies: The Appellate Body agreed with the European Union that an implementing Member cannot be required to “withdraw” a subsidy that no longer exists, or to “remove” the “effects” of such subsidies that do not exist. The Appellate Body therefore disagreed with the manner in which the Panel characterized the scope of the compliance obligation under Article 7.8 of the SCM Agreement. Rather, having upheld the Panel's finding that certain LA/MSF subsidies had expired before the end of the implementation period on 1 December 2011, the Appellate Body found that the European Union had no compliance obligation with respect to these subsidies. The Appellate Body underscored that the pertinent question for purposes of these compliance proceedings was whether the subsidies existing in the post‑implementation period (i.e. after 1 December 2011) caused adverse effects.

Adverse effects: The Appellate Body upheld the Panel's finding that the United States had brought its adverse effects claims with respect to appropriately defined product markets for LCA, namely, the global markets for single-aisle LCA, twin‑aisle LCA, and very large aircraft. The Appellate Body then focused its review on the Panel's analysis and findings regarding the effects of the subsidies existing in the post-implementation period, that is, essentially the A380 LA/MSF and the A350XWB LA/MSF subsidies. The Appellate Body disagreed with the European Union's claim that the Panel erred in its analysis regarding the “product effects” of these subsidies, that is, the effects of these subsidies on Airbus' ability to bring the A380 and A350XWB to the market as and when it did. Rather, in the Appellate Body's view, the Panel's findings, as well as relevant findings from the original proceedings, establish that the LA/MSF subsidies existing in the post-implementation period made it possible for Airbus to proceed with the timely launch of the A350XWB and to bring to market the A380, and that both events were crucial to renew and sustain Airbus' competitiveness in the post‑implementation period. The Appellate Body subsequently considered whether the “product effects” of the LA/MSF subsidies existing in the post-implementation period, in light of the competition in the relevant product markets as determined by the Panel, supported the conclusion that the LA/MSF subsidies caused adverse effects in the form of significant lost sales, displacement, and impedance of US LCA.

Conclusion: Based on its review of the Panel's analysis, the Appellate Body ultimately upheld the Panel's conclusion that insofar as significant lost sales in the twin-aisle markets (in which Airbus and Boeing sell the A330, A350XWB, 767, 777, and 787 product families) and significant lost sales and impedance in the very large aircraft markets (the A380 and 747) are concerned, the European Union had failed to comply with the recommendations and rulings of the DSB in the original dispute because the underlying subsidies continued to exist and cause adverse effects. The Appellate Body, however, did not uphold the Panel's findings of displacement in these two markets or its finding of impedance in the twin-aisle market. With regard to the market for single-aisle aircraft (in which the A320 and Boeing 737 compete), the Appellate Body observed that the Panel's findings concerned primarily the effects of subsidies that had expired before 1 December 2011 (the time by which the European Union had been required to comply with the recommendations and rulings of the DSB in the original dispute). The Appellate Body was not convinced that the Panel's analysis in this regard provided a sufficient basis to find that subsidies provided to Airbus continued to cause adverse effects in the market for single-aisle aircraft.

On this basis, in respect of subsidies existing in the post-implementation period, the Appellate Body upheld, albeit for different reasons, the Panel's conclusions that “{b}y continuing to be in violation of Articles 5(c) and 6.3(a), (b) and (c) of the SCM Agreement” insofar as the twin-aisle LCA and VLA markets are concerned, “the European Union and certain member States have failed to comply with the DSB recommendations and rulings and … the obligation under Article 7.8 of the SCM Agreement ‘to take appropriate steps to remove the adverse effects or … withdraw the subsidy’”; and that, “{t}o the extent that the European Union and certain member States have failed to comply with the recommendations and rulings of the DSB in the original dispute, those recommendations and rulings remain operative.”

The subsidies at issue in this proceeding were actionable subsidies disciplined under Part III of the SCM Agreement. The Arbitrator determined that the level of countermeasures “commensurate with the degree and nature of the adverse effects determined to exist”, in the December 2011-2013 reference period (which was the same reference period used in the compliance proceedings) within the meaning of Article 7.10 of the SCM Agreement, amounts to USD 7,496.623 million per annum. Therefore, the Arbitrator concluded that the United States may request authorization from the DSB to take countermeasures with respect to the European Union and certain member States, as indicated in document WT/DS316/18, at a level not exceeding, in total, USD 7,496.623 million annually.

These countermeasures may take the form of (a) suspension of tariff concessions and related obligations under the GATT 1994, and/or (b) suspension of horizontal or sectoral commitments and obligations contained in the United States' services schedule with regard to all services defined in the Services Sectoral Classification List, except for financial services.

Introduction

This proceeding concerns the European Union's request that the Panel find that it, and certain member States, have achieved full substantive compliance with the DSB's recommendations and rulings in the original and first compliance proceedings in EC and certain member States — Large Civil Aircraft.

The European Union asserted that it had achieved compliance through the adoption of a series of 18 additional measures that, in its view, constituted “appropriate steps to address the remaining and additional elements of the DSB's recommendations and rulings, either through the withdrawal of subsidies or the removal of the adverse effects”. The 18 “steps” included amendments made to the original LA/MSF loan agreements between Airbus and France, Germany, Spain and the United Kingdom used to fund the development of the A380 LCA; an amendment to the German LA/MSF agreement to fund development of the A350XWB LCA; and the alleged repayment of outstanding principal and interest of the UK LA/MSF loan agreement used to fund development of the A350XWB.

The United States rejected the entirety of the European Union' claims. Rather than achieving compliance, the United States maintained that the actions identified by the European Union have increased the amount of the subsidies provided to Airbus and prolonged their lives rather than achieving compliance or removing the adverse effects that the LA/MSF subsidies were found to cause. Moreover, the United States asked the Panel to find that the European Union has failed to achieve full substantive compliance with the DSB's recommendations and rulings by maintaining certain research and technological development subsidies, which the United States argued alone or together with the LA/MSF subsidies at issue, continue to cause adverse effects to the United States' interests.

Whether the United States' claims against certain research and technological development (R&TD) measures are outside the Panel's terms of reference

The European Union argued that the United States' complaint against the R&TD measures was not within the Panel's terms of reference because the R&TD measures were not identified in the European Union's panel request. In the absence of any reference to the specific R&TD measures in the European Union's panel request, the European Union argued that the proper course of action for the United States would have been to follow the guidance of the Appellate Body in US — Continued Suspension/Canada — Continued Suspension, and initiate its own Article 21.5 proceeding in which the United States could have raised its specific complaint against those measures.

The Panel found that the panel and Appellate Body reports in the Continued Suspension disputes do not provide clear guidance for determining whether the United States is entitled to have the merits of its claims against the R&TD measures examined in this “reverse” Article 21.5 dispute. Ultimately, the Panel determined that it was not necessary to decide this legal question, because even assuming, arguendo, that the absence of any reference to the challenged R&TD measures in the European Union's panel request could not prevent the United States from raising claims, the Panel considered that it would be precluded from addressing them on other procedural grounds. In particular, the Panel concluded that the United States was not entitled to raise claims in this second compliance proceeding against the R&TD measures that were the subject of findings in the original proceeding, as well as those more recent R&TD measures, which were not addressed in the original proceeding, but could have been challenged by the United States in the first compliance proceeding. The Panel further found that the United States has failed to establish that the most recent R&TD measures have “sufficiently close links” with the relevant measures taken to comply and the DSB's recommendations and rulings such that it would be appropriate to characterize them as “measures taken to comply”.

Whether the European Union demonstrated that the A350XWB and A380 LA/MSF subsidies have been withdrawn for the purpose of Article 7.8 of the SCM Agreement

The Panel found that the European Union failed to demonstrate that it had achieved the withdrawal of the French, German, Spanish and UK A380 LA/MSF subsidies, or the German and UK A350XWB LA/MSF subsidies, for purposes of Article 7.8 of the SCM Agreement. In particular, the Panel concluded the following:

• The European Union failed to demonstrate that modifications to the original German A350XWB LA/MSF loan agreement meant that the pre-existing subsidy had been “replaced” by a new and different loan, which resulted in the “withdrawal” of the subsidy;
• The European Union demonstrated that Airbus had repaid all outstanding principal and interest accrued under the UK A350XWB LA/MSF contract. However, the Panel rejected the European Union's argument that the repayment of a loan on subsidized terms would on its own bring the life of a subsidy to an end for the purpose of a Member's compliance obligations under Article 7.8 of the SCM Agreement; and
• The European Union failed to demonstrate that amendments to the four A380 LA/MSF agreements achieved the withdrawal of the subsidies conferred under those agreements. Specifically, the Panel concluded that the European Union failed to demonstrate that a commercial lender, faced with the likely termination of the A380 programme, would have entered into the A380 LA/MSF amendments on the terms agreed between Airbus and the relevant member State governments, to achieve the withdrawal of the pre-existing subsidies by aligning their terms with a market benchmark. The Panel also rejected the European Union's additional argument that the Spanish A380 LA/MSF subsidy has been withdrawn as a result of the alleged amortization of benefit of the pre-existing subsidy. Finally, the Panel rejected the European Union's argument that Airbus' announcement to “wind down” the A380 programme at present achieved the withdrawal of the French, German, Spanish and UK A380 LA/MSF subsidies.

Whether the European Union and certain member States had failed to “take appropriate steps to remove the adverse effects”

The Panel found that the European Union and certain member States failed to “take appropriate steps to remove the adverse effects” because:

• In the VLA product market, the “product” effects of the LA/MSF subsidies are a “genuine and substantial” cause of the impedance of the exports of a like product of the United States from Singapore and the United Arab Emirates within the meaning of Article 6.3(b) of the SCM Agreement, constituting serious prejudice to the interests of the United States within the meaning of Article 5(c) of the SCM Agreement;
• In the twin-aisle product market, the “product” effects of the LA/MSF subsidies are a “genuine and substantial” cause of impedance of the imports of a like product of the United States into the European Union within the meaning of Article 6.3(a) of the SCM Agreement, and are a “genuine and substantial” cause of the impedance of the exports of a like product of the United States from China, Korea, and Singapore within the meaning of Article 6.3(b) of the SCM Agreement, constituting serious prejudice to the interests of the United States within the meaning of Article 5(c) of the SCM Agreement; and
• In the twin-aisle product market, the "product" effects of the LA/MSF subsidies are a “genuine and substantial” cause of significant lost sales to the US LCA industry in the global market for twin-aisle LCA within the meaning of Article 6.3(c) of the SCM Agreement, constituting serious prejudice to the interests of the United States within the meaning of Article 5(c) of the SCM Agreement.

Overall conclusion

The Panel therefore concluded that the European Union and certain member States failed to implement the recommendations and rulings of the DSB to bring its measures into conformity with its obligations under the SCM Agreement, and to this extent, that the adopted recommendations and rulings remained operative.