DISPUTE SETTLEMENT

DS: European Communities — Measures Affecting Trade in Large Civil Aircraft

This summary has been prepared by the Secretariat under its own responsibility. The summary is for general information only and is not intended to affect the rights and obligations of Members.

  

See also:

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Current status

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Key facts

Short title:
Complainant:
Respondent:
Third Parties:
Agreements cited:
(as cited in request for consultations)
Request for Consultations received:
Panel Report circulated: 30 June 2010
Appellate Body Report circulated: 18 May 2011
Article 21.5 Panel Report circulated: 22 September 2016

 

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Latest document

  

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Summary of the dispute to date

The summary below was up-to-date at

Consultations

Complaint by the United States (See also dispute DS347).

On 6 October 2004, the United States requested consultations with the Governments of Germany, France, the United Kingdom, and Spain (the “member States”), and with the European Communities (“EC”) concerning measures affecting trade in large civil aircraft.

According to the request for consultations from the United States, measures by the EC and the member States provide subsidies that are inconsistent with their obligations under the SCM Agreement and GATT 1994. The measures include: the provision of financing for design and development to Airbus companies (“launch aid”); the provision of grants and government-provided goods and services to develop, expand, and upgrade Airbus manufacturing sites for the development and production of the Airbus A380; the provision of loans on preferential terms; the assumption and forgiveness of debt resulting from launch and other large civil aircraft production and development financing; the provision of equity infusions and grants; the provision of research and development loans and grants in support of large civil aircraft development, directly for the benefit of Airbus, and any other measures involving a financial contribution to the Airbus companies. The subsidies in question include those relating to the entire family of Airbus products (A300 through the A380)

The United States further notes that certain launch aid provided for the A340 and A380 appear to be illegal export subsidies in contravention of certain provisions of Article 3 of the SCM Agreement.

The United States is further concerned that the measures appear to be causing adverse effects to US in a manner contrary to the provisions of Articles 5 and 6 of the SCM Agreement.

The United States is also concerned that the measures appear to be inconsistent with Article XVI:1 of GATT 1994.

Finally, the United States is concerned that the measures have caused and continue to cause nullification or impairment of benefits to the United States under GATT 1994 within the meaning of Article XXIII:1.

On 31 May 2005, the United States requested the establishment of a panel. At its meeting on 13 June 2005, the DSB deferred the establishment of a panel.

 

Panel and Appellate Body proceedings

At its meeting on 20 July 2005, the DSB established a panel. Australia, Brazil, Canada, China, Japan and Korea reserved their third-party rights.

At its 23 September 2005 meeting, the DSB initiated the procedures provided in Annex V of the SCM Agreement.

On 7 October 2005, the United States requested the Director-General to compose the panel. On 17 October 2005, Deputy Director Alejandro Jara, acting in place of the Director-General who recused himself on this matter, composed the panel.

On 13 April 2006, the Chairman of the panel informed the DSB that the panel would not be able to complete its work within six months due to the substantive and procedural complexities involved in this dispute, including the process of developing information concerning serious prejudice under Annex V of the SCM Agreement, another request for consultations by the United States, the panel's subsequent agreement, at the parties' request, to set aside the original timetable for the dispute until an unspecified date in the future, and another request for the establishment of a panel by the United States. The Panel expected to complete its work in 2007. On 14 December 2007, the Chairman of the Panel informed the DSB that due to the substantive and procedural complexities involved in this dispute, it now expected to complete its work in 2008.

On 17 October 2008, the Chairman of the panel informed the DSB that due to, inter alia, the substantive and procedural complexities, and the volume of materials involved in this dispute, it expected to complete its works in 2009.  On 3 December 2009, the Chairman of the panel informed the DSB that due to, inter alia, the substantive and procedural complexities, and the volume of materials involved in this dispute, it now expected to complete its work before the end of April 2010.

Prior to the panel proceedings, a procedure under Annex V of the SCM Agreementfor the collection of information on alleged subsidies that are the subject of serious prejudice complaints under the SCM Agreement was conducted.  The procedure was commenced on 23 September 2005 by the DSB, and involved, inter alia, the exchange of hundreds of questions and answers between the parties, under special procedures for handling confidential and highly sensitive business information.  The Facilitator submitted his report to the panel on 24 February 2006.  Thereafter, the panel timetable was set aside at the request of the parties on 1 March 2006. The United States requested the panel to recommence its work on 4 September 2006, which it did. 

On 30 June 2010, the panel report was circulated to Members.

The measures at issue in this dispute are more than 300 separate instances of alleged subsidization, over a period of almost forty years, by the European Communities and four of its member States, France, Germany, Spain and the United Kingdom, with respect to large civil aircraft (“LCA”) developed, produced and sold by the company known today as Airbus SAS.  The measures that are the subject of the US complaint may be grouped into five general categories: (i) “Launch Aid” or “member State Financing” (LA/MSF); (ii) loans from the European Investment Bank; (iii) infrastructure and infrastructure-related grants; (iv) corporate restructuring measures; and (v) research and technological development funding.  The United States claims that each of the challenged measures is a specific subsidy within the meaning of Articles 1 and 2 of the SCM Agreement, and that the European Communities and the four member States, through the use of these subsidies, cause adverse effects to the US interests within the meaning of Articles 5 and 6 of the SCM Agreement.  In addition, the United States claims that seven of the challenged LA/MSF measures are prohibited export subsidies within the meaning of Article 3 of the SCM Agreement.

Before evaluating the substance of the US claims, the panel resolved a number of preliminary issues, including the temporal scope of the dispute, whether certain measures were subject to consultations, the adequacy of the identification of measures in the request for establishment, and requests for enhanced third party rights.  In addition, with respect to the identity of the subsidy recipient, the panel concluded that, notwithstanding changes in corporate structure, Airbus SAS was the same producer of Airbus LCA as the Airbus Industrie consortium, and that therefore all of the alleged financial contributions provided to entities in the Airbus Industrie consortium found to constitute subsidies would be considered to subsidize Airbus LCA, and would be taken into account for purposes of the analysis of adverse effects.  The panel also rejected the European Communities' argument that various transactions had “extinguished” or “extracted” the benefit of subsidies, or constituted “withdrawal” of subsidies. 

Turning to the allegations of subsidization, the panel found that each of the challenged LA/MSF measures constitutes a specific subsidy.  However, the panel found that the United States had failed to establish the existence, as of July 2005, of a commitment of LA/MSF for the A350 constituting a specific subsidy, and that the United States had failed to demonstrate the existence of a “LA/MSF Programme” as a distinct measure, separate from the individual grants of LA/MSF.   Finally, the panel concluded that the United States had established that the German, Spanish and UK A380 LA/MSF measures are subsidies contingent in fact upon anticipated export performance, and therefore prohibited export subsidies, but that the four other measures challenge in this respect are not prohibited export subsidies, either in law or in fact.

The panel found that each of the 12 challenged loans provided by the European Investment Bank (“EIB”) to various Airbus entities between 1988 and 2002 is a subsidy, but that none of these subsidies was specific, and therefore dismissed the US claims in respect of the EIB loans from further consideration.

The panel found that the provision of (i) the Mühlenberger Loch industrial site; (ii) the lengthened runway at the Bremen airport; and (iii) the ZAC Aéroconstellation and associated EIG facilities, constituted the provision of specific goods and services other than “general infrastructure” and were specific subsidies.  The panel also concluded that the challenged grants provided by national and regional authorities in Germany and Spain for the construction of manufacturing and assembly facilities in several locations in Germany and Spain are specific subsidies.  However, the panel found that road improvements by French authorities related to the ZAC Aéroconstellation industrial site were measures of general infrastructure, and thus not subsidies, and that GBP 19.5 million provided to Airbus UK in respect of its operations in Broughton, Wales, and a grant provided by the government of Andalusia to Airbus in Puerto Santa Maria, were not specific subsidies.

The panel found that the acquisition by Kreditanstalt für Wiederaufbau (“KfW”) of a 20 percent equity interest in Deutsche Airbus in 1989 was inconsistent with the usual investment practice of private investors in Germany, because no private investor seeking a reasonable rate of return on its investment would have made the equity investment in Deutsche Airbus which KfW made at the time, and that the subsequent sale of that interest to Messerschmitt-Bölkow-Blohm GmbH (“MBB”) in 1992 was for considerably less than its market value.  The panel therefore concluded that both of these transactions constituted specific subsidies.

The panel found that the United States had failed to demonstrate that the settlement by the German government of Deutsche Airbus' accumulated debt to the German government in 1998 conferred a benefit on Deutsche Airbus, and dismissed the US claim in this regard.

The panel found that four capital contributions by the French government and Crédit Lyonnais to Aérospatiale between 1987 and 1994 constitute specific subsidies to Airbus because each decision to invest in Aérospatiale was inconsistent with the usual investment practice of private investors in France at the time, and therefore each capital contribution is a specific subsidy.  The panel also found that the French government's transfer of its equity interest in Dassault Aviation to Aérospatiale in 1998 was inconsistent with the usual investment practice of a private investor in France at the time, and therefore is a specific subsidy.

Having first determined the amounts of the challenged grants at issue, the panel concluded that (i) research and technological development (R&TD) grants under the Second, Third, Fourth, Fifth and Sixth EC Framework Programmes; (ii) French government R&TD grants between 1986 and 2005; (iii) German Federal government R&TD grants under the LuFo I, LuFo II and LuFo III programmes; (iv) German sub-Federal government grants from the Bavarian authorities under the OZB and Bayerisches Luftfahrtforschungsprogramm, from the Bremen authorities under the AMST programmes, and from the Hamburg authorities under the Luftfahrtforschungsprogramm; (v) loans under the Spanish government PROFIT and PTA programmes; and (vi) UK government grants under the CARAD and ARP programmes, are specific subsidies.  However, the panel concluded that (i) the German Federal government's commitment to provide Airbus with a certain R&TD grant under the LuFo III programme, and (ii) certain R&TD grants under the UK Technology Programme, are not specific subsidies.

Having determined which of the measures challenged by the United States are specific subsidies, the panel proceeded to evaluate whether these subsidies to Airbus cause adverse effects to the US interests within the meaning of Articles 5(a) and (c) of the SCM Agreement.  Specifically, the panel considered whether, through the use of these subsidies, the European Communities, France, Germany, Spain and the United Kingdom cause or threaten to cause: (i) “injury” to the US industry producing LCA (Article 5(a)); and (ii) “serious prejudice” to US interests (Article 5(c)), in that the effect of the subsidies is (a) to displace or impede imports of US LCA into the EC market, (b) to displace or impede exports of US LCA from third country markets, and (c) significant price undercutting by EC LCA as compared with the price of US LCA in the same market, and significant price suppression, price depression and lost sales in the same market, within the meaning of Articles 6.3(a), (b) and (c) of the SCM Agreement.

The panel first concluded that it was appropriate to conduct the analysis of adverse effects on the basis of one subsidized product, all Airbus LCA, as proposed by the United States, and that there is a single US product that is “like” the subsidized product, namely all Boeing LCA.  With respect to the appropriate “reference period” for the assessment of injury and serious prejudice, the panel rejected the US view that it was required to make the determination concerning adverse effects “as of” the date of establishment of the panel in July 2005.  The panel concluded it is charged with making a determination of “present” adverse effects, taking into account all of the evidence before it, including the most recent information available, consistent with due process, that is relevant and reliable. 

The panel addressed the claims with respect to serious prejudice following a “two-step” approach, considering first whether the evidence demonstrated that the particular market effects identified in Article 6.3(a), (b) and (c) of the SCM Agreement existed, and second whether any of the effects found to exist was caused by the specific subsidies it had found.  The panel concluded that the United States had demonstrated the existence of displacement of imports and exports from the European and certain third country markets, as well as significant price depression, price suppression and lost sales, but had failed to demonstrate the existence of significant price undercutting. 

With respect to causation, the panel concluded that LA/MSF shifts a significant portion of the risk of launching an aircraft from the manufacturer to the governments supplying funding, which was in all instances on non-commercial terms, and that Airbus' ability to launch, develop, and introduce to the market, each of its LCA models was dependent on subsidized LA/MSF.  The panel found that all of the remaining specific subsidies at issue were sufficiently linked to the product and the particular market effects in question to make it appropriate to analyze the effects of the subsidies on an aggregated basis.  The panel concluded that Airbus would have been unable to bring to the market the LCA that it launched as and when it did but for the specific subsidies it received from the European Communities and the governments of France, Germany, Spain and the United Kingdom.  The panel did not conclude that Airbus necessarily would not exist at all but for the subsidies, but merely that it would, at a minimum, not have been able to launch and develop the LCA models it actually succeeded in bringing to the market.  Thus, the panel considered that Airbus' market presence during the period 2001-2006, as reflected in its share of the EC and certain third country markets and the sales it won at Boeing's expense, was clearly an effect of the subsidies in this dispute.   However, the panel rejected the US argument that the specific subsidies in this dispute provided Airbus with significant additional cash flow and other financial resources on non-market terms which allowed it to price its aircraft more aggressively than it would otherwise be able to without those subsidies, or that the effect of LA/MSF on cost of capital was such that it enabled Airbus to lower prices of LCA during the period 2001-2006.  Therefore, the panel concluded that the United States had failed to demonstrate that an effect of the subsidies was the significant price depression or price suppression observed during that period.

Overall, the panel concluded that the United States had established that the effect of the specific subsidies found was (i) displacement of imports of US LCA into the European market; (ii) displacement of exports of US LCA from the markets of Australia, Brazil, China, Chinese Taipei, Korea, Mexico, and Singapore; (iii) likely  displacement of exports of US LCA from the market of India; and (iv) significant lost sales in the same market, and that these effects constituted serious prejudice to the interests of the United States within the meaning of Article 5(c) of the SCM Agreement.  However, the panel concluded that the United States had not established that the effect of the specific subsidies found was (i) significant price undercutting; (ii) significant price suppression; and (iii) significant price depression.  In addition, the panel concluded that the United States had not established that, through the use of the subsidies, the European Communities and certain EC member States cause or threaten to cause injury to the US domestic industry.

Taking into account the nature of the prohibited subsidies it had found in this dispute, and in the light of Article 4.7 of the SCM Agreement, the panel recommended that the subsidizing Member granting each subsidy found to be prohibited withdraw it without delay, specifying that this be within 90 days.  In light of its conclusions with respect to adverse effects, the panel recommended, pursuant to Article 7.8 of the SCM Agreement, that upon adoption of its report, or of an Appellate Body report in this dispute determining that any subsidy has resulted in adverse effects to the interests of the United States, the Member granting each subsidy found to have resulted in such adverse effects “take appropriate steps to remove the adverse effects or ... withdraw the subsidy”.  However, the panel declined to make any suggestions concerning steps that might be taken to implement its recommendations.

On 21 July 2010, the European Union appealed to the Appellate Body certain issues of law covered in the panel report and certain legal interpretations developed by the panel.  On 12 August 2010, the Chairman of the Appellate Body advised the DSB that on 5 August 2010, the European Union requested to amend its Notice of Appeal dated 21 July 2010.  On 11 August 2010, the Appellate Body authorized the European Union to amend its Notice of Appeal.  On 19 August 2010, the United States appealed to the Appellate Body certain issues of law covered in the panel report and certain legal interpretations developed by the panel.

On 17 September 2010, the Chairman of the Appellate Body notified the DSB that it would not be able to issue its report within 60 days due to the considerable size of the record and the complexity of the appeal.  The Appellate Body will hold oral hearings in the appeal in November and December 2010, and will provide thereafter an estimate for circulation of the report.

On 18 May 2011, the Appellate Body Report was circulated to Members.

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. 

At its meeting on 1 June 2011, the DSB adopted the Appellate Body report and the panel report, as modified by the Appellate Body report.

 

Implementation of adopted reports

At the DSB meeting on 17 June 2011, the European Union informed the DSB that the European Union intended to implement the DSB's recommendations and rulings in a manner that respected its WTO obligations, and within the time-limit set out in the SCM Agreement. On 1 December 2011, the European Union informed the DSB that it had taken appropriate steps to bring its measures fully into conformity with its WTO obligations, and to comply with the DSB's recommendations and rulings.  By having taken appropriate steps to bring its measures into conformity with their WTO obligations, the European Union had ensured full implementation of the DSB's recommendations and rulings.  At the DSB meeting on 19 December 2011, the European Union informed the DSB that it had taken appropriate steps to brings its measures into conformity with its WTO obligations, as required by Article 7.8 of the SCM Agreement and Article 19.1 of the DSU.  The European Union said that it has serious systemic concerns that despite its compliance report, the United States had already made a request under Article 22.2 of the DSU to authorize the suspension of concessions and had also initiated consultations under Article 21.5 of the DSU.  The United States said that it had carefully reviewed the European Union's report on compliance but, in its view, the steps taken by the European Union did not bring it into compliance with the DSB's rulings.  The European Union said that there was clearly disagreement on compliance and that Article 21.5 of the DSU provided clear procedures for resolving the disagreement.

 

Compliance proceedings

On 9 December 2011, the United States requested consultations with the European Union pursuant to Article 21.5 of the DSU. On 12 January 2012, the European Union and the United States informed the DSB of Agreed Procedures under Articles 21 and 22 of the DSU and Article 7 of the SCM Agreement. On 30 March 2012, the United States requested the establishment of a compliance panel.  At its meeting on 13 April 2012, the DSB agreed to refer to the original panel, if possible, the matter raised by the United States pertaining to this dispute.  Canada, China, Japan and Korea reserved their third-party rights. Subsequently, Australia and Brazil reserved their third-party rights.  On 17 April 2012, the compliance panel was composed.

On 13 August 2012, the Chairman of the panel informed the DSB that the panel, after consultations with the parties, had adopted a timetable in which it expected to issue its report in 2013.  While the timetable originally adopted was likely to be revised, in light of certain matters being addressed by the parties, the panel continued to expect to issue its report before the end of 2013. On 9 December 2013, the Chairman of the panel informed the DSB that due to the substantive and procedural complexities of this dispute, it would not be possible for the panel to complete it work in 2013. The panel expected to complete its work by the end of 2014. However, on 9 October 2014, the Chair of the panel informed the DSB that due to the substantive and procedural complexities of the dispute, and having further reviewed the work that remains to be completed, it expected to complete its work by the end of 2015. On 11 December 2015, the Chair of the panel informed the DSB that due to the substantive and procedural complexities of the dispute, and having further reviewed the work that remains to be completed, it expected to complete its work by the end of June 2016.

On 22 September 2016, the compliance panel report was circulated to Members.

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

  1. 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

  1. 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”.
     
  2. 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

  1. 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.
     
  2. 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.
     
  3. 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.
     
  4. 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.
     
  5. 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.
     
  6. 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.
     
  7. 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

  1. 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”

  1. 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.
     
  2. 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.
     
  3. 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”

  1. 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

  1. 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.
       
  2. 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.

On 13 October 2016, the European Union notified the DSB of its decision to appeal certain issues of law and legal interpretations developed by the compliance panel. On 10 November 2016, the United States notified the DSB of its decision to cross-appeal.

On 21 December 2016, the Appellate Body informed the DSB that it would not be able to circulate the Appellate Body report in this appeal by the end of the 60-day period, or within the 90‑day timeframe provided for in the last sentence of Article 17.5 of the DSU, due to the exceptional size and complexity of these compliance proceedings. The Appellate Body also informed the DSB that the circulation date of the Appellate Body report in this appeal would be communicated to the participants and third participants in due course.

 

Proceedings under Article 22 of the DSU (remedies)

On 9 December 2011, the United States, being of the view that the European Union and certain member States had failed to comply with the DSB's recommendations and rulings, requested authorization by the DSB to take countermeasures under Article 22 of the DSU and Article 7.9 of the SCM Agreement.  At the DSB meeting on 22 December 2011, the European Union objected to the level of suspension of concessions or other obligations contained in the United States' request and claimed that the principles and procedures set forth in Article 22.3 of the DSU had not been followed.  The European Union also stated that the United States' proposal is not allowed under the covered agreements. The European Union requested the matter be referred to arbitration under Article 22.6 of the DSU.  The DSB agreed that the matter raised by the European Union in its statement at that meeting was referred to arbitration as required by Article 22.6 of the DSU.

On 19 January 2012, the United States and the European Union requested the Arbitrator to suspend its work.  As stated in paragraph 6 of the Agreed Procedures, in the event that the DSB, following a proceeding under Article 21.5 of the DSU, rules that the measure taken to comply does not exist or is inconsistent with a covered agreement, either party may request the Article 22.6 arbitrator to resume its work.  In accordance with the parties' joint request, the Arbitrator suspended the arbitration proceedings from 20 January 2012 until either party requests their resumption.

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