DISPUTE SETTLEMENT

DS: United States — Measures Affecting Trade in Large Civil Aircraft Ś Second Complaint

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: 31 March 2011
Appellate Body Report circulated: 12 March 2012
Article 21.5 Panel Report circulated: 9 June 2017

  

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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 European Communities.

On 27 June 2005, the European Communities requested consultations with the United States concerning prohibited and actionable subsidies provided to US producers of large civil aircraft. (See also dispute DS317).

The European Communities considers that the measures cited in its request for consultations are inconsistent with:

  • Articles 3.1(a), 3.1(b), 3.2, 5(a), 5(c), 6.3(a), 6.3(b) and 6.3(c) of the SCM Agreement; and
     
  • Article III:4 of the GATT 1994.

 

Panel and Appellate Body proceedings

On 20 January 2006, the European Communities requested the establishment of a panel. Having deferred the establishment of a panel on 2 February 2006, the DSB established a panel at its meeting on 17 February 2006. Australia, Brazil, Canada, China and Japan reserved their third-party rights at the meeting. Subsequently, Korea reserved its third-party rights. On 17 November 2006, the European Communities requested the Director-General to determine the composition of the Panel. On 22 November 2006, Deputy Director-General Alejandro Jara composed the Panel, on behalf of the Director-General.

On 18 May 2007, the Chairman of the Panel informed the DSB that it would not be possible for the Panel to complete its work within six months of the date of composition in light of the substantive and procedural complexities of this dispute. The Panel expected to complete its work in July 2008. On 11 July 2008, the Chairman of the Panel informed the DSB that it now expected to complete its work in 2009.

On 16 December 2009, the Chairman of the panel informed the DSB that it expected to issue its interim report to the parties in June 2010. On 7 July 2010, the Chairman of the panel informed the DSB that it now expects to issue its interim report by mid-September 2010, and expects to complete its work in the first half of 2011.

On 31 March 2011, the panel report was circulated to Members.

  1. In this dispute, the European Communities claimed that the following ten categories of measures constituted subsidies to Boeing's large civil aircraft division that were inconsistent with the SCM Agreement:
      
    1. State of Washington and municipalities therein — various tax and non-tax incentives provided by the State of Washington and the City of Everett, notably in connection with the location of the 787 assembly facility in Everett
        
    2. State of Kansas and municipalities therein — property and sales tax breaks provided by the City of Wichita and interest payments by the State of Kansas on Kansas State Development Bonds
       
    3. State of Illinois and municipalities therein — tax and non-tax incentives provided by the State of Illinois, the City of Chicago and Cook County in connection with the relocation of Boeing's headquarters
       
    4. National Aeronautics and Space Administration (NASA) — payments and access to government facilities, equipment and employees provided to Boeing pursuant to R&D contracts and agreements entered into under eight NASA aeronautics R&D programmes
       
    5. Department of Defense (DOD) — payments and access to government facilities, equipment and employees provided to Boeing pursuant to R&D contracts and agreements entered into under 23 DOD Research, Development, Testing and Evaluation programmes
       
    6. Department of Commerce (DOC) — payments and access to government facilities, equipment and employees provided to joint ventures/consortia in which Boeing participated under the Advanced Technology Program
       
    7. NASA/DOD — “Waivers”/“transfers” of intellectual property rights under NASA and DOD R&D contracts and agreements entered into with Boeing
       
    8. NASA/DOD independent R&D and bid and proposal reimbursements
       
    9. Department of Labor 787 worker training grants
       
    10. Tax breaks exemptions under legislation relating to Foreign Sales Corporations (“FSC”)  and the Extraterritorial Income Exclusion Act (“ETI”) and successor acts
       
  2. The European Communities estimated that the total amount of the alleged subsidies was $19.1 billion between 1989 and 2006.  More than half of this amount was accounted for by the value of the alleged NASA R&D subsidies, which, according to the European Communities, was $10.4 billion in this period.
     
  3. The European Communities claimed: (a)  that the United States acted inconsistently with  certain provisions of Articles 5 and 6 of the SCM Agreement because the effect of the alleged subsidies was to cause adverse effects to its interests in the form of serious prejudice;  (b) that the United States acted inconsistently with Article 3 of the SCM Agreement because the FSC/ETI and successor act subsidies and taxation measures enacted pursuant to Washington State Legislature House Bill 2294 (“HB 2294”) constituted prohibited export subsidies; and (c) that the United States had violated agreed obligations concerning support to the large civil aircraft sector  are set forth a bilateral 1992 Agreement between the United States and the European Communities on trade in large civil aircraft, thereby constituting serious prejudice to the European Communities' interests.
     
  4. The Panel upheld the European Communities' claims that: (a) some of the measures maintained by the States of Washington, Kansas, Illinois and municipalities therein, the NASA aeronautics R&D measures, some of the DOD aeronautics R&D measures, and the FSC/ETI and successor act subsidies, constituted specific subsidies.  The Panel estimated the total amount of these subsidies between 1989 and 2006 to have been at least $5.3 billion;  (b) the FSC/ETI and successor act subsidies constituted prohibited export subsidies; (c) some of the specific subsidies (i.e. the NASA and DOD aeronautics R&D subsidies, the FSC/ETI and successor act subsidies and the Washington State and municipal B&O tax subsidies) caused adverse effects to the European Communities' interests in the form of serious prejudice, finding that the effect of these subsidies was displacement and impedance (or threat thereof) of Airbus large civil aircraft from third country markets, significant price suppression and significant lost sales.
     
  5. The Panel rejectedthe European Communities' claims that: (a) the other challenged measures constituted specific subsidies and/or that they caused serious prejudice; (b) the Washington State taxation measures enacted under HB 2294 were prohibited export subsidies.
     
  6. The Panel exercised judicial economy in respect of the European Communities' claims that: (a) the specific subsidies caused adverse effects in the form of a threat of significant price suppression; (b) the United States had acted inconsistently with the bilateral 1992 Agreement between the United States and the European Communities on trade in large civil aircraft, thereby constituting serious prejudice to the European Communities' interests.
     
  7. With respect to its finding that FSC/ETI and successor act subsidies constitute prohibited export subsidies, the Panel did not consider it necessary or appropriate to make any additional recommendation because of the pre-existing DSB rulings and recommendations regarding those measures.  With respect to its finding that certain subsidies caused adverse effects to the interests of the European Communities, the Panel recommended, as provided for in Article 7.8 of the SCM Agreement, that the United States take appropriate steps to remove the adverse effects or withdraw the subsidy.
      
  8. The panel report addresses many important issues relating to the interpretation of Articles 1 and 2 (definition of subsidy and specificity), Article 3.1(a) (prohibited export subsidies) and Articles 5 and 6 (adverse effects) of the SCM Agreement.  For example, as noted above, the Panel found that R&D funding received by Boeing under certain NASA aeronautics R&D programmes, and some of the R&D funding received by Boeing pursuant to DOD R&D programmes, constitute specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement.  A fundamental question addressed by the Panel in this regard was whether or not the R&D transactions at issue were excluded from the scope of Article 1 of the SCM Agreement as “purchases of services”. 

On 1 April 2011, the European Union notified the DSB of its decision to appeal to the Appellate Body certain issues of law covered in the panel report and certain legal interpretations developed by the Panel.  On 28 April 2011, the United States notified the DSB of its decision to appeal to the Appellate Body certain issues of law covered in the panel report and certain legal interpretations developed by the Panel. On 4 July 2011, the Chair of the Appellate Body informed the DSB that due to the considerable size of the record and complexity of the appeal, the need to hold multiple sessions of the oral hearing, and taking into account the current overall workload of the Appellate Body, the Appellate Body would not be able to circulate its report within 60 days.  The Appellate Body will hold a first session of the oral hearing in August and a second session in October 2011.  Thereafter, the Appellate Body will provide an estimate for the circulation of its report.

On 12 March 2012, the Appellate Body report was circulated to Members.

This dispute concerns a number of US measures affecting trade in large civil aircraft (“LCA”).  The European Communities claimed that the United States has provided subsidies to US producers of LCA, namely The Boeing Company, and that such subsidies are prohibited and/or actionable under the Agreement on Subsidies and Countervailing Measures (the “SCM Agreement”).  In particular, the European Communities challenged:  (i) a number of state and local measures granted to US LCA producers by the states of Washington, Kansas, and Illinois, and municipalities therein;  (ii) payments and other support provided to Boeing by the US National Aeronautics and Space Administration (“NASA”), US Department of Defense (“USDOD”), US Department of Commerce, and US Department of Labor;  and (iii) export subsidies allegedly granted to Boeing pursuant to provisions of the US Internal Revenue Code relating to Foreign Sales Corporation (“FSC”) / extraterritorial income (“ETI”) and successor legislation.  The European Communities argued that these subsidies, which in its view amounted to $19.1 billion over the period 1989-2006, caused serious prejudice to its interests within the meaning of Articles 5(c) and 6.3 of the SCM Agreement.  The Panel however determined the value of the subsidies to be at least $5.3 billion.

As an initial matter, the Appellate Body found that the Panel had erred in denying various requests made by the European Communities with respect to the information-gathering procedure under Annex V of the SCM Agreement.  The Appellate Body found that the initiation of an Annex V procedure occurs automatically when there is a request for initiation of such a procedure and the DSB establishes a panel.  However, the Appellate Body declined to make findings as to whether the conditions for an initiation of an Annex V procedure were fulfilled in this dispute. 

As regards the measures under the eight NASA R&D programmes at issue and the 23 USDOD Research, Development, Test, and Evaluation (“RDT&E”) programmes at issue, the Appellate Body found that the payments and access to facilities, equipment and employees provided to Boeing under the NASA procurement contracts, and the payments and access to facilities provided to Boeing under the USDOD assistance instruments, constitute financial contributions within the meaning of Article 1.1(a)(1) of the SCM Agreement.  Because the Appellate Body took a different approach to the Panel's, it did not need to resolve the issue of whether measures properly characterized as purchases of services are excluded from the scope of Article 1.1(1)(i) of the SCM Agreement.  Consequently, the Appellate Body declared the Panel's interpretation that such measures are excluded from the scope of Article 1.1(a)(1)(i) of the SCM Agreement to be moot and of no legal effect.   The Appellate Body also declared moot the Panel's finding that the USDOD procurement contracts are properly characterized as purchases of services and thus are not financial contributions under Article 1.1(a)(1).  However, as neither participant had requested it to do so, the Appellate Body did not complete the analysis regarding the USDOD procurement contracts at issue in this dispute.  The United States did not appeal the Panel's finding that the access to facilities, equipment and employees provided to Boeing under the NASA Space Act Agreements constitute a financial contribution under Article 1.1(a)(1).

 Moreover, the Appellate Body upheld, albeit for different reasons, the Panel's findings that the payments and access to facilities, equipment, and employees provided under the NASA procurement contracts, and payments and access to facilities provided under the USDOD assistance instruments, conferred a benefit on Boeing within the meaning of Article 1.1(b) of the SCM Agreement.  The Appellate Body did not review the Panel's finding that the access to facilities, equipment and employees provided to Boeing under the NASA Space Act Agreements conferred a benefit. 

The Appellate Body found that the allocation of patent rights under contracts and agreements between NASA/USDOD and Boeing — on the assumption that such allocation is a self‑standing subsidy — is not explicitly limited to certain enterprises within the meaning of Article 2.1(a).  However, it found that the Panel erred by failing to examine the European Communities' arguments that such allocation is “in fact” specific under Article 2.1(c) of the SCM Agreement.  The Appellate Body thus found that the Panel's overall finding under Article 2.1 could not be sustained, but declined to find that such allocation is specific within the meaning of Article 2.1(c) of the SCM Agreement.

In relation to the Washington State B&O tax rate reduction, the Appellate Body upheld the Panel's finding that the reduction in the Washington State B&O tax rate applicable to commercial aircraft and component manufacturers constitutes the foregoing of revenue otherwise due, and therefore a financial contribution within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.  The Appellate Body also upheld the Panel's finding that the Washington State B&O tax rate reduction is a subsidy that is specific within the meaning of Article 2.1(a) of the SCM Agreement.

As for the subsidies provided by the City of Wichita (Kansas) through the issuance of Industrial Revenue Bonds ("IRB"), the Appellate Body upheld, albeit for different reasons, the Panel's finding that the IRB subsidies provided to Boeing and Spirit are specific within the meaning of Article 2.1(c) of the SCM Agreement.

With respect to the Panel's analysis of adverse effects, the Appellate Body observed that the Panel had conducted a separate analysis of adverse effects caused by the NASA/USDOD aeronautics R&D subsidies in the 200-300 seat LCA market (through their “technology effects”), and an analysis of the adverse effects caused by all the subsidies in the 100-200 seat and 300-400 seat LCA market (through their “price effects”). As regards to the analysis of the “technology effects”, the Appellate Body upheld the Panel's overall conclusion that the aeronautics R&D subsidies caused serious prejudice to the interests of the European Communities within the meaning of Articles 5(c) and 6.3(b) and (c) of the SCM Agreement with respect to the 200‑300 seat LCA market. Specifically, the Appellate Body upheld the Panel's finding of significant lost sales and significant price suppression in the 200‑300 seat LCA market, but reversed the Panel's finding of a threat of displacement and impedance with respect to the 200‑300 seat LCA market as it relates to Kenya, Iceland, and Ethiopia (but not with respect to Australia) within the meaning of Article 6.3(b) of the SCM Agreement.

As for the Panel's analysis of price effects, the Appellate Body reversed the Panel's findings that the FSC/ETI subsidies and the B&O tax rate reductions caused serious prejudice to the interests of the European Communities within the meaning of Articles 5(c) and 6.3(b) and (c) of the SCM Agreement with respect to the 100-200 seat and 300-400 seat LCA markets.  In completing the analysis, the Appellate Body found that the FSC/ETI subsidies and the Washington State B&O tax rate reduction caused, through their effects on Boeing's prices, serious prejudice in the form of significant lost sales within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement with respect to the 100-200 seat LCA market.  

Moreover, the Appellate Body: (i) found that the Panel erred in failing to consider whether the price effects of the B&O tax rate reductions complement and supplement the technology effects of the aeronautics R&D subsidies in causing significant lost sales and significant price suppression, and a threat of displacement and impedance, in the 200-300 seat LCA market;  (ii) reversed the Panel's finding that the remaining subsidies had not been shown to have affected Boeing's prices in a manner giving rise to serious prejudice with respect to the 100‑200 seat and 300-400 seat LCA markets;  and (iii) in completing the analysis, found that the effects of the City of Wichita IRBs complemented and supplemented the price effects of the FSC/ETI subsidies and the State of Washington B&O tax rate reduction, thereby causing serious prejudice, in the form of significant lost sales, within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement, in the 100‑200 seat LCA market.

At its meeting on 23 March 2012, the DSB adopted the Appellate Body report and the panel report, as modified by the Appellate Body report.

At the DSB meeting on 13 April 2012, the United States informed the DSB that it intended to implement the DSB recommendations and rulings in a manner that respects its WTO obligations and within the time-frame established in Article 7.9 of the SCM Agreement. The European Union welcomed the US intention and noted that the 6-month period stipulated in Article 7.9 of the SCM Agreement would expire on 23 September 2012.  On 24 April 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.

 

Reasonable period of time

On 23 September 2012, the United Stated notified the DSB of the withdrawal of subsidies and removal of adverse effects in this dispute.  Through the steps identified in their notification, the United States stated it had fully complied with the DSB recommendations and rulings.

 

Compliance proceedings

On 25 September 2012, the European Union requested consultations pursuant to Article 21.5 of the DSU. On 11 October 2012, the European Union requested the establishment of a compliance panel.  At its meeting on 23 October 2012, the DSB agreed to refer the matter to the original panel if possible.  Australia, Canada, China, Japan and Korea reserved their third-party rights.  Subsequently, Brazil and the Russian Federation reserved their third party rights.  On 30 October 2012, the compliance panel was composed. On 15 January 2013, the Chairman of the panel informed the DSB that the panel, after consultations with the parties, had adopted a timetable pursuant to which the case will be briefed and the substantive meeting of the parties and third parties with the panel will be completed before the summer break of 2013.  The timetable does not specify a date for the circulation of its report.  Taking into account the scale and complexity of the dispute, the panel expect ed that it would be in a position to circulate its report within the first half of 2014. On 27 May 2014, the Chairman of the panel informed the DSB that the panel did not expect to complete its work before mid‑2015. On 9 March 2015, the Chairman of the panel informed the DSB that due to the scale and complexity of the dispute, the panel did not expect that it will be in a position to complete its work before mid-2016. On 27 June 2016, the Chairman indicated that having further reviewed the work that remains to be completed, the panel expected to issue its final report to the parties no later than December 2016.

On 9 June 2017, the compliance panel report was circulated to Members.

  1. The compliance proceeding in this dispute concerns the European Union's complaint that the United States failed to comply with the recommendations and rulings adopted by the Dispute Settlement Body (DSB) in the original proceeding US – Large Civil Aircraft (2nd complaint).
     
  2. The subsidies to Boeing that were found to have caused adverse effects to EC interests in the 2004-2006 period in the original proceeding were: NASA aeronautics R&D instruments and a subset of U.S. Department of Defense (DOD) military research instruments (so-called “assistance instruments”) funded under certain identified NASA and DOD aeronautics R&D programmes, respectively; one business and occupancy (B&O) tax rate reduction enacted in the State of Washington in relation to Boeing's production of the 787; one Kansas tax measure in relation to the production of the 737NG; and the FSC/ETI subsidies, which had previously been the subject of other WTO disputes between the European Communities and the United States.
     
  3. In the compliance proceeding, the European Union alleged that the United States had failed to withdraw the above subsidies, and that since the date of the original proceeding in 2006: (a) had continued to grant these subsidies in increased amounts; (b) had continued to grant all of the other subsidies that had been challenged in the original proceeding which had not been found to have caused adverse effects; (c) had also granted a number of new subsidies to Boeing. The European Union claimed that all of these subsidies, in the September 2012 post-implementation period, caused or threatened to cause adverse effects in the form of lost sales of Airbus LCA, suppressed prices of Airbus LCA, and displaced and impeded imports and exports of Airbus LCA, and threats of the foregoing. The European Union also claimed that all of the subsidies are prohibited export subsidies and prohibited import substitution subsidies inconsistent with Articles 3.1(a), 3.1(b) and 3.2 of the SCM Agreement, and measures that violate the non-discrimination provisions of Article III:4 of the GATT 1994.
     
  4. The United States objected that many of the challenged measures and claims were outside the Panel's jurisdiction and that the United States had either withdrawn the subsidies the subject of the DSB recommendations and rulings or taken appropriate steps to remove their adverse effects.
     
  5. The Panel addressed the case in five main sections of the Report. First, the Panel addressed the positions of the parties with regard to what was required to achieve conformity with the obligation in Article 7.8 of the SCM Agreement to take appropriate steps to remove the adverse effects or otherwise withdraw the subsidy. Second, the Panel examined a series of objections by the United States that certain claims and measures identified by the European Union were outside the Panel's terms of reference or otherwise outside the scope of the compliance proceeding. Third, the Panel evaluated whether the European Union had established that the United States had failed to withdraw various subsidies, either by modifying the terms of the instruments in question or by continuing to grant or maintain certain subsidies to Boeing in the period since the date of the original panel request in 2006, and in the post-implementation period. Fourth, the Panel examined whether the European Union had established that the United States had failed to take appropriate steps to remove the adverse effects of any unwithdrawn subsidies by examining whether the European Union had established that any of the specific subsidies cause any of the alleged forms of serious prejudice in the post-implementation period. Finally, the Panel evaluated whether the European Union had established that the United States grants or maintains any subsidies inconsistent with Articles 3.1(a) and (b) and 3.2 of the SCM Agreement, and Article III:4 of the GATT 1994.

Alleged non-compliance of the United States with Article 7.8 of the SCM Agreement as the main subject of the compliance proceeding

  1. The Panel observed that the European Union's approach to demonstrating a failure to comply with Article 7.8 of the SCM Agreement on the basis of certain pre-2007 subsidies the subject of the DSB recommendations and rulings, and alleged post-2006 subsidies and their effects, rested on the premise that Article 7.8 of the SCM Agreement applied not only to the particular subsidy measures granted in the past that were the subject of the relevant DSB recommendations and rulings but also to measures taken subsequent to the conclusion of the original proceeding. The Panel considered that this premise was consistent with the Appellate Body's interpretation of the concept of “withdrawal” of the subsidy and its analysis in US – Upland Cotton (Article 21.5 – Brazil) of the scope of Article 7.8. Finally, the Panel noted that the European Union did not argue that the United States had failed to comply with Article 7.8 by not taking retrospective action with respect to the particular subsidies found to be actionable subsidies in the original proceeding, or to their effects. Nor did the European Union argue that the United States was obligated under Article 7.8 to seek repayment from Boeing of subsidies granted in the past.

The Panel's terms of reference and scope of the compliance proceeding

  1. The United States challenged the inclusion of numerous measures and claims within the jurisdiction of the Panel on a number of bases. Certain objections were based on an alleged failure of the European Union to comply with the requirements of Article 6.2 of the DSU. Other objections concerned the inclusion of certain measures within the scope of the compliance proceeding because the measures in question were neither measures the subject of the DSB recommendations and rulings, nor according to the United States, “measures taken to comply” within the meaning of Article 21.5 of the DSU. The United States additionally objected that the European Union was precluded from bringing certain claims in respect of certain measures on the basis that the claims in question were unsuccessfully brought against the measures in question in the original proceeding and therefore could not be re-litigated in the compliance proceeding, or had not been brought against other measures in the original proceeding when they could have been and therefore could not be raised for the first time in the compliance proceeding.
     
  2. On the major jurisdictional issues, the Panel ruled (a) that the military procurement contracts between DOD and Boeing, which the European Communities had unsuccessfully challenged as subsidies in the original proceeding, and sought to challenge again in the compliance proceeding, were within the scope of the compliance proceeding; (b) that the Washington tax measures (besides the Washington State B&O tax rate reduction which was the only Washington tax measure the subject of the DSB recommendations and rulings), while not found by the panel or Appellate Body in the original proceeding to have caused adverse effects, were also within the scope of the compliance proceeding; (c) that an aeronautics R&D measure granted by the U.S. Federal Aviation Authority (FAA) was also within the scope of the compliance proceeding, on the basis of its relationship to the NASA aeronautics R&D measures that were the subject of the DSB recommendations and rulings; and (d) that measures granted in connection with Boeing's location of 787 manufacturing facilities in the state of South Carolina were also within the scope of the compliance proceeding, on the basis of their relationship to the Washington state tax measures. The Panel made a number of other rulings, accepting claims under Article 3 of the SCM Agreement and Article III:4 of the GATT 1994 as being within the scope of the proceeding in relation to some measures and not others.
     
  3. Of note, during the course of the proceeding, the European Union requested the Panel to additionally consider in the proceeding certain amendments to the Washington state tax measures that were challenged in this proceeding, which amendments had entered into force in November 2013, more than a year after the Panel had held its meeting with the parties. The Panel declined this request. The European Union subsequently commenced a new proceeding in relation to these measures, as amended in 2013; see United States – Conditional Tax Incentives for Large Civil Aircraft (DS487).

Whether the United States has withdrawn the subsidy within the meaning of Article 7.8 of the SCM Agreement

  1. The Panel first addressed the question whether the United States had failed to “withdraw the subsidy” through modifications made to the allocation of intellectual property rights under the pre-2007 NASA procurement contracts and DOD assistance instruments at issue in the original proceeding. The United States asserted that it had modified the rights granted to NASA and DOD under the NASA and DOD instruments covered by the DSB recommendations and rulings by NASA and DOD entering into Patent Licence Agreements with Boeing, according to which Boeing granted NASA or DOD (as the case may be) a commercial use licence in respect of Boeing-owned patents arising from work under the respective NASA and DOD instruments. The United States argued that this modification of the allocation of intellectual property rights under the pre-2007 NASA procurement contracts and DOD assistance instruments brought those instruments into line with the intellectual property rights allocations under the private R&D contracts examined by the Appellate Body in the original proceeding (and which were the basis for the Appellate Body's findings that the NASA and DOD measures in question conferred a benefit), such that they no longer conferred a benefit on Boeing as the commissioned party. The European Union responded that the grant of commercial use licences to NASA and DOD in a context in which it was highly unlikely that NASA or DOD would ever make use of such rights was practically meaningless and in any case, did not bring the allocations of intellectual property rights under the NASA and DOD instruments into line with prevailing market practices in the manner asserted by the United States.
     
  2. The Panel compared the allocation of intellectual property rights between NASA and DOD (as commissioning party), on the one hand, and Boeing (as commissioned party), on the other, based on the operation of U.S. law in cases where an invention is made under a NASA procurement contract or DOD assistance instrument by each of (a) a Boeing employee, (b) a Boeing employee jointly with a NASA/DOD employee, and (c) a NASA/DOD employee, with the allocation of intellectual property rights between commissioning and commissioned parties under the six R&D contracts considered by the Appellate Body in the original proceeding, as well as under a further 18 collaborative R&D agreements identified by the parties' respective intellectual property licensing experts in this proceeding. The Panel concluded, on the basis of those comparisons, that the grant by Boeing to NASA and DOD of limited commercial use licences in respect of Boeing-owned patents obtained in the course of work under a relevant NASA procurement contract or DOD assistance instrument did not sufficiently alter the fundamental balance of rights in a way that removed the benefit. Rather, the balance between Boeing, on the one hand, and NASA and DOD, on the other, remained one in which NASA and DOD lacked the right to obtain an exclusive licence to practice Boeing-owned patents, and thus remained more favourable to Boeing as commissioned party than the corresponding allocations to commissioned parties under the private collaborative R&D agreements before the Panel. Accordingly, the Panel found that the European Union had established that the modifications to the terms of the pre-2007 NASA procurement contracts and DOD assistance instruments made by the respective Boeing Patent Licence Agreements did not constitute a withdrawal of the subsidy within the meaning of Article 7.8 of the SCM Agreement in respect of those instruments.
     
  3. The Panel then considered whether the United States had failed to withdraw the subsidy by granting or maintaining the seven types of post-2006 measures alleged to constitute specific subsidies. In this regard, the European Union alleged that the United States grants or maintains alleged subsidies to Boeing after 2006 through (a) various NASA aeronautics R&D measures, (b) various DOD aeronautics R&D measures, (c) an FAA aeronautics R&D measure, (d) FSC/ETI measures, (e) tax abatements related to the issuance of the City of Wichita IRBs, (f) Washington state and local measures, and (g) South Carolina state and local measures. For each of these allegations, the Panel considered whether the European Union had demonstrated that the measures in question involved a specific subsidy to Boeing, and if so, the amount of the subsidy.
     
  4. The Panel found that post-2006 payments and access to U.S.-Government facilities, equipment and employees provided to Boeing under identified NASA procurement contracts, cooperative agreements and Space Act Agreements, DOD assistance instruments (but not DOD procurement contracts), and a 2010 FAA “other transaction agreement” with Boeing were specific subsidies. While the European Union alleged that the value to Boeing of such payments and provision of access between 2007 and 2014 was approximately USD 7 billion, with the actual subsidy amount being an undefined multiple of that amount, the Panel found that there was insufficient evidence to enable it to estimate the amount of payments and provision of access for the post-2012 period, or to arrive at an estimate of the actual “subsidy” amount.
     
  5. Of note, the Panel again faced the issue of whether the DOD procurement contracts involved financial contributions within the scope of the SCM Agreement. The Panel concluded that, assuming arguendo that the payments and access to DOD facilities (and where relevant, equipment and employees) through the DOD procurement contracts did involve financial contributions (an issue on which it expressed no view), the European Union had in any case failed to demonstrate that they conferred a benefit and had therefore failed to demonstrate that the DOD procurement contracts involved a subsidy to Boeing.
     
  6. As regards the non-aeronautics R&D measures alleged to be specific subsidies, the Panel found (a) that the challenged Washington state and local tax measures were all specific subsidies (based on the original panel's findings), with the Washington State B&O tax rate reduction amounting to USD 325 million between 2013 and 2015; (b) only three of the 11 challenged South Carolina measures were specific subsidies (comprising an infrastructure-related grant of USD 50 million and certain property and sales tax exemptions worth approximately USD 28 million between 2013 and 2015); (c) the tax subsidies related to the State of Kansas were no longer specific and thus were no longer subject to the provisions of Part III of the SCM Agreement; and (d) the European Union had failed to demonstrate that Boeing received FSC/ETI benefits after 2006.
     
  7. On the basis of the foregoing, the Panel upheld European Union's claim that the United States had failed to “withdraw the subsidy” within the meaning of Article 7.8 of the SCM Agreement in relation to (a) the original aeronautics R&D measures, which remained specific subsidies (i.e. the pre-2007 NASA and DOD aeronautics R&D instruments that had been modified by the Patent Licence Agreements); (b) post-2006 NASA aeronautics R&D measures and DOD assistance instruments which were found to be specific subsidies, and the Washington state and local measures (which had been found to be specific subsidies in the original proceeding); as well as (c) post-2006 measures ruled within the scope of the proceeding and which were found to be specific subsidies (i.e. the FAA aeronautics R&D measure and certain South Carolina measures).

Whether the United States has failed to take appropriate steps to remove the adverse effects within the meaning of Article 7.8 of the SCM Agreement

  1. The European Union argued that the United States had failed to take appropriate steps to remove the adverse effects within the meaning of Article 7.8 of the SCM Agreement on the basis that the unwithdrawn subsidies were causing present adverse effects to the European Union's interests, within the meaning of Article 5 of the SCM Agreement, in the post-implementation period. In this respect, the European Union sought to demonstrate the existence of serious prejudice in the post-implementation period in the form of significant lost sales within the meaning of Article 6.3(c), impedance and/or displacement of imports and of exports within the meaning of Articles 6.3(a) and 6.3(b) and significant price suppression, within the meaning of Article 6.3(c), as well as threats of the foregoing, in relation to 22 LCA sales campaigns involving twin-aisle aircraft between 2007 and 2015 (implicating the United States and some eight third-country markets), and 21 LCA sales campaigns involving single-aisle aircraft between 2007-2015, (implicating the United States and some 11 third country markets). The European Union argued that certain aeronautics R&D subsidies operated through aspects of a “technology causal mechanism” while the non-aeronautics R&D subsidies (and certain other aeronautics R&D subsidies) operated through a “price causal mechanism”, in each case to impact Boeing LCA sales and prices, with consequent effects on Airbus sales and prices. The European Union also argued that the United States had failed to remove the adverse effects as required by Article 7.8 of the SCM Agreement because the serious prejudice that existed in the original proceeding in relation to lost sales of Airbus twin-aisle aircraft continued to exist in the post-implementation to the extent that (a) Boeing's deliveries of aircraft arising out of those lost sales had yet to occur, (b) Boeing had made subsequent sales to the same customers since 2006, and (c) Airbus' prices of twin-aisle aircraft were affected by those phenomena.
     
  2. The Panel found that the European Union had failed to establish its serious prejudice case in respect of twin-aisle aircraft (including with respect to the alleged continuation of serious prejudice that existed in the original 2004-2006 period). The Panel concluded that the “technology effects” of the aeronautics R&D subsidies that the original panel found had accelerated Boeing's development of the 787 leading to serious prejudice in the 2004-2006 period had dissipated since 2006, such that any “head-start” arising from those aeronautics R&D subsidies was over by the post-implementation period. The Panel therefore also rejected the European Union's arguments that the effects of the original aeronautics R&D subsidies had expanded to give Boeing technological advantages also in relation to its other new generation aircraft, such as the twin-aisle 777X and 787-10 and the single-aisle 737 MAX.
     
  3. The Panel upheld aspects of the European Union's serious prejudice case in respect of single-aisle aircraft: in relation to Washington State B&O tax rate reduction and its effects on Boeing's LCA prices and the outcome of sales campaigns involving competing Airbus LCA for three LCA sales campaigns (Fly Dubai 2014, Air Canada 2013 and Icelandair 2013) and two geographic markets (United States and United Arab Emirates). However, the Panel rejected the European Union's serious prejudice case in relation to the single-aisle LCA product market in all other respects. Notably, for both the twin-aisle and single-aisle product markets, the Panel rejected the European Union's argument that post-2006 aeronautics R&D subsidies and other post-2006 subsidies received by Boeing that were not tied to the sale or production of current aircraft on a per-unit basis affected Boeing's pricing behaviour such that they were capable of causing serious prejudice.
     
  4. In sum, the Panel upheld the European Union's claim that the United States has failed to “take appropriate steps to remove the adverse effects” within the meaning of Article 7.8 of the SCM Agreement, in respect of the three single-aisle LCA sales campaigns (involving orders of 152 737 MAX plus options and purchase rights for a further 73, and 11 737NGs) and two geographic markets.

Prohibited subsidy claims and claims under Article III:4 of the GATT 1994

  1. The Panel rejected on the merits those of the European Union's prohibited subsidy claims that it had determined to be within the scope of the proceeding, finding that the European Union had failed to demonstrate that the relevant subsidies were contingent upon export performance or upon the use of domestic over imported goods within the meaning of Article 3.1(a) and (b) of the SCM Agreement, respectively. The Panel also rejected on the merits the European Union's claims that the relevant subsidies are inconsistent with Article III.4 of the GATT 1994.

Overall conclusion

  1. In summary, the Panel found that:
    1. The European Union failed to establish that the effects of certain aeronautics R&D subsidies and other subsidies are a genuine and substantial cause of significant lost sales, significant price suppression, impedance of imports of the A350XWB to the United States or impedance of exports of the A350XWB to various third country markets, or threats of any of the foregoing, within the meaning of Articles 5(c) and 6.3(a), (b), and (c) of the SCM Agreement in the post-implementation period;
       
    2. The European Union failed to establish that the original adverse effects of the pre-2007 aeronautics R&D subsidies in respect of the A330 and Original A350 continue in the post-implementation period as significant price suppression of the A330 and A350XWB, significant lost sales of the A350XWB, or a threat of impedance of exports of the A350XWB in the twin-aisle LCA market, within the meaning of Articles 5(c) and 6.3(a), (b), and (c) of the SCM Agreement in the post-implementation period;
       
    3. The European Union established that the effects of the Washington State B&O tax rate reduction are a genuine and substantial cause of (i) significant lost sales of A320neo and A320ceo families of LCA in the single-aisle LCA market, in respect of the sales campaigns for Fly Dubai in 2014, Air Canada in 2013, and Icelandair in 2013, within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement in the post-implementation period, and (ii) a threat of impedance of imports of the A320ceo to the United States, and a threat of impedance of exports in the market for single-aisle LCA to the United Arab Emirates, within the meaning of Articles 5(c) and 6.3(a) and (b) of the SCM Agreement in the post-implementation period;
       
    4. The European Union failed to establish that the effects of certain aeronautics R&D subsidies and other subsidies are a genuine and substantial cause of significant price suppression of the A320neo and A320ceo, impedance of imports of the A320neo and A320ceo to the United States, or displacement and impedance of exports of the A320neo and A320ceo to Australia, Brazil, Canada, Iceland, Indonesia, Malaysia, Mexico, Norway, Russia, and Singapore,, within the meaning of Articles 5(c) and 6.3(a), (b), and (c) of the SCM Agreement in the post-implementation period.
       
    5. With respect to the European Union's claims under Articles 3.1 and 3.2 of the SCM Agreement and Article III:4 of the GATT 1994, to the extent that the Panel found that the claims were within the scope of this proceeding, and that the measures at issue were subsidies within the meaning of Article 1 of the SCM Agreement, the European Union failed to establish that the subsidies are inconsistent with Articles 3.1(a) and 3.2 or 3.1(b) and 3.2 of the SCM Agreement or with Article III:4 of the GATT 1994.
       
  2. The Panel therefore concluded that by continuing to be in violation of Articles 5(c) and 6.3(a), (b), and (c) of the SCM Agreement, the United States failed to implement the DSB recommendations and rulings to bring its measures into conformity with its obligations under the SCM Agreement. To the extent that the United States has failed to comply with the DSB recommendations and rulings in the original proceeding, those recommendations and rulings remained operative.

On 29 June 2017, the European Union notified the DSB of its decision to appeal certain issues of law and legal interpretations developed by the compliance panel.

 

Proceedings under Article 22 of the DSU (remedies)

On 27 September 2012, the European Union, being of the view that the United States has failed to comply with the DSB recommendations and rulings, requested authorization by the DSB to take countermeasures under Article 22 of the DSU, and Articles 4.10 and 7.9 of the SCM Agreement. On 22 October 2012, the United States objected to the level of suspension of concessions or other obligations and referred the matter to arbitration pursuant to Article 22.6 of the DSU.  At the DSB meeting on 23 October 2012, it was agreed that the matter is referred to arbitration as required by Article 22.6 of the DSU. On 27 November 2012, the Arbitrator received from the United States and the European Union requests to suspend the arbitration proceedings.  In accordance with the parties' requests, the Arbitrator suspended the arbitration proceedings from 28 November 2012.

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