Post on 28-Sep-2020
Before the Appellate Body
of the World Trade Organisation
United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint)
(AB-2011-3 / DS353)
Appellant Submission of the European Union
Contains no BCI or HSBI
Geneva 21 April 2011
US – Measures Affecting Trade in Large Civil Aircraft Appellant Submission (AB-2011-3 / DS353) European Union
Contains no BCI or HSBI ___________________________________________________________________________________________________________
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TABLE OF CONTENTS
I. INTRODUCTION .......................................................................................................................................... 1
II. AN SCM AGREEMENT ANNEX V PROCEDURE IS INITIATED BY ACTION BY NEGATIVE CONSENSUS NOT BY DECISION BY CONSENSUS.............................................................................. 4
A. INTRODUCTION AND EXECUTIVE SUMMARY................................................................................................. 4 B. SUMMARY OF THE RELEVANT FACTS............................................................................................................ 4 C. SUMMARY OF THE CLAIMS AND ARGUMENTS BEFORE THE PANEL ............................................................... 5 D. SUMMARY OF THE PANEL REPORT................................................................................................................ 7 E. AN SCM AGREEMENT ANNEX V PROCEDURE IS INITIATED BY ACTION BY NEGATIVE CONSENSUS NOT BY
DECISION BY CONSENSUS ............................................................................................................................. 8 F. LEGAL ERRORS IN THE PANEL REPORT AND REQUEST FOR REVERSAL ....................................................... 18 G. REQUEST FOR COMPLETION OF THE ANALYSIS AND OTHER CONSEQUENCES................................................ 19 H. JURISDICTIONAL CONSIDERATIONS............................................................................................................. 20
III. SUBSIDIES ................................................................................................................................................... 23
A. INTRODUCTION AND EXECUTIVE SUMMARY............................................................................................... 23 B. IN ITS ANALYSIS OF NASA AND DOD PATENT WAIVERS/TRANSFERS, THE PANEL ADOPTED AN
ERRONEOUS INTERPRETATION AND APPLICATION OF “GRANTING AUTHORITY” IN ARTICLE 2.1 OF THE SCM AGREEMENT ...................................................................................................................................... 24
1. Summary of the Facts and the Parties’ Arguments............................................................................... 24 2. Summary of the Panel’s Findings ......................................................................................................... 25 3. The Panel Erred in its Interpretation and Application of Article 2.1 of the SCM Agreement in its
Analysis of NASA and DOD Patent Waivers/Transfers ........................................................................ 27 a. The Proper Interpretation of Article 2.1 of the SCM Agreement .......................................................................27 b. Application of the Proper Interpretation of Article 2.1 of the SCM Agreement to the Facts .............................31
i. NASA...........................................................................................................................................................31 ii. DOD .............................................................................................................................................................33
c. Conclusion .........................................................................................................................................................35 C. THE PANEL ERRED BY EXCLUDING ALL TRANSACTIONS PROPERLY CHARACTERISED AS PURCHASES OF
SERVICES FROM THE SCOPE OF THE SCM AGREEMENT .............................................................................. 35 1. Summary of the Facts and the Parties’ Arguments............................................................................... 36 2. Summary of the Panel’s Findings ......................................................................................................... 37 3. The Panel Erred in its Narrow Interpretation of the Scope of Article 1.1(a)(1) of the SCM Agreement
............................................................................................................................................................... 39
IV. SUBSIDIES CONTINGENT/CONDITIONAL IN FACT UPON EXPORT.......................................... 48
A. INTRODUCTION AND EXECUTIVE SUMMARY............................................................................................... 48 B. THREE LEGAL ISSUES: THE MEANING OF CONTINGENT/CONDITIONAL; THE MEANING OF ACTUAL OR
ANTICIPATED; AND THE REQUIREMENT OF FAVOURING OR DIFFERENTIATION ........................................... 51 C. HB 2294 AS A WHOLE AND INSTANCES OF APPLICATION ........................................................................... 52
1. Summary of the facts ............................................................................................................................. 52 2. Summary of the Claims and Arguments Before the Panel .................................................................... 53 3. Summary of the Panel Report ............................................................................................................... 55 4. HB 2294 as a Whole and Instances of Application are Subsidies Contingent/Conditional in Fact Upon
Export.................................................................................................................................................... 57 5. Legal Errors in the Panel Report and Request for Reversals ............................................................... 58 6. Completion of the Analysis.................................................................................................................... 59
D. HB 2294 B&O TAX RATE REDUCTIONS AND INSTANCES OF APPLICATION................................................ 59 1. Summary of the Facts............................................................................................................................ 59 2. Summary of the Claims and Arguments Before the Panel .................................................................... 61 3. Summary of the Panel Report ............................................................................................................... 62 4. HB 2294 B&O Tax Rate Reductions and Instances of Application are Subsidies
Contingent/Conditional in Fact Upon Export....................................................................................... 62 5. Legal Errors in the Panel Report and Request for Reversals ............................................................... 64 6. Completion of the Analysis.................................................................................................................... 65
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V. ADVERSE EFFECTS .................................................................................................................................. 65
A. INTRODUCTION AND EXECUTIVE SUMMARY............................................................................................... 65 B. THE PANEL ERRED IN NOT AGGREGATING THE EFFECTS FROM THE B&O TAX SUBSIDIES AND THE
AERONAUTICS R&D SUBSIDIES BENEFITING THE 787 ................................................................................ 68 1. Summary of the Facts and the Parties’ Arguments............................................................................... 68 2. Summary of the Panel’s Findings ......................................................................................................... 69 3. The Panel Erred in its Interpretation and Application of Articles 5 and 6.3 of the SCM Agreement... 71
C. THE PANEL ERRED IN NOT AGGREGATING THE EFFECTS OF THE TAX SUBSIDIES WITH THE EFFECTS OF THE REMAINING SUBSIDIES ............................................................................................................................... 79
1. Summary of the Facts and the Parties’ Arguments............................................................................... 79 2. Summary of the Panel’s Findings ......................................................................................................... 80 3. The Panel Erred in its Interpretation and Application of Articles 5 and 6.3 of the SCM Agreement... 81
D. THE PANEL FAILED TO SATISFY THE DUE PROCESS RIGHTS REQUIRED BY ARTICLE 11 OF THE DSU WHEN IT EXCLUDED CERTAIN DOD RDT&E SUBSIDIES FROM ITS ADVERSE EFFECTS ANALYSIS BASED ON A SURPRISE STANDARD, AND WITHOUT ALLOWING FOR NECESSARY FACTUAL DEVELOPMENT................... 84
1. Summary of the Facts and the Parties’ Arguments............................................................................... 85 2. Summary of the Panel’s Findings ......................................................................................................... 86 3. The Panel Failed to Make the Objective Assessment Required by Article 11, Due to Deficiencies in its
Provision of Due Process...................................................................................................................... 88
VI. CONCLUSION ............................................................................................................................................. 95
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TABLE OF CASES Short Title Full Case Title and Citation
Australia – Automotive Leather II
Panel Report, Australia – Subsidies Provided to Producers and Exporters of Automotive Leather, WT/DS126/R, adopted 16 June 1999, DSR 1999:III, 951
Brazil – Aircraft Panel Report, Brazil – Export Financing Programme for Aircraft, WT/DS46/R, adopted 20 August 1999, as modified by Appellate Body Report WT/DS46/AB/R, DSR 1999:III, 1221
Brazil – Aircraft (Article 21.5 – Canada II)
Panel Report, Brazil – Export Financing Programme for Aircraft – Second Recourse by Canada to Article 21.5 of the DSU, WT/DS46/RW/2, adopted 23 August 2001, DSR 2001:X, 5481
Canada – Aircraft Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377
Canada – Autos Appellate Body Report, Canada – Certain Measures Affecting the Automotive Industry, WT/DS139/AB/R, WT/DS142/AB/R, adopted 19 June 2000, DSR 2000:VI, 2985
Canada – Continued Suspension
Appellate Body Report, Canada – Continued Suspension of Obligations in the EC – Hormones Dispute, WT/DS321/AB/R, adopted 14 November 2008
Chile – Price Band System Appellate Body Report, Chile – Price Band System and Safeguard Measures Relating to Certain Agricultural Products, WT/DS207/AB/R, adopted 23 October 2002, DSR 2002:VIII, 3045 (Corr.1, DSR 2006:XII, 5473)
China – Publications and Audiovisual Products
Appellate Body Report, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/AB/R, adopted 19 January 2010
EC and Certain Member States – Large Civil Aircraft
Panel Report, European Communities and Certain Member States – Measures Affecting Trade in Large Civil Aircraft, WT/DS316/R, circulated to WTO Members 30 June 2010
EC – Bananas III Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997, DSR 1997:II, 591
EC – Countervailing Measures on DRAM Chips
Panel Report, European Communities – Countervailing Measures on Dynamic Random Access Memory Chips from Korea, WT/DS299/R, adopted 3 August 2005, DSR 2005:XVIII, 8671
India – Patents (EC) Panel Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, Complaint by the European Communities and their member States, WT/DS79/R, adopted 22 September 1998, DSR 1998:VI, 2661
India – Patents (US) Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R, adopted 16 January 1998, DSR 1998:I, 9
Japan – DRAMs (Korea) Panel Report, Japan – Countervailing Duties on Dynamic Random Access Memories from Korea, WT/DS336/R, adopted 17 December 2007, as modified by Appellate Body Report WT/DS336/AB/R, DSR 2007:VII, 2805
Mexico – Corn Syrup (Article 21.5 – US)
Appellate Body Report, Mexico – Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the DSU by the United States, WT/DS132/AB/RW, adopted 21 November 2001, DSR 2001:XIII, 6675
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Short Title Full Case Title and Citation
Mexico – Taxes on Soft Drinks
Appellate Body Report, Mexico – Tax Measures on Soft Drinks and Other Beverages, WT/DS308/AB/R, adopted 24 March 2006, DSR 2006:I, 3
US – Anti-Dumping and Countervailing Duties (China)
Appellate Body Report, United States - Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, WT/DS379/AB/R, adopted 25 March 2011
US – Continued Zeroing Appellate Body Report, United States – Continued Existence and Application of Zeroing Methodology, WT/DS350/AB/R, adopted 19 February 2009
US – Countervailing Measures on Certain EC Products
Appellate Body Report, United States – Countervailing Measures Concerning Certain Products from the European Communities, WT/DS212/AB/R, adopted 8 January 2003, DSR 2003:I, 5
US – Gambling Appellate Body Report, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/AB/R, adopted 20 April 2005, DSR 2005:XII, 5663 (Corr.1, DSR 2006:XII, 5475)
US – Carbon Steel Appellate Body Report, United States – Countervailing Duties on Certain Corrosion-Resistant Carbon Steel Flat Products from Germany, WT/DS213/AB/R and Corr.1, adopted 19 December 2002, DSR 2002:IX, 3779
US – Softwood Lumber IV Appellate Body Report, United States – Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada, WT/DS257/AB/R, adopted 17 February 2004, DSR 2004:II, 571
US – Upland Cotton Appellate Body Report, United States – Subsidies on Upland Cotton, WT/DS267/AB/R, adopted 21 March 2005, DSR 2005:I, 3
US – Upland Cotton Panel Report, United States – Subsidies on Upland Cotton, WT/DS267/R, Corr.1, and Add.1 to Add.3, adopted 21 March 2005, as modified by Appellate Body Report WT/DS267/AB/R, DSR 2005:II, 299
US – Upland Cotton (Article 21.5 – Brazil)
Appellate Body Report, United States – Subsidies on Upland Cotton – Recourse to Article 21.5 of the DSU by Brazil, WT/DS267/AB/RW, adopted 20 June 2008, DSR 2008:III, 809
US – Continued Suspension Appellate Body Report, United States – Continued Suspension of Obligations in the EC – Hormones Dispute, WT/DS320/AB/R, adopted 14 November 2008, DSR 2008:X, 3507
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TABLE OF ABBREVIATIONS AD Agreement Agreement on Implementation of Article VI of the General Agreement
on Tariffs and Trade 1994 B&O Business and occupation DOD United States Department of Defense DUS&T Dual Use Science & Technology DSB Dispute Settlement Body DSU Understanding on Rules and Procedures Governing the Settlement of
Disputes EU European Union FSC/ETI Foreign Sales Corporation/Extraterritorial Income FWS First Written Submission GATT General Agreement on Tariffs and Trade GATS General Agreement on Trade in Services HB House Bill LCA Large Civil Aircraft ManTech Manufacturing Technology NASA National Aeronautics and Space Administration PEs Project elements R&D Research and development RDT&E Research, Development, Test and Evaluation SCM Agreement Agreement on Subsidies and Countervailing Measures Space Act National Aeronautics and Space Act of 1958 SWS Second Written Submission US United States USDOC United States Department of Commerce Vienna Convention Vienna Convention on the Law of Treaties, adopted on 22 May 1969
US – Measures Affecting Trade in Large Civil Aircraft Appellant Submission (AB-2011-3 / DS353) European Union
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I. INTRODUCTION
1. The European Union appeals discrete errors of law and legal interpretation
developed in the panel report in United States – Measures Affecting Trade in
Large Civil Aircraft (Second Complaint) (DS353) (“Panel Report”). Having
prevailed on significant parts of its claims before the Panel, the European Union
nevertheless files its appeal first. It does so with the objective of avoiding any
further unwarranted delay in these proceedings.
2. As a preliminary matter, the European Union appeals the Panel’s findings
concerning the absence of the procedure provided for under Annex V of the
Agreement on Subsidies and Countervailing Measures (“SCM Agreement”)
notwithstanding the fact that it was requested by the European Union.1 The
European Union considers that an Annex V procedure is initiated by negative
consensus and not, as the United States would have it, by consensus. Because the
United States failed to co-operate both by stating that it did not consent and by
refusing to respond to the questions put to it, the European Union was entitled to
base its case on the available information, and the Panel was required to complete
the record relying on best information otherwise available and, where appropriate,
to draw adverse inferences.
3. The European Union next appeals two of the Panel’s findings related to the
existence of specific subsidies, within the meaning Articles 1 and 2 of the SCM
Agreement. Each of these findings results from erroneous legal interpretations or
applications of key terms in those provisions. First, the European Union appeals
the Panel’s finding that any subsidy deriving from the allocation of patent rights
under National Aeronautics and Space Administration (“NASA”) and Department
of Defense (“DOD”) research and development (“R&D”) contracts and
agreements with Boeing are not “specific”.2 The European Union demonstrates
that the Panel’s conclusion, which was the only basis for its ultimate rejection of
the EU’s claims against these measures, stems from an erroneous interpretation
1 Panel Report, paras. 7.19-7.22. 2 Panel Report, para. 7.1276-7.1294.
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and application of the phrase “granting authority” in Article 2.1 of the SCM
Agreement.
4. Second, the European Union appeals the Panel’s finding that Article 1.1(a)(1)
excludes from its scope (and therefore the scope of the SCM Agreement)
transactions properly characterised as a “purchase of services” by a government –
even if those transactions include “direct transfers of funds”, “provisions of
goods”, or other activities specifically covered by Article 1.1(a)(1).3 This legal
error would open up a considerable loophole in the SCM Agreement. This
erroneous interpretation was the basis for the Panel’s decision that much of the
challenged funding and support provided by the DOD Research, Development,
Test and Evaluation (“RDT&E”) Programme to Boeing do not constitute
subsidies.
5. Next, the European Union appeals the Panel’s finding that the tax subsidies under
Washington State’s House Bill (“HB”) 2294 are not contingent/conditional in fact
upon export performance, under Article 3.1(a) and footnote 4 of the SCM
Agreement.4 Both HB 2294 and the business and occupation (“B&O”) tax rate
reductions that form part of it are obviously subsidies that are
contingent/conditional, the first on building a facility that can produce 36 787s per
year and the second on sales. Thus, unlike in some other cases, the issue is not
contingency/conditionality (or the lack of it). Rather, the issues were whether or
not the contingent/conditional event could reasonably be considered a proxy in
fact for exports, and whether or not there was any favouring or differentiation of
exports. The European Union considers this to be the case, because it is inherently
implausible that 787s will not be exported, and because by their own terms the
measures exclude a range of products that will not be exported.
6. Finally, the European Union appeals three findings in the Panel’s adverse effects
analysis, with the first two related to errors in the substance of the Panel’s
causation analysis, and the third related to deficiencies in the due process rights
provided to the European Union. First, the Panel erred in its interpretation and
3 Panel Report, paras. 7.953-7.970. 4 Panel Report, paras. 7.1513-7.1590 and 8.2(b).
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application of Articles 5 and 6.3 of the SCM Agreement, by considering it “not
appropriate”,5 due to their “entirely distinct causal mechanisms”,6 to cumulatively
assess (i) the effects of the B&O tax subsidies on 787 sales, prices and market
share and (ii) the effects of the US aeronautics R&D subsidies on 787 sales, prices
and market share on Airbus large civil aircraft (“LCA”) in the 200-300 seat LCA
market. Instead, the Panel merely isolated the B&O tax subsidies and examined
whether, “on their own”,7 they caused price suppression in the 200-300 seat
market. The Panel erred by failing to assess additionally the combined market
effects of the two sets of subsidies.
7. Second, the Panel erred in its interpretation and application of Articles 5 and 6.3 of
the SCM Agreement, by declining to aggregate with the Foreign Sales Corporation
and Extraterritorial Income (“FSC/ETI”) and B&O tax subsidies another group of
specific subsidies to Boeing, involving $550 million, and to assess their effects in
the aggregate.8 Both groups of subsidies benefited Boeing LCA and enabled price
effects on competing Airbus LCA in the three LCA markets. The Panel, therefore,
should have performed an aggregated assessment of both sets of subsidies, given
that they have a “sufficient nexus” to the subsidised product and the effects-related
variable.9
8. Third, the Panel acted inconsistently with the principle of due process required by
Article 11 of the DSU when it excluded from its adverse effects assessment the
effects of assistance instruments funded through the RDT&E programmes, other
than those funded pursuant to the Manufacturing Technology (“ManTech”) and
the Dual Use Science & Technology (“DUS&T”) programmes.10
5 Panel Report, para. 7.1824. 6 Panel Report, para. 7.1824. 7 Panel Report, para. 7.1824. 8 Panel Report, paras. 7.1825-7.1828. 9 Panel Report, US – Upland Cotton, para. 7.1191. 10 Panel Report, para. 7.1701.
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II. AN SCM AGREEMENT ANNEX V PROCEDURE IS INITIATED BY ACTION BY NEGATIVE CONSENSUS NOT BY DECISION BY CONSENSUS
A. Introduction and Executive Summary
9. The legal issue in dispute before the Panel and in dispute before the Appellate
Body in this appeal is a pure question of legal interpretation: is an SCM Agreement
Annex V procedure initiated, upon request, by DSB action by negative
consensus11 (as the European Union submits); or DSB decision by consensus (as
the United States submits). The European Union considers that the correct answer
to this question is obtained through a classic interpretative process, in which the
relevant terms of the treaty are contextualised, in light of the object and purpose.12
The precise order of the analysis is not determinative: what matters is that all the
relevant elements are taken into consideration and accorded appropriate and
reasonable weight.
10. In summary, the terms of Annex V, paragraph 2, first sentence of the SCM
Agreement do not state expressly whether initiation occurs by action by negative
consensus or decision by consensus. However, the negative consensus rule cross-
referenced in Article 7.4 of the SCM Agreement coupled with other elements of the
text, context and object and purpose, strongly support the conclusion that the rule
governing initiation is action by negative consensus and not decision by
consensus.
B. Summary of the Relevant Facts
11. The relevant facts are uncontroversial and not in dispute.
12. The EU Request for Panel Establishment and Initiation of an Annex V Procedure
in this dispute13 was considered for the second time14 at the DSB meeting on 17
11 That is, in effect and/or alternatively, automatically. 12 Vienna Convention on the Law of Treaties (“Vienna Convention”), Article 31(1): “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” 13 Panel Report, Annex B (WT/DS353/2/Corr.1).
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February 2006.15 The minutes of that meeting record a statement by the United
States that it did not agree to the initiation of an Annex V procedure.16 The
minutes further record that the DSB established the Panel and took note of the
statements made regarding the Annex V procedure.17 With respect to the Annex V
procedure, substantially the same events occurred at the DSB meetings of 14
March 2006,18 17 March 2006,19 21 April 200620 and 17 May 2006.21 The
European Union submitted fact-finding questions also to the United States by
letters dated 23 May 200622 and 2 August 2007,23 to which the United States
refused to respond. The European Union was thus obliged to proceed with the
case in the absence of co-operation by the United States with the fact-finding
procedure provided for in Annex V of the SCM Agreement.24
C. Summary of the Claims and Arguments before the Panel
13. The European Union raised as a preliminary matter before the Panel the existence
of a procedural defect in these proceedings, that is, the absence of any Annex V
procedure.25 The European Union explained that this flowed from a disagreement
between the European Union and the United States on a question of legal
interpretation. The European Union argued that an Annex V procedure is initiated
by action by negative consensus. In contrast, the United States argued that an
14 Article 6.1 of the DSU provides that: “If the complaining party so requests, a panel shall be established at the latest at the DSB meeting following that at which the request first appears as an item on the DSB’s agenda, unless at that meeting the DSB decides by consensus not to establish a panel.” 15 WT/DSB/M/205, 31 March 2006, paras. 68-76. 16 WT/DSB/M/205, 31 March 2006, para. 71. 17 WT/DSB/M/205, 31 March 2006, paras. 73-75. 18 WT/DSB/M/206, 4 April 2006, paras. 11-26. 19 WT/DSB/M/207, 26 April 2006, paras. 92-101. 20 WT/DSB/M/210, 30 May 2006, paras. 99-104. 21 WT/DSB/212, 20 June 2006, paras. 64-73. 22 Exhibit EC-1 to the EU Request for Preliminary Rulings. 23 Letter dated 2 August 2007 from the EU to the Panel, copied to the United States and the Secretariat. 24 EU FWS, paras. 51-59. 25 EU Request for Preliminary Rulings, paras. 7-44.
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Annex V procedure is initiated by decision by consensus.26 The European Union
explained to the Panel that pursuant inter alia to paragraphs 1 and 6 to 9 of Annex
V of the SCM Agreement, the United States had an obligation to co-operate in the
development of the evidence; that the EU request for an Annex V procedure could
not lawfully be delayed or denied through the actions of the United States or
otherwise; and that as a matter of law the Annex V procedure was initiated and/or
should be deemed to have been initiated and/or should have been initiated.27 The
European Union further asked the Panel to take the necessary steps to ensure that
the information gathering process provided for in Annex V of the SCM Agreement
would in fact take place.28 Alternatively, the European Union asked the Panel to
exercise its powers under Article 13 of the DSU to seek the necessary information
from the United States.29
14. In response, the United States argued that the Panel did not have the authority to
consider the matter raised by the European Union.30 It argued that all actions or
decisions by the DSB, or the absence thereof, are matters with respect to which
neither panels nor the Appellate Body have any authority to rule.31 The United
States also considered the matter outside the Panel's terms of reference.32 In any
event, the United States argued that initiation was by decision by consensus.33
According to the United States, the European Union was inventing a distinction
between decisions and actions of the DSB, and no such distinction exists.34 The
United States considered that Article 2.4 of the DSU establishes a general rule of
26 EU Request for Preliminary Rulings, particularly paras. 7-29. 27 EU Request for Preliminary Rulings, particularly paras. 7-43 and para. 44, first indent. See also EU FWS, paras. 60-68; EU Responses to Panel Questions 1 to 5 and EU Comments on US Reponses to Panel Questions 1 and 6 to 9 (“Issues relating to information gathering and the amount of the alleged subsidies”); EU SWS, paras. 19-23; EU Responses to Panel Questions 106, 107 and 109 and EU Comments on US Reponses to Panel Questions 108 and 109 (“Best information available and adverse inferences”); EU Responses to Panel Questions 316 and 317 (“Best information available”). 28 EU Request for Preliminary Rulings, particularly para. 44, second to third indents. 29 EU Request for Preliminary Rulings, particularly para. 58, fifth and sixth indents. 30 US Response to EU Request for Preliminary Rulings, paras. 21-25. 31 US Response to EU Request for Preliminary Rulings, para. 23, first sentence. 32 US Response to EU Request for Preliminary Rulings, para. 24. 33 US Response to EU Request for Preliminary Rulings, paras. 26-33. 34 US Response to EU Request for Preliminary Rulings, paras. 28 and 33.
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decision by consensus, and Annex V, paragraph 2, first sentence of the SCM
Agreement is not an exception from such general rule.35 The United States
asserted that in past cases the European Union and other Members had considered
that initiation is by decision by consensus.36 Finally, the United States argued that
there had been an Annex V procedure in DS317.37
15. Brazil agreed with the European Union that initiation is by negative consensus38
and encouraged the Panel to draw adverse inferences from the United States’
refusal to co-operate in the information gathering process.39 Canada agreed with
the European Union on the substance of the matter, that is, that initiation is by
negative consensus.40 However, Canada considered that the Panel had no
jurisdiction to rule on the matter.41
D. Summary of the Panel Report42
16. On the substance of the matter, the Panel, agreeing with the European Union,
twice stated that it may well be that the initiation of an Annex V procedure is not a
decision that is subject to consensus.43 However, the Panel also stated that it was
unable to rule that an Annex V procedure was initiated in this dispute. The Panel
observed that the European Union had requested such procedure; that the United
States had refused to consent; and that the DSB merely “took note” of those
statements without taking any action to initiate. For these reasons, the Panel
35 US Response to EU Request for Preliminary Rulings, para. 26. 36 US Response to EU Request for Preliminary Rulings, paras. 34-36. 37 US Response to EU Request for Preliminary Rulings, paras. 37-39. 38 Brazil’s Observations on the EU Request for Preliminary Rulings, para. 2. 39 Brazil’s Third Party Written Submission, paras. 1-8. 40 Canada’s Observations on the EU Request for Preliminary Rulings, third paragraph. 41 Canada’s Observations on the EU Request for Preliminary Rulings, first paragraph. 42 Footnote 1026 of the Panel Report recalls that the decision reproduced in paras. 7.19-7.24 of the Panel Report was originally transmitted to the Parties on 30 July 2007. 43 Panel Report, para. 7.21, second and final sentences.
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rejected the EU request (as framed by the Panel) and what it characterised as the
EU's dependent additional requests.44
17. The European Union sought clarification of the Preliminary Ruling from the Panel,
but the Panel responded that it considered it “unnecessary to rule in the abstract on
the issue” and rejected the EU's request for clarification.45
E. An SCM Agreement Annex V Procedure is Initiated by Action by Negative Consensus Not by Decision by Consensus
18. In addressing this matter, we begin with the relevant treaty terms. Article 7.4 of
the SCM Agreement provides:
If consultations do not result in a mutually agreed solution within 60 days20, any Member party to such consultations may refer the matter to the DSB for the establishment of a panel, unless the DSB decides by consensus not to establish a panel. The composition of the panel and its terms of reference shall be established within 15 days from the date when it is established.
20 Any time periods mentioned in this Article may be extended by mutual agreement.
(emphasis added)
19. Annex V, paragraph 1, first sentence of the SCM Agreement provides:
Every Member shall cooperate in the development of evidence to be examined by a panel in procedures under paragraphs 4 through 6 of Article 7. …
(emphasis added)
20. Annex V, paragraph 2, first sentence, of the SCM Agreement provides :
In cases where matters are referred to the DSB under paragraph 4 of Article 7, the DSB shall, upon request, initiate the procedure to obtain such information from the government of the subsidizing Member as necessary to establish the existence and amount of subsidization, the value of total sales of the subsidized firms, as well as information necessary to analyze the adverse effects caused by the subsidized product.66
44 Panel Report, paras. 7.20-7.22. 45 Communication from the Panel dated 30 August 2007, second paragraph.
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66 In cases where the existence of serious prejudice has to be demonstrated.
(emphasis added)
21. Thus, the terms of Annex V, paragraph 2, first sentence of the SCM Agreement do
not state expressly whether initiation occurs by action by negative consensus or
decision by consensus. However, there is a direct cross-reference from Annex V,
paragraph 2 to Article 7.4 of the SCM Agreement where the negative consensus
rule is expressly provided for. This provides a strong textual basis to support the
conclusion that a Member cannot block an Annex V procedure by withholding its
consent. Furthermore, the text, context and object and purpose of the other relevant
provisions discussed below strongly support the conclusion that Annex V initiation
is by action by negative consensus and not decision by consensus.
22. Since the legal issue in dispute also touches upon the procedures to be followed in
the DSB the European Union considers that it is appropriate to set out and have
regard to the overall framework of legal rules that govern those procedures. In this
respect, the European Union recalls that, when the General Council convenes as
the DSB, it must follow the rules of procedure for the General Council, except as
provided otherwise in the DSU.46 The General Council takes decisions in
accordance with Article IX of the WTO Agreement.47
23. The DSB is “established” by Article 2.1 of the DSU. According to this provision,
the DSB “administer{s} these rules and procedures” (that is, those referred to in
the DSU). It has the authority to “establish” panels, “adopt” panel and Appellate
Body reports (any “recommendations or rulings” becoming DSB recommendations
or rulings), “maintain” surveillance and “authorize” suspension of concessions. It
also “informs” the relevant WTO Councils and Committees about disputes.48
46 Rules of Procedure for Meetings of the Dispute Settlement Body (WT/DSB/9) (“DSB Procedures”), paragraph 1: “When the General Council convenes as the Dispute Settlement Body (DSB), it shall follow the rules of procedure for meetings of the General Council, except as provided otherwise in the Dispute Settlement Understanding (DSU) or below.” 47 Rules of Procedure for Sessions of the Ministerial Conference and Meetings of the General Council (“GC/DSB Procedures”), Rule 33: “The General Council shall take decisions in accordance with the decision-making provisions of the WTO Agreement, in particular Article IX thereof entitled “Decision-Making”. 48 DSU, Article 2 and Article 21.
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Significantly, Article 2.1 of the DSU, final sentence expressly provides that, where
the DSB “administers” dispute settlement rules, it proceeds by way of “decisions
or actions”.
24. Article 2.4 of the DSU provides:
Where the rules and procedures of this Understanding provide for the DSB to take a decision, it shall do so by consensus.1
1 The DSB shall be deemed to have decided by consensus on a matter submitted for its consideration, if no Member, present at the meeting of the DSB when the decision is taken, formally objects to the proposed decision.
25. Thus, certain DSU rules and procedures provide for the taking of decisions by
consensus. At the same time the DSU also provides for the taking of DSB actions,
and as a brief review of the relevant provisions confirms, DSB actions relating to
dispute settlement must occur unless the DSB decides by consensus not to act
(often referred to as “negative consensus”).
26. The first relevant provision is Article 6.1 of the DSU, which provides:
If the complaining party so requests, a panel shall be established at the latest at the DSB meeting following that at which the request first appears as an item on the DSB’s agenda, unless at that meeting the DSB decides by consensus not to establish a panel.5
5 If the complaining party so requests, a meeting of the DSB shall be convened for this purpose within 15 days of the request, provided that at least 10 days’ advance notice of the meeting is given.
27. It follows from the preceding analysis that, when a panel is established at a DSB
meeting, it is not established by way of a DSB decision by consensus, but by way
of a DSB action by negative consensus. It cannot be a decision by consensus
pursuant to Article 2.4 of the DSU because it is not taken by consensus, but by
negative consensus. Thus, by definition and of necessity, what Article 6.1 of the
DSU refers to is something else – namely an action by negative consensus in
accordance with Article 6 of the DSU. That is why a WTO document is
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subsequently distributed recording the establishment of the panel "in accordance
with Article 6 of the DSU".49
28. A DSB action establishing a panel by negative consensus is subject to only one
condition: a “request” by the complaining party.
29. The analysis is the same for Articles 16.450 and 17.1451 of the DSU (“adoption” by
DSB action by negative consensus of panel and Appellate Body Reports); as well
as Articles 22.6, first sentence52 and 22.7, final sentence53 of the DSU
(“authorization” by DSB action by negative consensus to suspend concessions).
30. The second sentence of Article 22.6 of the DSU,54 which concerns referral to an
arbitration panel, also provides for action by the DSB following a request. Under
the logic of the US argument, because the second sentence of Article 22.6 of the
DSU does not expressly refer to negative consensus, the matter could only be
referred to an arbitration panel by consensus. This cannot be correct. A
complaining Member could not unilaterally block an arbitration panel as a means
of obtaining the retaliation requested without judicial review; nor could a
defending Member unilaterally block a retaliation request by indefinitely
49 See, for example, in the present case, WT/DS353/6 of 4 December 2006: “At its meeting on 17 February 2006, the Dispute Settlement Body (DSB) established a Panel pursuant to the request of the European Communities in document WT/DS353/2, in accordance with Article 6 of the DSU.” 50 “Within 60 days after the date of circulation of a panel report to the Members, the report shall be adopted at a DSB meeting unless a party to the dispute formally notifies the DSB of its decision to appeal or the DSB decides by consensus not to adopt the report. …”. See, for example, most recently, WT/DS402/5, of 1 March 2011, US – Use of Zeroing in Anti-dumping Measures Involving Products from Korea, “Action by the Dispute Settlement Body.” 51 “An Appellate Body report shall be adopted by the DSB and unconditionally accepted by the parties to the dispute unless the DSB decides by consensus not to adopt the Appellate Body report within 30 days following its circulation to the Members. …”. See, for example, most recently, WT/DS367/17, of 5 January 2011, Australia – Measures Affecting the Importation of Apples From New Zealand, “Action by the Dispute Settlement Body.” 52 “When the situation described in paragraph 2 occurs, the DSB, upon request, shall grant authorization to suspend concessions or other obligations within 30 days of the expiry of the reasonable period of time unless the DSB decides by consensus to reject the request. …”. 53 “… The DSB shall be informed promptly of the decision of the arbitrators and shall upon request grant authorization to suspend concessions or other obligations where the request is consistent with the decision of the arbitrator, unless the DSB decides by consensus to reject the request.” 54 “… However, if the Member concerned objects to the level of suspension proposed, or claims that the principles and procedures set forth in paragraph 3 have not been followed where a complaining party has requested authorization to suspend concessions or other obligations pursuant to paragraph 3(b) or (c), the matter shall be referred to arbitration. …”
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obstructing an arbitration panel. It is the context of the first sentence, together
with the text contained in the first sentence, and the object and purpose, that
compels this interpretation.
31. With the above observations in mind, the European Union now turns to further
analyze Annex V of the SCM Agreement.
32. First, Annex V, paragraph 2 expressly cross-refers to the first sentence of Article
7.4 of the SCM Agreement. The existence of an express cross-reference means
that, in the case of paragraph 2 of Annex V, and compared to Article 22.6 of the
DSU discussed above, even greater weight has to be given to the express reference
to the negative consensus procedure in Article 7.4 of the SCM Agreement.
33. Second, the term “the DSB shall” indicates that the provision creates an obligation
on the DSB to proceed according to the terms of the treaty. This is highly
significant. Each of the provisions of the DSU analysed above55 relating to actions
by negative consensus contains the same mandatory language. By contrast, there
is no provision of the DSU that imposes an obligation on the DSB with respect to
any decision by consensus relating to the procedural conduct of a dispute. The
logic of this is self-evident. The Members would not oblige the DSB to act, and yet
at the same time provide the defending Member in a dispute with the means to
frustrate such action. That would create an internal incoherence within the treaty
that would render the treaty provision obliging the DSB to act wholly ineffective.
A treaty may not be interpreted so as to render entire provisions without effect. In
short, there is a clear pattern in the DSU: such mandatory language with respect to
the DSB and disputes is consistently associated with action by negative consensus
and dissociated from decision by consensus. Accordingly, the presence of such
mandatory language in Annex V, paragraph 2, first sentence of the SCM
Agreement strongly supports the conclusion that initiation is by action by negative
consensus.
34. Third, the word “request”, used in paragraph 2 of Annex V, is also used in Articles
6.1, 22.6 first sentence and 22.7 final sentence of the DSU. This supports the view
55 DSU, Articles 6.1, 16.4, 17.14, 22.6 first sentence, 22.7 final sentence and 22.6 second sentence.
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that the provision refers to a DSB action by negative consensus, conditional only
on a “request” being made by the interested Member.
35. Fourth, we have also had regard to the use of the term “under” in Annex V,
paragraph 2. We note that the dictionary meanings of the term “under” include :
Covered by, enveloped in; within, on the inside of … In an inferior or subordinate position or capacity to; below in rank or standing … Subject to the authority, control, direction or guidance of … Controlled, restrained or bound by …56
36. Thus, the ordinary meaning of this term supports the view that the “cases” or
“matters” referred to in Annex V, paragraph 2, will be subject to the procedures
provided for in Article 7.4 of the SCM Agreement, namely negative consensus.
The terms “cases” and “matters” in paragraph 2 of Annex V suggest the same
conclusion. A procedure under Annex V, paragraph 2 of the SCM Agreement does
not constitute a separate case or matter, distinct from the case or matter which is
the subject of the request for the establishment of the panel.
37. Fifth, the term “procedure” is used in Annex V, paragraph 2 of the SCM
Agreement. Article 2(1) of the DSU expressly refers to the DSB “administering”
the relevant “rules and procedures”, and most particularly the dispute settlement
provisions of the covered agreements, expressly stated by Appendix 2 of the DSU
to include Annex V of the SCM Agreement. The use of the term “procedure”
under Annex V of the SCM Agreement thus clearly falls within the scope of a DSB
action by negative consensus administering the rules and procedures referred to in
the DSU.
38. Sixth, the first sentence of paragraph 1 of Annex V of the SCM Agreement
establishes an overarching obligation that informs the remainder of Annex V. The
first sentence provides that every Member shall cooperate in the development of
evidence to be examined by a panel in procedures under paragraphs 4 through 6 of
Article 7. This is entirely consistent with the proposition that the correct
procedure is negative consensus. It is difficult to understand how a defending
Member could lawfully prevent the initiation of an Annex V procedure whilst
56 Shorter Oxford English Dictionary (5th ed. 2002).
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acting in a manner consistent with this basic obligation to cooperate. In other
words, the proposition that there is an obligation to cooperate, but a right to do
nothing appears to us to constitute a conflict that cannot be resolved. This is
inconsistent with the “principle” that the rules and procedures in the DSU should
be used to the extent necessary to “avoid conflict.”57 This view is further
confirmed by the terms of the second sentence of paragraph 1 of Annex V, which
refers, in mandatory terms, to “the procedures to be used to comply with requests
for information.” Once again, this language does not suggest that compliance is
optional. On the contrary, it suggests that compliance is mandatory.
39. Seventh, paragraph 5 of Annex V provides that the information gathering process
shall be completed within 60 days of the date on which the matter has been
referred to the DSB under paragraph 4 of Article 7. This is a mandatory 60 day
period that must be complied with. Significantly, it begins to run from the date on
which the matter is referred to the DSB under paragraph 4 of Article 7. It is not
expressed to run from the date on which the Annex V procedure is initiated. The
reason for this is self-evident. The provision assumes that, perhaps absent
exceptional steps taken by a complaining Member, initiation of an Annex V
procedure will generally be contemporaneous with the establishment of a panel.
Furthermore, use of the terms “the matter” again supports the view that there is a
close link between the panel request and the Annex V procedure. In other words,
the two are closely bound together and follow the same procedure: negative
consensus.
40. Eighth, paragraphs 6 to 9 of Annex V provide for specific consequences in the
event that the defending Member fails to cooperate, and specifically also condition
the panel’s subsequent behaviour. Once again, these provisions are inconsistent
with the proposition that the defending Member has a right to do nothing (that is,
to block the procedure and/or refuse to cooperate). If that would be the case, there
would be no reason for the SCM Agreement to provide for what are in effect
penalties for non-cooperation.
57 DSU, Article 1.2, final sentence: “… the principle that … the rules and procedures set out in this Understanding should be used to the extent necessary to avoid conflict.”
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41. Ninth, the provisions of Article 12.7 of the SCM Agreement provide, in the context
of countervailing investigations, that if interested Members or parties do not
cooperate in providing information, determinations may be made on the basis of
facts available. The drafters thus recognised the information gathering issue in the
context of countervailing investigations and effectively mandated cooperation with
the sanction of using facts available. This being so, we fail to see why, in the
context of serious prejudice cases, in which the panel makes the initial
determination, the drafters would have accepted that the defending Member should
be free to refuse to cooperate with impunity. That is precisely why they foresaw
the initiation of an Annex V procedure, in conjunction with a panel request, by
negative consensus.
42. Tenth, the Appellate Body has confirmed the general principle that Members have
an obligation to co-operate in the information gathering procedures of the DSU,
failing which it may be appropriate to draw adverse inferences.58 The reasoning of
the Appellate Body draws expressly on the terms of the SCM Agreement.
43. Taking all these aspects of the text and context into consideration, the European
Union submits that it is evident that the initiation of a procedure within the
meaning of Annex V, paragraph 2 of the SCM Agreement is not a DSB decision to
be adopted by consensus, but a DSB action by negative consensus.59
44. In addition to the above arguments, also from an object and purpose point of view
it is apparent that the initiation of the Annex V procedure is and must be by action
by negative consensus. The Annex V process is a necessary corollary and integral
part of the establishment of a panel in a dispute settlement proceeding, which,
through the establishment of a panel, is launched by negative consensus. Any
attempt to make this fact-finding procedure specifically designed for serious
58 Appellate Body Report, Canada – Aircraft, para. 202: “… the authority to draw adverse inferences from a Member's refusal to provide information … seems to us an ordinary aspect of the task of all panels to determine the relevant facts of any dispute involving any covered agreement: a view supported by the general practice and usage of international tribunals.” 59 We leave open the question of whether the action is also or alternatively to be characterised as a decision by negative consensus, since that is not relevant to our analysis. In fact, whether the event in question is characterised by the US or anyone else as an action, a decision, an action and a decision, or something else, or as automatic, the EU considers that the negative consensus rule applies to Annex V procedures, for the reasons set out in this submission.
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prejudice cases subject to a veto of the defending party would severely limit the
ability of a complaining party to successfully bring a serious prejudice case. The
overall balance and effectiveness of the SCM Agreement would be severely
hampered with far-reaching systemic implications. The complainants must have a
tool to prepare their serious prejudice case by obtaining the necessary information
before their submissions have to be made to a panel.
45. The European Union considers that the above interpretation is confirmed by a
consideration of the preparatory work and/or the circumstances of conclusion (or
alternatively that such consideration resolves any ambiguity or obscurity in the
meaning in favour of the European Union and/or disproves the manifestly absurd
and unreasonable interpretation advanced by the United States).60 The substantive
provisions of Annex V of the SCM Agreement were not contained in the first two
draft texts circulated by the Chairman of the Negotiating Group on Subsidies and
Countervailing Measures,61 but first appeared in the third draft text.62 It remains
clear from this and subsequent drafts that the Annex V procedure was tied-to the
panel request, in the sense that the same procedures would apply, which explains
why, when the reference to negative consensus was subsequently added to Article
7.4 of the SCM Agreement it was well understood that the linked Annex V
procedure would follow the same procedure.
46. It is particularly instructive to note that the Annex V procedure was added
following a proposal by the United States,63 the essential elements of which were
agreed to by all the Members by consensus. The United States eloquently
explained the object and purpose of its proposal in the following terms (bold
underline emphasis added):
60 Vienna Convention, Article 32 (Supplementary means of interpretation): “Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable.” 61 MTN.GNG/NG10/W/38 of 18 July 1990 and MTN.GNG/NG10/W/38/Rev. 1 of 4 September 1990. 62 MTN.GNG/NG10/W/38/Rev. 2 of 2 November 1990. 63 MTN.GNG/NG10/W/40, of 5 October 1990, p. 2 and 3.
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Both the current Code and the Chairman's Note tie subsequent countermeasures to a demonstration of adverse effects but provide no credible, explicit means for determining the degree and nature of these effects. Unlike a multilateral review of a countervailing measure, where there is already a determination by an investigating authority of the existence of a subsidy and material injury, and a record of detailed evidence on which to conduct a review, a Panel or Committee proceeding with respect to serious prejudice is de novo.
With no effective, multilaterally-sanctioned guidelines for conducting the necessary serious prejudice enquiry, a party's ability to prepare an adequate case is limited. The party must rely on whatever information it can gather without any particular confidence regarding the factors essential to establish serious prejudice. Further, and perhaps as important, the complaining party may not get full or prompt co-operation from the subsidizing country or a third country in its efforts. In addition, it would be difficult for a multilateral body to discharge its responsibilities with due regard to all information relevant to the case on a timely basis.
The problem of developing a proper case is especially acute where third-countries are involved because the information necessary to show adverse effects caused by subsidized products is not necessarily within the reach of the complaining party. Moreover, unlike the situation where there are effects in the home market of the subsidizing country, such information is also beyond the reach of the subsidizing country. In some cases, the third country would have an incentive not to co-operate in producing the necessary evidence because the effects which are adverse to companies in the complaining country may actually be beneficial to the consumers in the third country. Thus, while the complaining country might be able to present a determination of subsidization and adverse effects with respect to the third country, it might be denied critical information regarding the relation between the imports and adverse effects in the third market.
To strengthen the ability to establish the effects in the home market of the subsidizing country and in third countries, this proposal envisions an information-gathering process supported by a commitment to co-operate. With this information, the parties can make their arguments on adverse effects based on a record of information developed. If a country determines, on the basis of its examination of this information, to seek full multilateral review, the multilateral body can make an informed and timely determination on the basis of that record. An obligation to co-operate in the gathering of information, as well as, where necessary, reliance on best information available, should especially enhance the ability of countries with the most limited national resources in preparing cases to bring to multilateral dispute settlement.
Therefore, in order to improve the multilateral rules and procedures for demonstrating adverse effects required to show serious prejudice, and for enhancing the credibility of remedies in this area, the following mechanism is suggested.
47. In this instance, of course, the United States and all WTO Members got exactly
what they wished for: an information gathering procedure hand-in-hand with a
panel procedure that is mandatory (that is, by negative consensus) backed up with
a threat of adverse inferences in case of failure to co-operate.
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F. Legal Errors in the Panel Report and Request for Reversal
48. Obviously, the Panel has, in effect, simply avoided ruling on the legal question at
the root of the dispute between the Parties, even though on the substance of the
matter the Panel appears to agree with the European Union.
49. The Panel has not done this by ruling that the matter is outside its jurisdiction, as
the United States and Canada argued. Rather, the Panel appears to have accepted,
at least by implication, that it had an implied or inherent power, and in fact an
obligation, to rule on the matter.
50. However, what the Panel appears to have done is to erroneously re-state part of the
EU complaint as a request for a ruling on a narrow factual proposition: that the
DSB has initiated an Annex V procedure by action by negative consensus. The
Panel then states that it cannot agree with that factual proposition (of the Panel's
own invention) and rejects the remainder of the EU request, characterising it as
“dependent”. Obviously, this reasoning is circular and unreasonable. It is exactly
the absence of an Annex V procedure about which the European Union was
complaining; and yet for the Panel that absence becomes the very justification for
rejecting the EU request. Equally obviously the EU request constituted far more
than such a narrow factual proposition, as the United States itself well-understood
in its response64 and as Brazil and Canada well-understood in their observations on
the matter.
51. In light of the above explanations, the European Union submits that this constitutes
a failure to make an objective assessment of the matter within the meaning of
Article 11 of the DSU, including a failure to make an objective assessment of the
facts; and/or a false exercise of judicial economy; and/or an error in the
interpretation and application of Article 7.4 and Annex V, paragraph 2, first
sentence of the SCM Agreement. For these reasons, we request reversal of the
statements at paragraph 7.22 of the Panel Report, first and final sentences, denying
the EU requests.
64 US Response to EU Request for Preliminary Rulings, particularly paras. 26-33.
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G. Request for completion of the analysis and other consequences
52. The most substantial part of the relief that the European Union was seeking from
the Panel in its request for Preliminary Rulings was that the Panel take the
necessary steps to ensure that in fact the information gathering process provided
for in Annex V of the SCM Agreement should actually take place. That did not
occur. The United States' failure to co-operate in the information-gathering
process, which began with its repeated DSB statements referenced above and
continued throughout the Panel proceedings, forced the European Union to present
its serious prejudice case on the basis of the evidence available to it. In these
circumstances, the European Union requests the Appellate Body to complete the
analysis by making the following findings:65
• the initiation of an SCM Agreement Annex V procedure is by action by
negative consensus, not by decision by consensus, or in any event is by
negative consensus or automatic;
• as a matter of law, with the EU request at the DSB meeting of 17 February
2006, re-iterated at the subsequent DSB meetings of 14 March 2006, 17
March 2006, 21 April 2006 and 17 May 2006, all the conditions for the
initiation of an Annex V procedure were fulfilled, and such procedure was
initiated and/or is deemed to have been initiated and/or should have been
initiated;
• that in refusing to co-operate in the information-gathering process,
beginning with its repeated DSB statements referenced above and
continuing throughout the Panel proceedings with its refusal to answer the
questions set out in the European Union’s letters dated 23 May 2006 and 2
August 2007, the United States failed to comply with its obligations under
Annex V, paragraph 1, first sentence, of the SCM Agreement; and
• that, pursuant to paragraphs 6 to 9 of Annex V of the SCM Agreement, and
in light of the US failure to co-operate described in this submission and
65 Each finding is requested as a separate and independent matter. No one finding is requested as dependent upon any other finding or findings.
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particularly in the preceding bullet point, the European Union was entitled
to present its serious prejudice case based on the evidence available to it,
the Panel was entitled to complete the record as necessary relying on best
information otherwise available, and that, in making its determinations, the
Panel was entitled to draw adverse inferences.66
53. Independently from its request for reversal and completion of the analysis, the
European Union requests the Appellate Body to constantly bear in mind the
circumstances of this case. The US refusal to co-operate in the Annex V
procedure colours the entire dispute.67 This means that, with respect to any matter
that the United States might appeal, either pursuant to Article 11 of the DSU or
with respect to the Panel's legal characterisation of the facts, the Appellate Body
should constantly bear in mind that the United States has chosen to withhold
information from the European Union and the Panel. Consequently, the United
States cannot now reasonably criticise the Panel for its assessment of the facts or
for the reasonable drawing of factual inferences where the United States itself is
responsible for depriving the Panel of information. Conversely, in considering the
substantive aspects of the EU appeal, or any request by the European Union to
complete the analysis, the Appellate Body should constantly bear in mind the
above circumstances. In case of doubt or evidentiary conflict or equipoise, the
Appellate Body should rule in favour of the European Union.
H. Jurisdictional Considerations
54. Since the Panel did not deny the EU request based on the jurisdictional argument
advanced by the United States and Canada we do not address that matter in full
detail in this submission. Rather, for the time being we summarise our position as
follows.
66 See, in particular, EU FWS, paras. 60-68. 67 For example, EU FWS, paras. 60-68; EU Responses to Panel Questions 1 to 5 and EU Comments on US Reponses to Panel Questions 1 and 6 to 9 (“Issues relating to information gathering and the amount of the alleged subsidies”); EU SWS, paras. 19-23; EU Responses to Panel Questions 106, 107 and 109 and EU Comments on US Reponses to Panel Questions 108 and 109 (“Best information available and adverse inferences”); EU Responses to Panel Questions 316 and 317 (“Best information available”).
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55. The Panel had the implied or inherent power, and indeed the obligation, to
consider the matter raised by the European Union. The DSU, including the special
or additional rules listed in Appendix 2, which expressly references Annex V of
the SCM Agreement, is a covered agreement.68 The DSU itself applies to disputes
regarding the interpretation of the DSU.69 The dispute settlement system serves to
preserve the rights and obligations of Members under the covered agreements,
including the DSU, and to clarify the existing provisions of those agreements in
accordance with customary rules of interpretation of public international law.70
When Members seek redress of a violation of their DSU rights they must have
recourse to, and abide by, the rules and procedures of the DSU;71 and the DSU
affords them that right.72 Thus, disputes regarding the correct interpretation of the
DSU are themselves to be resolved through the application of the DSU and the
dispute settlement system, by a panel and eventually by the Appellate Body,
applying the negative consensus rule.
56. The absence of the matter from the Panel Request is not determinative, since the
matter post-dates the Panel Request. Article 11 of the DSU expressly provides that
a panel must make an objective assessment of the matter before it, including an
objective assessment of the facts of the case and the applicability of and
conformity with the relevant covered agreements, and "make such other findings
as will assist the DSB in making the recommendations or in giving the rulings
provided for in the covered agreements". Thus, disputes about the correct
interpretation of the DSU are not issues that necessarily require the complaining
Member to instigate new panel proceedings. Rather, they are issues that fall to be
assessed, at least in the first place, within the panel proceedings in which the issue
arises. This is confirmed by the principle that the prompt settlement of disputes is
essential to the effective functioning of the WTO and the maintenance of a proper
balance between the rights and obligations of Members.73 It is perfectly illustrated
68 DSU, Article 1.1, first sentence, and Appendix 1(B), fifth item. 69 DSU, Article 1.1, second sentence. 70 DSU, Article 3.2, second sentence. 71 DSU, Article 23.1; Appellate Body Report, Mexico – Taxes on Soft Drinks, para. 52. 72 DSU, Article 3.3; Appellate Body Report, Mexico – Taxes on Soft Drinks, para. 52. 73 DSU, Article 3.3.
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by the numerous panel and Appellate Body reports addressing issues under Article
4.2 and 6.2 of the DSU that have arisen in the same DSU proceedings. There are
numerous procedural defects that might arise in the operation of the DSU during
dispute settlement proceedings and that could disrupt the balance of rights and
obligations set out in the DSU, and thus by extension any and all of the covered
agreements. By definition they must all be subject to resolution through the DSU
itself. Panels and the Appellate Body have repeatedly confirmed this analysis.74
57. We reserve the right to return to this issue should the United States appeal this
aspect of the Panel Report.
58. With respect to the different question of the Appellate Body's jurisdiction to
consider the matters raised in this submission, we consider it self-evident that,
pursuant to Article 17.6 of the DSU, the Appellate Body has the authority to
consider issues of law covered in the Panel Report and legal interpretations
developed by the Panel.
59. Finally, with respect to the Appellate Body's jurisdiction in the context of
completing the analysis, we consider that this follows the Panel's jurisdiction,
since the Appellate Body would be stepping into the shoes of the Panel.
Accordingly, as indicated above, until such time as this matter may be raised by
the United States, we do not comment in full detail at this time, but reserve our
right to do so in response to any submissions from the United States on this issue.
74 Appellate Body Report, Mexico – Corn Syrup (Article 21.5 - US), para. 36; Appellate Body Report, India – Patents (US), para. 92; Appellate Body Report, Mexico – Taxes on Soft Drinks, para. 42; Appellate Body Report, US-Continued Suspension, para. 433; Appellate Body Report, Canada – Continued Suspension, para. 433; Panel Report, India – Patents (EC), paras. 7.9 to 7.24 (ruling on the propriety of its own establishment); Panel Report, Australia – Automotive Leather II, paras. 9.13 to 9.15 (assessing the substance of Australia’s claim that, on a proper interpretation of the DSU, the panel was established – also through the actions of the DSB – inconsistently with the DSU).
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III. SUBSIDIES
A. Introduction and Executive Summary
60. The European Union appeals two of the Panel’s findings related to the existence of
specific subsidies, within the meaning Articles 1 and 2 of the SCM Agreement.
Each of these findings results from an erroneous legal interpretation or application
of key terms in those provisions.
61. First, the European Union appeals the Panel’s finding that any subsidy deriving
from the allocation of patent rights under NASA and DOD R&D contracts and
agreements with Boeing are not “specific”.75 The European Union demonstrates
that the Panel’s conclusion stems from an erroneous interpretation and application
of the phrase “granting authority” in Article 2.1 of the SCM Agreement. Having
adopted an erroneous interpretation of “granting authority” that focuses on the
policy of the Member (i.e., the United States Government, as a whole) rather than
the actions of the actual government entity providing the subsidy, the Panel
proceeded to find that the NASA and DOD patent waivers/transfers are not
specific. If the Panel had adopted the correct legal interpretation, it would have
readily reached the conclusion that these NASA and DOD patent waivers/transfers
are indeed “specific”, within the meaning of Article 2.1(a).
62. Second, the European Union appeals the Panel’s finding that Article 1.1(a)(1)
excludes from its scope (and therefore the scope of the SCM Agreement)
transactions properly characterised as a “purchase of services” by a government –
even if those transactions included “direct transfers of funds”, “provisions of
goods”, or other activities specifically covered by Article 1.1(a)(1).76 In finding,
for example, that the ordinary meaning of “direct transfer of funds” in its context
excludes a significant class of direct transfers of funds (i.e., those that occur
pursuant to transactions properly characterised as a purchase of services), the
Panel failed to perform a holistic interpretation of the provision in light of its
75 Panel Report, para. 7.1294. 76 Panel Report, paras. 7.953-7.970.
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context, and the object and purpose of the SCM Agreement. Indeed, the Panel’s
interpretation opens up an enormous loophole in the SCM Agreement. It was this
interpretation that provided the basis for the Panel’s decision that much of the
challenged funding and support provided by the DOD RDT&E Programme to
Boeing does not constitute subsidies. And, if upheld, the Panel’s interpretation
will provide the basis in the future for Members to modify the form (but not the
substance) of their measures in a manner that allows them to escape from all of the
disciplines of the SCM Agreement.
B. In Its Analysis of NASA and DOD Patent Waivers/Transfers, the Panel Adopted an Erroneous Interpretation and Application of “Granting Authority” in Article 2.1 of the SCM Agreement
1. Summary of the Facts and the Parties’ Arguments
63. Beginning with its first written submission, the European Union detailed the way
in which NASA and DOD transferred valuable patent rights to Boeing, including
patents related to Boeing’s development of LCA.77 It explained why such transfers
of patent rights should be found to constitute “financial contributions” that confer
“benefits” to Boeing, pursuant to Article 1 of the SCM Agreement, and that such
subsidies were “specific” within the meaning of Article 2.1.78
64. The United States did not dispute much of the EU’s factual description of the US
law and practice through which NASA and DOD allocate property rights
developed pursuant to NASA and DOD R&D contracts.79 Instead, the United
States disagreed with each aspect of the European Union’s legal characterisation of
these NASA and DOD patent waivers and transfers, including the evaluation of
whether they constitute a “financial contribution”, provide a “benefit”, and are
“specific”.
77 Panel Report, para. 7.1266. 78 Panel Report, para. 7.1266. 79 Panel Report, paras. 7.1272-7.1275.
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65. The legislative authority for NASA’s R&D programmes, including the authority to
waive patents, derives from the National Aeronautics and Space Act of 1958
(“Space Act”), and its implementing regulations. Accordingly, the European
Union reasoned that NASA patent waivers are specific to the enterprises that
participate in aeronautics and space-related R&D (just like the NASA R&D
funding and support).80 As for DOD patent waivers and transfers, the European
Union explained that these are granted pursuant to the overall provision of R&D
funding and support provided by DOD, and that they are therefore specific to the
group of defence-related industries capable of conducting the specialised activities
required by DOD.81
66. By contrast, the United States argued that NASA and DOD patent waivers and
transfers are not specific because NASA and DOD “look to the policy established
in the Presidential Memorandum of 18 February 1983 and Executive Order
12591”.82 Further, the United States argued that the “granting authority” in the
case of these patent waivers is the “President of the United States”.83 In response,
the European Union repeatedly pointed out that the “‘granting authorities’ at issue
with respect to the provision/waiver of intellectual property rights are NASA and
DOD”.84
2. Summary of the Panel’s Findings
67. In the name of “simplicity and efficiency”, the Panel opted to begin and end its
analysis by evaluating the Parties’ arguments on specificity pursuant to Article 2 of
the SCM Agreement,85 concluding that the allocation of patent rights under NASA
and DOD R&D contracts and agreements with Boeing are not “specific”, within
80 Panel Report, para. 7.1270, citing EU FWS, para. 853. 81 Panel Report, para. 7.1270, citing EU FWS, para. 853. 82 Panel Report, para. 7.1275, citing US FWS, paras. 338-339. 83 See, e.g., US Response to Panel Question 144(k) and Exhibit US-1268. 84 EU SWS, para. 570; see also EU FNCOS, para. 86; EU Comments on US Response to Panel Question 144, para. 138. 85 Panel Report, para. 7.1276 and note 2933.
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the meaning of Article 2 of the SCM Agreement.86 Rejecting the European
Union’s arguments that NASA and DOD should be considered the relevant
“granting authorit{ies}” for purposes of the Article 2.1 analysis, the Panel instead
focused on the broader US Government-wide policies and legislation related to the
allocation of intellectual property under government contracts.87
68. In particular, the Panel found that “allocation of patent rights is uniform under all
U.S. government R&D contracts, agreements, and grants, in respect of all U.S.
government departments and agencies, for all enterprises in all sectors”.88 The
Panel considered the “U.S. Government” policy, as implemented through a number
of different legal instruments.89 Although the Panel acknowledged the existence of
“NASA-specific regulations”,90 it found that these regulations “cannot, for
purposes of Article 2 of the SCM Agreement, be analysed in isolation from the
broader policy and legal framework that they implement”.91 It reached this
conclusion despite the Panel’s earlier finding that NASA R&D funding and
support provided pursuant to the Space Act were specific under Article 2.1(a),
based in part on the undisputed fact that the Space Act “explicitly limits the scope
of NASA’s R&D activities (i.e. to aeronautics and space)”.92
69. With respect to DOD, the Panel found lack of specificity because DOD generally
allocates patent rights in accordance with certain federal laws and policies (which
are not specific to DOD), such as the Bayh-Dole Act (i.e., providing government
contractors with an option to retain patent rights, subject to certain exclusions) and
the 1983 Executive Memorandum (i.e., expanding the Bayh-Dole Act such that it
applies to large businesses that serve as government contractors).93 It reached this
conclusion despite its earlier finding that, to the extent it was necessary to evaluate
86 Panel Report, para. 7.1294. It did so assuming arguendo that the allocation of the patent rights was a “subsidy”, as it did not evaluate the EU’s claims under Article 1 of the SCM Agreement. 87 Panel Report, para. 7.1276. 88 Panel Report, para. 7.1266 (emphases added). 89 Panel Report, para. 7.1278. 90 Panel Report, paras. 7.1278, 7.1287, 7.1293. 91 Panel Report, para. 7.1293. 92 Panel Report, para. 7.1045. 93 Panel Report, paras. 7.1291-7.1292.
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specificity of the RDT&E Program “as a whole,” “RDT&E funding goes
‘predominantly’ to firms in the defense industry, and this is enough to establish de
facto specificity under Article 2.1(c)”.94
3. The Panel Erred in its Interpretation and Application of Article 2.1 of the SCM Agreement in its Analysis of NASA and DOD Patent Waivers/Transfers
a. The Proper Interpretation of Article 2.1 of the SCM Agreement
70. The Panel erred in its interpretation and application of Article 2.1 of the SCM
Agreement when it found that the US Government, as a whole, was the “granting
authority” for the NASA and DOD patent waivers/transfers. The Panel did this in
view of its finding that the US Government, as a whole, had an overall “policy”
related to intellectual property rights in government contracts.95 In addition to
adopting an interpretation of “granting authority” contrary to its ordinary meaning
in its context, the interpretation of “granting authority” implicit in the Panel
Report, if upheld by the Appellate Body, would establish a road map for obscuring
the specificity of measures that would otherwise be considered specific subsidies.
Under the Panel’s interpretation, a government entity within a Member that
provides massive subsidies to “certain enterprises” could avoid a finding that those
subsidies are specific under Article 2.1 by simply referring to a series of
government-wide policy statements and the intent of those policies to support all
industries throughout the entire economy.
71. The Panel did not set out a systematic interpretation, under the Vienna Convention,
of the phrase “granting authority”. Nevertheless, the content of the Panel’s
analysis reveals that it was a flawed interpretation of that phrase which led to the
ultimate finding of no specificity. Specifically, in evaluating specificity of the
NASA and DOD patent waivers/transfers, the Panel implicitly interpreted
“granting authority” as encompassing not the authority that actually granted the
94 Panel Report, para. 7.1197. 95 Panel Report, para. 7.1277.
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subsidies at issue, but rather the highest authority of the US Government that could
somehow be linked to the granting of the subsidy.
72. Beginning with the ordinary meaning of “granting authority”, as the Panel should
have done, the adjective “granting” is defined as something “{t}hat grants, in
senses of the {verb}”.96 To grant is to “agree to, promise, undertake”; to “allow or
concede as an indulgence; to permit or suffer (a person) to have (something); to
bestow or confer as a favour, or in answer to a request”; and, with particular
respect to “a sovereign or supreme authority” “{t}o bestow or confer (a possession,
right, etc.) by a formal act”.97 An “authority” is “the body or persons exercising
power or command”.98 Thus, the “granting authority”, in the context of Article
2.1, is the “body or persons exercising power” that “bestow{s} or confer{s}” a
subsidy “as a favour, or in answer to a request”.
73. Considering the context of the SCM Agreement, it is evident that the drafters used
a number of different terms to reference the actor at issue in particular provisions.
For example, while the drafters used the term “granting authority” in Article 2.1,
they chose instead to use the term “Member” in Articles 5 and 6. If the drafters of
the SCM Agreement had intended for the Article 2.1(a) analysis to focus on the
activities of the US Government, as a whole, and without regard to the entity
within the government that actually provided the subsidy, then they would have
used the term “Member” in that provision, as well. They did not.
74. The use of these terms in the SCM Agreement and other WTO agreements
confirms a distinction between a “Member”, on the one hand, and “authorities”
comprising a Member’s internal governmental structures, on the other. The SCM
Agreement repeatedly references “the authorities of a Member” and “the
authorities of the importing Member”99, and both the SCM Agreement and the
Agreement on Implementation of Article VI of the General Agreement on Tariffs
96 Oxford English Dictionary (2nd ed. 1989); online version November 2010, http://www.oed.com:80/Entry/80776 (accessed 4 March 2011). 97 Id. 98 Oxford English Dictionary (2nd ed. 1989); online version November 2010, http://www.oed.com:80/Entry/13349 (accessed 4 March 2011). 99 SCM Agreement Articles 12.12, 13.3, 18.2, 18.3, 18.5, 18.6, and 19.2.
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and Trade 1994 (“AD Agreement”) frequently and consistently use “authority” or
“authorities” as signifying an investigating entity of a Member.100 Moreover,
language used in both agreements clearly contemplates the existence of multiple
“authorities” for any single Member.101 Other WTO agreements similarly
distinguish between an “authority”/“authorities” and a “Member” (or “contracting
party”),102 utilising the term “authority”/“authorities” in reference to internal
(central, regional, local) governmental entities.103
75. Thus, and as further detailed below, the Panel erred by effectively reading
“granting authority” as equivalent to “Member”, pursuant to its analysis of the
NASA and DOD patent waivers/transfers.
76. Moreover, an interpretation of Article 2.1 that looks to government-wide policies
of a Member, rather than the actions and legislation of the authority that actually
provides the subsidy, could frustrate the object and purpose of the SCM
Agreement, i.e., to “impose multilateral disciplines on subsidies which distort
international trade” in goods.104 Under the Panel’s interpretation, a Member could
simply issue a series of government-wide “policy statements” on its intent to
100 See, e.g., SCM Agreement Articles 12.3, 14; see generally AD Agreement Articles 2-12, 16-17. 101 See, e.g., SCM Agreement Article 25.12 (“Each Member shall notify the Committee (a) which of its authorities are competent to initiate and conduct investigations referred to in Article 11...”); id. at Article 23 (For the purpose of judicial review of CVD measures, “{e}ach Member whose national legislation contains provisions on countervailing duty measures shall maintain” tribunals or procedures providing for such review and which are “independent of the authorities responsible for the determination or review in question...”) (emphasis added); Agreement on the Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (“Anti-dumping Agreement”) Article 2.2.1, n. 3 (“When in this Agreement the term ‘authorities’ is used, it shall be interpreted as meaning authorities at an appropriate senior level”); id. at Article 6.1.3 (“...the authorities shall provide the full text of the written application received under paragraph 1 of Article 5 to the known exporters{} and to the authorities of the exporting Member...”); id. at Article 8.5 (“Price undertakings may be suggested by the authorities of the importing Member...”); id. at Article 14.1 (“An application for anti-dumping action on behalf of a third country shall be made by the authorities of the third country requesting action”). 102 See, e.g., General Agreement on Trade in Services (“GATS”) Article VI:3 (“the competent authorities of a Member shall, within a reasonable period of time after the submission of an application considered complete under domestic laws and regulations, inform the applicant of the decision concerning the application”) (emphasis added). 103 See, e.g., GATS Annex on Financial Services Article 5(c) (“‘Public entity’ means: {} a government, a central bank or a monetary authority, of a Member, or an entity owned or controlled by a Member...”); General Agreement on Tariffs and Trade Article XXIV:12 (“Each contracting party shall take such reasonable measures ... to ensure observance of the provisions of this Agreement by the regional and local governments and authorities within its territories”). 104 Panel Report, Brazil – Aircraft, para. 7.26; Panel Report, Brazil – Aircraft (Article 21.5 – Canada II), para. 4.4.
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support all industries throughout the entire economy in a variety of ways, and this
could potentially be enough to avoid a finding of specificity when the authorities
providing the subsidy reference those “policy statements”. That is because the
focus would be on the “Member’s” general policy statements, rather than the
activities and limitations of the entity granting the subsidy.
77. According to Article 2.1(a), the source of the requisite “explicit{} limitat{ion of}
access to a subsidy to certain enterprises” can be either “the granting authority” or
“the legislation pursuant to which the granting authority operate{d}”. Thus,
specificity can be analysed from either of these two perspectives – from the point
of view of the “granting authority” or the “legislation”. Although the Panel does
not specifically address Article 2.1(b) of the SCM Agreement, it appears that non-
specificity under that paragraph may likewise be evaluated from the perspective of
either the “granting authority” or “legislation pursuant to which the granting
authority operates”. Yet, the United States did not properly present a developed
defence under the terms of Article 2.1(b). Further, the Panel did not evaluate the
United States’ arguments according to the terms of Article 2.1(b), nor did it make
any findings that the United States had met the factual requisites of that provision
(i.e., “objective criteria or conditions governing the eligibility for, and the amount
of, a subsidy”, “eligibility is automatic”, “such criteria and conditions are strictly
adhered to”). If it had properly considered Article 2.1(b), then the Parties’
arguments may have ultimately turned to Article 2.1(c), pursuant to which the
European Union had also presented argument and evidence.105
78. It is unclear whether the Panel evaluated specificity of NASA or DOD patent
waivers/transfers from the perspective of a “granting authority”, “legislation
pursuant to which the granting authority operate{d}”, or perhaps a combination of
both frameworks.106 What is clear, however, is that the Panel adopted a flawed
interpretation of “granting authority”, which failed to identify the “body or persons
exercising power” that “bestow{s} or confer{s}” a subsidy “as a favour, or in
answer to a request”. At the same time, the Panel failed to interpret Article 2.1 in a
105 See, e.g., EU FWS, paras. 854-856; EU SWS, paras. 578-582. 106 Panel Report, paras. 7.1276-7.1294.
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holistic manner, but instead appears to have focused its analysis exclusively on
Article 2.1(a) of the SCM Agreement.
b. Application of the Proper Interpretation of Article 2.1 of the SCM Agreement to the Facts
i. NASA
79. Having adopted an erroneous interpretation of “granting authority” that focuses on
the Member (i.e., the United States Government, as a whole) rather than the actual
government entity providing the subsidy, the Panel also erred in its application of
Article 2.1, by finding that the NASA patent waivers are not specific. If the Panel
had adopted the correct legal interpretation, it would have reached the conclusion
that these NASA patent waivers are indeed “specific”, within the meaning of
Article 2.1(a), as detailed below.
80. First, it is undisputed, and the Panel specifically found, that NASA has its own
specific legislation and regulations related to patent waivers.107 The Space Act,
which provides NASA’s statutory basis for performing aeronautical research,
specifically provides that any invention made pursuant to a NASA contract “shall
be the exclusive property of the United States, and if such invention is patentable a
patent therefore shall be issued to the United States” unless waived by NASA.108
As the Panel also correctly noted, NASA generally waives patent rights to
contractors at their request, pursuant to NASA-specific regulations.109
81. Consequently, the Space Act and its implementing regulations constitute “the
legislation pursuant to which the granting authority operates”, within the meaning
of Article 2.1(a) of the SCM Agreement, and this legislation determines whether
107 Panel Report, paras. 7.1287-7.1289. NASA’s statutory authority is not superseded by the more generalized US patent law, with respect to large businesses like Boeing. See EU SWS, para. 572, citing 35 U.S.C. § 210(a)(7) (Exhibit EC-558). 108 Panel Report, para. 7.1287, quoting Space Act, 42 U.S.C. §2457(a) (Exhibit EC-571). 109 Panel Report, para. 7.1287, citing 14 C.F.R. §§ 1254.100 et seq (Exhibit EC-572). Notably, these regulations do not require that the contractor compensate NASA for granting the waiver, although they do provide that the government receives a nonexclusive, nontransferable, irrevocable paid-up license to practice the invention for its own benefit. 14 C.F.R. §§ 1254.107 (Exhibit EC-572).
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NASA will grant the requested patent waiver. Moreover, as the Panel stated in the
context of its analysis of the NASA R&D programmes, “it is not in dispute that the
Space Act explicitly limits the scope of NASA’s aeronautics R&D activities (i.e.,
to aeronautics and space)”.110
82. Second, it is also undisputed that the patent waivers at issue are those granted as a
feature of the R&D contracts entered into between NASA and Boeing. Stated
differently, if NASA did not grant the R&D contracts to Boeing, then Boeing
would not be eligible to have NASA waive the resulting patent rights. In a
different context, the United States makes this point on several occasions, arguing
that “{t}he allocation of intellectual property rights under U.S. Government
contracts cannot be analyzed independently of the contracts that generate those
rights”.111 Just as it is not the US Government as a whole that provides the R&D
funding and support for NASA R&D, it is also not the US Government as a whole
that waives the patent rights resulting from those same contracts.
83. Third, as the Panel points out, when NASA waives patent rights, it does so in
response to a request either in advance of the invention, or after the contractor
reports back to NASA on the invention after-the-fact.112 The instrument that
executes this waiver provides, for example, that “the {NASA} administrator waives
the property rights of the United States Government ... and hereby conveys to the
waiver recipient the entire right, title, and interest in and to each invention which
may be conceived or first actually reduced to practice in the performance of work
under the above-mentioned contract”.113
84. Thus, it is particularly clear from this process of requesting and granting patent
waivers that the “granting authority” – i.e., the “body ... exercising power” that
“bestow{s} or confer{s}” a subsidy “as a favour, or in answer to a request” – is
110 Panel Report, para. 7.1042. 111 US SWS, p. 40, heading VI(A); see also US Response to Panel Question 18(c), para. 41 (“{S}ince the intellectual property arises out of the performance of the services required under the contract, it is impossible to consider the provisions assigning rights in the intellectual property independently from the contract”) (emphasis added). 112 Panel Report, para. 7.1287, citing 14 C.F.R. §§ 1245.104, 1245.105 (Exhibit EC-572). 113 Panel Report, para. 7.1288, quoting NASA, Instrument of Waiver (Domestic and Foreign Rights), Structures and Materials Technology for Aerospace Vehicles (Exhibit EC-1227) (emphases added).
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NASA, and not the entirety of the US Government. The “request” made to the
granting authority is the request to waive the patent right, and the body that
“bestow{s} or confer{s}” the patent waiver is NASA.
85. Consequently, the European Union submits that, in view of the ordinary meaning
of “granting authority” in its context, and the factors discussed above, the Panel
erred in failing to consider that NASA is the “granting authority” of the patent
waivers/transfers provided pursuant to NASA R&D contracts. Alternatively, and
also in view of the ordinary meaning of “legislation pursuant to which the granting
authority operates”, the Panel erred in failing to consider that the NASA Space Act
qualifies as the relevant “legislation”.
86. Instead, the Panel focused on the activities of authorities other than the actual
granting authority, including those of other US Government agencies.114 The
activities of these other authorities are not relevant to the analysis under Article
2.1(a), which requires a focus on the “granting authority”.
ii. DOD
87. As with NASA, having adopted an erroneous interpretation of “granting authority”
that focuses on the Member (i.e., United States Government, as a whole) rather
than the actual government entity providing the subsidy, the Panel erred in
proceeding to find that the DOD patent transfers are not specific. If the Panel had
adopted the correct legal interpretation, it would have reached the conclusion that
these DOD patent transfers are indeed “specific”, within the meaning of Article
2.1(a), as detailed herein.
88. First, it is uncontested that, as the entity that grants the R&D contracts, DOD need
not waive or grant rights in favour of a contractor to inventions arising from DOD-
funded contracts.115 For example, as the Panel explains, DOD can remove a
contractor’s ability to retain patent rights “when it is determined by the agency that
restriction or elimination of the right to retain title to any subject invention will
114 Panel Report, para. 7.1276. 115 Panel Report, para. 7.1291.
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better promote the policy and objectives of” the provisions of US Patent Law on
“Patent Rights Made with Federal Assistance”.116
89. As with NASA, DOD is in the position of the “granting authority”, as it is the
“body ... exercising power” that “bestow{s} or confer{s}” a subsidy “as a favour”.
DOD is the body that includes in its R&D contract the clauses providing that
contractors are generally entitled to the rights from the inventions developed
pursuant to the R&D contracts, and it is the body that chooses not to exercise its
authority to remove this possibility. As the United States explained to the Panel, it
is DOD that “committed those {patent} rights at the time they signed the {R&D}
contract”.117
90. Second, as with NASA, the DOD patent waivers/transfers at issue are those
provided as a feature of the R&D contracts and agreements issued pursuant to the
DOD RDT&E Program. Stated differently, if DOD did not grant the R&D
contracts to Boeing, then Boeing would not be eligible to have DOD
waive/transfer the resulting patent rights. In a different context, the United States
makes this point on several occasions, arguing that “{t}he allocation of intellectual
property rights under U.S. Government contracts cannot be analyzed
independently of the contracts that generate those rights”.118 Just as it is not the
US Government as a whole that provides the R&D funding and support pursuant to
DOD RDT&E Program, it is also not the US Government as a whole that
waives/transfers the patent rights deriving from those same contracts.
91. Third, it is important to recall that the Panel found, as an alternative basis for
specificity of the DOD RDT&E Program as a whole, that “RDT&E funding goes
‘predominantly’ to firms in the defense industry, and this is enough to establish de
facto specificity under Article 2.1(c)”.119 In turn, the transfers/waivers of patent
116 Panel Report, para. 7.1291, quoting 35 U.S.C. §§200-212, Patent Rights in Inventions Made with Federal Assistance, § 202(a) (Exhibit EC-558) (emphasis added). 117 US FWS, para. 331. 118 US SWS, p. 40, heading VI(A); see also US Response to Panel Question 18(c), para. 41 (“{S}ince the intellectual property arises out of the performance of the services required under the contract, it is impossible to consider the provisions assigning rights in the intellectual property independently from the contract”) (emphasis added). 119 Panel Report, para. 7.1197.
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rights deriving from this funding likewise go “predominantly to firms in the
defense industry”. Although the United States certainly challenged the legal
relevance of the facts relied upon by the EU’s Article 2.1(c) analysis for the DOD
RDT&E Programme, it did not dispute the key underlying facts themselves, such
as the average share of RDT&E funding distributed to Boeing (12.6%), and to five
aerospace companies (45.2%).120 These un-rebutted facts provide a strong basis
for a finding of specificity, under Article 2.1 of the SCM Agreement, as long as the
actual “granting authority” is chosen.
c. Conclusion
92. In sum, the European Union submits that, in view of the proper interpretation of
“granting authority” in Article 2.1 and the factors discussed above, the Panel erred
in failing to consider NASA and DOD, respectively, as the “granting authority” of
the patent waivers/transfers at issue. The Panel’s erroneous focus on the United
States as the granting authority necessarily reflects an erroneous legal
interpretation of the treaty term “granting authority”. Consequently, the Panel’s
findings must be reversed.
C. The Panel Erred by Excluding All Transactions Properly Characterised as Purchases of Services from the Scope of the SCM Agreement
93. The Panel erred by adopting an interpretation of Article 1.1(a)(1) that excluded
from its scope (and therefore the scope of the SCM Agreement) transactions
properly characterised as a “purchase of services” by a government – even if
those transactions included “direct transfers of funds”, “provisions of goods”, or
other activities specifically covered by Article 1.1(a)(1).121 In particular, the
Panel failed to properly apply the customary rules of treaty interpretation
codified, at least in part, in Articles 31 to 33 of the Vienna Convention, and in
doing so created a loophole in the coverage of the SCM Agreement that will
frustrate its object and purpose. As a direct consequence of this error of law, the
120 US FWS, para. 338. 121 Panel Report, paras. 7.953-7.970.
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Panel came to the erroneous conclusion that much of the provision of funding
and other support to Boeing pursuant to the DOD RDT&E Program is excluded
from the scope of the SCM Agreement.122
1. Summary of the Facts and the Parties’ Arguments
94. Before the Panel, the European Union explained that NASA and DOD provide
R&D funding and support that benefits Boeing’s LCA division. In particular, the
European Union presented evidence and argument to demonstrate that NASA
provided billions of dollars in R&D funding and support to Boeing’s LCA
division, through a series of specific R&D programmes.123 As for DOD, the
European Union explained that DOD has provided billions of dollars in R&D
contracts and agreements, through the DOD RDT&E Program, which have directly
benefited Boeing LCA without any requirement that Boeing repay any portion of
the commercial benefits.124
95. The European Union argued that the cash flows accruing to Boeing from the
NASA and DOD aeronautics R&D programmes were “direct transfer{s} of funds”
within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement, and therefore
“financial contribution{s}”.125 The European Union advanced a Vienna
Convention analysis of Article 1.1(a)(1) to demonstrate that there is neither an
explicit nor implicit exclusion for alleged purchases of services that otherwise fit
into any of the other categories of financial contributions listed in Article 1.1(a)(1),
and that the US interpretation would create an enormous loophole in the SCM
Agreement that would allow Members to frustrate its object and purpose.126
122 Panel Report, paras. 7.1136-7.1171. 123 Panel Report, para. 7.940. 124 Panel Report, paras. 7.1111-7.1123. 125 Panel Report, para. 7.971, citing EU FWS, paras. 455, 524, 548, 572, 588, 603, 618, 631, and 650 (NASA); DS353 Panel Report, para. 7.1125, citing EU FWS, para. 762 (DOD). The European Union also explained that NASA and DOD provide Boeing access to facilities, equipment, and employees pursuant to the challenged programmes, and therefore provide goods and services to Boeing within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement. DS353 Panel Report, para. 7.972, citing EU FWS, paras. 524, 548, 572, 588, 603, 618, 631, 650, and 890-901(NASA); DS353 Panel Report, para. 7.1126, citing EU FWS, para. 762 (DOD). 126 Panel Report, para. 7.949, citing EU SWS, paras. 349-364.
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96. With particular respect to the object and purpose, the European Union argued as
follows:
It could not have been the intention of the drafters of the SCM Agreement that the acquisition of services by the government from a goods producer, at whatever price and conditions, should escape all discipline under the Agreement. The implication of this would be that a producer of goods could obtain potentially unlimited amounts of non-market benefits by receiving excessive payments from the government in return for providing “services”. The nature of this benefit is exactly the same as that conferred by a direct transfer of funds – i.e., a payment from the government.127
97. The United States responded that the funding and support to Boeing pursuant to
the NASA and DOD contracts, under the challenged aeronautics R&D
programmes, constitute part of a “purchase of services”.128 Further, the United
States argued that purchases of services are a category of transactions that do not
qualify as “financial contributions” pursuant to Article 1.1(a)(1), regardless of
whether they take a form that would otherwise fall within the scope of Article
1.1(a)(1).129 While the United States did not point to any language explicitly
excluding purchases of services from the coverage of Article 1.1(a)(1) for
transactions that would otherwise qualify – for example, as a “transfer of funds” –
it argued that the context of Article 1.1(a)(1)(i), and the negotiating history of the
SCM Agreement, require such a finding.130
2. Summary of the Panel’s Findings
98. Before proceeding to evaluate any of the specific NASA or DOD measures at issue
in the dispute, the Panel began its analysis of the aeronautics R&D subsidies by
considering the pure legal question raised by the United States on the scope of
Article 1.1(a)(1). Specifically, the question presented was whether “transactions
properly characterised as ‘purchases of services’ are excluded from the scope of
127 EU Response to Panel Question 119(b), para. 60. 128 Panel Report, paras. 7.975, 7.1130-7.1133. 129 Panel Report, paras. 7.950, 7.1130. 130 Panel Report, para. 7.950, citing US FWS, paras. 48, 218, and US Responses (and/or Comments on the EU Responses) to Panel Questions 15, 17, and 113-120.
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Article 1.1(a)(1) of the SCM Agreement”. The Panel agreed with the United
States, finding that such transactions are indeed excluded.131
99. Beginning with the ordinary meaning of the phrase “a government practice
involves a direct transfer of funds” in isolation, the Panel agreed with the European
Union that these words “might be broad enough to cover purchases of services”.132
It then proceeded to evaluate the “context” of Article 1.1(a)(1)(i), with a special
focus on Articles 1.1(a)(1)(iii) and 14(d) of the SCM Agreement.133 The Panel
noted that both reference the provision of “goods or services” and the purchase of
“goods”, but do not mention the purchase of services.134 From this omission, the
Panel concluded that the parties intended to exclude purchases of services from the
scope of Article 1.1(a)(1).135 The Panel also found that an interpretation of the
other provisions of Article 1.1(a)(1) in a manner that would encompass purchases
of services would render inutile the term “purchase of goods” in Article
1.1(a)(1)(iii).136
100. With respect to the object and purpose of the SCM Agreement, the Panel rejected
the argument by the European Union, Brazil and Australia that an exclusion of
purchase of services would open up a loophole in the subsidy disciplines,
reasoning that “WTO panels and national investigating authorities will be able to
detect transactions that are not properly characterized as purchases of services”.137
Further, the Panel found confirmation for its view in the preparatory work, and in
the evolution of the drafts of what would ultimately become Article 1.1(a)(1) of the
SCM Agreement.138
131 Panel Report, paras. 7.953-7.970. 132 Panel Report, para. 7.954. 133 Panel Report, para. 7.955-56. 134 Panel Report, para. 7.955-56. 135 Panel Report, para. 7.955. 136 Panel Report, para. 7.956. 137 Panel Report, para. 7.960. 138 Panel Report, para. 7.962.
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101. The Panel then proceeded to evaluate whether the NASA and DOD aeronautics
R&D contracts at issue could properly be characterised as “purchases of
services”.139
3. The Panel Erred in its Narrow Interpretation of the Scope of Article 1.1(a)(1) of the SCM Agreement
102. The Panel erred in adopting an interpretation of Article 1.1(a)(1) that excluded
from its scope (and therefore the scope of the SCM Agreement) transactions
properly characterised as a “purchase of services” by a government – even if those
transactions included “direct transfers of funds”, “provisions of goods”, or other
activities specifically covered by Article 1.1(a)(1). In doing so, the Panel failed to
properly apply the customary rules of treaty interpretation codified, at least in part,
in Articles 31 to 33 of the Vienna Convention, Article 31(1) of which provides that
“a treaty shall be interpreted in good faith in accordance with the ordinary meaning
to be given to the terms of the treaty in their context and in the light of its object
and purpose”.
103. In particular, the Panel failed to consider in a holistic manner the “ordinary
meaning” of the terms of Article 1.1(a)(1), in their context, and in light of the
“object and purpose”. As a result, the interpretation formulated by the Panel, if
upheld by the Appellate Body, will established a road map for entirely avoiding
the disciplines of the SCM Agreement. Under the Panel’s interpretation, the SCM
Agreement would allow Members to massively distort international trade in goods,
by transferring enormous amounts of funding to specific industries and companies
on non-market terms, as long as those “transfers of funds” are pursuant to
transactions properly characterised as purchases of services. This exemption will
shield the Member against findings not just of providing actionable subsidies
causing adverse effects, but also of granting prohibited subsidies.
104. The Panel began by considering the ordinary meaning of the phrase “a government
practice involves a direct transfer of funds” in Article 1.1(a)(1)(i), and correctly
139 Panel Report, paras. 7.977-7.1027 (NASA), 7.1136-7.1171 (DOD).
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found that this phrase (at least considered in isolation) was broad enough to cover
fund transfers that occur as part of a purchase of services.140
105. A “transfer of funds” refers to the conveyance of financial resources from one
person to another. This follows from the definition of “transfer”, which is “a
conveyance from one person to another”,141 and the definition of “fund,” which is
“a stock or sum of money, esp. one set apart for a particular purpose” or “financial
resources”.142 There is nothing in the ordinary meaning of “a government practice
{that} involves a direct transfer of funds” that indicates it could not encompass the
direct transfer of funds that takes place as part of a purchase of services. Neither
the Panel nor the United States appears to have disagreed with this understanding
of the “ordinary meaning”, at least in isolation.
106. The Panel’s error arose when it proceeded to evaluate the surrounding “context”
and “object and purpose”, and in doing so failed to apply the interpretative rule set
out in Article 31 of the Vienna Convention in a holistic way.
107. As described in the previous subsection, the Panel relied on two particular aspects
of “context” to yield its interpretation, both of which rely on the content of a
different subsection of Article 1.1(a)(1), namely, sub-paragraph (iii). In particular,
sub-paragraph (iii) lists the following as one of the types of “financial
contributions” covered by Article 1.1(a)(1): “a government provides goods or
services other than general infrastructure, or purchases goods”.143 The Panel also
pointed out that those three types of transactions – i.e., provision of goods,
provision of services, and purchase of goods – are also listed in Article 14(d),
which provides guidelines on calculation of benefit for Part V of the SCM
Agreement.144
108. The Panel noted that these provisions both reference the provision of “goods or
services” and the purchase of “goods”, but do not mention the purchase of
140 Panel Report, para. 7.954. 141 The New Shorter Oxford English Dictionary 3367 (4th ed. 1993). 142 The New Shorter Oxford English Dictionary 1042 (4th ed. 1993). 143 Emphases added. 144 Panel Report, para. 7.955.
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services.145 From this omission, the Panel came to two conclusions, both of which
are erroneous.
109. First, the Panel found that the drafters intended to exclude purchases of services
from the definition of financial contribution in Article 1.1(a)(1), even if those
services are purchased in a manner that would be covered by other elements of the
“financial contribution” definition.146
110. Second, the Panel found that an interpretation of the other provisions of Article
1.1(a)(1), such as Article 1.1(a)(1)(i), that would encompass purchases of services,
would render inutile the term “purchase of goods” in Article 1.1(a)(1)(iii). The
Panel reasoned that this would be the case because other aspects of a “purchase of
goods” would be covered by the other paragraphs of Article 1.1(a)(1).147
111. In assessing the Panel’s use of “context” in its interpretation of Article 1.1(a)(1) of
the SCM Agreement, it is important to recall the Appellate Body’s guidance from
US – Continued Zeroing:
The principles of interpretation that are set out in Articles 31 and 32 are to be followed in a holistic fashion. The interpretative exercise is engaged so as to yield an interpretation that is harmonious and coherent and fits comfortably in the treaty as a whole so as to render the treaty provision legally effective. A word or term may have more than one meaning or shade of meaning, but the identification of such meanings in isolation only commences the process of interpretation, it does not conclude it. ... {A} treaty interpreter is required to have recourse to context and object and purpose to elucidate the relevant meaning of the word or term. This logical progression provides a framework for proper interpretative analysis. At the same time, it should be kept in mind that treaty interpretation is an integrated operation, where interpretative rules or principles must be understood and applied as connected and mutually reinforcing components of a holistic exercise.148
145 Panel Report, para. 7.955-56. 146 Panel Report, para. 7.955. 147 Panel Report, para. 7.956. 148 Appellate Body Report, US – Continued Zeroing, para. 268.
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112. An interpretation that excessively narrows the meaning of a term in a manner that
frustrates the object and purpose of the treaty, can not constitute a “holistic”
interpretation.
113. In China – Publications and Audiovisual Products, emphasising the holistic nature
of treaty interpretation, the Appellate Body explained that “the purposes of the
interpretative exercise is to narrow the range of possible meanings of the treaty
term to be interpreted, not to generate multiple meanings or confirm the ambiguity
and inconclusiveness of treaty obligations. Rather, a treaty interpreter is required
to have recourse to context and object and purpose to elucidate the relevant
meaning of the word or term”.149
114. By contrast, in finding that the ordinary meaning of “direct transfer of funds” in its
context excludes a significant class of direct transfers of funds (i.e., those that
occur pursuant to transactions properly characterised as a purchase of services),
the Panel did not, in the words of the Appellate Body, “narrow the range of
possible meanings of the treaty term” by having “recourse to context and object
and purpose to elucidate the relevant meaning of the ... term”. As such, the Panel
did not properly “ascertain the common intention of the parties to” the treaty,
which, according to the Appellate Body in US – Anti-Dumping and Countervailing
Duties (China), is the goal of treaty interpretation under Article 31 of the Vienna
Convention.150 Instead, it came to this conclusion while putting aside the concerns
over object and purpose, finding that there is “every reason to believe” that future
panels will somehow be able to effectively deal with the enormous loophole
potentially created by the interpretation.151
115. Moreover, the Panel’s understanding of the context provided by Article
1.1(a)(1)(iii) fails on its own terms. Specifically, the Panel erred in its
understanding that the EU’s interpretation could render the “purchase of goods”
phrase inutile.152 It failed to appreciate, as pointed out by the panel in Japan –
149 Appellate Body Report, China – Publications and Audiovisual Products, para. 399. 150 Appellate Body, US – Anti-Dumping and Countervailing Duties (China), para. 312. 151 Panel Report, para. 7.960. 152 Panel Report, para. 7.956.
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DRAMs, that “certain … transactions might be covered simultaneously by different
sub-paragraphs of Article 1.1(a)(1)”,153 and that such overlap is not unexpected.
Consequently, an interpretation that would allow purchases of goods to be covered
by two different paragraphs of Article 1.1(a)(1) (e.g., the first as a direct transfer of
funds, and the second as a purchase of goods) is neither unexpected nor somehow
discouraged, and there is no need to attempt to interpret the ordinary meaning in
order to avoid that result.
116. One example of a transaction that may fall under more than one sub-paragraph is
an equity infusion.154 It is explicitly mentioned in Article 1.1(a)(1)(i), but can also
be considered as a “purchase of goods”, within the meaning of Article
1.1(a)(1)(iii), given that ownership rights can be considered “goods”, according to
the jurisprudence of the Appellate Body.155 Accordingly, the text of the SCM
Agreement itself acknowledges on its face that overlaps between categories of
financial contributions are an integral feature of Article 1.1(a)(1), and therefore do
not indicate “inutility” of certain sub-paragraphs of that provision. Following the
Panel’s reasoning, however, “purchase of goods” would need to be interpreted in a
manner that excludes “equity infusions”, or else the reference to “equity infusion”
would be rendered inutile. Such strained interpretations are both unnecessary and
incorrect.
117. Furthermore, the Panel erred when it condemned the EU’s interpretation on the
basis that “the scope and coverage of Article 1.1(a)(1) of the SCM Agreement
would be precisely the same if those words {i.e., ‘purchases goods’} had not been
added to Article 1.1(a)(1)(iii)”.156 For example, a government may purchase
goods from a company, where the “consideration” for the purchase is or includes
153 Panel Report, Japan – DRAMs (Korea), para. 7.439. See also Panel Report, EC – Countervailing Measures on DRAM Chips, para. 7.92 (finding that the purchase of corporate bonds constitutes a direct transfer of funds). 154 While the Panel alludes to the fact that the “equity infusion” is both a direct transfer of funds and the purchase of something, it did not appear to accord significance to this fact in its review of the context. Panel Report, para. 7.954 (“{O}ne of the examples of a ‘direct transfer of funds’ given in Article 1.1(a)(1)(i) is that of ‘equity infusion,’ which refers to a situation in which a government ‘purchases’ something (i.e. shares in a company)”) 155 Appellate Body Report, US – Softwood Lumber IV, paras. 46-76. 156 Panel Report, para. 7.956
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the promise to exercise government discretion in enforcing regulations in a certain
way, or to provide preferential treatment in competitions for future government
contracts. Such a purchase of goods on preferential terms would be covered only
by Article 1.1(a)(1)(iii), and not by any of the other types of financial
contributions listed in Article 1.1(a)(1). In this example, therefore, Article
1.1(a)(1)(iii) serves an important purpose, even under the EU’s interpretation of
Article 1.1(a)(1).
118. Turning to the object and purpose, as a Multilateral Agreement on Trade in Goods
in Annex 1A of the WTO Agreement, the overall object and purpose of the SCM
Agreement is to “impose multilateral disciplines on subsidies which distort
international trade” in goods.157 By contrast, Article XV of the General
Agreement on Trade in Services addresses subsidies that distort trade in services.
As the Appellate Body has held, “measures that involve a service relating to a
particular good” properly fall within the scope of the Multilateral Agreements on
Trade in Goods in Annex 1A of the WTO Agreement.158 Thus, transactions
properly characterised as purchases of services that nonetheless relate to a
particular good should not fall outside the scope of the SCM Agreement.
119. A failure to discipline subsidies that distort international trade in goods, because
they can be characterised as purchases of services, would create a considerable gap
in the coverage of the SCM Agreement. This gap would, for example, allow a
Member to entirely avoid the SCM Agreement simply by asking for some type of
service from a goods producer (whether a shoe shine, a musical performance, a
drive around the block, etc.) in exchange for something that would otherwise be
considered an actionable or prohibited subsidy under Parts II and III of the SCM
Agreement (whether a transfer of funds, foregoing of government revenue
otherwise due, or provision of goods or services).
157 Panel Report, Brazil – Aircraft, para. 7.26; Panel Report, Brazil – Aircraft (Article 21.5 – Canada II), para. 4.4. 158 Specifically, the Appellate Body held that there is a “category of measures that could be found to fall within the scope of both the GATT 1994 and the GATS. These are measures that involve a service relating to a particular good or a service supplied in conjunction with a particular good”. Appellate Body Report, EC – Bananas III, para. 221.
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120. The Appellate Body considered an analogous situation in Canada – Autos, where
ordinary meaning and object and purpose led to one interpretation, while context
could have led to a very different interpretation. In that case, the relevant context
was the omission of a term in one provision (“in fact”) that appeared in the
preceding provision, where the two provisions together constituted the exclusive
list of the types of prohibited subsidies. In particular, Article 3.1(a) of the SCM
Agreement specifically indicates that “subsidies contingent, in law or in fact ...
upon export performance” are prohibited,159 while Article 3.1(b) omits the phrase
“in law or in fact” in providing that “subsidies contingent ... upon the use of
domestic over imported goods” are also prohibited. As with the omission of the
phrase “purchase of services” in Article 1.1(a)(1), there is likewise an omission in
Article 3.1(b) of the SCM Agreement. The Appellate Body emphasised the
possibility of circumvention of the SCM Agreement when it found that Article
3.1(b) nevertheless covers de facto contingency on the use of domestic over
imported goods, despite the omission.160 In particular, the Appellate Body
explained:
Finally, we believe that a finding that Article 3.1(b) extends only to contingency “in law” upon the use of domestic over imported goods would be contrary to the object and purpose of the SCM Agreement because it would make circumvention of obligations by Members too easy. We expressed a similar concern with respect to the GATS in European Communities – Bananas ….161
Similarly, in this dispute, given the other considerations required by the Vienna
Convention interpretation of Article 1.1(a)(1), the focus on the omission of the
phrase “purchase of services” would lead to an interpretation that is contrary to the
object and purpose of the SCM Agreement. And as in Canada – Autos, it “would
make circumvention of obligations by Members too easy”. 162
121. In fact, the loophole that would be created by excluding purchases of services from
the scope of Article 1.1, even if it impacts trade in goods, would be far greater than
the risk of circumvention that concerned the Appellate Body in Canada – Autos.
159 Emphasis added. 160 See Appellate Body Report, Canada – Autos, paras. 142-143. 161 Appellate Body Report, Canada – Autos, para. 142.
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That is because if a measure cannot get beyond the Article 1.1 analysis, then it can
never reach the point where the disciplines of either Part II or Part III are even
considered.
122. The Appellate Body similarly expressed concern about the possible creation of
loopholes in the SCM Agreement in US – Countervailing Measures on Certain EC
Products. In that case, the United States argued that when the recipient of the
benefit is a firm, the benefit cannot be extinguished by the sale of that firm under
any circumstances because the firm and the owner are two different legal
persons.163 The Appellate Body rejected this interpretation in view of its
implications for the overall coverage of the SCM Agreement, explaining as
follows:
Furthermore, the approach advocated by the United States could potentially undermine the SCM Agreement by opening wide a door enabling subsidizing governments to circumvent that Agreement’s provisions by bestowing benefits directly on the firm’s owners rather than on the firms themselves.164
123. The Panel’s test to evaluate whether a transaction is properly characterised as a
“purchase of services” does not eliminate the loophole created by an exclusion of
“purchase of services” from the scope of the SCM Agreement. In the context of
considering the DOD RDT&E Program, the Panel explained its test as inquiring
“whether the R&D that Boeing was required to conduct was principally for its own
benefit and use, or whether it was principally for the benefit and use of the U.S.
Government (or unrelated third parties)”.165 Pursuing this enquiry in a different
context reveals that the loophole persists. Consider, for example, a scenario where
the Secretary of the US Department of Defense pays Boeing $2 billion to fly him
on a company jet from Washington, DC to a conference in Geneva, Switzerland.
Was the “service” (i.e., the flight) “principally for {Boeing’s} own benefit and use,
or ... principally for the benefit and use of the U.S. Government”? In this case,
following the Panel’s test, there is no doubt that the “service” was properly
162 Appellate Body Report, Canada – Autos, para. 142. 163 Appellate Body Report, US – Countervailing Measures on Certain EC Products, para. 107 (summarising US argument). 164 Appellate Body Report, US – Countervailing Measures on Certain EC Products, para. 115. 165 Panel Report, para. 7.1137.
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characterised as such, as it was for the principal benefit and use of an agent of the
US Government. Consequently, the direct transfer of $2 billion in funds for a
service likely valued at no more than $100,000 would escape the disciplines of the
SCM Agreement.
124. Thus, the test envisioned by the Panel allows Members to package together in one
transaction: (1) a transaction properly characterised as a purchase of services
(whether or not for market value); and (2) an enormous direct transfer of funds in
the form of a grant. The grants would be shielded from all disciplines of the SCM
Agreement, allowing Members to frustrate the object and purpose of the
Agreement. Consequently, even if the Panel is correct that “{t}here is every
reason to believe that WTO panels and national investigating authorities will be
able to detect transactions that are not properly characterized as purchases of
services”, this does not prevent Members from combining transactions properly
characterised as purchases of services with grants in a manner that shields the
grants from disciplines of the SCM Agreement.
125. With respect to supplementary means of interpretation under Article 32 of the
Vienna Convention, the negotiating history provides limited insight into the
conclusions that can already be drawn under the Article 31 interpretation. While
the Panel correctly points out that the phrase “purchase of services” was
eliminated from earlier drafts of what would ultimately become Article 1.1(a)(1) of
the SCM Agreement,166 neither the Panel nor the Parties could identify any explicit
explanation by the negotiators as to why this phrase was not included in the final
draft.
126. In particular, there are no indications that the negotiators of the SCM Agreement,
by not including “purchase of services” in sub-paragraph (iii), intended to exempt
purchases of services that affect trade in goods from the disciplines of the SCM
Agreement. As set out above, such an understanding would go against the object
and purpose of the SCM Agreement. Whereas it remains unclear why the drafters
omitted an explicit reference to “purchase of services” in sub-paragraph (iii), it is
unambiguously clear that the drafters did not insert an exemption in the SCM
166 Panel Report, para. 7.962.
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Agreement according to which a transaction that “involves a direct transfer of
funds” or “provi{sion} {of} goods or services other than general infrastructure”
falls outside the scope of Article 1.1(a)(1) to the extent that it is also considered a
“purchase of services”.
127. In conclusion, the Appellate Body should reverse or modify the Panel’s finding
that transactions properly characterised as purchases of services are excluded from
the scope of Article 1.1(a)(1) of the SCM Agreement. Because there are a number
of contested facts related to the DOD RDT&E Program measures that were found
to constitute purchases of services, the European Union does not request that the
Appellate Body complete the analysis.
IV. SUBSIDIES CONTINGENT/CONDITIONAL IN FACT UPON EXPORT
A. Introduction and Executive Summary
128. The US authorities granted Boeing subsidies (HB 2294 and instances of
application) contingent/conditional upon the construction in Washington State of a
facility with a capacity to produce at least thirty-six superefficient airplanes (i.e.,
787s) per year. The European Union considers that that
contingency/conditionality is a proxy in fact for exports, because 787s are sure to
be exported (as well as sold in the domestic US market). Further, we consider that
the measure favours or differentiates exports because it excludes other products
that will certainly not be exported. In the alternative, we argue that the subsidy
was granted because of (and is tied-to) the anticipation of exports.
129. In addition, embedded within HB 2294, the B&O tax rate reduction is a subsidy
contingent/conditional upon sales, including export sales. We consider that this
favours or differentiates exports for the same reasons.
130. Thus, we consider that HB 2294 as a whole and the B&O tax rate reduction, and
instances of application, are subsidies contingent/conditional in fact upon export,
prohibited by Article 3.1(a) and footnote 4 of the SCM Agreement, albeit for
different reasons.
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131. The discussion is complicated by the fact that at least three legal issues are
currently before the WTO Appellate Body: (i) is there a single standard of
contingency/conditionality on export, or is there a double standard that also
captures the grant of a subsidy "because of" the “anticipation of” exports; (ii) does
the term “actual or anticipated” in footnote 4 refer to exports that exist when the
measure is enacted (actual) or future exports (anticipated) - or does it refer to
exports occurring (actual) (whether in the past or the future) or the notional state
of mind of the granting authority (anticipation); and (iii) must there be favouring or
differentiation of exports. Thus, in the present case, the European Union claims
that each of the measures at issue is inconsistent with the prohibition on subsidies
contingent/conditional in fact upon actual or anticipated export, regardless of how
any one or more of these three issues is determined. The European Union reserves
the right to withdraw this appeal, in whole or in part, in light of any subsequent
clarification from the Appellate Body on one or more of these three issues.
132. With respect to HB 2294 as a whole and instances of application, the first EU
claim and argument is based on the contingency/conditionality single standard; the
terms “actual or anticipated” meaning past or future; and is not dependent on
whether there is any favouring/differentiation requirement. The same claim and
argument is made with respect to the B&O tax rate reduction and instances of
application. The second EU claim and argument is based on the “because of”
double standard; the terms “actual or anticipated” meaning realised or state of
mind; and is not dependent on whether there is any favouring/differentiation
requirement.
133. In order to provide the Panel with a full understanding of the European Union’s
systematic approach to the interpretation of Article 3.1(a) and footnote 4, the
European Union explained in a Reference Interpretation the circumstances in
which the reasons for the adoption of a backward looking measure might be
evidence of contingency/conditionality in some other forward looking measure.
However, we carefully explained to the Panel that we were not pursuing this line
of argument in the present case.167
167 EU Response to Panel Question 56.
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134. The United States defended itself by arguing that the European Union’s export
subsidy claims are based on a failure to understand that HB 2294 does not require
Boeing to actually produce thirty-six airplanes a year, merely to have the capacity
to do so. The United States also argued that the EU's claims were precluded by the
second sentence of footnote 4 of the SCM Agreement, which provides that the
grant of a subsidy to an enterprise that exports shall not for that reason alone be
considered to be an export subsidy.
135. With respect to HB 2294 as a whole and instances of application, the Panel
focussed its analysis on the second EU claim and argument, rejecting it on the
grounds that the European Union had not demonstrated the requisite tie between
the subsidy and the anticipation of exports. We appeal for two reasons. First,
because in failing to adequately deal with the first EU claim and argument, the
Panel erred in the interpretation and application of Article 3.1(a) and footnote 4
and failed to make an objective assessment, including an objective assessment of
the facts, as required by Article 11 of the DSU. Second, with respect to the second
EU claim and argument, we appeal because, in concluding that the requisite tie
was not demonstrated, the Panel also erred in the interpretation and application of
Article 3.1(a) and footnote 4 and failed to make an objective assessment, including
an objective assessment of the facts, as required by Article 11 of the DSU.
Furthermore, we request the Appellate Body to complete the analysis and find that
HB 2294 as a whole and instances of application are subsidies
contingent/conditional in fact upon export, prohibited by Article 3.1(a) and
footnote 4 of the SCM Agreement.
136. With respect to the B&O tax rate reductions, the Panel rejected the EU claim on
the basis of the second sentence of footnote 4 of the SCM Agreement. The Panel
also failed to adequately consider the EU arguments regarding favouring or
differentiation. For both of these reasons we appeal the Panel findings on the basis
that the Panel erred in the interpretation and application of Article 3.1(a) and
footnote 4 and failed to make an objective assessment, including an objective
assessment of the facts, as required by Article 11 of the DSU. Also with respect to
this matter, we request the Appellate Body to complete the analysis and find that
the B&O tax rate reductions and instances of application are subsidies
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contingent/conditional in fact upon export, prohibited by Article 3.1(a) and
footnote 4 of the SCM Agreement.
B. Three Legal Issues: the Meaning of Contingent/Conditional; the Meaning of Actual or Anticipated; and the Requirement of Favouring or Differentiation
137. The European Union identifies the following three legal issues relating to the
question of what is the correct standard for determining whether or not a measure
is consistent with the prohibition on subsidies contingent/conditional upon export:
• is there a single standard of contingency/conditionality on export, or is there a double standard that also captures the grant of a subsidy “because of” the “anticipation of” exports;168
• the related question: does the term "actual or anticipated" in footnote 4 refer to exports that exist when the measure is enacted (actual) or future exports (anticipated); or does it refer to exports occurring (actual) (whether in the past or the future) or the notional state of mind of the granting authority (anticipation); and
• does there have to be a favouring or differentiation of exports in order for the measure to be prohibited.
138. Each of these issues remains subject to judicial scrutiny in pending WTO dispute
proceedings. Thus, in the present case, the European Union claims that each of the
measures is inconsistent with the prohibition on subsidies contingent/conditional
in fact upon actual or anticipated export, regardless of how any one or more of
these three issues is determined. The European Union reserves the right to
withdraw this appeal in whole or in part in light of any subsequent clarification
from the Appellate Body on one or more of these three issues.
168 Panel Report, para. 7.1537, first sentence: “In the Panel's view, a “tie” exists where a subsidy is granted because of the granting authority's expectation of exports."; Panel Report, para. 7.1540, final sentence: “… but also refers to granting a subsidy to a company because it is expected to export or will actually export.”.
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C. HB 2294 as a Whole and Instances of Application
1. Summary of the facts
139. The facts regarding the HB 2294 measure as a whole, including the B&O tax rate
reductions, and instances of application, are not controversial, and have never been
contested by the United States nor questioned by the Panel.169
140. HB 2294, by its own terms, is contingent on the requirement to establish a capacity
to produce “at least thirty-six” 787s per year. Various market forecasts, including
those by Boeing itself, demonstrate that a significant portion of 787 sales will be
exports. Applying conservative assumptions, Boeing's overall demand
assessments, as evidenced by the future delivery predictions from Boeing’s market
outlook reports from 2004 through 2006, would result in an estimate of between 27
and 33 deliveries of 787 aircraft per year in the US market. Boeing’s 2003 Current
Market Outlook confirms that over 77% of twin-aisle aircraft were expected to be
delivered outside the United States in a 20-year period. Of the 448 orders for 787s
as of year-end 2006, under 9% were directly placed by US airlines.
141. Moreover, in addition to the fact that the 787 is an export-oriented project, Boeing
itself is a highly export-oriented company. Indeed, Boeing is the largest exporter
in the United States, by sales. In 2006, for example, the US aerospace industry
had a $52 billion positive trade balance. It is also the largest exporter in
Washington State, which is the “most trade-dependent state” in the United States,
and accounts for approximately 50% of Washington State’s total exports. Based
on Boeing’s publicly reported information, it is estimated that Boeing’s annual
LCA export sales ranged from 46% to 75% of total LCA sales, by value, during
the period 1989 through 2005. From 1989 through 2005, an estimated 60% of
total Boeing LCA sales revenue was reported as export sales revenue.
142. In a speech by Washington State’s Governor approximately three weeks prior to
enacting HB 2294, he detailed the importance of exports to the state, and his
understanding that the 787 must be produced in Washington State to maintain
169 See, particularly, EU FWS, Section VI.B and paras. 981-987.
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those strong exports. Further, in the November 2003 letter from Governor Locke
restating the commitments undertaken in the Master Site Agreement he recalled
the importance of Boeing LCA exports to China.
143. Finally, statements by the US Federal Government also reflect the export oriented
nature of Boeing’s LCA business. NASA, for example, has often characterized its
support of Boeing and the US aerospace industry as “ensuring that the U.S.
industry has the technology for a strong competitive position in the international
aviation market” and as providing “benefit [for] the civil aviation industry’s
international competitiveness.” Appearing before the US House of
Representatives, Wesley Harris, NASA’s Associate Administrator, testified that
the objective of the NASA AST Program was to provide “U.S. industry with a
competitive edge to recapture market share [and] maintain a strongly positive
balance of trade.”
144. In summary, the facts demonstrate that the contingency/conditionality expressly
provided for in the HB 2294 subsidy and instances of application was in fact a
proxy for exports.
2. Summary of the Claims and Arguments Before the Panel
145. The European Union advanced its claims and arguments in the alternative.170
146. The first EU claim and argument is based on the contingency/conditionality
standard; the first meaning of the terms “actual or anticipated” (past or future); and
whether or not there is any favouring/differentiation requirement.171 The second
EU claim and argument is based on the “because” standard; the second meaning of
the terms “actual or anticipated” (realised or state of mind); and whether or not
there is any favouring/differentiation requirement.172
170 EU FWS, para. 992. 171 EU FWS, paras. 971-991. 172 EU FWS, paras. 992-996.
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147. With respect to the first EU claim and argument, the main issue was not whether or
not the grant of the subsidy had a contingency/conditionality attached to it.
Clearly, the grant of the subsidy was contingent/conditional upon the decision to
site in Washington State a facility with the capacity to produce at least thirty-six
superefficient airplanes a year. Rather, the more limited question was whether or
not that contingency/conditionality could reasonably be construed as a proxy in
fact for production and sale, including export sales. The European Union
explained that to be the case, given that capacity is not created to stand idle, the
size of the US market, the export oriented nature of the project and Boeing, and
various other evidence. If a subsidy is contingent upon "X" and "X" is in fact a
proxy for exports, then clearly the subsidy is contingent in fact upon exports.173
148. A second question was whether or not, notwithstanding the neutral treatment of
787 aircraft sales in the domestic and export markets, there was nevertheless a
favouring or differentiation of exports. The European Union explained this to be
the case by reference to the non-exported products excluded from the measure
entirely.174
149. With respect to the second EU claim and argument the Panel found that the
measure provided for subsidies and that the grantor anticipated exports. The
central question was whether or not the grant of the subsidy was “tied-to” the
anticipation of exports. Citing in large part the same evidence, the European
Union explained that it considered this to be the case. In summary, given all the
evidence, it is simply inconceivable that the subsidies would have been provided to
firms that had been selling and would be expected to continue selling only into the
US market. The anticipation of exports was therefore a reason for the grant of the
subsidy, and absent that reason or anticipation the subsidy would not have been
granted. The anticipation of exports was therefore a necessary pre-condition to the
grant of the subsidy. Hence, the grant of the subsidy was tied to anticipated
exports.175
173 EU FWS, paras. 981-987; EU FNCOS, para. 100; EU Response to Panel Question 54, para. 177; EU Response to Panel Question 269, para. 473. 174 EU FWS, paras. 980 and 989; EU FNCOS, para. 100. 175 EU FWS, paras. 992-996.
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150. The United States argued that the EU's export subsidy claims are based on a failure
to understand that HB 2294 does not require Boeing to actually produce 36
airplanes a year, merely to have the capacity to do so. The United States also
argued that the EU's claims were precluded by the second sentence of footnote 4 of
the SCM Agreement.176
3. Summary of the Panel Report
151. The Panel began by summarising its understanding of the existing case law.177
The Panel concluded that de facto export contingency “must” be demonstrated on
the basis of the legal framework reflected in the second EU claim and argument.178
In this respect, the Panel considered that “anticipated” refers to the state of mind of
the granting authority179 and that “actual” refers to an export that is realised.180
Consistent with this, the Panel based its analysis on the “because” standard.181 In
doing so, the Panel made the following observation:
We acknowledge that establishing the existence of a “tie” under footnote 4 of Article 3.1(a) by determining whether the subsidy was granted because of the granting authority's expectation of exports could be considered problematic in some respects. The interpretation could lead to the result that two subsidy programmes, which may operate identically and have the same distorting effect in the market, may not necessarily be subject to the same finding regarding de facto export contingency under Article 3.1(a), where the evidence differs regarding the government’s reasons in providing the subsidy. Further, in some circumstances, establishing the necessary “tie” through a focus on the reasons for the grant of the subsidy may make circumvention of Article 3.1(a) relatively easy. … Perhaps an approach that considers the reasons for the grant of the subsidy may encourage governments to be more discrete without necessarily changing their underlying policies. …182
176 US FWS, paras. 684-702, particularly para. 687; US FNCOS, paras. 36-39; US SWS, paras. 149-158, particularly para. 157; US Responses to Panel Questions 54 and 55; US Comments on EU Responses to Panel Questions 54-57. 177 Panel Report, paras. 7.1517-7.1529. 178 Panel Report, para. 7.1530. 179 Panel Report, para. 7.1533. 180 Panel Report, para. 7.1535. 181 Panel Report, para. 7.1537. 182 Panel Report, para. 7.1538.
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152. The Panel then applied its understanding of the law to the facts. First, the Panel
found that the HB 2294 and instances of application involved subsidies.183
Second, the Panel found, as a matter of fact, that the grantor of the subsidy
anticipated export performance.184 Third, the Panel found that the European Union
had not demonstrated that the grant of the subsidy was tied-to the anticipated
exportation.185
153. In this respect, the Panel first reviews certain evidence, including: the capacity
requirement; a speech by the Washington State Governor expressing a desire to
keep Boeing in Washington because of its export performance (considered by the
Panel as of “low probative value”186); a letter attached to the Master Site
Agreement regarding the Governor's promotion of Boeing sales in China
(considered by the Panel to do little to support the EU case187); and the fact that
HB 2294 acts as a filter, such that only companies which produce products that
will necessarily be exported may be recipients of the subsidies.188
154. The Panel then reviews other evidence, concluding that at least one of the reasons
for the grant of the subsidy was to encourage Boeing to locate its 787 final
assembly facility in Washington State because this would have positive effects on
the State's economy, including its employment rate. This evidence includes: the
preamble and Sections 1 and 16 of the legislation itself; recitals D and E of the
Master Site Agreement; Recital C of the Memorandum of Agreement; the House
and Senate Floor Debates for HB 2294; and two press releases from the Office of
Governor Gary Locke dated 9 June 2003.189 The Panel also referred to a
declaration by Andrew Gordon, Head of Market Analysis and Research at Airbus,
183 Panel Report, para. 7.1531, note 3261 and para. 7.302; Panel Report, para. 7.1545, final sentence. 184 Panel Report, paras. 7.1546-7.1565. 185 Panel Report, paras. 7.1566-7.1583. 186 Panel Report, para. 7.1578. 187 Panel Report, para. 7.1579. 188 Panel Report, para. 7.1567. 189 Panel Report, paras. 7.1568-7.1574.
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to the effect that the US market is incapable of absorbing a production level of
thirty-six superefficient airplanes per year.190
155. The Panel considered that “on a generous view” the evidence supported a finding
that there was an expectation of exports, but that this was not sufficient to establish
a “tie” and that further “corroborating” evidence would be necessary. The Panel
thus concluded that the European Union had not established that the grant of the
subsidies was tied-to anticipated export.191
4. HB 2294 as a Whole and Instances of Application are Subsidies Contingent/Conditional in Fact Upon Export
156. Referring to and summarising the claims and arguments set out in its submissions
to the Panel, the European Union submits that HB 2294 as a whole, including the
B&O tax rate reductions, and instances of application, are subsidies
contingent/conditional in fact upon export.
157. The grant of the subsidies was contingent/conditional upon the decision to site in
Washington State a commercial airplane final assembly facility with the capacity
to produce at least thirty-six superefficient airplanes a year. In light of all the facts
and evidence, that contingency/conditionality could and should reasonably be
construed as a proxy in fact for production and sale, including export sales. This is
particularly the case in light of the fact that capacity is not created to stand idle, the
size of the US market, the export oriented nature of the project and Boeing, and the
various other evidence before the Panel. If a subsidy is contingent upon “X” and
“X” is in fact a proxy for exports, then clearly the subsidy is contingent in fact
upon exports.192
158. Furthermore, notwithstanding the neutral treatment of sales of 787 aircraft in the
domestic and export markets, there was nevertheless a favouring or differentiation
of exports by reference to the non-exported products excluded from the measure
190 Panel Report, para. 7.1577. 191 Panel Report, paras. 7.1575-7.1577 and 7.1583. 192 EU FWS, paras. 981-987; EU FNCOS, para. 100; EU Response to Panel Question 54, para. 177; EU Response to Panel Question 269, para. 473.
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entirely.193 Accordingly, the grant of the subsidy was contingent/conditional in
fact upon exports and thus prohibited by Article 3.1(a) and footnote 4 of the SCM
Agreement.
159. With respect to the second EU claim and argument, the grant of the subsidy was
“tied-to” the anticipation of exports. Given all the evidence, it is simply
inconceivable that the subsidies would have been provided to firms that had been
selling and would be expected to continue selling only into the US market. The
anticipation of exports was therefore a reason for the grant of the subsidy, and
absent that reason or anticipation the subsidy would not have been granted. The
anticipation of exports was therefore a necessary pre-condition to the grant of the
subsidy. Hence, the grant of the subsidy was tied to anticipated exports.194
Accordingly, the grant of the subsidy was contingent/conditional in fact upon
exports and thus prohibited by Article 3.1(a) and footnote 4 of the SCM
Agreement.
5. Legal Errors in the Panel Report and Request for Reversals
160. The Panel has failed to properly assess the first EU claim and argument. Rather, it
has conducted its analysis by focussing on the because standard, and rejected the
second EU claim and argument on the basis that a tie has not been demonstrated.
The European Union submits that this constitutes an error in the interpretation and
application of Article 3.1(a) and footnote 4 and a failure to make an objective
assessment of the matter, including an objective assessment of the facts, as
required by Article 11 of the DSU. For these reasons we request the Appellate
Body to reverse the Panel's finding that the European Union has failed to
demonstrate that HB 2294, including the B&O tax rate reductions, and instances of
application, are subsidies contingent/conditional in fact upon export.195
161. With respect to the Panel’s assessment of the second EU claim and argument, and
in particular the Panel’s rejection of the argument that the grant of the subsidy was
193 EU FWS, paras. 980 and 989; EU FNCOS, para. 100. 194 EU FWS, paras. 992-996. 195 Panel Report, paras. 7.1590 and 8.2(b).
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tied-to the anticipation of exports, the European Union submits that, based on the
evidence, it is simply inconceivable that the subsidies would have been provided to
firms that had been selling and would be expected to continue selling only in the
US market. The anticipation of exports was therefore a reason for the grant of the
subsidy, and absent that reason or anticipation the subsidy would not have been
granted. The anticipation of exports was therefore a necessary pre-condition to the
grant of the subsidy. Hence, the grant of the subsidy was tied to anticipated
exports. In concluding otherwise the European Union submits that the Panel erred
in the interpretation and application of Article 3.1(a) and footnote 4 and a failed to
make an objective assessment of the matter, including an objective assessment of
the facts, as required by Article 11 of the DSU. For these reasons we request the
Appellate Body to reverse the Panel's finding that the European Union failed to
demonstrate that HB 2294, including the B&O tax rate reductions, and instances of
application, are subsidies contingent/conditional upon export.196
6. Completion of the Analysis
162. Having reversed the Panel's findings, the European Union requests the Appellate
Body to complete the analysis, in light of the facts and evidence before the Panel,
and find that HB 2294 as a whole and instances of application are subsidies
contingent/conditional in fact upon export.197
D. HB 2294 B&O Tax Rate Reductions and Instances of Application
1. Summary of the Facts
163. The facts regarding the HB 2294 B&O tax rate reductions and instances of
application are not controversial, and have never been contested by the United
States nor questioned by the Panel.198
196 Panel Report, paras. 7.1590 and 8.2(b). 197 Paragraphs 156-159 of this submission. 198 EU FWS, paras. 103-109.
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164. HB 2294 requires the State of Washington to reduce B&O tax rates for businesses
that produce and sell commercial airplanes or components within Washington
State. The B&O tax is a gross receipts tax imposed on business activities within
the State, such as manufacturing or sales. For businesses engaged in manufacturing
activities in Washington State, the B&O tax rate is applied to the “value of
products” manufactured, which is generally derived from the “gross proceeds of
sales.” For businesses engaged in sales activities in Washington State, the B&O
tax rate is applied to the “gross proceeds of sales.”
165. Generally, the B&O tax rate in Washington State is 0.484% for manufacturing and
wholesaling activities, and 0.471% for retailing activities. For commercial
airplane manufacturers, the B&O tax rate, prior to HB 2294, was 0.484% for sales
to consumers for use in interstate commerce (i.e., to airlines) or for sales to
resellers (i.e., to leasing companies), and 0.471% for sales to other consumers (i.e.,
to government entities or private individuals).
166. HB 2294 reduced the B&O tax rate for commercial airplanes and components in
two stages: first, to 0.4235% effective 1 October 2005; and second, to 0.2904%
effective 1 July 2007, or “the date final assembly of a superefficient airplane
begins in Washington state,” whichever is later. Relative to the pre-October 2005
rates: (1) the first change results in a 12.5% tax rate reduction; and (2) the second
change results in a 40% tax rate reduction. “Final assembly of a superefficient
airplane” is defined to mean “the activity of assembling an airplane from
components parts [sic] necessary for its mechanical operation such that the
finished commercial airplane is ready to deliver to the ultimate consumer.” These
reduced rates are in effect until 1 July 2024.
167. The Project Olympus Master Site Agreement confirms that the State must extend
these B&O tax rate reductions specifically to Boeing. Exhibit B-1 to the Project
Olympus Master Site Agreement essentially reiterates the requirements for the
B&O tax rate reductions specified in HB 2294, including the extent of the rate
reductions, effective date, term, and reporting requirements. LCA component
manufacturers that locate in Washington State and produce components there for
Boeing LCA will also receive these B&O tax rate reductions.
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168. Thus, in summary, the measure at issue in effect provides for the grant of a subsidy
(in the form of a 40% reduction in the normally applicable rate of Washington
State sales tax) contingent/conditional upon the sale of a commercial airplane or
component, whether in the US market or in an export market.
2. Summary of the Claims and Arguments Before the Panel
169. The European Union argued that the HB 2294 B&O tax rate reductions and
instances of application are subsidies contingent/conditional in fact upon export.
In particular, the European Union pointed out that, by their own terms, the
measures at issue are contingent/conditional upon a sale, including an export sale.
Insofar as the legal standard requires a favouring or differentiation of exports, the
European Union argued that the measures at issue favour certain goods, a
substantial percentage of which are inevitably exported or incorporated within an
exported product. Companies manufacturing other goods, including goods not
destined for export, are excluded from the measures.199
170. Thus, this EU argument is based on a standard of contingent/conditional; the first
meaning of “actual or anticipated” (future); and whether or not there is a
favouring/differentiation requirement.
171. The United States argued that the EU’s export subsidy claims are based on a
failure to understand that HB 2294 does not require Boeing to actually produce 36
airplanes a year, merely to have the capacity to do so. The United States also
argued that the EU's claims were precluded by the second sentence of footnote 4 of
the SCM Agreement.200
199 EU FWS, paras. 977-996, particularly paras. 980 and 989; EU FNCOS, paras. 99-115, particularly para. 111; EU SWS, paras. 641-644; EU Responses to Questions 54-57; EU Comments on US Response to Panel Questions 54 and 55. 200 US FWS, paras. 684-702, particularly para. 687; US FNCOS, paras. 36-39; US SWS, paras. 149-158, particularly para. 157; US Responses to Panel Questions 54 and 55; US Comments on EU Responses to Panel Questions 54-57.
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3. Summary of the Panel Report
172. The Panel found that the HB 2294 B&O tax rate reductions and instances of
application are subsidies.201 However, the Panel also found that the European
Union had not demonstrated that the HB 2294 B&O tax rate reductions and
instances of application are contingent upon export. The Panel reasoned as
follows:202
However, any form of conditionality or dependence between the B&O tax reduction and exports arises simply because the recipient of the subsidy is an exporter. If this is the case, the B&O tax reduction is contingent upon either domestic or export sales. The European Communities does not make any other submissions regarding why the grant of the B&O tax reduction is "tied to" exportation. Therefore, it is clear that a "tie" between the B&O tax reduction and exportation arises simply because the subsidy is granted to an enterprise that exports. However, the final sentence of footnote 4 to Article 3.1(a) provides that the grant of a subsidy to an enterprise that exports “shall not for that reason alone be considered to be an export subsidy”. Therefore, it is clear from footnote 4 that the standard for de facto export contingency is not met.203
4. HB 2294 B&O Tax Rate Reductions and Instances of Application are Subsidies Contingent/Conditional in Fact Upon Export
173. The Panel found that the HB 2294 B&O tax rate reductions and instances of
application are subsidies.204 It is not controversial and was not disputed before the
Panel that the HB 2294 B&O tax rate reduction subsidies are
contingent/conditional upon sales, whether they occur in the US market or in an
export market.
174. Consequently, if there is no requirement of favouring or differentiation (issue 3
referred to above), it is self-evident that the HB 2294 B&O tax rate reductions are
subsidies contingent/conditional upon export. To the extent that the term "actual
or anticipated" has the first meaning outlined above (past or future), then we argue
that the HB 2294 B&O tax rate reductions are subsidies contingent/conditional
upon anticipated export. To the extent that it has the second meaning (realised or
201 Panel Report, para. 7.1531, note 3261 and para. 7.302. 202 Panel Report, paras. 7.1541-7.1543. 203 Panel Report, para. 7.1542. 204 Panel Report, para. 7.1531, note 3261 and para. 7.302.
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notional state of mind), then we argue that the HB 2294 B&O tax rate reductions
are subsidies contingent/conditional upon actual export.
175. To the extent that there is a requirement of favouring or differentiation (issue 3
referred to above), the European Union does not compare the treatment of the
relevant good when sold in the US market with the treatment of the same good
when sold in an export market.
176. Rather, we compare the treatment of goods that are excluded from HB 2294 B&O
tax rate reductions with the treatment of goods that benefit from HB 2294 B&O
tax rate reductions. We point out that the terms of the HB 2294 B&O tax rate
reduction measure expressly limit its availability to commercial airplanes and
goods to be incorporated within commercial airplanes, including the 787. We
assert, and provide supporting evidence, to the effect that it is inconceivable that
787 aircraft will not be exported.205 On the other hand, we point to the fact that
other goods that do not benefit from HB 2294 B&O tax rate reductions will not be
exported. Therefore, by its own terms, the measure enacting HB 2294 B&O tax
rate reductions effectively focuses or targets the available subsidies on goods that
will be exported, excluding other goods that will not be exported. In other words,
what is on its face a neutral measure granting subsidies contingent/conditional
upon performance is, by its own terms, in fact skewed or slanted towards export
performance. This constitutes the favouring or differentiation required to
demonstrate an inconsistency with Article 3.1(a) and footnote 4 of the SCM
Agreement. In other words, it demonstrates that the grant of the subsidy has been
made contingent/conditional, whether solely or as one of several other conditions,
upon export.
177. To the extent that the term “actual or anticipated” has the first meaning outlined
above (past or future), then we argue that the HB 2294 B&O tax rate reductions
are subsidies contingent/conditional in fact upon anticipated export. To the extent
that it has the second meaning (realised or state of mind), then we argue that the
HB 2294 B&O tax rate reductions are subsidies contingent/conditional in fact
upon actual export.
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5. Legal Errors in the Panel Report and Request for Reversals
178. First, the Panel states that contingency/conditionality arises in this case “simply
because the recipient of the subsidy is an exporter” and “simply because the
subsidy is granted to an enterprise that exports”.206 The Panel thus assimilates the
fact pattern in this case to the second sentence of footnote 4.207 The Panel's
analysis is obviously erroneous.
179. The European Union does not rely in its arguments only on the proposition that the
subsidy is granted to an enterprise, and that such enterprise exports. Rather, in the
present case, it is not contested that the subsidy is granted contingent/conditional
upon sales, whether in the US market or in an export market. This is different
from and more than what is described in the second sentence of footnote 4. The
Panel therefore erred when it reasoned that the second sentence of footnote 4 was
sufficient basis on which to dismiss the EU claim.
180. Second, the Panel states that "The European Communities does not make any other
submissions regarding why the grant of the B&O tax reduction is “tied to”
exportation".208 That analysis is obviously erroneous. The fact of the
contingent/conditional relationship between the subsidy and a sale was not in
dispute (and could not reasonably be disputed). Insofar as more was required in
terms of the favouring or differentiation of exports, the European Union carefully
explained how the measure at issue, by its own terms, was focussed on goods in
large part destined for export, to the exclusion of other goods that would certainly
not be exported.209
181. Consequently, the Panel's analysis is based on an erroneous interpretation and
application of Article 3.1(a) and footnote 4 of the SCM Agreement and a failure to
make an objective assessment, including an objective assessment of the facts
205 In particular, EU FWS, paras. 981-987. 206 Panel Report, para. 7.1542, second and fifth sentences (italic emphasis added). 207 Panel Report, para. 7.1542, sixth sentence. 208 Panel Report, para. 7.1542, fourth sentence. 209 EU FWS, paras. 977-996, particularly paras. 980 and 989; EU FNCOS, paras. 99-115, particularly para. 111; EU SWS, paras. 641-644; EU Responses to Panel Questions 54-57; EU Comments on US Responses to Questions 54 and 55.
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pursuant to Article 11 of the DSU. For these reasons we request that the Panel's
findings210 be reversed.
6. Completion of the Analysis
182. Based on the analysis set out above211 the European Union respectfully requests
the Appellate Body to complete the analysis and find that the HB 2294 B&O tax
rate reductions and instances of application are subsidies contingent/conditional in
fact upon export.
V. ADVERSE EFFECTS
A. Introduction and Executive Summary
183. The European Union appeals three errors in the Panel’s adverse effects analysis.
The first two of these errors are substantive errors of law and legal interpretation,
while the third error stems from the Panel’s failure to accord due process rights to
the European Union in violation of Article 11 of the DSU.
184. Beginning with the substantive errors of law, the first error is the Panel’s refusal to
cumulate (i) the effects, in the 200-300 seat LCA market,212 of the B&O tax
subsidies with (ii) the effects of the aeronautics R&D subsidies in that same
market.213 The second substantive error is the Panel’s failure to aggregate with the
FSC/ETI and B&O tax subsidies (collectively “Tax Subsidies”) various other
subsidies, including the other Washington State and City of Everett tax subsidies;
property and sales tax abatements provided to Boeing pursuant to industrial
210 That is, the findings at Panel Report, paras. 7.1541- 7.1543, particularly para. 7.1543, and para. 8.2(b). 211 At paras. 173-177 of this submission. 212 The European Union recalls that it challenged the effects of the US subsidies at issue in three separate product markets in which subsidised Boeing LCA compete with Airbus LCA. See Panel Report, paras. 7.1595, 7.1669-7.1674. These markets are the world markets for (i) single-aisle 100-200 seat LCA with a short to medium range (covering the subsidised Boeing 737, and the Airbus A320), (ii) 200-300 seat wide-body LCA with a medium to long range (covering the subsidised Boeing 787 and 767, and the Airbus A330, Original A350 and A350XWB-800), and (iii) 300-400 seat wide-body LCA with a long to ultra-long range (covering the subsidised Boeing 777, and the Airbus A340, as well as the A350XWB-900 and -1000). 213 Panel Report, para. 7.1824.
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revenue bonds issued by the State of Kansas and municipalities therein; and tax
credits and other incentives provided to Boeing by the State of Illinois and
municipalities therein (collectively the “Remaining Subsidies”),214 and to
aggregate the effects of these subsidies in all LCA markets at issue.215
185. The European Union’s first appeal specifically concerns the legal question whether
a panel must assess collectively the effects of two different subsidies that
contribute to the same form of adverse effects (e.g., significant price suppression,
lost sales, and/or displacement). The Panel erred in answering that question in the
negative. The only reason it gave was that the subsidies affected the market
through “entirely distinct causal mechanisms”.216
186. Yet, a panel must not atomise or compartmentalise its analysis so as to mask the
contribution of any subsidy to adverse effects. Under Articles 5 and 6.3 of the
SCM Agreement, a panel must assess whether the “use” of “any” subsidy causes
adverse effects. The ordinary meaning of these terms requires that potential effects
of any use of any subsidy be considered. Both provisions focus on whether the
subsidies cause particular forms of effects; they are not segregated and limited to
particular causal mechanisms. Imposition of such a test would create an entirely
new requirement on a complaining Member that is not found in the text, context or
object and purpose of the SCM Agreement. Thus, where different subsidies
contribute through different causal mechanisms to the same form of adverse
effects, their effects must be assessed cumulatively.
187. The requirement to cumulate the effects of subsidies causing similar effects is
confirmed by the context of Article 6.1 of the SCM Agreement. While Articles
6.1(b)-(d) specifically require the isolation of effects of particular forms of
subsidies, Article 6.1(a) requires the summation of all forms of subsidies. It
follows that, had the drafters intended to limit the assessment under Articles 5 and
6.3 to the effects of subsidies under the same causal mechanism, they would have
done so explicitly.
214 See Panel Report, paras. 7.1431-7.1433, 7.1826-7.1827. 215 Panel Report, para. 7.1828. 216 Panel Report, para. 7.1824.
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188. The Panel’s approach is also contrary to the object and purpose of the SCM
Agreement. It would weaken the actionable subsidy disciplines by allowing
Members to subsidise a single product through a diverse range of subsidies, and
then require an assessment of the effects of these subsidies separately for each
“distinct causal mechanism{}”.217 Clinical isolation in the assessment of effects
from subsidies that benefit the same product and that are alleged to cause the same
adverse effects could fail to yield an adverse effects finding where cumulating the
effects from all subsidies would demonstrate that a causal link exists.
189. Thus, the Panel erred by failing to cumulate the effects from the B&O tax
subsidies – that it found to exist in the 100-200 and 300-400 seat LCA markets –
with the effects from the aeronautics R&D subsidies on Airbus’ 200-300 seat
LCA, and by failing to find that they collectively caused adverse effects. In
making its adverse effects finding and based on a proper interpretation of Articles
5 and 6.3, the Panel was not entitled to ignore the additional negative effects from
the B&O subsidies on the market for 200-300 seat LCA.
190. The second error specifically relates to the Panel’s failure to aggregate, for
purposes of assessing their effects on Boeing’s prices, the Remaining Subsidies
with the Tax Subsidies, despite the fact that both subsidies had a sufficient nexus
to the subsidised product and the effects-related variable – i.e., price. Under the
approach adopted by the panel in EC and Certain Member States – Large Civil
Aircraft, this Panel was required to find that the Remaining Subsidies caused
adverse effects because they “complemented and supplemented”218 the effects of
the Tax Subsidies. Were the Appellate Body, in the appeal in EC and Certain
Member States – Large Civil Aircraft, to uphold the test articulated by the panel in
that dispute, then the Appellate Body must reverse the Panel’s reasoning and find
that the Panel should have examined the collective effects of the Remaining
Subsidies and the Tax Subsidies.
191. The Panel’s failure to cumulate the effects of the Remaining Subsidies with the
Tax Subsidies also constitutes error under Articles 5 and 6.3 of the SCM
217 Panel Report, para. 7.1824. 218 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1956.
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Agreement for the reasons set forth in respect of the first adverse effects appeal,
above. The Panel examined these subsidies in isolation without examining
whether they contributed to any particular form of serious prejudice and found
that, on their own, they did not “give rise to serious prejudice”.219
192. The Appellate Body should reverse the Panel’s finding on either, or both, basis and
find that the Tax Subsidies and the Remaining Subsidies collective cause adverse
effects.
193. The Panel’s third error arises under Article 11 of the DSU, and is based on the
Panel’s failure to uphold the principle of due process when it excluded from its
adverse effects assessment the effects of assistance instruments funded through the
RDT&E programmes, other than those funded pursuant to the ManTech and
DUS&T programmes.220 The Panel did so based on a standard that first appeared
in the Final Panel Report, without providing the Parties with an opportunity to
comment on this standard, and without requesting information on the facts
(pursuant to Article 13 of the DSU) that would demonstrate whether or not that
standard was satisfied. This error is aggravated given the Panel’s failure to draw
reasonable inferences from the related instances of US non-cooperation in the
production of key documents and evidence within its exclusive control.
B. The Panel Erred in Not Aggregating the Effects from the B&O Tax Subsidies and the Aeronautics R&D Subsidies Benefiting the 787
1. Summary of the Facts and the Parties’ Arguments
194. Before the Panel, the European Union argued that “the subsidies to Boeing have
resulted in {adverse effects} through two causal mechanisms”.221 Specifically, for
219 Panel Report, para. 7.1828. 220 Panel Report, para. 7.1701, particularly sixth and ninth to eleventh sentences. 221 Panel Report, para. 7.1596, citing EU SWS, para. 711. See also EU FWS, paras. 1334 (“The US subsidies benefiting Boeing’s 787 family LCA have had two principal effects (1) they have expedited the launch and future delivery of Boeing’s technologically-advanced 787 family LCA (the ‘technology effect’); and (2) they have directly allowed Boeing to lower the prices at which it offers its 787 family LCA (the ‘price effects’). Both effects have contributed to the significant price suppression, significant lost sales, and displacement and impedance suffered by Airbus in the 200-300 seat wide-body LCA market”) (underlining
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the 200-300 seat LCA market, the European Union argued (i) that “the aeronautics
R&D subsidies ... ‘have helped Boeing develop, launch and produce a
technologically-advanced 200-300 seat LCA much more quickly than it could have
on its own’”,222 and (ii) that “all of the subsidies have ... ‘price effects’ in that they
have enabled Boeing to charge lower prices for its LCA”.223 The European Union
provided sales campaign-specific evidence in support of its claim that both causal
mechanisms resulted in significant price suppression and significant lost sales.224
195. The United States argued that the US aeronautics R&D measures had no effect on
Boeing’s ability to launch, develop and produce the 787,225 and that the subsidies
Boeing received also had no price effects.226 Accordingly, the United States did
not address the issue of aggregation of the effects from these two groups of
subsidies.
2. Summary of the Panel’s Findings
196. The Panel split its adverse effects analysis into several parts. First, it assessed, and
properly found, that the US “aeronautics R&D subsidies contributed in a genuine
and substantial way to Boeing’s development of technologies for the 787 and that,
added), 1341 (“the combined technology and price effects of the US subsidies for the 787 have resulted in the substantial loss of revenue and market-share by Airbus in the 200-300 seat wide-body LCA market”) (underlining added) 997 (“The US subsidies have had two principal effects: (1) they have provided Boeing sales negotiators with millions of dollars to price down each Boeing LCA in sales campaigns against Airbus, forcing Airbus to lower its LCA prices and lose LCA sales to Boeing; and (2) they have financed Boeing’s development of the latest technology and production methods used on the 787, further forcing Airbus to lower its LCA prices and lose sales to Boeing in the 200-300 seat LCA marker”) (emphasis in original, underlining added) 998 (“Reduced to its essence, this dispute is about Boeing using federal, state and local subsidies to win sales and suppress Airbus’ prices”) (not distinguishing between subsidies), 1003 (“The evidence presented by the European Communities displays a consistent theme and goal – it demonstrates that Airbus lost sales and suffered suppressed prices because the US subsidies facilitated Boeing’s offering of lower prices and its use of advanced technologies. But for the effects of the US subsidies, Airbus would have won certain additional sales and Airbus’ average LCA prices would be higher”) (emphasis in original, underlining added), 1070 (In assessing the causal link between the US subsidies and adverse effects to the interests of the European Communities, the Panel should assess the cumulative effect of subsidies to Boeing.”) (emphasis in original), 1070-1073. 222 Panel Report, para. 7.1597, citing EU FWS, paras. 1343, 1335 and 1345. 223 Panel Report, para. 7.1598, citing EU FWS, para. 1229 (emphasis added). 224 Panel Report, para. 7.1622. 225 Panel Report, paras. 7.1626-7.1634. 226 Panel Report, paras. 7.1635-7.1641.
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in the light of the conditions of competition in the LCA industry, these subsidies
conferred a competitive advantage on Boeing”.227 The Panel concluded that the
aeronautics R&D subsidies “caused Airbus to lose a significant number of sales of
its A330 and Original A350 between 2004 and 2006, and significantly suppressed
the prices of those aircraft” in the 200-300 seat LCA market.228
197. Second, with respect to the B&O and FSC/ETI tax subsidies, the Panel found it
“inescapable to arrive at the conclusion that in law the effects of the{se} subsidies
on Airbus’ prices and sales constitute significant lost sales and significant price
suppression, within the meaning of Article 6.3(c) of the SCM Agreement, as well
as displacement and impedance of exports from third country markets, within the
meaning of Article 6.3(b)”.229
198. Nonetheless, the Panel found adverse effects from the B&O and FSC/ETI tax
subsidies in only two of the three product markets at issue – i.e., the single-aisle
100-200 seat LCA market and the 300-400 seat wide-body LCA market.230 With
respect to the third product market (200-300 seat wide-body LCA), it reasoned that
“there is insufficient evidence before us that would enable us to conclude that these
{B&O tax} subsidies are of a magnitude that would enable them, on their own, to
have such an effect on Boeing’s prices of the 787 as would lead to a finding that
their effects in the 200-300 seat wide-body market were significant price
suppression, significant lost sales or displacement or impedance of European
Communities imports into the United States or exports to third countries”.231 The
Panel then recalled its finding that the US aeronautics R&D subsidies cause
serious prejudice to EU interests in that third product market.232 It concluded that
“owing to the very different way in which the aeronautics R&D subsidies operate,
we do not consider that it is appropriate to aggregate the effects of the B&O tax
subsidies on Boeing’s prices of the 787 with the effects of the aeronautics R&D
227 Panel Report, para. 7.1773. 228 Panel Report, paras. 7.1780, 7.1797, 7.1854, 8.3(a)(i). 229 Panel Report, para. 7.1822. 230 Panel Report, paras. 7.1823, 7.1833, 7.1854, 8.3(a)(ii) and 8.3(a)(iii). 231 Panel Report, para. 7.1824 (emphasis added). 232 Panel Report, para. 7.1824.
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subsidies on Boeing’s development of technologies applied to the 787, as it is
clear that the two groups of subsidies operate through entirely distinct causal
mechanisms”.233 The Panel offered no other reason in support of its finding that it
was not appropriate to aggregate the established effects of the B&O and the
aeronautics R&D subsidies.
3. The Panel Erred in its Interpretation and Application of Articles 5 and 6.3 of the SCM Agreement
199. The Panel erred in its interpretation and application of Articles 5 and 6.3 of the
SCM Agreement when it declined to assess the cumulative effects of two groups of
subsidies benefiting Boeing’s LCA in the 200-300 seat LCA market. The Panel
improperly isolated its assessment of the effects of the B&O tax subsidies from its
separate assessment of the effects of the aeronautics R&D subsidies, even though
both contributed to negative commercial impacts on Airbus LCA in the 200-300
seat market. Specifically, the Panel erred in explaining that it “do{es} not consider
that it is appropriate to aggregate” such effects, given the “entirely distinct causal
mechanisms”234 through which the two groups of subsidies operate.
200. As explained below, the existence of “distinct causal mechanisms”235 from various
subsidies is not a legitimate basis to refrain from assessing the cumulative effects
of all subsidies. A proper interpretation of Articles 5 and 6.3 of the SCM
Agreement reveals that a cumulative assessment is required.
201. At the outset, the European Union recalls the Appellate Body’s finding that “a
panel has a certain degree of discretion in selecting an appropriate methodology
for determining whether the ‘effect’ of a subsidy”236 amounts to adverse effects.
That discretion is not, however, without bounds. It is circumscribed by the
requirement that a panel find adverse effects where the enumerated “effect of the
233 Panel Report, para. 7.1824 (emphasis added). 234 Panel Report, para. 7.1824. 235 Panel Report, para. 7.1824. 236 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 370; Appellate Body Report, US – Upland Cotton, para. 436.
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subsid{ies}”237 are “cause{d}”238 by the use of subsidies. In conducting that
assessment, a panel must consider whether the alleged effects, in fact, “result from
a chain of causation that is linked to the impugned subsid{ies}”,239 and whether
that chain of causation amounts to a “genuine and substantial relationship of cause
and effect”.240 In other words, a panel must consider the collective effects of any
and all subsidies that have an impact on the competing product of the complaining
Member in the market at issue, and determine whether collectively they cause
effects that amount to adverse effects. A panel does not enjoy the discretion to
atomise or compartmentalise its analysis so as to mask the contribution of any
subsidy to adverse effects.
202. The following initial considerations are useful to guide the analysis:
• Initially, a panel should examine the nature of the individual subsidies, in terms of their structure, design and operation,241 and aggregate in a group those specific subsidies that have a sufficient nexus to the subsidised product242 and have a similar structure, design and operation. Depending on the facts at issue, there could be more than one group of subsidies.
• A panel would then be expected to assess, by individual subsidy or group of subsidies, if and how the subsidies (or groups of subsidies) provide a competitive advantage to the subsidised producer and its products in the market at issue.243 At this stage of its analysis, a panel would focus on the
237 Article 6.3 of the SCM Agreement. 238 Article 5 of the SCM Agreement. 239 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 372. 240 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 374; Appellate Body Report, US – Upland Cotton, para. 438 (quoting Appellate Body Report, US – Wheat Gluten, para. 69). 241 See, e.g., Appellate Body Report, US – Upland Cotton, para. 450; Panel Report, US – Upland Cotton, paras. 7.1289-7.1290. 242 Panel Report, US – Upland Cotton, para. 7.1191. 243 See, e.g., Panel Report, paras. 7.1773 (“The Panel concludes that the aeronautics R&D subsidies contributed in a genuine and substantial way to Boeing’s development of the 787 and that, in the light of the conditions of competition in the LCA industry, these subsidies conferred a competitive advantage on Boeing. The Panel now proceeds to analyse whether the aeronautics R&D subsidies, as a result of this competitive advantage, affected Airbus’ sales and prices in the 200-300 seat wide-body LCA product market in the 2004-2006 period”) (emphasis and underlining added), 7.1818 (“We have no doubt that the availability of the FSC/ETI subsidies, in combination with the B&O tax subsidies, enabled Boeing to lower its prices beyond the level that would otherwise have been economically justifiable, and that in some cases, this led to it securing sales that it would not otherwise have made, while in other cases, it led to Airbus being able to secure the sale only at a reduced price”) (underlining added). See also Panel Report, EC and Certain Member States – Large Civil Aircraft, paras. 7.1880-7.1976 (assessing the impact on Airbus’ ability to
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type of market impact that the subsidies (or groups of subsidies) have, and their ability to cause, or contribute to causing, adverse effects.244 This is the fact-intensive aspect of the analysis addressed by the Appellate Body, when it found that a panel has the discretion to structure its approach,245 and to select the evidence on which to rely.246
• Irrespective of how a panel exercised its discretion to structure its causation analysis of the market impact of the various subsidies (or groups of subsidies), ultimately, it must assess – quantitatively or qualitatively – whether the collective competitive impact of the different (groups of) subsidies at issue amounts to adverse effects. That is, a panel must assess the collective effects from all subsidies at issue in deciding whether the “use” of these subsidies, collectively, causes one or more of the particular forms of adverse effects.
203. Thus, once a panel finds that a specific subsidy (or group of subsidies) negatively
impacts competition in the market at issue,247 then it must combine its assessment
of the effects of that subsidy (or group of subsidies) with the effects of all other
(groups of) subsidies that also impact competition in that market.248 That
assessment may involve quantitatively adding the levels of, for example, price
effects from various (groups of) subsidies. It may also involve qualitatively
combining the effects of certain (groups of) subsidies on the existence of a new
product with the effects of other (groups of) subsidies on prices for that product.
204. Under Articles 5 and 6.3, a panel has no discretion to clinically isolate, and assess
solely “on their own”,249 the effects of one of several (groups of) subsidies.
compete in the LCA markets) and 7.1977-7.1984 (assessing the collective impact of Member State Financing and other subsidies on Boeing’s sales and market shares). 244 For example, a panel could assess how a subsidy causes, or contributes to, the development of a new product by its recipient, or how it enables a recipient to charge lower prices in the market. See, e.g., Panel Report, paras. 7.1764 (and analysis of the product launch impact of the aeronautics R&D subsidies leading to that finding in paras. 7.1701-7.1763) and 7.1818 (and analysis of the price impact on Boeing’s prices of the FSC/ETI and B&O tax subsidies leading to that finding in paras. 7.1801-7.1817). 245 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 370; Appellate Body Report, US – Upland Cotton, para. 436. 246 If no such negative impact on competition in the relevant market is found, then the causation analysis for that particular subsidy or group of subsidies would end. 247 As set out in the second bullet in paragraph 202, above. 248 As set out in the third bullet in paragraph 202, above. 249 Panel Report, para. 7.1824.
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Instead, a panel’s assessment whether the subsidies at issue cause adverse effects
must be made on the basis of the effects on competition in a particular market from
all subsidies. This requirement flows from a proper interpretation of the text of
Articles 5 and 6.3, in its context, and taking into account the object and purpose of
the SCM Agreement.
205. Textually, Article 5 disciplines adverse effects caused by “the use of any subsidy
referred to in paragraphs 1 and 2 of Article 1”.250 Article 6.3 relies on the concept
of a “subsidized product”, without limitation on the scope of subsidies that might
benefit that “subsidized product”. Thus, neither provision addresses, or
distinguishes between, the wide variety of subsidies covered by the term “any
subsidy”. Nor do these provisions differentiate between different “groups of
subsidies {that} operate through entirely distinct causal mechanisms”.251 Instead,
the broad language of Articles 5 and 6.3, in particular the use of the terms “any
subsidy” and “subsidized product”, suggests that these provisions discipline the
collective impact of any and all subsidies benefiting the subsidised product in the
market at issue.
206. Thus, the causation analysis required by Articles 5 and 6.3 does not focus on any
particular causal mechanisms – it simply requires a finding of causation resulting
from the use of “any” subsidy. Accordingly, where two subsidies support the same
subsidised product and negatively impact competition in the market at issue, then a
panel must consider the effects of these subsidies collectively in determining
whether they amount to any form of adverse effect.252
250 Emphasis added. 251 Panel Report, para. 7.1824. 252 Indeed, the panel in US – Upland Cotton properly rejected the notion that the use of the singular in Article 6.3 – “the effect of the subsidy” (underlining added) – required the clinical isolation of the effects of each subsidy. See Panel Report, US – Upland Cotton, para. 7.1191 (“We do not see the Article 6.3(c) reference to ‘the effect of the subsidy’ (in the singular, rather than the plural) as meaning that a serious prejudice analysis of price suppression must clinically isolate each individual subsidy and its effects …. {W}hile due attention must be paid to each subsidy at issue as it relates to the subsidized product, a serious prejudice analysis may be integrated to the extent appropriate in light of the facts and circumstances of a given case …. {T}extual references to ‘any subsidy’ and ‘the effect of the subsidy’ permit an integrated examination of effects of any subsidies with a sufficient nexus with the subsidized product and the particular effects-related variable under examination”).
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207. Conversely, there is no textual support in Articles 5 and 6.3 of the SCM Agreement
for an interpretation that the effects of two different subsidies, which both
negatively impact competition in the market at issue, cannot be assessed
cumulatively, simply because those subsidies affect competition through “distinct
causal mechanisms”.253 The text of these provisions does not even refer to any
“mechanism” or manner in which subsidies cause adverse effects.
208. The context of now-expired Article 6.1 of the SCM Agreement further supports an
interpretation of Articles 5 and 6.3 that requires panels to cumulate the effects of
subsidies, or groups of subsidies, that negatively impact competition in the market
at issue. Article 6.1(a) established a presumption of serious prejudice where “the
total ad valorem subsidization14 of a product exceed{ed} 5 per cent”. Footnote 14
provided that “{t}he total ad valorem subsidization shall be calculated in
accordance with the provisions of Annex IV”. Paragraph 6 of Annex IV, in turn,
required that “subsidies given under different programmes and by different
authorities in the territory of a Member shall be aggregated”. Thus, in determining
whether subsidies rise to an ad valorem level of subsidisation sufficient to trigger
the presumption of serious prejudice, Article 6.1(a) and Annex IV mandate that all
subsidies be included (except, pursuant to paragraph 8 of Annex IV, those that are
non-actionable).
209. Significantly, when the drafters of the SCM Agreement wished to require isolation
of the effects of particular types of subsidies, they did so explicitly. For example,
now-expired Articles 6.1(b), (c) and (d) created a presumption of serious prejudice
from subsidies covering operating losses for an industry or enterprise, as well as
direct forgiveness of debt. Textually, each of these provisions expressly identified
types of subsidies that benefit the subsidised product and affect the market at issue
through a particular causal mechanism. By contrast, Article 6.3 focuses on the
effects of subsidies – it does not distinguish between subsidies based on their type;
nor does it limit the particular causal mechanisms that may be relevant.
210. The Panel’s refusal to assess cumulatively the effects of the B&O tax subsidies and
the aeronautics R&D subsidies is also contrary to the object and purpose of the
253 Panel Report, para. 7.1824.
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SCM Agreement, which is “to strengthen and improve GATT disciplines relating to
the use of both subsidies and countervailing measures”,254 and “to impose
multilateral disciplines on subsidies which distort international trade”.255 The
Panel’s interpretation and application of Articles 5 and 6.3 would permit panels to
avoid cumulating the effects of two or more subsidies benefiting the same product,
and alleged to cause the same form of adverse effect, on the basis of differences in
the “causal mechanisms”256 – even in situations where both groups of subsidies
cause identical forms of adverse effects. Yet, consistent with the object and
purpose of the SCM Agreement, Articles 5 and 6.3 must not be interpreted so as to
undermine, rather than “strengthen and improve”, the actionable subsidy
disciplines.
211. Under the Panel’s interpretation, Members could provide a series of smaller
subsidies that each affect the recipient slightly differently and that, on their own,
cause a degree of trade distortion that is insufficient to amount to adverse effects.
The Panel’s approach would lead to a finding that, because these small subsidies
work along different causal pathways, their effects may not be cumulated, and “on
their own”257 cause no adverse effects. In reality, however, the Member would
have, “through the use of any subsidy referred to in paragraphs 1 and 2 of Article
1, {caused} adverse effects”. Thus, rather than “strengthen{ing} and
improv{ing}”258 the disciplines on subsidies, the Panel’s approach undermines the
object and purpose of the SCM Agreement.
212. Finally, the European Union recalls the Appellate Body’s suggestion, in US –
Upland Cotton, that a panel might have erred in excluding non-price-contingent
subsidies from its adverse effects finding because of their different structure,
design and operation. The Appellate Body explained, in obiter dicta, that it was
important to examine whether the non-price-contingent subsidies “contribute to
254 Appellate Body Report, US – Softwood Lumber IV, para. 64, citing Appellate Body Report, US – Carbon Steel, paras. 73-74. 255 Panel Report, Brazil – Aircraft, paras. 7.26. 256 Panel Report, para. 7.1824. 257 Panel Report, para. 7.1824. 258 Appellate Body Report, US – Softwood Lumber IV, para. 64, citing Appellate Body Report, US – Carbon Steel, paras. 73-74.
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price suppression”.259 That statement is fully consistent with the particular focus
of an Article 5 and 6.3 assessment – i.e., whether each challenged specific subsidy
benefiting a common subsidised product contributes to the same adverse effects
claimed.
213. Applying these legal principles to the facts in this dispute reveals that the Panel
erred in relying on “distinct causal mechanisms” when it refused to assess
cumulatively whether the B&O tax subsidies and the aeronautics R&D subsidies
cause adverse effects in the 200-300 seat LCA market.
214. To recall, having initially isolated the B&O tax subsidies, the Panel concluded that
it had “insufficient evidence”260 to find that, “on their own”,261 they affected
Boeing’s prices for the 787 sufficiently enough to cause adverse effects. However,
as established above, the Panel did not need to find that the B&O subsidies caused
adverse effects “on their own”.
215. More significantly, having made a finding on the effects of the B&O “on their
own”, the Panel had not yet properly discharged its obligations under Articles 5
and 6.3 to assess the effects of “any” subsidies. Given that the European Union
had raised claims, and presented arguments, regarding the adverse effects caused
jointly in the market for 200-300 seat LCA by the B&O tax subsidies and the
aeronautics R&D subsidies,262 the Panel was required to make that joint
assessment.
216. In this respect, it is significant that the Panel found “inescapable”263 its conclusion
that the cumulative effect of FSC/ETI and B&O tax subsidies caused, in the single-
259 Appellate Body Report, US – Upland Cotton, note 589 (“We do not exclude the possibility that challenged subsidies that are not ‘price-contingent’ (to use the Panel’s term) could have some effect on production and exports and contribute to price suppression”). The European Union notes that Brazil had not appealed that panel’s refusal to cumulate any effects of non-price-contingent subsidies. 260 Panel Report, para. 7.1824. 261 Panel Report, para. 7.1824 (emphasis added). 262 See paragraph 194 and note 221, above. For example, the European Union argued that “the combined technology and price effects of the US subsidies for the 787 have resulted in the substantial loss of revenue and market-share by Airbus in the 200-300 seat wide-body LCA market”. See EU FWS, para. 1341 (underlining added). 263 Panel Report, para. 7.1822.
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aisle and the 300-400 seat LCA markets, the same forms of adverse effects at issue
in the 200-300 seat LCA market.264 Thus, the evidence before the Panel suggested
that the B&O tax subsidies could, at a minimum, contribute to the adverse effects
from the aeronautics R&D subsidies. With both sets of subsidies benefiting the
subsidised 787 and contributing to the negative commercial effects on Airbus’
200-300 seat LCA, these facts triggered the requirement that the Panel assess the
effects of these subsidies cumulatively – even if, “on their own”, the B&O tax
subsidies were not shown to cause adverse effects in that market. The Panel’s
failure to do so amounts to reversible legal error.
217. In sum, in light of the argumentation and evidence before the Panel that the two
groups of subsidies, although “operat{ing} through entirely distinct causal
mechanisms”,265 jointly cause particular market phenomena that amount to adverse
effects, the Panel was required to undertake that combined assessment. By
declining to do so – because it considered it “not appropriate to aggregate {those}
effects”266 based solely on the “distinct causal mechanisms” of the two subsidies –
the Panel erred in its interpretation and application of Articles 5 and 6.3 of the
SCM Agreement.
218. Accordingly, the European Union requests the Appellate Body to reverse the
Panel’s finding.267
264 Panel Report, para. 7.1822. The Panel found that the FSC/ETI and B&O tax subsidies caused significant price suppression, significant lost sales, and displacement and impedance in the single-aisle and 300-400 seat LCA markets. 265 Panel Report, para. 7.1824. 266 Panel Report, para. 7.1824. 267 The European Union recognises that the Panel did not undertake the necessary factual analysis to assess the joint effects of US aeronautical R&D and B&O tax subsidies. Accordingly, the European Union does not consider that there is a basis for the Appellate Body to complete the analysis. However, reversal of the Panel’s finding is important, as it avoids creating findings that might bind an arbiter in possible subsequent proceedings in this dispute.
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C. The Panel Erred in Not Aggregating the Effects of the Tax Subsidies With the Effects of the Remaining Subsidies
219. The Panel also erred in its interpretation and application of Articles 5 and 6.3 of
the SCM Agreement, by failing, at paragraph 7.1828, to aggregate with the Tax
Subsidies the approximately $550 million268 in Remaining Subsidies.269
1. Summary of the Facts and the Parties’ Arguments
220. Throughout its submissions, the European Union argued that the Panel should
examine, on a cumulative basis, the price effects of the subsidies to Boeing.270
221. The European Union argued that the Remaining Subsidies have a sufficient nexus
with the subsidised Boeing LCA at issue, in the sense that they benefit Boeing’s
LCA. The operation of these subsidies was such that they freed up cash for
Boeing’s LCA division to reduce prices for these LCA.271 While the Remaining
Subsidies are not tied to the production of individual, or particular families of,
Boeing LCA, they are “fungible” and should, therefore, be treated as the functional
equivalent of additional cash flow available to Boeing’s LCA division to price
down its products.272 Thus, they have a sufficient nexus with the effects-related
variable that negatively impacts competition in the relevant markets at issue – i.e.,
price.
268 See Panel Report, para. 7.1828; see also Panel Report, para. 7.1433 (“Amount of subsidies to Boeing’s LCA division over the period 1989-2006”). 269 The Remaining Subsidies are comprised of the Washington State and City of Everett tax subsidies other than the B&O tax subsidies; the property and sales tax abatements provided to Boeing pursuant to industrial revenue bonds issued by the State of Kansas and municipalities therein; and the tax credits and other incentives provided to Boeing by the State of Illinois and municipalities therein. See Panel Report, paras. 7.1431-7.1433, 7.1826-7.1827. 270 See, e.g., EU FWS, paras. 1070-1073, 1092, 1333, 1470, 1564. See also EU Response to Panel Question 383, para. 542 (“{the} European Communities’ claim that US subsidies caused Boeing to engage in an aggressive pricing of a cumulative effect of approximately $17 billion, causing serious prejudice to EC LCA-related interests. The total price effects from US subsidies translates into per-aircraft price effects that vastly exceed any “significance” threshold under the European Communities serious prejudice claim”) (underlining added). 271 Panel Report, paras. 7.1609, 7.1827. 272 Panel Report, paras. 7.1609, 7.1827.
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222. The United States contended that the Remaining Subsidies are unlikely to affect
Boeing’s pricing decisions.273 The United States argued that in an analysis of
serious prejudice, the effects of the subsidy depend on whether the subsidy creates
or maintains LCA “supply” that would not otherwise exist.274 According to the
United States, if subsidies – like the Remaining Subsidies – that are not tied to the
development, production or sale of a particular product, are provided to a company
that enjoys unfettered access to capital markets, they are unlikely to affect pricing
decisions, unless the subsidy is such that, absent the subsidy, the company would
not be economically viable.275 However, the United States also agreed that “the
absence of a direct link between subsidies and the development, production, or sale
of large civil aircraft ‘should not be determinative of the outcome of the Panel’s
causation analysis’”.276
2. Summary of the Panel’s Findings
223. After having found that the US aeronautics R&D subsidies cause adverse effects in
the 200-300 seat LCA market277 and that the Tax Subsidies cause adverse effects
in the single-aisle and 300-400 seat LCA markets,278 the Panel turned to the
Remaining Subsidies. The Panel considered that the “comparatively small”279
amount of US subsidies that “are not directly related to Boeing’s production or sale
of LCA”280 did not, on their own, cause adverse effects. The Panel explained its
finding as follows:
273 Panel Report, para. 7.1635. 274 Panel Report, para. 7.1635. 275 Panel Report, para. 7.1635. 276 Panel Report, note 3786; see also US Comments on EU Response to Panel Question 379, para. 435. 277 See, e.g., Panel Report, paras. 7.1773 and 7.1780. 278 Panel Report, para. 7.1822 279 Panel Report, para. 7.1827. 280 Panel Report, para. 7.1827.
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the Panel is assessing the effects on Boeing’s LCA pricing of approximately $550 million in subsidies, the receipt of which is not directly tied to the production or sale of particular LCA. We are not persuaded that subsidies of this nature and of this amount have affected Boeing’s prices in a manner that could be said to give rise to serious prejudice to the European Communities’ interests.281
3. The Panel Erred in its Interpretation and Application of Articles 5 and 6.3 of the SCM Agreement
224. The Panel’s finding, at paragraph 7.1828, that the Remaining Subsidies, on their
own, do not cause adverse effects, amounts to an error in the interpretation and
application of Articles 5 and 6.3 of the SCM Agreement, because the Panel failed
to analyse the price effects of the Remaining Subsidies and the Tax Subsidies on
an aggregated basis.
225. The European Union’s first argument relates to the initial aspect of a causation
analysis, as set out in paragraph 202, above.282 This argument relies on a finding
by the panel in EC and Certain Member States – Large Civil Aircraft (currently on
appeal). That panel held that it is appropriate, for purposes of a panel’s adverse
effects analysis, to aggregate subsidies that “complement{} and supplement{}”283
each other in circumstances where the subsidies have a “sufficient nexus with the
subsidized product ... {and} they also have a sufficient nexus with ‘the particular
effects-related variable{s} under examination’”.284 On that basis, and without
significant further analysis, the panel included in its adverse effects findings a
series of subsidies that it found “complemented and supplemented”285 to the effects
of Member State financing.
281 Panel Report, para. 7.1828 (underlining added). 282 As set out above, a panel has the discretion to examine individual subsidies to determine whether their nature is such that they should be aggregated in a particular group of subsidies. A panel should also add to that group any subsidies that “complement{} and supplement{}” the likely effect of those subsidies. Depending on the case, there could be more than one such group of subsidies. A panel would then be expected to assess whether the aggregated subsidies within these particular groups cause any negative competitive effects in the relevant market. 283 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1956. 284 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1961. 285 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1956.
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226. Should the Appellate Body uphold that panel’s analysis, it follows that, under a
proper interpretation of Articles 5 and 6.3 of the SCM Agreement, a panel must not
segregate its adverse effects analysis so that it cannot take account of the combined
market effect of subsidies that collectively enhance Boeing’s cash flow and its
ability to price down its LCA.
227. Here, the Remaining Subsidies and the Tax Subsidies both contribute to price
effects. Aggregating them for purposes of assessing their effects is consistent with
the rejection by the panel in US – Upland Cotton of US arguments that the effects
of each individual subsidy had to be examined separately. The panel in that
dispute held that an “integrated examination of effects of any subsidies” was
permitted in circumstances where subsidies had “a sufficient nexus” with (i) “the
subsidized product”; and (ii) “the particular effects-related variable under
examination”.286
228. The Remaining Subsidies in this dispute fulfil these requirements. First, the
Remaining Subsidies have a “sufficient nexus with the subsidized product”287 –
i.e., Boeing LCA. Although the Remaining Subsidies are not tied to the
production of individual, or particular families of, Boeing LCA, they were received
by Boeing’s LCA division for its benefit, and constitute the functional equivalent
of additional cash flow available to Boeing’s LCA division.288
229. Second, the Remaining Subsidies impacted the same “effects-related variable”289
as the Tax Subsidies – i.e., price.290
286 Panel Report, US – Upland Cotton, para. 7.1191 (“We do not see the Article 6.3(c) reference to ‘the effect of the subsidy’ (in the singular, rather than the plural) as meaning that a serious prejudice analysis of price suppression must clinically isolate each individual subsidy and its effects …. {W}hile due attention must be paid to each subsidy at issue as it relates to the subsidized product, a serious prejudice analysis may be integrated to the extent appropriate in light of the facts and circumstances of a given case …. {T}extual references to ‘any subsidy’ and ‘the effect of the subsidy’ permit an integrated examination of effects of any subsidies with a sufficient nexus with the subsidized product and the particular effects-related variable under examination”) (underlining added). 287 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1961; see also Panel Report, US – Upland Cotton, para. 7.1191. 288 Panel Report, paras. 7.1609, 7.1827; see also EU FWS, paras. 1330-1332. 289 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1961; see also Panel Report, US – Upland Cotton, para. 7.1191. 290 Panel Report, paras. 7.1827-28.
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230. In US – Upland Cotton, the Appellate Body found that “challenged subsidies that
are not ‘price-contingent’ (to use the Panel’s term) could have some effect on
production and exports and contribute to price suppression”.291 (The panel in that
dispute had found that the “price-contingent” subsidies caused significant price
suppression through their effects on “production and exports” of cotton.292) The
Appellate Body, therefore, implied that the panel in that dispute could have
aggregated non-price-contingent subsidies with the price-contingent subsidies.
Similarly, in this dispute, the Remaining Subsidies were all alleged to have “some
effect on”293 Boeing’s ability to charge lower prices for its LCA,294 and thus
“contribute to price suppression”, lost sales, and displacement and impedance.
231. Indeed, even the United States acknowledged that “the absence of a direct link
between subsidies and the development, production, or sale of large civil aircraft
‘should not be determinative of the outcome of the Panel’s causation analysis’”.295
Similarly, the Panel found that, “where a subsidy is not tied to production of a
particular product, the subsidy may still affect the behaviour of the recipient of the
subsidy in a manner that causes serious prejudice”.296
232. Thus, under the reasoning of the panel in EC and Certain Member States – Large
Civil Aircraft, this Panel was entitled – and indeed, required – to find that the
Remaining Subsidies, amounting to $550 million, also caused adverse effects.
These subsidies “complemented and supplemented”297 the effects of the Tax
Subsidies, which had already been found to cause adverse effects.298 In examining
the effects from the Remaining Subsidies, the Panel, therefore, should have
conducted an analysis of the price effects of the Tax Subsidies and the Remaining
291 Appellate Body Report, US – Upland Cotton, note 589. 292 Panel Report, US – Upland Cotton, paras. 7.1308-7.1309, 7.1351-7.1354. 293 Appellate Body Report, US – Upland Cotton, note 589. 294 EU Comments on US Response to Panel Question 90, paras. 295-296; 295 Panel Report, note 3786; see also US Comments on EU Response to Panel Question 379, para. 435. 296 Panel Report, para. 7.1828 (emphasis added). 297 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1956. 298 Panel Report, para. 7.1822
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Subsidies on an aggregated basis. Given the adverse effects finding for the Tax
Subsidies alone, cumulative analysis must also result in an adverse effects finding.
233. The European Union’s second argument in relation to this appeal is based on the
argument set forth in Section V.B.3, above. In particular, the Panel erred in not
cumulating the effects of the Remaining Subsidies with the effects of the
aeronautics R&D subsidies and the effects of the Tax Subsidies. Again, the Panel
was tasked with assessing whether the use of subsidies caused the adverse effects,
not whether they did so on their own. Yet, the Panel never addressed their
cumulative effect and, instead, limited its assessment to the question whether the
Remaining Subsidies, on their own, caused adverse effects. By failing to take the
proper analytical steps to cumulate the effects of the Remaining Subsidies with the
effects of the aeronautics R&D subsidies and the effects of the Tax Subsidies, the
Panel failed to comply with the causation requirements under Articles 5 and 6.3 of
the SCM Agreement.
234. Based on the errors detailed above, the European Union requests that the Appellate
Body reverse the Panel’s finding that the Remaining Subsidies do not cause
adverse effects, and find that, aggregated with the Tax Subsidies (or the
aeronautics R&D subsidies and the Tax Subsidies) that were found to cause
adverse effects, the Remaining Subsidies also cause adverse effects.
D. The Panel Failed to Satisfy the Due Process Rights Required by Article 11 of the DSU When It Excluded Certain DOD RDT&E Subsidies From Its Adverse Effects Analysis Based on a Surprise Standard, and Without Allowing for Necessary Factual Development
235. The Panel acted inconsistently with the principle of due process required by
Article 11 of the DSU when it excluded from its adverse effects assessment the
effects of assistance instruments funded through the RDT&E programmes, other
than those funded pursuant to the ManTech and DUS&T programmes.299 The
Panel did so based on a standard that first appeared in the Final Panel Report,
without providing the Parties with an opportunity to comment on this standard, and
299 Panel Report, para. 7.1701.
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without requesting information on the facts that would demonstrate whether or not
that standard was satisfied.
1. Summary of the Facts and the Parties’ Arguments
236. As described above in Section III.C.1, the European Union argued that the transfer
of funds, and provision of goods and services, pursuant to all of the contracts with
Boeing issued pursuant to the DOD aeronautics R&D programmes at issue
constituted financial contributions within the meaning of Article 1.1(a)(1). While
the European Union maintained the position that purchases of services are not
excluded from the scope of the SCM Agreement, the European Union attempted to
demonstrate that, regardless of the Panel’s view on that threshold issue, none of the
DOD contracts at issue can properly be characterised as purchases of services.300
237. The United States advanced the contrary position – i.e., that all of the contracts
with Boeing pursuant to the DOD aeronautics R&D programmes at issue
constituted “purchases of services”,301 which according to the United States’ legal
theory implied that they were not “financial contributions” and therefore not
disciplined by the SCM Agreement. In responding to the Panel’s questions,302 both
the United States and the European Union maintained their positions that the type
of contract used by DOD303 makes no difference to the evaluation of whether or
not those contracts provided financial contributions to Boeing, within the meaning
of Article 1.1(a)(1) of the SCM Agreement.304 Likewise, there were no arguments
by either the United States or the European Union that the type of contract used by
DOD should be considered when evaluating whether the alleged subsidies cause
adverse effects and serious prejudice, within the meaning of Articles 5 and 6 of the
SCM Agreement.
300 Panel Report, para. 7.1154. 301 US FWS, paras. 90-97. 302 Panel Report, para. 7.1153, referencing questions 19, 20, 152, 154, 191, 192, 195, 197, and 321. 303 In a single footnote in its First Written Submission, the United States explained that some of the contracts at issue are “procurement contracts”, while others are “assistance instruments”, with the latter category including “cooperative agreements, technology investment agreements or other transactions”. Panel Report, para. 7.1153, citing US FWS, para. 91.
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238. Thus, throughout the dispute, both parties considered that the substance of the
EU’s challenges to the DOD RDT&E programmes, and the United States’ defence
to those challenges, would not, and should not, be impacted by the types of
contracts used by DOD to fund those programmes. As detailed in the next
subsection, however, the Panel surprised the parties with a novel theory of its own.
2. Summary of the Panel’s Findings
239. Despite the consistent position of both the European Union and the United States
that the type of contract at issue made no difference for the consideration of
whether the DOD aeronautics R&D programmes at issue provided financial
contributions within the meaning of Article 1.1(a)(1) of the SCM Agreement, the
Panel, on its own initiative, came to a different conclusion. Specifically, the Panel
found that the contract type was determinative of the question of whether the DOD
funding at issue constituted a proper purchase of services, and therefore a
“financial contribution”.305 The Panel explained as follows:
The evidence relating to DOD aeronautics R&D, reviewed above, leads to the conclusion that the work that Boeing performed under its aeronautics R&D {procurement} contracts with DOD was principally for the benefit and use of DOD, and is therefore properly characterized as a “purchase of services”. Therefore, the Panel finds that the payments and access to facilities provided to Boeing under DOD contracts are not financial contributions within the meaning of Article 1.1(a)(1). However, the evidence demonstrates that the work performed under its aeronautics R&D “assistance instruments” with DOD was principally for the benefit and use of Boeing itself. Accordingly, the Panel concludes that DOD’s R&D agreements (i.e. “assistance instruments”) with Boeing are not properly characterized as “purchases of services”. Therefore, the Panel finds that payments made to Boeing under these agreements are covered by Article 1.1(a)(1)(i) of the SCM Agreement as a direct transfer of funds. The Panel further finds that the access to DOD facilities provided to Boeing under these agreements constitutes a provision of goods or services within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.306
304 Panel Report, para. 7.1154. 305 Panel Report, para. 7.1171. 306 Panel Report, para. 7.1171.
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240. When considering whether the DOD RDT&E aeronautics programmes at issue
cause serious prejudice, the Panel recalled its earlier finding that only “assistance
instruments” provided pursuant to the challenged DOD RDT&E programmes are
subsidies, in contrast to “procurement contracts”, which constitute purchases of
services outside the scope of the SCM Agreement.307 The Panel acknowledged that
the European Union did not “distinguish{} between effects which are attributable
to procurement contracts under those programmes, and those which are attributable
to assistance instruments”.308
241. With respect to two programmes, however, the ManTech and DUS&T
Programmes, the Panel found that there was evidence of record that they “were
predominantly funded through cooperative agreements or other assistance
instruments”, and the Panel included these programmes in its subsequent adverse
effects analysis and findings.309 As for all other DOD RDT&E programmes –
including programmes that were known to include at least some assistance
instruments310 – the Panel excluded them from the scope of the measures
attributing to its adverse effects findings, reasoning as follows:
The Panel considers that there is insufficient evidence on the record that those other RDT&E programmes funded predominantly assistance instruments, as opposed to procurement contracts, or a mixture of assistance instruments and procurement contracts. The end result is that the European Communities has not advanced sufficient argument or evidence regarding the effects of assistance instruments funded through RTD&E programmes other than in relation to the ManTech and DUS&T programmes.311
242. Consequently, the analysis of the effects of the DOD RDT&E subsidies that
followed was limited to the ManTech and DUS&T programmes, despite the fact
307 Panel Report, para. 7.1701. 308 Panel Report, para. 7.1701. 309 Panel Report, para. 7.1701. 310 Panel Report, para. 6.124 (“{T}he Panel is aware that assistance instruments were funded through RDT&E programmes other than ManTech and DUS&T, and of evidence on the record linking the assistance instruments on record to the RDT&E programmes that funded them.”); see also EU Comments on the Interim Panel Report, Annex A (“Table Listing PE #s Providing Funding for Each DOD Assistance Instrument on the Record”). 311 Panel Report, para. 7.1701.
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that the Panel had found that assistance instruments funded through other DOD
programmes constituted subsidies.312
3. The Panel Failed to Make the Objective Assessment Required by Article 11, Due to Deficiencies in its Provision of Due Process
243. As described above, the Panel formulated its own theories on: (i) the types of DOD
RDT&E contracts that constitute “financial contributions”; and (ii) the distribution
of contract types within a challenged DOD RDT&E programme that must be
demonstrated before that challenged programme can be found to cause adverse
effects. While a panel is not prohibited from formulating an analysis that is
explicitly opposed by both parties, under Article 11 of the DSU, “a panel is also
duty bound to ensure that due process is respected”, particularly because “{d}ue
process is an obligation inherent in the WTO dispute settlement system”.313
244. In this dispute, the Panel failed to meet the standard required by Article 11 of the
DSU because it failed to provide the European Union with an opportunity to
respond to the Panel’s unexpected approach to its adverse effects analysis, or to
seek the necessary information from the United States. As the Appellate Body
stated in US – Gambling, “as part of their duties, under Article 11 of the DSU, to
make ‘an objective assessment of the matter’ before them, panels must ensure that
the due process rights of parties to a dispute are respected”.314 The Appellate Body
explained that a “panel may act inconsistently with this duty if it addresses a
defence that a responding party raised at such a late stage of the panel proceedings
that the complaining party had no meaningfully opportunity to respond”.315 In this
instance, it was not one of the parties that raised an argument at a late stage of the
proceedings, but rather the Panel, itself. And the effect was that the European
Union “had no meaningfully opportunity to respond” to a theory that eliminated all
but two DOD RDT&E Project Elements (“PEs”) from the scope of the R&D
subsidies found to cause adverse effects.
312 Panel Report, paras. 7.1709-7.1797. 313 Appellate Body Report, Chile – Price Band System, para. 176. 314 Appellate Body Report, US – Gambling, para. 273.
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245. As detailed further below, the Panel’s failure was particularly egregious and
harmful in view of the United States’ persistent failure to provide the DOD
RDT&E contracts necessary to conduct the type of analysis required by the Panel.
Indeed, the European Union had asked the Panel to impose adverse inferences in
view of the US non-cooperation in revealing information about the DOD RDT&E
programmes.316
246. It was not until the European Union received the final Panel Report that it had any
hint that the Panel was going to limit its findings of adverse effects to those DOD
programmes that “funded predominantly assistance instruments, as opposed to
procurement contracts, or a mixture of assistance instruments and procurement
contracts”.317 The Panel had not even articulated this approach in its interim
report.318 Instead, the interim report had stated that the Panel included the
ManTech and DUS&T programmes in its adverse effects analysis because they
were funded through cooperative agreements, but that the Panel was excluding all
other RDT&E programmes due to insufficient evidence about whether they funded
assistance instruments or procurement contracts.319 In response, the European
Union prepared a detailed comment drawing the Panel’s attention to the limited
evidence on record of assistance instruments linked to RDT&E programmes.320
Rather than expand its adverse effects analysis to encompass RDT&E programmes
funding at least one assistance instrument as the European Union had expected, the
Panel announced its new “predominan{ce}” standard in the Final Panel Report,
and continued to exclude all but the ManTech and DUS&T Programmes.
247. Given that the European Union and United States both rejected the proposition that
the subsidy or adverse effects analysis should be impacted by the types of contracts
315 Appellate Body Report, US – Gambling, para. 273 (emphasis added). 316 See, e.g., EU FWS, para. 763; EU Response to Panel Question 2(c). 317 Panel Report, para. 7.1701 (emphasis added). 318 This standard and the quoted language was added only after the Panel had reviewed the EU’s interim comments, and found the need for “further clarification” of the Panel’s findings on the effects of assistance instruments funded by projects other than ManTech and DUS&T. Panel Report, para. 6.124. 319 Interim Panel Report, para. 7.1701. 320 Comments of the European Union on the Panel’s Interim Report, p. 22 (comment on para. 7.1701) and Annex A thereof (“Table Listing PE #s Providing Funding for Each DOD Assistance Instrument on the Record”).
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funded by each DOD RDT&E PE, this finding was even more surprising. Having
decided on an approach to subsidisation and adverse effects dependent on contract-
type, the Panel should have provided the European Union with the opportunity to
explain how the evidence of record relates to that approach, or to point out what
further inquiries and evidence would be necessary for an objective assessment of
the matter.
248. This situation is similar to the one considered by the Appellate Body in US –
Continued Zeroing, where the panel had decided on its own initiative that it needed
a certain type of evidence in order to be satisfied that the complainant had met its
burden. In that dispute, the panel required the European Union to submit original
documents from the US Department of Commerce (“USDOC”) (from the time of
review) before it was willing to accept the EU’s contention that the United States
had made use of the simple zeroing practice in the periodic reviews at issue.321
The Appellate Body found that the panel had violated Article 11 of the DSU, in the
following terms:
{I}t is not enough for a panel to leave it to the parties to guess what proof it will require. Moreover, while a panel cannot make the case for a party, Article 11 requires a panel to test evidence with the parties, and to seek further information if necessary, in order to determine whether the evidence satisfies a party’s burden of proof. As the Appellate Body has explained “{a} panel may, in fact, need the information sought in order to evaluate evidence already before it” so as to make an objective assessment of whether the complaining party has established a prima facie case, regardless of whether a party has requested such information. In our view, the Panel required evidence that was authenticated as USDOC documents, but then did not take the necessary steps to elicit from the parties information that might, in the words of the Panel, “elucidate its understanding of the facts and issues in the dispute before it”.322
249. Just like the requirement for “evidence that was authenticated as USDOC
documents” in the US – Continued Zeroing dispute, the Panel in this dispute
required evidence that the RDT&E programmes funded “predominantly assistance
instruments, as opposed to procurement contracts, or a mixture of assistance
321 Appellate Body Report, US – Continued Zeroing, para. 347. 322 Appellate Body Report, US – Continued Zeroing, para. 347, quoting Appellate Body Report, Canada – Aircraft, para. 192 (internal footnote omitted).
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instruments and procurement contracts”, before it was willing to find that those
RDT&E programmes caused adverse effects.323 Yet, neither party was ever asked
to provide this information. In the words of the Appellate Body, it was “not
enough for a panel to leave it to the parties to guess what proof it will require”.324
Nor did the European Union in this dispute have any reason to believe that such
evidence of “predominance” of contract-type would be relevant, yet alone
determinative, for the Panel’s analysis of whether DOD RDT&E programmes (to
the extent they provide subsidies) would be found to cause adverse effects.
250. While the Panel did ask a series of questions about the distinction between
procurement contracts and assistance instruments, the US and EU answers were
always the same – i.e., in their view, this distinction made no difference for the
Panel’s analysis of the existence and effect of the subsidies stemming from the
challenged DOD RDT&E programmes.325
251. Moreover, it is essential to recall that the United States had refused to provide the
information that would have permitted a contract-by-contract analysis. The United
States failed to disclose all of the contracts funded by the challenged DOD
RDT&E PEs,326 and redacted key information (e.g., statements of work) in a
number of the contracts that were actually provided. It did so despite the existence
of two levels of confidentiality protection, including protection for Highly
Sensitive Business Information.327 As the European Union explained:
323 Panel Report, para. 7.1701. 324 Appellate Body Report, US – Continued Zeroing, para. 347, quoting Appellate Body Report, Canada – Aircraft, para. 192 (internal footnote omitted). 325 EU Response to Panel Questions 19 and 20(b), paras. 71-73, 74 (“the form of the instrument chosen ... is not decisive for the analysis of whether a transaction is properly characterised as a ‘purchase of services’”); US Response to Panel Questions 19 and 20(a), paras. 42-60; EU Comments on US Responses to Panel Questions 19 and 20(a), paras. 67-78. 326 EU Comment on US Response to Panel Question 212, paras. 256-257 (clarifying the EU critique of the “overly narrow US selection criteria” for identifying contracts to share with the Panel, and pointing to “evidence calling into question the completeness of the US process for identifying relevant contracts.”). 327 EU Response to Panel Question 190(b), para. 321.
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Unless the United States discloses all of the contracts (including “procurement contracts,” “cooperative agreements,” “technology investment agreements,” “other transactions,” etc.) and sub-contracts pursuant to which Boeing and McDonnell Douglas received funding and support under the 23 DOD RDT&E PEs at issue, including all relevant dollar figures, statements of work, indications and values of goods and services provided under the contracts, etc., there is no way to conduct an adequate bottom-up analysis of the financial contributions to Boeing’s LCA division from the DOD RDT&E Program.328
While the European Union consistently criticised this lack of cooperation with
respect to its ability to value the DOD RDT&E subsidies at issue, it did not
appreciate the further implications that would arise from an unexpected focus by
the Panel on contract-type in evaluating existence of subsidies and adverse effects.
As discussed above, the European Union did not know of the full extent of this
focus until it received the Final Panel Report, at a point where the record was
closed. Thus, to the extent the Panel was determined to focus on contract-type in
order to evaluate existence and effects of DOD RDT&E subsidies, it was even
more imperative that the Panel not let the parties speculate on what information it
would require. Instead, in this situation it was imperative for the Panel to request
the contract information from the United States that the European Union had been
seeking to enable it to make the assessment it considered necessary to resolve the
dispute.
252. Yet, despite the failure of the United States to provide the detailed contract-
specific and PE-specific information requested repeatedly by the European Union,
the Panel did not ask any questions that would enable it to determine the precise,
or even approximate, division of contract types within each of the challenged DOD
RDT&E programmes. Nonetheless, it was this division that served as the basis for
the Panel’s decision to exclude all but two of the challenged programmes. In
particular, the Panel found that only those DOD programmes that funded
“predominantly assistance instruments, as opposed to procurement contracts, or a
mixture of assistance instruments and procurement contracts”329 could be found to
328 EU SWS, para. 464. 329 Panel Report, para. 7.1701.
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cause adverse effects, without asking for a breakdown of contract-types funded by
each challenged programme.
253. The closest the Panel came to asking about the allocation of contract types within
particular DOD RDT&E PEs was the following, where the Panel asked for
confirmation of its erroneous assumption that each PE was exclusively funded by
the same contract type:
Question 321 Is the Panel correct in its understanding that some of the DoD RDT&E project elements at issue were funded through cooperative agreements or other “assistance” instruments, whereas others were funded through procurement contracts? If so, please clarify which project elements were funded through cooperative agreements or other “assistance” instruments, and which project elements were funded through procurement contracts.
254. In response, the European Union stated that the Panel’s understanding was
incorrect, but noted also that “as the information linking contracts and contract
types to PEs rest with the United States – information that the United States only
began to share, in limited part, at the late stage of responding to the Panel’s
questions following the second substantive meeting – it remains for the United
States to confirm the EC understanding”.330 The United States confirmed the EU’s
understanding (and the Panel’s misunderstanding), explaining that “program
elements typically do not, by their terms, provide funding through one type of
instrument” and noting that “{n}one of the 23 PEs challenged by the EC make
such specifications”.331
255. After receiving this clarification, the Panel decided that it would nevertheless find
adverse effects from only those DOD PEs “predominantly” made up of assistance
instruments. Yet, the Panel erred when it opted to make its decision based on the
evidence of record and failed to seek from the United States the necessary
information that the United States had failed to disclose on its own initiative. It
was imperative for the Panel to enquire as to which DOD RDT&E PEs would
satisfy the Panel’s test. In finding that it had evidence of only two DOD RDT&E
330 EU Response to Panel Question 321, para. 29. 331 US Response to Panel Question 321, paras. 20-21.
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PEs that were composed predominantly of assistance instruments, the Panel
referenced a few non-exhaustive examples submitted in passing by the United
States as part of its response to Question 321.332 In particular, the United States
referred to the ManTech and DUS&T programmes as examples of programmes
that tended to make use of assistance instruments.333
256. The United States never stated that these were the only two programmes that
tended to use assistance instruments, and the Panel never exercised its right to ask
pursuant to Article 13 of the DSU. And there was no reason for the parties to
know that the Panel, at any point, was considering whether to include or exclude
entire DOD RDT&E PEs on the basis of whether they predominantly used
assistance instruments.
257. Moreover, the Panel failed to draw reasonable inferences from instances of US
non-cooperation in disclosing the relevant contracts, as “an ordinary aspect of the
task of all panels to determine the relevant facts of any dispute involving any
covered agreement”,334 and as it could have pursuant to paragraphs 6 to 9 of
Annex V of the SCM Agreement.335
258. Consequently, the Panel failed to protect the due process rights of the European
Union, in violation of Article 11 of the DSU. The impact of these errors on the
EU’s due process rights was escalated by the United States’ continuing failure to
disclose the RDT&E contracts and details about the RDT&E project elements that
were exclusively in its possession. As demonstrated above, the European Union
“had no meaningful opportunity to respond”336 to the Panel’s novel theory, and the
Panel did not conduct a factual enquiry that would enable it to consider the
evidence necessary to reach a conclusion based on that theory. Just like the US –
Continuing Zeroing panel, this Panel “required evidence ..., but then did not take
332 Panel Report, para. 7.1701. 333 US Response to Panel Question 321, para. 21. 334 Appellate Body Report, Canada – Aircraft, at para. 202 (footnote omitted). 335 See supra Section II. 336 Appellate Body Report, US – Gambling, para. 273 (emphasis added).
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the necessary steps to elicit from the parties information that might ... elucidate its
understanding of the facts and issues in the dispute before it”.337
259. In summary, the Appellate Body should reverse the Panel’s finding that the DOD
RDT&E programmes (other than ManTech and DUS&T) do not cause the same
effects as the other aeronautics R&D subsidies,338 at least to the extent that those
remaining DOD RDT&E programmes are funded through assistance instruments.
This finding was reached in violation of Article 11 of the DSU. The European
Union does not, however, ask the Appellate Body to complete the analysis.339
VI. CONCLUSION
260. For the reasons set out herein, the European Union requests the Appellate Body to
reverse or modify the legal findings and conclusions appealed by the European
Union in this appellant submission, and complete the analysis where requested to
do so.
337 Appellate Body Report, US – Continued Zeroing, para. 347 (internal quotation marks omitted). 338 Panel Report, para. 7.1701. 339 The European Union recognises that the Panel did not undertake the necessary factual analysis (and could not do so given the United States’ failure to provide the required un-redacted documents). Accordingly, the European Union does not consider that there is a basis for the Appellate Body to complete the analysis. However, reversal of the Panel’s finding is important, as it avoids creating findings that might bind an arbiter in possible subsequent proceedings in this dispute.