World Trade

Organization

Australia - Subsidies Provided to Producers and 
Exporters of Automotive Leather

IX. Findings:  A. Preliminary issues and requests for preliminary rulings;  3. Limitation on Evidence and Arguments

9.30 We therefore deny Australia's request that we limit the evidence and arguments on which the United States may rely in this proceeding to those set forth in the request for consultations, WT/DS126/1.[191]

4. Information acquired in the context of consultations held pursuant to the first request (WT/DS106/1) and Exhibit 2 to the United States first submission

9.31 Australia also requests that we rule that information acquired in the context of consultations held pursuant to the first request by the United States, in document WT/DS106/1, including Exhibit 2 to the United States first submission, is not admissible before this Panel. Australia argues that those consultations, and any facts derived by the United States from those consultations, including Exhibit 2, and arguments based on those facts, are confidential to that panel process, and should therefore not be permitted in this panel process without Australia's agreement.

9.32 As Australia rightly notes, Article 4.6 of the DSU provides that "Consultations shall be confidential, and without prejudice to the rights of any Member in any further proceedings". However, in our view, this does not mean that facts and information developed in the course of consultations held pursuant to one request cannot be used in a panel proceeding concerning, as it does in this case, the same dispute, between the same parties, conducted pursuant to another, different request.

9.33 We recall that Article 11 of the DSU obliges a panel to conduct "an objective assessment of the matter before it". As discussed earlier, any evidentiary rulings we make must be consistent with this obligation. The panel in Korea – Taxes on Alcoholic Beverages recently confirmed the right of a party to a WTO dispute to use information learned in consultations in panel proceedings. After noting the requirement of confidentiality in Article 4.6 of the DSU, which the panel viewed as "essential if the parties are to be free to engage in meaningful consultations", the panel continued:

"However, it is our view that this confidentiality extends only as far as requiring the parties to the consultations not to disclose any information obtained in the consultations to any parties that were not involved in those consultations. We are mindful of the fact that the panel proceedings between the parties remain confidential, and parties do not thereby breach any confidentiality by disclosing in those proceedings information acquired during the consultations. Indeed, in our view, the very essence of consultations is to enable the parties [to] gather correct and relevant information, for purposes of assisting them in arriving at a mutually agreed solution, or failing which, to assist them in presenting accurate information to the panel. It would seriously hamper the dispute settlement process if the information acquired during consultations could not be subsequently used by any party in the ensuing proceedings".[192]

9.34 Given that, in this case, the parties and the dispute are the same, no panel was actually composed or considered the dispute in the first-requested proceeding, and there are no third parties involved in either proceeding who might have learned information in the course of consultations, we cannot see any reason to exclude the United States Exhibit 2 from our consideration, merely because it was developed in the course of the consultations held pursuant to the first request.[193] Australia has failed to specify what other, if any, facts might have been derived by the United States from the earlier consultations, and so there is no basis for us to exclude any such facts.

9.35 We therefore deny Australia's request that we rule that information acquired in the context of consultations held pursuant to the first request by the United States, in document WT/DS106/1, including Exhibit 2 to the United States first submission, is not admissible before this Panel.

1. What are the measures before the Panel?

9.36 Australia argues that the measures before us are the A$25 million preferential loan to Howe and the first two payments made to Howe pursuant to the grant contract. Thus, in Australia's view, neither the third payment to Howe, made in June 1998, nor the grant contract itself are "measures" encompassed by the request for establishment, and are consequently not before us. The United States, on the other hand, asserts that its request for establishment in this dispute explicitly identifies the measures before the Panel as being the loan contract and the grant contract, including any and all possible disbursements under the latter contract. In the alternative, citing Japan – Film[194], the United States asserts that if the Panel were to conclude that either the grant contract or the third payment thereunder was not explicitly described in the request for establishment, these were clearly included in the request for establishment, as subsidiary or closely related to the specifically identified measures.

9.37 Australia attempts to draw a distinction, in particular, between the grant contract and the three payments made thereunder.[195] The issue is significant because the final payment under the grant contract was not made until after the Panel was established, and thus, in Australia's view, falls outside the Panel's terms of reference and cannot be considered by the Panel. Australia maintains that the Panel will have to consider the consistency with the SCM Agreement of each of the grant payments, and of the loan, separately, and could find that one or more were consistent, and the other(s) were not.

9.38 In our view, the distinction that Australia invites us to draw between the grant contract and the grant payments is artificial as regards the determination of what measures are before the Panel. The document setting out the "matter" before the Panel, and therefore governing the Panel's terms of reference, is the United States' request for establishment of a panel. In this document, the United States states:

"The Government of Australia has provided subsidies [to Howe]. The United States understands that these subsidies include the provision by the Government of Australia to Howe of grants worth as much as A$30 million and a A$25 million loan on preferential and non-commercial terms”. [196]

9.39 The ordinary meaning of the term “provision” is “the act or an instance of providing".[197] The act or instance of providing the grant payments in this case was the grant contract, which established the conditions for the disbursement of the grant funds. Thus, the language of the request for establishment specifically includes the grant contract. Moreover, the ordinary meaning of the term "grant" means "the process of granting or a thing granted",[198] and therefore includes both the government’s commitment to make payments (that is, the grant contract), and the grant payments themselves, including all possible disbursements, whether past or future.

9.40 Thus, we conclude that the specific words of the request for establishment, which sets the terms of reference for this panel, cover the loan contract (which encompasses the single disbursement of the loan funds), the grant contract, and the individual payments made under the latter contract.[199]

9.41 Apart from the specific language used in the panel request itself, other considerations also support our conclusion that the measures before the Panel are not limited to the specific payments made under the grant contract prior to the request for establishment of this Panel, but include the contract itself and any payments thereunder. The grant contract is the specific legal instrument that lays out the terms and conditions for the individual payments to be made thereunder, and which therefore governs and defines the nature of those payments. The grant contract commits the government of Australia to make certain payments to Howe, provided the conditions established in the contract are satisfied. In our view, we have before us all the necessary information to rule on all the payments provided for in the grant contract.

9.42 Based on the foregoing, we do not consider it necessary to draw the distinction that Australia proposes between the grant contract and the grant payments for the purpose of defining the measures that are before the Panel, and conclude that the measures before us are the loan contract, the grant contract and the individual payments under the latter contract.

2. Are the measures before the panel "subsidies" within the meaning of Article 1 of the SCM Agreement?

9.43 The parties are in agreement that the loan is a subsidy within the meaning of Article 1 of the SCM Agreement. The parties are also in agreement that each of the three payments under the grant contract is also a subsidy within the meaning of Article 1 of the SCM Agreement. However, the parties are not in agreement whether the grant contract itself is a subsidy within the meaning of Article 1 of the SCM Agreement. Therefore, we turn now to that question.

9.44 The United States argues that the grant contract is a "financial contribution" that confers a "benefit" and is, therefore, a subsidy under Article 1 of the SCM Agreement. The United States asserts that Howe has been given a benefit in the form of government funds that it need not repay. Australia, on the other hand, asserts that the United States has not demonstrated that the grant contract is a subsidy, although, as noted above, it acknowledges that the payments authorized by that contract are subsidies, i.e. "financial contributions" that confer a "benefit".

9.45 This issue is closely linked to our discussion above concerning what are the "measures" that are before the Panel. Australia does not dispute that the grant payments are, themselves, subsidies. The terms and conditions for the disbursement of the payments are provided for in the grant contract. In our view, each payment can be evaluated individually to determine whether it is a prohibited export subsidy, but only by reference to the criteria for disbursement set out in the grant contract. Thus, we need not decide whether or not the grant contract is a subsidy in order to evaluate the individual payments. We have determined above that, based on the specific language of the request for establishment, the grant contract is a measure that is before us in this case. The evaluation of the consistency of challenged elements of the grant contract must take into account what actually occurs, particularly in a case where the allegation is that the subsidies are contingent in fact on export performance. Therefore, we need not determine whether the grant contract is itself a subsidy in order to determine whether the payments made pursuant to that contract, which Australia acknowledges are subsidies, are prohibited export subsidies.

9.46  Article 3.1 of the SCM Agreement provides:

"3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article1, shall be prohibited: 

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

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

Article 3.2 of the SCM Agreement reinforces this prohibition, providing:

"3.2 A Member shall neither grant nor maintain subsidies referred to in paragraph1".

(a) contingent in law

9.47 The United States argued, in its first written submission to the Panel, that, becauseHowe was granted the new aid package as a specific replacement for the de jure subsidies of the ICS and EFS export schemes, the new subsidies are also de jure export subsidies. However, the United States did not pursue this line of argument in subsequent submissions, after it had received copies of the grant and loan contracts. Australia asserts that the United States put forward no evidence that any of the measures is contingent “in law” upon export performance, and moreover that this issue is not properly before the Panel as there is no claim regarding the question of "contingent in law" in the request for establishment.

9.48 In our view, the Panel's terms of reference include the issue of whether the subsidies in question are contingent "in law" on export performance. The United States panel request cites both the "in law" and "in fact" aspects of Article 3.1(a) of the SCM Agreement, and the United States claim is that the subsidies are inconsistent with Article 3.1(a). How those subsidies are inconsistent, whether because they are contingent in law or in fact upon export performance, is an aspect of the arguments put forward by the United States in support of its claim.

9.49 However, as the United States has not pressed its arguments in this regard, we consider that it has abandoned them. We therefore do not reach any conclusions on this issue, and, turn now to the question whether the subsidies in question are contingent in fact upon export performance.

(b) contingent in fact

9.50 The United States argues that the measures are subsidies contingent in fact on Howe's export performance, as they are tied to actual or anticipated exportation or export earnings. The United States favours a broad approach to the "contingent … in fact" standard in Article 3.1(a), and emphasizes that this standard must be approached on a case-by-case basis, taking into account the structure and design of the measure at stake and the specific facts involved. In the United States view, the distinction between the "in law" and "in fact" standard is that "in law" subsidies are explicitly contingent, and "in fact" subsidies are implicitly contingent, upon export performance. Moreover, footnote 4 of the SCM Agreement does not preclude consideration of the fact of exportation or the level of exports; it simply proscribes finding a prohibited export subsidy basedsolely upon the level of exports. In fact, the explicit reference to level of exports in Article 3, in the United States view, indicates that the drafters specifically contemplated that the level of exports would be taken into account in determining whether a “contingent in fact” export subsidy exists. The United States argues that a contingent-in-fact export subsidy will exist when actual or anticipated exportation is merely one of several potential criteria influencing the bestowal of benefits. Thus, if the totality of the circumstances reveal that these benefits are designed to promote exports, then such benefits fall within the broad definition of Article 3.1(a). The United States urges us to look to the assumptions underlying the government's decision to grant the subsidy in order to determine whether the "in fact" standard has been met.

9.51 Australia favours a narrow approach to the "contingent … in fact" test in Article 3.1(a).[200] In Australia's view, the contingent in fact standard is defined and limited by footnote 4 of the SCM Agreement. The distinction between "contingent in law" and "contingent in fact" is intended to distinguish between the situation where something is set out explicitly in legislation or regulation ("in law") and where there is some non-legislative, administrative arrangement whereby the granting of the subsidy is actually tied to export performance ("in fact"). The purpose of the “in fact” provision is to provide a way of dealing with the situation where the administration of a subsidy programme allows the disbursement of funds to favour exports, i.e. to provide subsidies to firms tied to export performance. Australia urges us to reject a test based on some "undefined level of exports" for determining whether a subsidy is a prohibited export subsidy. The facts must demonstrate that the granting of the subsidy is in fact tied to actual or anticipated exportation or export earnings. In other words, "the complainant must show that the granting of the subsidy is in fact tied in its application to export performance and so favours export over domestic sales".[201] In this regard, Australia argues that WTO rules need to provide clear guidance to Members, and the United States position would leave Member unable to plan domestic support policies in a way that would avoid running afoul of the prohibitions of Article 3.1(a).

9.52 The United States asserts that a subsidy must be found to be "in fact" contingent when actual or anticipated exportation is merely one of several criteria influencing the bestowal of benefits.[202] Thus, the United States asserts that if the totality of the circumstances reveals that the subsidy in question is designed to promote exports, then that subsidy comes within the ambit of Article 3.1(a), and is prohibited.[203] Australia argues, on the other hand, that in order to demonstrate that the granting of the subsidy is in fact tied in its application to export performance, it must be determined that the grant (or maintenance) of the subsidy favours export over domestic sales.[204]

9.53 The essential difference between the parties relates to the nature and scope of the relationship or connection that must exist between a subsidy and export performance in order for the subsidy to be "in fact" contingent upon export performance and, thus, a prohibited export subsidy within the meaning of Article 3.1(a) of the SCM Agreement. The resolution of this issue hinges upon the interpretation and application of the term "contingent … in fact … upon export performance" in Article 3.1(a) of the SCM Agreement.

9.54 Pursuant to Article 3.2 of the DSU, we must interpret Article 3.1(a) of the SCM Agreement "in accordance with customary rules of interpretation of public international law". According to established WTO practice, these rules are found in Article 31 of the Vienna Convention. Paragraph 1 of this Article states:

"A treaty shall be interpreted in good faith and 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".

9.55 An inquiry into the meaning of the term "contingent … in fact" in Article 3.1(a) of the SCM Agreement must, therefore, begin with an examination of the ordinary meaning of the word "contingent". The ordinary meaning of "contingent" is "dependent for its existence on something else", "conditional; dependent on, upon".[205] The text of Article 3.1(a) also includes footnote 4, which states that the standard of "in fact" contingency is met if the facts demonstrate that the subsidy is "in fact tied to actual or anticipated exportation or export earnings". The ordinary meaning of "tied to" is "restrain or constrain to or from an action; limit or restrict as to behaviour, location, conditions, etc.".[206] Both of the terms used -- "contingent … in fact" and "in fact tied to" – suggest an interpretation that requires a close connection between the grant or maintenance of a subsidy and export performance.

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

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

(c) analysis of the facts

9.58 The United States asserts that the status of the loan contract, the grant contract, and the grant payments is inextricably linked, and that the factual circumstances demonstrate that each of them is a subsidy contingent in fact upon export performance. In the United States view, the following facts demonstrate that the subsidies in question are prohibited export subsidies: the Australian government was aware that Howe was exporting 90 per cent of its sales at the time the government of Australia entered into the grant and loan contracts; the replacement package was specifically and explicitly designed to compensate Howe for its exclusion from two "in law" export subsidy programmes (the ICS and EFS programmes) that had helped transform Howe into a major exporter; the recognized purpose of the replacement package by both the Australian government and Howe was export promotion; Howe had aggressive export plans; Howe must significantly increase its sales to receive the full A$30 million grant for which it is eligible; however, the Australian leather market is too small to absorb Howe's current -- much less, its increased -- production; the only way that Howe could increase its sales and utilise the expanded production capacity that it has acquired as a result of the subsidies in question is to significantly increase its exports; and the subsidies in question were provided only to Howe, which exports virtually all of its production, and not to any leather manufacturer that supplies the domestic market.

9.59 Australia emphasizes that the measures before the Panel are individual measures, and each must be individually considered in determining whether it is consistent with the requirements of the SCM Agreement. With regard to the facts relied on by the United States, Australia asserts that the nature of prior measures (the ICS and EFS programmes) is not relevant and, in any case, these measures are outside the Panel's terms of reference; an assessment of the imputed objectives of governments is not the basis on which a rules-based system such as the WTO is supposed to operate; and the structure of the loan and the grant demonstrate that they are not linked in any way to Howe's export performance. With respect to the loan, Australia argues that the level of Howe's production and sales is irrelevant so long as the company pays the Government any monies owing. Precisely how Howe and ALH finally repay the loan is a matter solely for the borrowers themselves. The loan contract determines the interest rate payable and the schedule for repayments of principal. It does not prescribe how Howe and ALH will fund the repayments or from where it will source these funds. Australia notes that the ability of Howe/ALH to repay does not rely solely on the domestic or export markets for automotive leather. These are currently important elements of Howe/ALH's operations, but it is impossible to say what the markets or the product mix will be when the major repayments are due.

9.60 With respect to the grant payments, Australia argues that only the first two payments made under the grant contract are before the Panel. Because these monies are not recoverable regardless of the actual level of sales by Howe, they cannot be considered to be in fact tied to exports. In Australia's view, they are not linked to future exports, let alone satisfying what it considers the stringent requirements for the “in fact” condition in Article 3.1(a). Australia asserts that, in any event, the first payment of A$5 million was an automatic payment made following the signing of the grant contract, and was not tied to anything, let alone export performance. The second payment of A$12.5 million was made on the basis that the company had satisfied its investment and sales targets on a best endeavours basis, as well as normal due diligence considerations. There is no way in which the company could have obtained more money regardless of how much it invested or sold. Assuming the Panel considers the third grant payment, Australia asserts that it was made on the basis of an assessment that the company had performed satisfactorily on a best endeavours basis in respect of a combination of investment and production in 1997/98, as well as normal due diligence considerations. Again, Australia states that the government cannot take back that money, provided that Howe continues in business. The company could expand or reduce sales and the status of the payments under the grant contract would be unchanged. The money is gone and there is no connection with future sales, including sales for export.

9.61 We agree with Australia that we must consider the challenged measures individually to determine their consistency with the SCM Agreement. Merely because all the challenged subsidies form part of a single "package" of assistance to Howe does not mean that all of them are perforce either prohibited export subsidies or not. In this regard, we note that, in our view, it is perfectly possible for a Member to construct a package of subsidies to aid domestic industry, of which some are consistent with the SCM Agreement, and others are not. It is, therefore, necessary that each subsidy be evaluated on its own terms in deciding whether it is consistent with the SCM Agreement.

(i) the payments under the grant contract

9.62 The grant contract provides for three subsidy payments up to a maximum of A$30 million. The contract is between the government of Australia and Howe and its parent company, ALH. However, the terms of the grant contract are specifically directed at Howe, and more particularly at Howe's automotive leather operations. The contract provides for an aggregate sales performance target for the period 1 April 1997 – 31 December 2000, broken down into four interim sales targets.[207] The contract provides for the funds to be disbursed in three payments during the first two years of the contract term.[208] The first payment of A$5 million was made upon the signing of the contract between Howe/ALH and the Australian government. The second and third payments of up to A$12.5 million each were to be made on specific dates in 1997 and 1998 upon receipt of a report from Howe showing performance against the sales performance and investment targets for the years ending 30 June 1997 and 30 June 1998, respectively, satisfactory to the Department of Industry, Science and Tourism. Howe is obliged by the contract to use its "best endeavours" to satisfy the performance targets set forth in the contract.

9.63 Australia has acknowledged that it is unlikely that the grant contract would have been entered into in a circumstance other than the removal of automotive leather from the EFS and ICS programmes. In this regard, we note Australia's argument that it is "simplistic" to conclude that this was the sole reason for providing the challenged assistance to Howe, pointing to, inter alia, the government's concern for job retention in the region in the absence of support for the company. However, we recall that Article 3.1(a) recognizes that there may be multiple conditions for the grant or maintenance of a subsidy, and explicitly prohibits a subsidy if one of the conditions is that the subsidy is contingent in fact upon export performance. In taking into consideration the fact that the government of Australia was providing assistance to Howe directly following the removal of automotive leather from eligibility for benefits under the EFS and ICS programmes, we do not make any legal conclusions about those programmes. The ICS and EFS themselves are not measures that fall within our terms of reference, and we need not draw any conclusions about whether they are prohibited export subsidies under the provisions of Article 3 of the SCM Agreement.

9.64 Australia argues that the nature of the ICS and EFS programmes cannot be considered in analysing the consistency with the SCM Agreement of the challenged subsidies, including the grant payments, asserting that it must be possible for a government to provide subsidies to domestic firms without such assistance being automatically deemed a prohibited export subsidy even assuming the programme those firms previously benefitted from was a prohibited subsidy. WTO Members cannot be prevented from replacing purported prohibited export subsidies with other measures that are not prohibited, thereby bringing themselves into compliance with their multilateral obligations under the SCM Agreement. We agree that, even assuming the ICS and EFS were prohibited export subsidies (a question on which we draw no conclusions), this would not, ipso facto, mean that any subsequent subsidy granted to a company that had previously benefited from those programmes would be a prohibited export subsidy.

9.65 Nevertheless, in this case, based upon evidence concerning those programmes submitted by the United States, the facts of which are undisputed by Australia, we observe that both the ICS and EFS programmes give incentives to Australian companies to export certain products. Howe earned significant benefits from its exports of automotive leather pursuant to those programmes. Automotive leather was removed from eligibility under those programmes, and the government of Australia entered into the loan contract and the grant contract providing financial assistance at least in part to tide Howe over after it had lost eligibility for benefits related to automotive leather under these programmes.[209] Public reports at the time indicated that the amount of the assistance provided for was that deemed necessary to ensure that Howe continued in business.lass [210]

9.66 At the time the grant contract was concluded, Howe exported a significant portion of its production, and the Australian government was aware of this. The parties dispute the level of Howe's exports in relation to domestic sales. However, it is undisputed that Howe's exports had increased significantly during the period it benefitted from the ICS and EFS programmes, and that at the time automotive leather was removed from eligibility under those programmes, the overwhelming majority of Howe's sales were for export. The government of Australia was concerned that Howe remain in business, and determined to give it a financial assistance package in order to ensure that it did so. [211] In these circumstances, it is clear to us that continued exports, that is, anticipated exportation, was an important condition in the provision of that assistance. We note, as discussed above, that footnote4 of the SCM Agreement does not preclude consideration of the fact that a company exports, or of the level of its exports, in a prohibited subsidy examination. Rather, it merely proscribes finding a prohibited export subsidy based solely upon the fact that a subsidy is granted to a company which exports. While the fact of exportation cannot be the sole determinative fact in the evaluation, in our view, it is clearly a relevant factor in this case, as is the level of exports.

9.67 Moreover, it is clear that the Australian market for automotive leather is too small to absorb Howe's production, much less any expanded production that might result from the financial benefits accruing from the grant payments, and the required capital investments, which were to be specifically for automotive leather operations.[212] Therefore, we conclude that, in order to expand its sales in a manner that would enable it to reach the sales performance targets (interim targets and the aggregate target) set out in the grant contract, Howe would, of necessity, have to continue and probably increase exports. At the time the contract was entered into, the government of Australia was aware of this necessity, and thus anticipated continued and possibly increased exports by Howe. In our view, these facts effectively transform the sales performance targets into export performance targets. We thus consider that Howe's anticipated export performance was one of the conditions for the grant of the subsidies. Australia argues that this consideration would lead to a result that would penalize small economies, where firms are often dependent on exports in order to achieve rational economic levels of production. Nevertheless, in the specific circumstances of this case, we find this consideration compelling evidence of the close tie between anticipated exportation and the grant of the subsidies.

9.68 We note that confidential business information provided by Australia indicates that, in fact, the proportion of Howe's sales going to export has not increased. However, we must make our determination on the facts that existed at the time the contract establishing the conditions for the grant payments was entered into. Thus, the fact that the anticipated exports may not have come to pass in the volumes anticipated does not affect our conclusion. Moreover, we note that confidential business information provided by Australia strongly suggests to us that the expectation of continued and increasing exports was an element in the assessment of Howe's compliance with the terms of the grant contract.

9.69 Australia insists that the fact that the grant contract was provided only to Howe, which exports a large proportion of its production, and not to any leather manufacturer that supplies the domestic market is irrelevant, since Howe was the only company affected by the removal of automotive leather from eligibility under the ICS and EFS programmes. Australia has confirmed that Howe is the only dedicated producer and exporter of automotive leather in Australia.[213] Australia specifically stated, in response to the Panel's question, that aside from the grant and loan to Howe, Australia does not have any subsidy specific to the Australian leather industry.[214] In our view, the fact that the government of Australia provided the subsidies in question only to Howe, the only exporter of automotive leather, is relevant, and supports the conclusion that one of the conditions for the subsidy was anticipated exportation and/or export earnings.

9.70 Australia argues that, because the grant funds cannot be taken back by the government once the payments are made, and because a change in Howe's level of exports would not affect the disbursement of the funds, the grant payments are not "in fact" contingent upon export performance. However, as noted above, in our view the pertinent consideration is the facts at the time the conditions for the grant payments were established, and not possible subsequent developments.

9.71 All of the facts, weighed together, lead us to conclude that the three subsidy payments under the grant contract are in fact tied to Howe's actual or anticipated exportation or export earnings.[215] These payments are conditioned on Howe's agreement to satisfy, on the basis of best endeavours, the aggregate performance targets. The second and third grant payments are, in addition, explicitly conditioned on satisfaction, on a best endeavours basis, of interim sales performance targets. Given the export-dependent nature of Howe's business, and the size of the Australian market, these sales performance targets are, in our view, effectively, export performance targets. The sales performance targets set out in the grant contract, in conjunction with the other facts enumerated above, therefore lead us to the conclusion that the grant of the subsidies was conditioned on anticipated exportation.

9.72 We therefore conclude that the payments under the grant contract are subsidies "contingent … in fact" on export performance in violation of Article 3.1(a) of the SCM Agreement.

ii) the loan contract

9.73 The loan contract provides for a fifteen-year loan of $A25 million by the Government of Australia to Howe/ALH. For the first five-year period of this loan, Howe/ALH is not required to pay principal or interest. After the expiration of this five-year period, interest on the loan is to be based on the rate for Australian Commonwealth Bonds with a ten-year maturity, plus two percentage points. The loan is secured by a second lien over the assets and undertakings of ALH.

9.74 There is nothing in the loan contract that explicitly links the loan to Howe's production or sales, and therefore nothing in its terms, the design of the loan payment, or the repayment provisions that would tie the loan directly to export performance, or even sales performance. Australia argues that under the loan contract, the level of production and sales is irrelevant so long as the company pays the government any monies owing.[216] The United States responds that the "viability of the loan is necessarily contingent upon Howe's export earnings"[217] given that the Australian government has acknowledged that the financial assistance provided for in the loan and grant contracts is the minimum amount necessary to ensure the viability of Howe, and that Howe has no choice but to export in order to maintain its production and sales levels in order to remain in business and pay off the loan. The United States asserts that, "[i]f Howe does not export, the Australian government will not be repaid".[218]

 10.1 In conclusion, we find that:

(a) The loan from the Australian government to Howe/ALH is not a subsidy which is contingent upon export performance within the meaning of Article 3.1(a) of the SCM Agreement;

(b) The payments under the grant contract are subsidies within the meaning of Article 1 of the SCM Agreement which are contingent upon export performance within the meaning of Article3.1(a) of that Agreement.

10.2 Pursuant to Article 3.8 of the DSU, the finding in paragraph 10.1(b) also constitutes a case of prima facie nullification or impairment of benefits accruing to the United States under the SCM Agreement, which Australia has not rebutted.

10.3 Accordingly, pursuant to Article 4.7 of the SCM Agreement, we recommend that Australia withdraw the subsidies identified in paragraph 10.1(b) above without delay.

10.4 Article 4.7 further provides that "the panel shall specify in its recommendation the time-period within which the measure [i.e., the measure found to be a prohibited subsidy] must be withdrawn". This is one of the first cases involving export subsidies to have been brought before the WTO, and there is consequently no experience or prior practice as to what factors should be considered in establishing the time-period within which the measure must be withdrawn. Presumably, the nature of the measures and issues regarding implementation might be relevant.

10.5 Australia has argued that, since the "normal" period of time for implementation of panel decisions under the DSU is fifteen months, and time periods in export subsidy disputes are halved pursuant to Article 4.12, a period of seven and one-half months would be appropriate.

10.6 Even assuming Australia is correct in its consideration of fifteen months as the "normal" period of time for implementation of panel decisions, a question we do not reach, we do not agree that one-half of that period is appropriate in a dispute involving export subsidies. In the first place, Article4.12 specifically provides that "except for time periods specifically prescribed in this Article" the time periods otherwise provided for in the DSU should be halved in export subsidy disputes. Article 4.7, which provides that the subsidy shall be withdrawn "without delay", and that the panel shall specify the time-period for withdrawal of the measure in its recommendation, in our view establishes that the time-period for withdrawal is "specifically prescribed in this Article", that is, in Article 4 of the SCM Agreement itself. Moreover, we do not, as a factual matter, believe that a period of seven and one-half months can reasonably be described as corresponding to the requirement that the measure must be withdrawn "without delay".

10.7 In light of the nature of the measures, we consider that a 90-day period would be appropriate for the withdrawal of the measures. We therefore recommend that the measures be withdrawn within 90days.