Australia -
Subsidies Provided to Producers and
Exporters of Automotive Leather
I. INTRODUCTION
1.1
On 4 May 1998, the United States requested consultations with Australia
under Articles 1 and 4 of the Understanding on Rules and Procedures Governing
the Settlement of Disputes ("DSU") and Articles 4.1 and 30 (to
the extent that it incorporates by reference ArticleXXIII:1 of the General
Agreement on Tariffs and Trade1994) of the Agreement on Subsidies
and Countervailing Measures (the "SCM Agreement") regarding allegedly
prohibited subsidies provided to an Australian producer and exporter of
automotive leather, Howe and Company Proprietary Ltd. ("Howe"), or any
of its affiliated and/or parent companies (WT/DS126/1).
1.2
The United States and Australia met on 4 June 1998.
1.3
On 11 June 1998, pursuant to Article 4.4 of the SCM Agreement and Article
1.2 of the DSU, the United States requested the immediate establishment of a
panel to examine the consistency of the subsidies provided to Howe with
Australia's obligations under the Marrakesh Agreement Establishing the World
Trade Organization (the "WTO Agreement"), in particular those
contained in the SCM Agreement (WT/DS126/2).
1.4
At the meeting of the Dispute Settlement Body ("DSB") on 22
June 1998, the DSB established a panel in accordance with Article 4.4 of the SCM
Agreement and Article 6 of the DSU with standard terms of reference.
The terms of reference were:
To
examine, in the light of the relevant provisions of the covered agreements cited
by the United States in document WT/DS126/2, the matter referred to the DSB by
the UnitedStates in that document and to make such findings as will assist
the DSB in making the recommendations or in giving the rulings provided for in
those agreements. (WT/DS126/4)
1.5
On 27 October 1998, the United States requested the Director-General to
determine the composition of the Panel, pursuant to paragraph 7 of Article 8 of
the DSU. On 2 November 1998, the Director-General composed the Panel
as follows:
Chairperson: H. E. Carmen Luz Guarda
Members: Mr. Jean-François Bellis
Mr. Wieslaw Karsz
1.6
The Panel met with the parties on 9-10 December 1998 and 13-14 January
1999.
1.7
The Panel submitted its interim report to the parties on 8 March 1999.
On 15 March 1999, Australia and the United States submitted written
requests for the Panel to review precise aspects of the interim report.
The Panel submitted its final report to the parties on 23 March 1999.
II.
FACTUAL ASPECTS
2.1
This dispute concerns certain assistance provided by the government of
Australia to Howe, a wholly-owned subsidiary of Australian Leather Upholstery
Pty. Ltd., which is owned by Australian Leather Holdings, Limited ("ALH"),
part of which is owned by Schaffer Corporation, Ltd.
Howe is the only dedicated producer and exporter of automotive leather in
Australia. Automotive leather is
primarily used for seat coverings and other interior components of automobiles,
such as head and armrests, centre consoles and door trim.
2.2
On 9 March 1997, the Australian government signed two contracts with ALH
and Howe: a grant contract (the "grant contract") and a loan
contract (the "loan contract") providing for funding for an assistance
package. The Australian Department
of State of Industry, Science and Resources
is the governmental authority responsible for administering the contracts
and disbursing the payments thereunder.
2.3
The grant contract provides for a series of three grant payments
totalling up to a maximum of A$30 million.
The aggregate of payments under the grant contract was capped at A$30
million to limit the overall level of ad
valorem subsidization of sales over the period to mid-2000 to approximately
5 percent.
The payments were scheduled to occur in three instalments:
the first payment of A$5 million was to paid upon conclusion of the grant
contract; the second payment of up
to A$12.5 million was to be paid in July 1997 on the basis of Howe's performance
against the performance targets set out in the grant contract for the period 1
April 1997 to 30 June 1997, as well as due diligence considerations such as
whether the company was functioning properly;
the third payment of up to A$12.5 million was to be paid in July 1998 on
the basis of Howe's performance against the performance targets set out in the
grant contract for the period 1 July 1997 to 30 June 1998, as well as due
diligence considerations such as whether the company was functioning properly.
The performance targets consisted of sales targets and capital
expenditure targets for certain specified periods: 1 April – 30 June 1997; 1 July 1997 - 30 June 1998; 1 July
1998 – 30 June 1999; and 1 July 1999 – 30 June 2000.
Under the grant contract, Howe was required to use its best endeavours to
achieve the performance targets. With
regard to capital expenditure under the grant contract, the aggregate target for
approved capital expenditure was $22.8 million
over the four-year period in question.
The maximum amount of A$30 million was essentially paid out in the
three grant payments, in accordance with the grant contract.
2.4
The loan contract provides for a fifteen-year loan of $A25 million by the
government of Australia to ALH/Howe. For
the first five-year period of this loan, ALH/Howe 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.
2.5
These arrangements were put in place by the
Australian government in compensation
for the excision, as of 1 April 1997, of automotive leather from the
Australian Textiles, Clothing and Footwear Import Credit Scheme
(the
"ICS") and the Export Facilitation Scheme for Automotive Products
(the "EFS") pursuant to a settlement agreement with the United
States reached in November 1996. This
excision was enacted on 26 March 1997 by Australian Customs Notice No. 97/29.
Automotive leather will be part of the general textile, industry and
clothing arrangements due to come into force in Australia on 1 July 2000.
III.
PREVIOUS WTO DISPUTE SETTLEMENT PROCEDURES BETWEEN THE PARTIES WITH RESPECT TO
THE SAME OR RELATED MATTERS
3.1
On 7 October 1996, the United States requested consultations with
Australia concerning subsidies available to leather under the ICS and any other
subsidies to leather granted or maintained in Australia which were prohibited
under Article3 of the SCM Agreement.
Following one round of consultations, the United States and
Australia reached a settlement on 24 November 1996.
This settlement was announced on 25 November 1996.
Under the terms of settlement, the government of Australia would excise
automotive leather from eligibility under the ICS, as well as under the EFS, by
1 April 1997. On 26 March 1997,
Australian Customs Notice No. 97/29 excised automotive leather from the ICS and
EFS, effective 1 April 1997.
3.2
On 10 November 1997, the United States requested consultations regarding
"prohibited subsidies provided to Australian producers and exporters of
automotive leather, including subsidies provided to Howe Leather" which the
United States understood to "include the provision by the government of
Australia of an $A25 million loan on preferential and non-commercial terms and
grants amounting potentially to another $A30 million."
Consultations held between the United States and Australia on 16
December 1997 failed to resolve the dispute.
At its meeting of 22 January 1998, the DSB established a panel in
accordance with Article 4.4 of the SCM Agreement and Article 6 of the DSU
pursuant to the request made by the United States on 9 January 1998.
That panel was never composed.
IV. PROCEDURES ADOPTED BY THE PANEL GOVERNING "BUSINESS CONFIDENTIAL
INFORMATION"
4.1
Due to concern expressed by one of the parties concerning the submission
to the Panel of sensitive business information, the Panel adopted
"Procedures Governing Business Confidential Information" at its first
meeting with the parties. Pursuant
to these procedures, only "approved persons" – i.e. a Panel member,
representative, Secretariat employee or a member of the Permanent Group of
Experts (the "PGE") -- having filed with the Chairperson of the Panel
a Declaration of Non-Disclosure were permitted to view or hear information
designated by a party as business confidential information in the course of the
Panel proceedings. Such approved
persons were under an obligation not to disclose that information, or allow it
to be disclosed, to any other person other than another approved person, except
in accordance with the Procedures. The
Panel was under an obligation not to disclose business confidential information
in its interim and final reports, but could make statements of conclusion drawn
from such information. Accordingly,
the Panel has taken steps to ensure that all information designated by a party
as business confidential information has been omitted from this Panel Report.
Where the Panel deemed it necessary, a description of the type of
information concerned has been provided.
V. FINDINGS AND RECOMMENDATIONS REQUESTED BY THE
PARTIES
5.1 The United States asks the Panel to make the following preliminary
requests and rulings:
(a)
that Australia produce, by 30 November 1998,
authentic copies of certain documents
for review by
the Panel and the United States;
(b) "rejecting Australia's argument that any further proceedings before
this Panel should be terminated";
(c)
"that the United States has met its obligations under Article 4.2 of
the Subsidies Agreement"; and
(d)
"rejecting Australia's argument that the Panel should disregard
those facts and argument not explicitly set forth in the consultation
request".
5.2 With respect to the merits of the case, the United States requests the
Panel to find that "Australia is in violation of its obligations under
Article 3.1 of the SCM Agreement", and asks the Panel to "recommend
that Australia withdraw the subsidy to Howe without delay".
5.3
Australia
asks the Panel to make the following preliminary rulings:
(a) that
"the establishment of the Panel was inconsistent
with the DSU and that as a consequence the Panel should terminate its
work";
(b)
that
"in WT/DS126/1 the United States did not meet its disclosure obligations
under Article 4 of the Subsidies Agreement and that consequently the
establishment of the Panel and the basis for the United States case before the
Panel are irremediably flawed. Australia
asks that, as a consequence, the Panel terminate the proceedings, or rule
immediately that the United States has not demonstrated its claims before the
Panel"; and
(c)
"If the Panel does not agree to the requests in subparagraphs [(a)
and (b)] above, then Australia asks that the Panel rule that, as a result of the
failure of the United States to fulfil its disclosure obligations under Article
4 of the Subsidies Agreement, all facts and arguments not explicitly spelled out
in the request for the Panel (WT/DS126/1) will be disregarded for the purpose of
the proceedings of the Panel. Of
this evidence, Australia asks in addition that information acquired in the
context of consultations under WT/DS106/1 be ruled to be confidential to that
process [footnote omitted] and not admissible before this Panel, including
Exhibit 2 of the United States First Submission."
5.4 In the event that the Panel does not terminate the
proceedings on the basis of Australia's requests for preliminary rulings,
Australia requests the Panel to find that:
(a)
"the Loan does not fall under Article 3.1(a) of the Subsidies
Agreement";
(b)
"the two first payments under the Grant contract do not fall under
Article 3.1(a) of the Subsidies Agreement"; or
(c)
"if the Panel decides to consider subsequent payments or the Grant
contract itself, none of the payments or the Grant contract itself falls under
Article 3.1(a) of the Subsidies Agreement".
5.5 In addition, if the Panel finds that any measure
before it is inconsistent with Article 3.1(a) of the SCM Agreement, then
Australia requests that:
(a)
"consistent with Article 19.2 of the DSU, the Panel make no
recommendation or suggestion regarding the way in which Australia should bring
itself into conformity"; and
(b)
"consistent with Article 4.12 of the Subsidies Agreement, recommend
that Australia have at least 7.5 months for implementation from the adoption of
the Panel or Appellate Body report, i.e. at least half of that provided as a
benchmark period in Article21.3(c) of the DSU, but that this issue be
addressed by the Panel and the parties after the circulation of the Interim
Report setting out the Panel’s draft findings on the nature of the measures
before the Panel".
VI. PRELIMINARY ISSUES AND REQUESTS FOR PRELIMINARY RULINGS
A. Request for documents by the united States
6.1 In its first written submission to the Panel, the United
States asked the Panel to request that Australia produce, by 30 November
1998, authentic copies of the following documents for review by the Panel and
the United States:
(a)
"Any document which provides the grant from the Australian
government to Howe, and any related documents;
(b)
The loan contract between the Australian government and Howe, and any
documents related to that contract;
(c)
The report prepared by the accounting firm commissioned by the Australian
government and used in devising the replacement package;
(d)
Financial statements of Howe (or related corporate entities) for the
period 1989 to present;
(e)
Internal business plans or strategic plans of Howe (or related corporate
entities) for the period 1995 to present;
(f)
Any correspondence between the Australian government and Howe (or
corporate entities related to Howe), or vice versa, regarding the replacement
subsidy package;
(g)
Annual reports of Howe (or related corporate entities) for the period
1989 to present; and
(h)
Any analysis or forecast of the Australian automotive leather market in
the custody or control of the Australian government, Howe, or any entity related
to Howe."
6.2 The United States indicated that it was prepared to agree to appropriate
procedures necessary to protect any business confidential information contained
in the documents. The United States
asserted that it had requested most of this information in consultations with
Australia, but the Australian government had to date been unwilling to provide
it. The United States recalled that
the Appellate Body Report in India -Patent Protection for Pharmaceutical and Agricultural Chemical Products ("India
– Patents") stated:
All
parties engaged in dispute settlement under the DSU must be fully forthcoming
from the very beginning both as to the claims involved in a dispute and as to
the facts relating to those claims. Claims
must be stated clearly. Facts must
be disclosed freely. This must be
so in consultations as well as in the more formal setting of panel proceedings.
In fact, the demands of due process that are implicit in the DSU make
this especially necessary during consultations.
For the claims that are made and the facts that are established during
consultations do much to shape the substance and the scope of subsequent panel
proceedings. If, in the aftermath
of consultations, any party believes that all the pertinent facts relating to a
claim are, for any reason, not before the panel, then that party should ask the
panel in that case to engage in additional fact-finding.
6.3
Australia
responded that the obligation is upon the complainant, the United States, to
come forward with the facts on which its case is based.
There is no obligation upon Australia to provide the information sought
by the United States. The United
States could at any time have used the procedures of the SCM Agreement to seek
information about the measures in question.
Specifically, Australia pointed out, Article 25.8 of the SCM Agreement is
the means by which a Member can seek information about measures of another
Member. The United States chose not
to use this procedural provision under the relevant agreement and so cannot
expect that the information will be provided at its request in the Panel
process.
6.4 The United States indicated that it had requested information, including
information concerning notification of the subsidies as provided in Article 25.8
of the SCM Agreement, during consultations.
According to the United States, at that time, Australia did not provide
any of the requested information.
6.5
In Australia’s view, the United States was misrepresenting the
situation in implying that it was analogous to that before the Appellate Body in
India – Patents.
While the statement of the Appellate Body may have wider application, it
was made in respect of a particular situation where the analogy for this case
would be that there had been a substantial change affecting the measures before
the Panel.
yes"> Of course, it is within the scope of a Panel’s working
procedures to seek additional information from parties.
However, that is for the Panel to do in the light of whether the
admissible evidence from the United States has made a case that warrants further
investigation by the Panel. It is
up to the complainant to make a case that there has been a breach of the rules.
6.6 Australia asserted that if the Panel were to rule against Australia’s
requests to terminate the Panel proceedings, then Australia wanted to cooperate
with the Panel to enable it to reach its conclusions.
Accordingly, if the Panel considered that the two contracts (i.e. the
grant contract and the loan contract) were necessary for its deliberations,
Australia was willing to provide the Panel with the two contracts, without the
more sensitive commercial-in-confidence numbers that, in Australia's view, are
not pertinent to issues under Article 3 of the SCM Agreement. However, Australia would look for assurances that the
contracts would be treated as confidential information by both the Panel and the
United States. There
is only one medium-sized Australian company involved in this dispute and the
mere fact of the United States' action has placed a great deal of commercial
pressure and uncertainty on this company in the market place.
This is a situation where a single company is involved and any
information about its business is potentially valuable to its competitors. It is essential, therefore, that Howe’s
competitors do not
gain further advantage from the disclosure of commercially sensitive
information. Australia expressed
its regret that statements by the United States to the Panel regarding Howe
could only be understood as being driven by commercial considerations rather
than legal argumentation for this Panel. It
would be inappropriate for the government of Australia to provide further
information on the contracts that would find its way quickly into the commercial
domain.
6.7 Australia
submitted redacted versions of the grant contract and the loan contract at the
first substantive meeting of the Panel with the parties.
6.8
The United States expressed its appreciation for Australia's willingness
to provide redacted copies of the grant contract and the loan contract and
assured Australia that it would treat the information as confidential.
At the first substantive meeting of the Panel with the parties, the
United States urged the Panel to request that Australia provide the remaining
information it had requested, in the belief that this information would better
enable the Panel to make an objective assessment of the facts and their
applicability under the SCM Agreement. The
United States assured Australia that all information would be treated as
confidential.
6.9As noted below,
on 10 December 1998, the Panel ruled as follows with respect to the United
States request that the Panel ask Australia to produce certain documents:
"…
we note that Australia has already submitted redacted versions of the loan and
grant contracts. In addition, among
the questions from the Panel to the parties are certain requests for information
and documents which we have concluded are relevant to our consideration of the
issues in this dispute, and therefore have asked Australia to submit."
6.10 On 10 December 1998, as part of the written questions posed to the
parties by the Panel after its first substantive meeting with the parties, thePanel
asked Australia to provide the following to the Panel and the United States:
(a)
"the report prepared by the accounting firm commissioned by the
Australian government and used in devising the compensation arrangements to
Howe;
(b)
any correspondence between the Australian government and Howe (or
corporate entities related to Howe) regarding the compensation arrangements to
Howe and any documents relating to payments made under the grant contract which
would indicate precisely what facts were taken into account in determining that
Howe was in compliance with the performance criteria of the grant contract in
order to make the grant payments to date, including the report for the year
ending 30 June 1997 showing performance against the performance targets and the
report for the year ending 30 June 1998 showing performance against the
performance targets;
(c)
in the schedule of the grant contract, the numbers relating to
performance targets (these could be indicated in indexed form, or as a range),
the headings for categories of capital expenditure and the numbers for capital
expenditure (these could be indicated in indexed form, or as a range);
(d)
any documents indicating the legal basis for the grant(s) and the loan in
Australian law (for example, budget documentation); and
(e)
any records or reports of discussions in the Australian Parliament
relating to the grant(s) and the loan."
6.11
On 17 December 1998, Australia
responded, with respect to the report by the accounting firm commissioned
by the Australian government and used in devising the compensation arrangements
to Howe that:
"As part
of the development of this
compensation arrangements, the then Department of Industry Science and Tourism
(DIST) engaged the firm of KPMG, Chartered Accountants, to assess the financial
viability of Howe as a result of the removal of automotive leather from the ICS
and EFS schemes.Under the terms of
the engagement KPMG was required to examine certain information provided by Howe
Leather and report to the Government of Australia.The report was to be strictly confidential between the
Government of Australia and KPMG.In
fact, KPMG agreed to undertake the engagement on the pre-understanding that
"our report is solely ... for the information of the Australian Government
and is not to be used for any other
purpose or distributed to any other party".(emphasis supplied by Australia)
The
Government of Australia often engages firms to carry out such reviews as part of
its industry policy development.It
is critical that these reports be completely candid and this means that
confidentiality must be absolute.It
is only to be expected in this case that the Government would require an
independent assessment of the viability of the company."
6.12 Australia submitted, as business confidential information, redacted
versions of the letters from ALH to the Department of Industry, Science and
Tourism in July 1997 and July 1998 reporting on Howe's actual performance
against the interim performance targets for the periods 1 April–30 June 1997
and 1 July 1997-30 June 1998, as well as a non-business-confidential attachment
explaining the domestic law on “best endeavours” as it applied in this case.
With respect to the Panel's request for the
numbers relating to performance targets, the headings for categories of capital
expenditure and the numbers for capital expenditure, Australia stated:
"Any financial data provided either in
indexed form or as a range would be amenable to deductive manipulation which
could unfairly breach the commercial confidentiality of any data so provided in
good faith. Similarly, provision of
any further details of the categories of capital investment undertaken by Howe
could endow its competitors with an unfair commercial advantage.
Accordingly, Australia regrets that it is unable to respond to this
request by the panel." Australia asserted that the fundamental legal basis for the
grant and loan is in the 1996/97 Portfolio Additional Estimates Statements for
the Industry, Science and Tourism Portfolio of the Australian Government, in
particular in the section entitled “Explanation of additional estimates
1996/97”. Australia submitted a
copy of this, as well as a digest of Appropriation Bill (No. 4) 1996/97 and
extracts from the 1997-98 and 1998-99 Budget papers.
Australia further stated that there had been no discussions
in the Australian Parliament relating to the grant(s) and the loan.
6.13
On 12 January 1999, the Panel
reiterated its request to Australia to provide:
(a)
"the report prepared by the accounting firm commissioned by the
Australian government and used in devising the compensation arrangements to
Howe; and
(b)
in the schedule of the grant contract, the numbers relating to
performance targets (these could be indicated in indexed form, or as a range),
the headings for categories of capital expenditure and the numbers for capital
expenditure (these could be indicated in indexed form, or as a range)."
6.14 On 14 January 1999, Australia
submitted to the Panel the numbers relating to the performance targets, the
headings for categories of capital expenditure and the numbers for capital
expenditure, as well as unredacted versions of the letters from ALH to the
Department of Industry, Science and Tourism in July 1997 and July 1998 reporting
on Howe's actual performance against the interim performance targets for the
periods 1 April–30 June 1997 and 1 July 1997-30 June 1998.
Before October 1998, this Department was known as the Department of
Industry, Science and Tourism.
See para. 123 of Australia's first written submission; infra,
para 7.191
.
Howe constructed a new tannery at Rosedale and a new finishing plant at
Thomastown. The latter was
commissioned during February/March 1998 and commenced operating in April
1998. It replaced the old plant
in Preston which was decommissioned during the same period and closed in May
1998.
A portion of the third payment of A$12.5 million was held back pending
completion of the audit process.
In response to questioning by the Panel, Australia stated that this was not
"compensation" in the sense of off-setting a legal obligation on
the part of the government of Australia, nor in the sense of trying to
achieve an equivalent outcome, nor in the sense of it being an equivalent
amount of assistance. Australia
stated, however, that there was a political commitment to help maintain the
commercial viability of Howe in the light of the settlement reached between
Australia and the United States in November 1996.
The ICS has been in effect from 1 July 1991,
and remains in effect through 30 June 2000.
Under this programme, exporters of eligible textile, clothing and
footwear products can earn import credits that may be used to reduce the
import duties payable on eligible textile, clothing and footwear items by an
amount up to the value of the credits held.
Exporters are not required to use their credits as offsets against
import duties, but may transfer them to another holder in exchange for a
cash payment. The value of
import credits that can be earned is calculated as the F.O.B. value of an
eligible export sale, multiplied by the Australian value-added content of
the export sale. This total is
multiplied by a specified “Export Phasing Rate".
TCF Import Credit Scheme: Administrative
Arrangements (March 1995), United States Exhibit 7.
The ICS is managed by the Australian Customs Service on behalf of the
Australian Textiles, Clothing and Footwear Authority.
The EFS has been in its current form since
1991, and remains in effect until 31 December 2000.
The EFS allows Australian manufacturers to earn A$1 of export credit
for every dollar of eligible exports of covered automotive items.
The value of exports eligible to earn exports credits is equal to the
Australian value-added content of eligible exports, calculated as the F.O.B.
sales price less the value of any imported components and raw materials.
Export credits earned under this programme can be used to obtain
rebates on the duties payable on eligible imports of automotive vehicles and
automotive components or may be sold for cash to any importer of eligible
goods who may similarly seek such rebates.
The amount of import duty that can be rebated under this programme is
determined by a tariff reduction schedule that varies depending on the year
in which the export credit is used. Australian
Department of Industry, Science &Technology, Report on the State of
the Automotive Industry 1994 (June 1995), United States Exhibit 13.
WT/DS57/1, G/SCM/D7/1, 9 October 1996.
WT/DS106/1, G/SCM/D17/1, 17 November 1997.
These documents are listed infra,
para. 6.1
.
WT/DS50/AB/R, adopted 16 January 1998, para. 94.
Infra,
para. 9.9
and note 182
.
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