World Trade

Organization

Australia - Subsidies Provided to Producers and 
Exporters of Automotive Leather

VII. Main Arguments of the Parties: 

B. Nature of the Evidence Presented

7.27 Australia has serious systemic concerns about the nature of those United States exhibits where the United States has chosen to use inter-governmental communications, without consultation with Australia. However, Australia recognizes that this is not an issue for the Panel except where the provenance has not been provided by the United States and the presentation may even be misleading.[53]   On the other hand, it is important that the Panel address the issue of what cognizance it should give to media reports and other comments by private parties, including the company, in assessing governmental actions and decisions.  Australia submits that the Panel should place little or no weight upon such exhibits, or at least take great care about assessing their probative value.

7.28 As an example of the risks of making misrepresentations of factual material, Australia points to a specific paragraph in the United States' submissions to the Panel.[54]  In Australia’s view, these numbers do not bear on the matter before the Panel.  However, the United States has chosen to compare unlike situations here.  Until Howe was bought by ALH in 1994, it also produced furniture leather.  A reorganization within the group of companies resulted in Howe dealing only with the group’s automotive leather business.  Before the reorganization, Howe used to export more than three-quarters of its automotive leather production.  Given the growth in the global market for automotive leather both in Australia and in many other larger markets, it is not surprising that Howe’s production has increased and that its sales to overseas markets have also increased.  Australia states that business confidential information it provided to the Panel regarding Howe's sales figures over the period 1995/96 to 1997/98 showed that exports of automotive leather represented a significantly lower share of Howe's total sales in this period than suggested by media and other reports cited by the United States.

7.29 The United States asserts that it is worth noting that although Australia questions the probative value of media articles, it has not specifically disputed any of the information the United States has obtained from those articles.

7.30 The United States argues that Australia fails to counter any of the United States’ factual evidence (such as Howe's current or anticipated exports or the small size of the Australian automotive leather market) with facts that would undermine their credibility.In fact, Australia does not even deny their truthfulness.  Instead, Australia questions the probative value of relying upon newspaper and other media articles.  However, it is entirely appropriate to rely on media articles in the absence of other inconsistent information.  In fact, the evidence before the panel in Indonesia - Certain Measures Affecting the Automobile Industry[55] included information from newspaper articles.  Although Australia argues that the statements by Australian government officials which appear in the press should be considered in their proper domestic political context, Australia does not offer any evidence rebutting the statements quoted from the media releases and articles.

7.31 The United States asserts that the Panel should note the variety and volume of sources relied upon by the United States in this case. The United States has not just cited one isolated newspaper article; it has offered a range of articles from well-respected newspapers to industry magazines. They all have the same theme: Australia provided replacement subsidies to Howe to support its export drive.Furthermore, the information obtained from the media articles was consistent with other sources presented, including press releases from the Australian government

7.32 Australia does not accept this characterization of its position by the United States.   The fact that Australia has not commented on each of the media articles and other such exhibits does not mean that it accepts the conclusions that the United States has drawn from them.   In particular, Australia does not accept that these media reports, with selective quotes and journalistic commentary, represent any sort of evidence of the rationale for Australian government decisions on trade and industry policy issues.

7.33 Australia assumes that the media reports are accurate citations.[56]   But all that they represent are interpretations by the media.  In Australia, as in most, if not all, countries, being internationally competitive and a successful exporter is seen as being admirable.Comments attributed to ministers and officials need to be taken in their proper domestic political context, where terms are not being used with the same meaning and precision as in the context of the WTO.  It is commonplace for comments to focus on success in selling in foreign markets.  However, that is not the same as saying that industry arrangements favour exports, or that in this case the comments represent evidence that the recognized purpose of the measures in question were to favour exports, or are in any way “in fact tied” to export performance.

7.34 Australia states that where quotations are cited they are necessarily selective (as are often the United States excerpts) and were, no doubt, given in quite different contexts.  The ubiquitous “former senior official” is often quoted in the media without any level of authority (or current knowledge).  It would hardly be a productive exercise, and of no value to the Panel, for Australia to try to track down the journalists and people interviewed and try to obtain from them what they had in mind at the time and what they thought their comments would mean in terms of footnote 4 of the SCM Agreement.  Many of those interviewed presumably would be protected by journalistic confidence.  If such exhibits are to be considered at all, they would need to be treated with great caution, since by their very nature they do not represent the views of government and are hardly in the realm of facts.  The Panel’s obligation under Article 11 of the DSU is to “make an objective assessment of the matter before it, including an objective assessment of the facts….”  In Australia’s view, relying on, and drawing factual conclusions from, such sources in any way would not be consistent with this obligation.

7.35 Against this background, Australia raises specific comment on some of the United States exhibits.  For example, the United States purports to quote the Australian Deputy Prime Minister, Tim Fischer, as saying: “by dint of effort, we [the Australian government] have ensured that Howe Leather has been able to continue its export activity over the last 18 months.”  This quote is from a newspaper article of 29 September 1997 included in the United States exhibits.[57]  There are a couple points that are worth making.  First, the references to “export activity” and “the last 18 months” are for the period from the launching of the section 301 case in the United States and refer to preserving the right of Howe to sell to its United States customers, where clearly the petitioners did not want the original equipment manufacturers (OEM) market for automotive leather to be contested by non-US firms.  This was about maintaining market access to the world’s largest market for automotive leather in the face of the dispute with the United States, not about export subsidization.  Secondly, the purported quotation goes on to say that this was done “while honouring all of our WTO commitments.”  The quote in the article also said that the new arrangements “fully complied with all the elements of the agreement reached with the US last year.”  If the United States chooses to introduce selective quotations as somehow representing “evidence” of the “recognized purpose” of the Australian government, it should choose such quotations more carefully, as read in full they leave no doubt that the government had no intent of introducing prohibited export subsidy arrangements.

7.36 The United States points out that the 18-month period referred to by Trade Minister Fischer included the six month period from April to September 1997.  This was after the replacement package became operative.

7.37 Similarly, Australia continues there is the media release by the Australian Minister for Industry, Science and Tourism, John Moore, of 27 December 1996[58] where Mr Moore says that: “The package safeguards the jobs of around 500 employees and will ensure that Howe and Co. can continue to invest and grow as planned.”  This again underlines that the government’s focus was not on some sort of circumvention arrangement in respect of export subsidies, but the much more immediate domestic task of maintaining jobs in disadvantaged regional areas, through WTO-consistent means.

7.38 In the same vein, Australia continues, Howe and its parent company did not make public comments in the context of the WTO Agreement.  Presumably, when they commented in annual reports, they simply sought to inform their shareholders about their current commercial prospects, as they are required to do by domestic law.  However, again this has no bearing on issues concerning footnote 4 of the SCM Agreement, and the legal issues involved in this case.  The views of companies on trade policy or related legal issues that they would often find arcane are not relevant to the consistency, or otherwise, of government measures.

7.39 As one final example, Australia considers the quote that ‘Howe’s then Managing Director stated that he had been “assured” that Howe “would be compensated with an alternative arrangement that would help it continue to expand exports”'.[59]  This needs to be put in context.  This is a company that had been affected by a section 301 case in one of its major markets.The Managing Director was hardly going to send the wrong signal to potential customers.  In the reality of the market-place, he had to confirm that the company was in business for the long haul in the United States market.  The article implies that he did not know the details of the arrangements between Australia and the United States and clearly he did not know what the new arrangements would be.  Indeed, how could he since they had not been designed, much less finalized, at that time.  The sense of the article is that the Managing Director also recognized the need for any such assistance to be “within the WTO rules”.[60]  These are not the comments of someone being told that a covert scheme would be crafted.But rather it is a story about a firm that the government has said it would not abandon as a result of cutting automotive leather out of two entitlement schemes.  That would be the plain reading interpretation of that article.As Australia has already stated, press articles are not government policy documents and are not always accurate in terms of facts, representation of individuals’ statements and the spin given to a story by the author.  Nevertheless, Australia asserts, the full context of the quotes clearly illustrates that WTO-consistency was an essential parameter for any new assistance arrangements for the company.

1. "financial contribution"

7.40 The United States notes that, before addressing whether the measures in question constitute subsidies "contingent … in fact upon export performance" within the meaning of Article 3.1(a) of the SCM Agreement, the Panel must first consider whether the measures fall within the definition of "subsidy" under Article 1 of the SCM Agreement.

7.41 The United States alleges that the assistance bestowed on Howe by the Australian government constitutes subsidies under Article 1 of the SCM Agreement.  The Australian government directly transferred two significant sums of money to Howe, one in the form of a grant and the other in the form of a preferential loan.  The United States observes that Article 1.1(a)(1)(i) of the SCM Agreement expressly states that both “grants” and “loans” qualify as “financial contributions” by a government.  Accordingly, the United States contends, the Australian government cannot dispute that the A$30 million grant and the A$25 million preferential loan provided to Howe constitute financial contributions within the meaning of the SCM Agreement. 

7.42 Australia submits that the loan is a subsidy under Part I of the SCM Agreement, without prejudice to issues such as calculation and its status under other parts of the SCM Agreement.  Australia also states that the payments under the grant contract are subsidies within the meaning of the SCM Agreement.  However, Australia submits that the United States has not demonstrated that the grant contract is a subsidy, even though, on at least due process grounds, it should have been required to do so in its first written submission to the Panel.  Australia underlines that it agrees with the United States that the ‘“grants” … qualify as “financial contributions” by a government’.  However, the United States then jumps to “the grant” conferring a benefit, which could be a reference to the grant contract, or could possibly be a reference to each of the individual grants referred to in the previous paragraph.  Even assuming for the sake of argument that the reference is to the grant contract, the United States did not demonstrate the nature of the "financial contribution", as required for defining a subsidy. 

7.43 The United States notes Australia's assertion that the United States has not demonstrated that the grant contract itself is a subsidy.  This is a dubious distinction.  The grant contract is not a separate measure from the payments made pursuant to the contract.The grant measure at issue in this case is the Australian government's commitment to make grant payments to Howe, which subsumes the disbursements themselves.  A legally enforceable promise by the government to provide funds constitutes an asset that Howe may rely upon in its business planning.As such it is a "financial contribution" that confers a "benefit" within the meaning of Article 1 of the SCM Agreement.

7.44 Furthermore, the United States asserts, if a party had to wait until the subsidy is paid out to challenge it, such a requirement would have the effect of eviscerating the SCM Agreement's disciplines for prohibited subsidies.

7.45 The United States notes that to qualify as a “subsidy” within Article 1 of the SCM Agreement, the financial contribution must have conferred a "benefit".  With respect to the grant, the benefit is self-evident:  Howe has been given government money that it need not repay.  The Australian government has provided Howe with a free source of capital that can be used to improve its productivity, decrease its labour and material costs, improve the quality of its automotive leather, lower its prices and generally enhance its competitiveness.  Based upon an allocation of the benefits received, the total benefits conferred on Howe in 1998 were A$31,977,692.71.[61]

7.46 While the United States observes that a loan obviously differs from a grant in that it eventually must be repaid with interest, the United States asserts that there are several indications that the A$25 million loan at issue also conferred a “benefit” upon Howe.  These include:

(a) The Five Year Holiday on Principal and Interest Payments Confers a “Benefit”

7.47 The United States contends that, under the terms of the loan, Howe is not required to pay principal or interest for the first five years, nor does interest accrue during this period.  According to the United States, this is a valuable benefit to Howe.First, there is a substantial savings to Howe of the interest that it would have paid in the absence of the holiday.  Using the interest costs that  Howe’s parent incurred for commercial borrowings as a benchmark, Howe saved approximately A$8,700,000 over the five-year period in interest payments.[62] Howe also received the additional benefit of being able to invest this money.  For example, if Howe had invested the money in Australian government long‑term bonds (a conservative illustration), Howe would have earned a total of A$8,625,000 over the five year period. [63] Accordingly, the total benefit to Howe conferred by the five year holiday on principal and interest payments based on a Australian government bond rate of 6.89% equals A$17,325,000.[64]

7.52 Australia submits that the loan is a subsidy under Part I of the SCM Agreement, without prejudice to issues such as calculation and its status under other parts of the SCM Agreement.[77]  Australia also states that the payments under the grant contract are subsidies within the meaning of the SCM Agreement.  It is up to the United States, rather than Australia, to demonstrate that the grant contract is a subsidy, and for Australia to respond to that.  The United States appears not to have made such a demonstration, even though, on at least due process grounds, it should have been required to do so in its first written submission to the Panel.

7.53 While it is not relevant to the issue in Australia’s view, Australia believes that it may be worthwhile commenting on the United States point about Howe being in financial trouble.[78]  The evidentiary value of the facts put forward by the United States is highly questionable, but in any case they do not demonstrate this.  There are many highly creditworthy companies that have short term and even long term losses.  In Howe’s case, an assessment of its creditworthy position would involve an analysis of Howe itself, its parent company and its ultimate controllers.  It would involve an assessment of the creditworthiness of all of these entities.  If this was a genuine concern of the United States at the time, why did it insist that the grant contract money be devoted largely to investment?

7.54 The United States observes that Australia confirmed that it does not dispute that the loan and the grant fall within the definition of “subsidy” in Article 1.In addition, Australia concedes that the loan was on concessional terms.  With respect to Australia's assertion that the United States has not demonstrated that the grant contract itself is a subsidy, the United States maintains that the grant measure at issue in this case is the Australian government's commitment to make grant payments to Howe, which subsumes the disbursements themselves.  A legally enforceable promise by the government to provide funds constitutes an asset that Howe may rely upon in its business planning.  As such it is a "financial contribution" that confers a "benefit" within the meaning of Article 1 of the SCM Agreement.[79]

7.58 While Australia maintains that calculation issues are not relevant to the Panel, Australia nevertheless asserts that the United States has grossly exaggerated the extent of subsidy provided by the loan, including the benefits in the first five years.  This is not a case about United States countervailing duty methodology.  For example, the United States[82] uses a method of determining the level of subsidy from a loan (which it describes as a conservative illustration), which assumes that the money is invested in government bonds.  Clearly, in that case, the benefit to the company would be just the returns from the bonds.[83]   No company would borrow at a high interest rate to invest at a lower one.  It makes no economic sense to add the second and third columns in the table in United States Exhibit 51 to calculate the level of subsidy, since this is just double counting.

7.59 On the actual calculation of benefits under the grant contract, again as with the loan, this is not a case about United States countervailing duty methodology.  Few, if any, other jurisdictions would, in an allocation scenario, add the total unamortized portion to the interest saved and call that the annual benefit.  This leads to the calculated benefit from the potential maximum payments of A$30 million over 1996/97-1998/99 (July/June) as being A$31,977,692 in 1998 alone.  The sum of the calculated annual benefits derived from the unamortized payments, excluding interest payments, comes to A$210 million in the table in United States Exhibit 50.  This is seven times greater than the A$30 million cap on payments.

7.60 The United States notes that Australian government contends that the calculations "grossly exaggerate" and erroneously calculate the amount of benefit provided.  Australia has misconstrued the United States' calculations for the benefits conferred by the grant and loan.  With respect to the grant, the Australian government suggests that the United States is claiming that the total benefit provided for the A$30 million grant is A$210 million.  That is not correct.  The total "value" of the benefit to Howe in 1998 was A$31,977,692.  However, these benefits are not intended to be cumulative.  The United States did not suggest that the annual benefit for each year would be added together to arrive at a "total benefit", as the Australian government suggests.  Rather, these calculations represent the "value" of the benefit in each particular year.  As the table in United States Exhibit 50 shows, the value of the benefit declines gradually over time.

7.61 With respect to Australia's contention that the benefit conferred by the loan has been miscalculated, the United States submits that, again, Australia has misconstrued the benefit calculations.  These calculations reflect the fact that Howe received a double benefit when it received a preferential loan with a five-year interest holiday.First, column two in United States Exhibit 51 represents the interest that Howe would have had to pay if Howe could have secured a commercial loan for A$25 million to finance its capital expenditures.  Because Howe was not required to repay any interest for five years, it obviously received a benefit from this five-year holiday.  The higher interest rate used in this column reflects the rate at which Howe would have had to borrow funds, based on the company's financial statement.  The Australian government has provided no evidence to suggest that Howe's borrowing rate would be lower.  In fact, its actual rate could have been considerably higher in light of its financial difficulties.  The third column reflects the interest that Howe could have earned on A$25 million if it invested this money.  If, as Australia suggests, Howe’s investment yielded a higher return than the government bond rate, then the benefit to the company was even larger.  In other words, the United States’ use of the bond rate was a conservative estimate of Howe’s return.  Combining these two columns does not "double count" the same benefit because Howe was in fact receiving a double benefit.  First, unlike a regular commercial loan, Howe is not required to pay back any interest for the first five years, as it would have had to do if it had borrowed money at a commercial rate.  Thus, it is receiving the benefit of a five-year interest-free period.  The benefit from the interest-free period is reflected in the second column.  Moreover, Howe was given the money to use, and thus received a benefit from this receipt of funds.  The benefit received from having access to these funds is reflected in the third column.  Thus, the United States properly cumulated these two benefits to derive the full measure of the benefit from the loan for the first five years of the loan.

7.62 Australia continues to disagree with the United States calculations in United States Exhibits 50 and 51 even for countervail or other purposes.  The United States clearly misunderstood the points that Australia made.  The fact that Australia makes these comments should not be taken to imply that Australia accepts any aspect of the United States' approach in respect of the grant or loan contracts.

7.63 In respect of the grant contract, Australia observes that the United States confirms that the last column of its Exhibit 50 is supposed to set out the computed benefit in each year of the total possible payments under the grant contract.It is unclear what the United States means when it says that “these benefits are not intended to be cumulative.”  Benefits of allocation of subsidies must be in some sense cumulative, subject to present value considerations, otherwise the concept is meaningless. Australia contends that the figures of A$19,530,000 and A$31,977,692 for the benefits in 1997 and 1998, respectively, far exceed the total potential payments.  However, Australia does agree with the implication of the first two rows that the potential payments have been totally expensed in the periods for which they would be received.

7.64 In respect of the loan contract, Australia asserts that the concept of benefit is based on the idea that enterprises borrow money to do something with it.  The benefit for countervail purposes of a government loan is based on the difference between what the government charges and the comparable commercial rate (alternatively the borrowing cost of the government for a cost to government calculation). The benefit from the subsidy has nothing to do with what the enterprise does with the money so long as it is free to do what it wants with it.  An enterprise that borrows commercially has exactly the same capacity as an enterprise benefiting from a government loan to use borrowed money to generate income.

7.65 Australia submits that the calculations in United States Exhibits 50 and 51 and the related arguments, while irrelevant to the current case, were wrong.  According to Australia, the United States has not disputed this.  Nor has it explained the disconnect between its approach to the allocation of the grants over time and its claim that they are tied to export performance.  The specific period of the grant contract is to mid-2000 -- no longer.  The payments under the grant contract were based on reports for the period to mid-1998.  If they were tied to export performance, then they became exhausted after the time period for those exports.  Alternatively, under the logic of the United States' case about replacement measures, subsidies should be allocated across the period for the schemes they are supposedly replacing, i.e. through to mid-2000 or at most end-2000.  Although irrelevant to this case, the allocation across lengthy periods on the basis of investment underlines that the United States in reality does not see any linkage between the measures and export performance.