World Trade

Organization

Australia - Subsidies Provided to Producers and 
Exporters of Automotive Leather

VII. Main Arguments of the Parties: C. Article 1 of the SCM Agreement

7.66 In addition, Australia asserts that the United States' position on the issues of calculation and allocation inherently contradicts aspects of its argument on the issue of "contingent … in fact" under Article 3.1(a) of the SCM Agreement.  In the case of the loan, the United States first looks at the value of the loan over the period to 2002 and also at the rest of the loan period when referring to more favourable credit terms.[84] The United States has argued that the measure is a replacement for a programmes that ran until 2000 (30 June 2000 for ICS and 31 December 2000 for EFS) and that this in some way taints the replacement measures.  It is arguing here about the benefits this measure allegedly provides the company over a fifteen year period, with even the first five years extending beyond 2000.  An export subsidy must be tied, attached in some way, (“in law or in fact”) to exports.  Exports in turn must have, or be going, to occur in some particular period for the discipline to have any meaning. Australia argues that the United States has not produced any facts that demonstrate that the loan should be considered to fall under Article 3.1(a) of the SCM Agreement.  Its argument seems to be based solely on an association between the loan contract and the grant contract.

7.67 Australia also notes that the United States has allocated payments under the grant contract across the period to 2009 for the first two payments (i.e. those measures before the Panel) and 2010 for the total potential payment in 1998/99.[85]  As in the case of the loan, this gives rise to inconsistencies in the United States' arguments.  The facts presented by the United States state that the performance targets, investment and sales, are limited to the period to 2000, i.e. the grant contract only covers the period to 2000.  Indeed, the United States' arguments about the grant contract’s relationship with ICS and EFS turn on it being for the same period as the company would have attracted entitlements under those plans, i.e. mid-2000 and end-2000, respectively.  However, United States Exhibit 50 seeks to allocate the first two payments and the residual potential payment over a thirteen-year investment period to 2010.  The United States has not even made an allegation, let alone produced any facts, that there is any connection made by the Australian government to any form of performance after 30 June 2000.  By allocating the entire A$30 million over an investment period, the United States appears to be arguing that none of the money paid out should be attributed to sales.  On that basis, presumably no weight should be put on any of its arguments regarding linkages between payments and sales requirements.

7.68 Australia maintains that the United States is seeking to have it both ways through making an allocation across time as if for countervailing or possibly consideration of investment subsidies for the purposes of Article 6.1(a) of the SCM Agreement. Whatever relationship the second and third grant payments bore to any sales, those sales would have essentially gone.The United States argues that the grant contract is a substitute for ICS and EFS, over the remainder of their duration, but they both terminate in 2000, not in 2010.  According to Australia, the reality is that the United States is focusing on a serious prejudice case, not a case under Article 3.1(a) of the SCM Agreement.

7.69 Australia asserts that the “in fact” condition in Article 3.1(a) of the SCM Agreement is there to deal with circumvention cases where a government provides money contingent on export performance but does so in a manner other than through legislation or legal contract.  It is not there as a trade effects test, which would have to be assessed on a case-by-case basis.  The United States has not produced or alleged that the contract involves circumvention.Rather, it relies on economic tests and arguments.

7.70 Australia asserts that the work under Annex IV of the SCM Agreement to elaborate calculation issues for Article 6.1(a) of the SCM Agreement involves a merger of the cultures of the multilateral remedy and countervail.  A number of Members have some problems with aspects of this.  However, regardless of the merits of that work on allocation, there is nothing under Article 3.1(a) of the SCM Agreement that would allow such an allocation across time for the purposes of this rule. Article 3.1(a) is about actual exports. If a Member provided export subsidies, for the sake of example, assume that these were straightforward export subsidies contingent in law upon the export of 100 widgets.  The measure would no longer be in place once those 100 widgets had been exported.The condition would no longer have any force.  It would be absurd to suggest that somehow future activities of a company were tainted because past performance had been subsidized.   This is not an issue for Part II of the SCM Agreement.  It may be an issue for Part III, i.e. serious prejudice, but that would depend on the circumstances.

7.71 Australia argues that the United States, by presenting the measures as being allocated across time, is accepting that there is no linkage between the granting of the measures and export performance.  Thus, the United States is implicitly accepting that the measures do not meet the “in fact” standard of Article 3.1(a) of the SCM Agreement and are consistent with that Article.

7.72 Of course, Australia continues, in many instances, there may be no remedy at all for a past measure, certainly not under Part II of the SCM Agreement.  This is in keeping with GATT/WTO practice.It is important that there not be some confusion between the retrospectivity of serious prejudice cases and countervailing duty action, and normal rules under the WTO.  If a tariff is found to be in breach of a binding, then the remedy is to bring it into conformity.  It is not to go back and find all the importers of record who may have paid too much over whatever period the tariff was in force.  In Australia's view, the job of the dispute settlement system is to obtain consistency, not retrospective compensation or penalty.

7.73 The United States asserts that it provided the subsidy calculations to demonstrate, as a preliminary matter, that the grant and loan did confer a benefit upon Howe.  However, the Australian government has misinterpreted the United States' argument with respect to the calculation of the benefit.  Australia suggests that the method used by the United States to value the benefit is inconsistent with the United States' position that these benefits were tied to exports.  The method used to calculate the value of the benefit is not directly related to the question of whether a subsidy is, or is not, an export subsidy.  The calculation methodology and the legal and factual criteria for "in fact" subsidies are not interchangeable.  Rather, the calculation methodology simply reflects the common sense inference that a benefit received from a grant or a preferential loan will extend well beyond the precise moment that the grant or loan is given.Thus, Howe continues to benefit now from the past receipt of the replacement subsidies.

7.74 The United States submits that, in addition to demonstrating that a benefit was conferred, the benefit calculations are useful for determining an appropriate prospective remedy should the United States prevail in this case.  Article 4.7 of the SCM Agreement provides that “[i]f the measure in question is found to be a prohibited subsidy, the panel shall recommend that the subsidizing Member withdraw the subsidy without delay.”  Although the subsidies in this case are non-recurring, the United States asserts that, given the substantial size of the subsidies involved, it is appropriate to allocate the amount of the subsidies over time in order to fashion an appropriate prospective remedy.  This is because the subsidies continues to exist -- and therefore may be “withdrawn” -- for as long as they continue to benefit the recipient.

7.75 Australia submits that the United States did not ask the Panel to reach a finding on remedy beyond Article 4.7 of the SCM Agreement.  Australia requests the Panel not to make a recommendation or suggestion on remedy consistent with Article 19.2 of the DSU.  Were the Panel to find that some measure was inconsistent with Article 3.1(a) of the SCM Agreement, the way in which Australia chose to bring itself into compliance, if it were necessary to take any action at all, would depend on the actual findings of the Panel.  Australia’s obligations would be to bring itself into consistency regarding the nature of any outstanding measures.

7.76 The point Australia has made is that the argument that the benefit of the subsidies should be allocated across time means that the complainant would have to demonstrate that the tie to exports stretches across the same time period.  By arguing about allocation across time, the United States has created an inconsistency in its approach.  On the one hand, it implies that there is a tie to exports over a lengthy period.  On the other hand, it argued about exports over 1997-2000 under the grant contract.

1. Text of Article 3.1(a)

7.77 Article 3.1(a) of the SCM Agreement states:

3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited:

(a) subsidies contingent, in law or in fact4, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I5;

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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.

5Measures referred to in Annex I as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement.

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2. Principles of Treaty Interpretation

7.78 The United States recalls that Article 3.2 of the DSU provides that the covered agreements shall be interpreted in accordance with “customary rules of interpretation of public international law”, and that the Vienna Convention sets forth the customary rules of treaty interpretation.[86]  Accordingly, the rights and obligations of the parties under the SCM Agreement must be interpreted in accordance with the Vienna Convention.  Article 31 of the Vienna Convention provides that “a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose.”  According to Article 32, recourse to supplementary means of interpretation including preparatory work, inter alia, may be had “in order to confirm the meaning resulting from the application of Article 31.” 

(a) application of the customary rules of interpretation of public international law

7.79 The United States notes that, in this case, the ordinary meaning of the text of Article 3.1 of the SCM Agreement prohibits the replacement subsidy package provided to Howe by the Australian government.  Article 3.1(a) of the SCM Agreement prohibits “subsidies contingent in law or in fact, whether solely or as one of several other conditions, upon export performance.” (emphasis supplied by the United States).  Thus, the prohibition in Article 3.1(a) extends not only to subsidies expressly based on export performance (de jure export subsidies), but also to subsidies that are in fact based upon export performance (de facto export subsidies).  The term “subsidy” is defined in Article 1 of the SCM Agreement as a “financial contribution” by a government, such as a loan or a grant, that confers a “benefit.”  The ordinary meaning of the term “benefit” is captured by its dictionary definition:  a benefit is “a favourable or helpful factor or circumstance; advantage, profit."[87]

7.80 According to the United States, the dimensions and purpose of the prohibition on de facto export subsidies are illuminated by the drafting history of this provision.  The Agreement on Interpretation and Application of Articles VI, XVI and XXIII of the GATT (the "Tokyo Round Subsidies Agreement”) provided generally in Article 9 that “Signatories shall not grant export subsidies on products other than certain primary products”, and this prohibition included all export subsidies – both de jure and de facto.  During the Uruguay Round negotiations in Negotiating Group 10 on subsidies and countervailing measures, the European Community proposed that the application of the prohibition to de facto export subsidies be clarified:

The prohibition of export subsidies in Article 9 of the Subsidies Code should be reformulated in order to define clearly its scope.  This prohibition must apply to all export subsidies, that is, all government interventions which confer, through a charge on the public account (in the form of direct financial outlays or revenue foregone, such as tax relief and debt forgiveness), a benefit on a firm or an industry contingent upon export performance.

In addition, since experience has shown that government practices may be easily manipulated or modified in order to avoid this prohibition, it is apparent that a prohibition only of those subsidies which are de jure (that is, expressly) made contingent upon export performance is open to circumvention.

The prohibition, in the present discipline also applies to subsidies de facto contingent upon export.  This, however, makes it necessary to provide for clearer guidance in identifying de facto export subsidies … De facto export subsidies are those where facts which were known -- or should clearly have been known -- to the government when granting the subsidy demonstrate that the subsidy, without having been made expressly contingent upon export performance, was indeed intended to increase exports.[88]

7.81 The United States submits that footnote 4 in the text of Article 3.1 of the SCM Agreement clarifies that the “in fact” standard “is met when the facts demonstrate that the granting of the subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings.”  While the note also cautions against finding a de facto subsidy on “the mere fact that a subsidy is accorded to enterprises which export”, this admonition is premised on finding an export subsidy based on “that reason alone”, that is, where the fact that the recipients happen to export is the only factor indicating that a subsidy is a de facto export subsidy.

7.82 In addition, the United States contends, the Uruguay Round negotiations expanded the scope of a prohibited subsidy.  Rather than requiring that export performance be the “only” or the “most important” element, Article 3.1(a) provides that export performance may be either the sole contingency for the subsidy or merely “one of several other conditions”.  The export requirement therefore does not need to carry preponderant weight in the approval of benefits to qualify as an export subsidy.  Rather, an export subsidy will exist when actual or anticipated exportation is merely one of several potential criteria influencing the bestowal of benefits.  This expansion of the definition in the SCM Agreement recognizes the serious and harmful consequences flowing from export subsidies.  Thus, even in circumstances where export performance is only one of several criteria for award of the subsidy, a finding that the subsidy is a prohibited subsidy would be warranted and, indeed, compelled.  Moreover, by explicitly including a footnote emphasizing that subsidies are prohibited without having been made expressly contingent upon export performance, the SCM Agreement recognizes that Members may well attempt to mask the export-orientation of particular benefits by claiming that they are bestowed without explicit contingencies.  Yet, if the totality of the circumstances reveals that these benefits are designed to promote exports, then such benefits fall within the broad definition of Article 3.1(a). 

7.83 Australia submits that the Panel is being asked to address a number of issues that have far-reaching implications for the interpretation of Article 3.1(a) of the SCM Agreement. Australia asserts that the Panel is being asked by the United States to widen the application of the “in fact” condition in Article 3.1(a) of the SCM Agreement to include the nature of any prior measure and to interpret it as a trade effects test on the basis of a subjective, case-by-case assessment of the level of exports by an enterprise.  This movement away from the hard rules-based approach of Article 3 of the SCM Agreement was rejected by Australia. 

7.84 Australia contends that the issue whether the subsidies are contingent “in fact” upon export performance has to be analysed in the context of footnote 4 to Article 3.1(a) of the SCM Agreement, which defines, and thereby limits the scope of, “in fact" . Australia asserts that the onus is on the United States to demonstrate that the conditions are met.  Inter alia, the United States has to:  (a) present the relevant “facts” to the Panel; and  (b) prove that these facts demonstrate that the granting of the subsidy is in fact tied to actual or anticipated exportation or export earnings.  This is not a question of analyzing the incidence of a subsidy as distributed between domestic and export sales.  This is a matter of proving that the act of granting the subsidy is tied to export sales.  According to Australia, the United States does not do that.

7.85 Australia argues that this means that the required proof is not one of economic inference but rather that the actual or anticipated exportation or export earnings are actually tied to the granting of the subsidy.  The second sentence in footnote 4 means that it is not sufficient to look at a company’s exports to demonstrate the “in fact” standard.  Rather, the complainant must produce facts that show the granting is actually tied to export performance.The fact that an enterprise has a high level of exports, or the fact that its exports are increasing, do not demonstrate that the standard of footnote 4 has been met.  The wording of the text is to distinguish between the situation where something is set out explicitly in legislation or regulation and where there is some non-legislative, administrative arrangement whereby the granting of the subsidy is actually tied to export performance.  Australia states that neither is true in this case.

7.86 Australia asserts that the rules are more rigorous for export than domestic subsidies because export subsidies allow companies to sell more cheaply on export markets while benefiting from higher domestic prices.  Hence, the original bi-level price test in Article XVI:4 of GATT 1947. This was obviously too simple to prevent circumvention and the rules were elaborated leading to the Illustrative List annexed to the Tokyo Round Subsidies Agreement.  Again, these were all measures that targeted, that favoured, exports.  There was never any suggestion that some high level of exports test would apply.

7.87 According to Australia, the SCM Agreement maintains the Illustrative List (with some changes and interpretations in Annexes II and III) and the concept of “export performance”.  For a subsidy to fall under Article 3.1(a) of the SCM Agreement, whether in law or in fact, its granting must be conditioned on “export performance”.This is not about it being an exporting firm or being export ready.  It is about favouring concrete, tangible exports.

7.88 Australia maintains that the SCM Agreement is permissive of subsidies that do not fall under Article 3.1.  Such subsidies are not prohibited by the SCM Agreement.  For example, traditional subsidies paid on the basis of production are clearly permitted under the SCM Agreement.  This is reflected in the structure of the SCM Agreement, where Part II of the SCM Agreement does not apply to such subsidies, but instead Part III of the SCM Agreement provides for multilateral remedies for such measures where adverse effect can be demonstrated.  Where adverse effects are alleged to be caused by subsidies in the sense of Article 5 of the SCM Agreement, a Member has a multilateral remedy under Article 7 of the SCM Agreement.  In particular, for a case of serious prejudice, Article 6.3 of the SCM Agreement sets out criteria for the establishment of a case of serious prejudice.  This is the basis for pursuing allegations of adverse effect for subsidies whose granting is not explicitly tied to export performance.

7.89 According to Australia, the essential difference is between a hard rules-based test and a trade effects test.  Article 3.1(a) of the SCM Agreement sets out rules for a breach of the SCM Agreement and they are to be treated as strict criteria and not an effects-based set of tests.  They call for facts to be established, rather than for a Panel to look at trade outcomes.  Australia submits that the United States' position turns on the argument that some undefined level of exports by an enterprise is indicative of its status under Article 3.1(a) of the SCM Agreement.

7.90 Australia argues that the United States' approach, if accepted, would lead to results at clear variance with the object and purpose of the SCM Agreement, and indeed could lead to absurdities.  In the case of an enterprise that exports, what would be the outcome if a panel were to judge that a high level of exports in itself met the “in fact” test of Article 3.1(a) of the SCM Agreement?  No number, no bright line has been established under the SCM Agreement.  How would a Member know whether a measure was to fall under Article 3.1(a) of the SCM Agreement?  Would the threshold be 50%, 75%, or 90%?  Would an increase in exports by a recipient potentially make a measure inconsistent after the decision to grant?  In the view of Australia, it would be inappropriate for panels to make case by case judgments on these sorts of issues when it came to questions of violation of a rule such as Article 3.1(a) of the SCM Agreement.  Provisions on rules need to provide clear guidance to Members without introducing a large element of subjectivity, which would be the case if the level of exports or other such concepts were to be introduced into any assessment under Article 3.1(a) of the SCM Agreement.

7.91 Australia asserts that, depending on the circumstances, a Member that considers that it is being adversely affected in some way by such a subsidy has a number of remedies open to it, including multilateral remedies under Article 7 of the SCM Agreement and Article 26 of the DSU, or countervailing duty provisions.  Thus, under the SCM Agreement itself there are already remedies to be pursued in Parts III and V, rather than Part II.  Australia notes that Article 27.4 (including footnote 55) of the SCM Agreement clearly envisages that the level of export subsidies can be quantified.  This would be inconsistent with an approach that said that only a panel can determine what falls under the “in fact” provision of Article 3.1(a) of the SCM Agreement on a subjective, case-by-case basis.  This would be further complicated if the performance of an enterprise could somehow change the status of a measure, which could arise under a level of exports approach.

7.92 As a further example, Australia notes that some unquantified level of exports test would cause a potential conflict with the purpose and operation of Article 13(c) of the Agreement on  Agriculture (“Due Restraint”).  The obligations on export subsidies under the Agreement Agriculture are quantitative and so need to be clear cut.  If the definition of “export subsidy” under the Agreement on Agriculture includes measures meeting such an “in fact” test, then it would be virtually impossible for many Members to conform with quantitative disciplines of the Agreement on Agriculture.  On the other hand if the definition of “export subsidy” under the Agreement on Agriculture does not include measures meeting such an “in fact” test, then they would not be given cover by the Due Restraint article and so be subject to the disciplines of the SCM Agreement.  This is clearly not what was envisaged when the agreements were negotiated.

7.93  Australia asserts that the United States seeks to reinterpret the meaning of “in law or in fact” and footnote 4 in Article 3.1(a).  The concepts of “de jure” and “de facto” do not appear in the SCM Agreement, or indeed in the Tokyo Round Subsidies Agreement.  The assertion by the United States that Article 9 of the Tokyo Round Subsidies Agreement “included all export subsidies -- both de jure and de facto” is simply an assertion and without any actual, concrete meaning.  Article 9 of the Tokyo Round Subsidies Agreement did prohibit export subsidies, but this was not defined beyond the Illustrative List.  There was no such division between de jure and de facto or any definition of what de facto might mean.  Australia is not aware of any panel decision on this issue under the Tokyo Round Subsidies Agreement.  If it had been the accepted jurisprudence that the notion extended to the much wider scope being argued here by the United States, it is surprising that it was never utilized by the United States or other signatories.  In any case, the actual situation under the Tokyo Round Subsidies Agreement is irrelevant to the current case, which is under the WTO Agreement.  This is not even a successor agreement.

7.94 Australia contends that the current SCM Agreement does not refer to “de jure” and “de facto” but to “in law” and “in fact” and the latter is defined and limited through footnote 4.  While some broader definition might or might not have been in the mind of the European Community when it submitted MTN.GNG/NG/W/31 of 27 November 1989,the final text only emerged much later from the negotiations. Australia notes that a plain reading of the relevant section in the EC paper shows that it was concerned that the Tokyo Round Subsidies Agreement already covered subsidies “de facto contingent upon export” and that: “[t]his, however, makes it necessary to provide for clearer guidance in identifying de facto export subsidies, in order to avoid undue extensions of the category of export subsidies.” (emphasis supplied by Australia)  Australia suggests that this could be read as the European Community seeking to limit the scope of any new agreement in this area.  The third paragraph of the same section makes it clear that the European Community is looking at a situation where: “subsidies aim at distorting trade by favouring exports.  A mere reference to the effect if [sic] a subsidy on exports, as observed ex post facto, would be inconsistent with this rationale.  If it cannot be shown that, on the basis of the facts which the government knew – or should clearly have known – when granting the subsidy, the intention of the government was in fact to favour exports, and therefore it cannot be said that the subsidy aims, de jure or de facto, at distorting trade, this subsidy should not be prohibited; it should rather be subject to remedial action if and when it produces demonstrable negative effects on trade.”

7.95 Australia points out that, at that stage of the Uruguay Round negotiations, there were a number of proposals concerning the ambit of the provision in question. The United States, in MTN.GNG/NG10/W/29 of 22 November 1989, argued for the prohibition of: “[a]ny subsidies to a firm and/or firms [footnote omitted] predominantly engaged in export trade,  i.e. whose exports exceed [X] per cent of total sales.”[89]   That was not accepted.  Indeed, Australia submits, the argument of the United States before the Panel appears to be an attempt to achieve what it sought unsuccessfully in the Uruguay Round.

7.96 Australia notes that, in MTN.GNG/NG10/W/29, the United States did not call such subsidies export subsidies, but rather distinguished them from export subsidies by calling them “trade-related subsidies”, but nonetheless prohibited.  As with Article 3.1(b) of the SCM Agreement, such subsidies would have been prohibited but were not “export subsidies”.

7.97 Australia states that, in MTN.GNG/NG10/W/38, this concept was listed as one of the reasons for the presumption of serious prejudice (Article 6.1(c)) with a footnote to the effect that it might appear instead under the prohibition article (then Article 1) with a different threshold percentage.  This was a provision additional to, and separate from, the “in law or in fact” rule on export subsidies   It was included under the deeming of serious prejudice provision (Article 6.1) in the Chair’s consultation draft for MTN.GNG/NG10/W/38/Rev.2 with a square bracketed figure of 95% but without the footnote referencing the prohibition article (Article 3).  Australia, at least, was opposed to the provision and presumably many other participants shared this view, because it was dropped completely from the actual version of MTN.GNG/NG10/W/38/Rev.2, which emerged from the consultations.

7.98 Australia asserts that this goes to demonstrate that Uruguay Round participants were not prepared to accept that a high level of exports should lead to a deeming of serious prejudice let alone prohibition.  In addition, the draft provisions on prohibition for a high level of exports would have been separate from the “in fact or in law”, which was already in the draft.  Thus, the drafters of the text saw the high level of exports, while potentially creating a prohibited category under the agreement, as a category separate from the export subsidy (in law or in fact) category.  Moreover, even the United States did not consider during the Uruguay Round that a high level of exports would satisfy an “in fact” test, since it did not characterize such situations as export subsidies but instead part of a separate category of trade-related subsidies.

7.99 According to Australia, this goes to underline that countries have always been careful not to confuse the categories for which disciplines are being negotiated, and not to overreach themselves on what it was sensible to seek disciplines from a practical point of view.  The disciplines on export subsidies are in respect of subsidies that discriminate, that target, that favour, exports against domestic sales.  Any other construction would lead to a potentially unworkable discipline and lead to uncertainty about its application by governments.  That sort of uncertainty is what the new DSU is supposed to reduce because an automatic system without a high degree of certainty in its future application would undermine its legitimacy.

7.100 In the context of the negotiating history, Australia states, MTN.GNG/NG10/23[90] dated 7 November 1990 was circulated by the Chairperson of Negotiating Group 10 prior to the Ministerial meeting at Heysel in December 1990.The footnote to “in fact” (then numbered Footnote 3) read in its entirety[91]:

This standard is met whenever the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in practice tied to actual or anticipated exportation or export earnings.  (emphasis supplied by Australia)

7.101 Thus, Australia states, the unagreed text that the Chairperson sent to Heysel in December 1990 had two very different aspects to that which is in the SCM Agreement, that is:  (a)  what the facts had to demonstrate was the standard of “in practice” rather than the much higher standard of “in fact”; and (b)  the important, limiting qualifier of the second sentence had not been added.  For Australia, the change in the drafting makes it clear that some participants were not prepared to accept a nebulous “in practice” standard.  The current text appeared in the Draft Final Act, MTN.TNC/W/FA, of 20 December 1991, except that the change from “whenever” to “when”, came later from the Legal Drafting Group.

7.102 Australia submits that the “in fact” standard in Article 3.1(a) of the SCM Agreement is not some undefined de facto standard.  The “in fact” standard is defined in footnote 4.  In order to establish that that standard is met, footnote 4 must be satisfied. This sets a high threshold for the complainant.  The construction that the United States puts on Article 3.1(a) and footnote 4 of the SCM Agreement is not borne out by the drafting.  The text of Article 3.1(a) says: “subsidies contingent, … in fact, whether solely or as one of several other conditions, upon export performance …[footnote 4 omitted]”.  In order to prove that any particular measure before the Panel satisfies this, the United States must prove that the measure is a subsidy contingent in fact, whether solely or as one of several other conditions, upon export performance, where the "in fact" standard is defined in footnote 4 of the SCM Agreement.  The text is clear that “contingent in fact” is a condition that must be proven to exist.

7.103 Australia observes that the United States seeks to argue that: "the mere fact that a subsidy is accorded [sic] to enterprises which export" means “the fact that the recipients happen to export is the only factor indicating that a subsidy is a de facto export subsidy.”[92]  According to Australia, this misrepresents the limitation inherent in the second sentence of footnote 4 of the SCM Agreement.  This sentence means that the complainant cannot just look to an enterprise’s exports as the grounds for proving the standard in the first sentence.  Of course, it can be assumed that a case would only arise where there was exportation.  Accordingly, the interpretation that the United States seeks to put on the limitation inherent in the second sentence of footnote 4 of the SCM Agreement would trivialize it.  This additional sentence underlines that the level of exports by an enterprise cannot be the basis for proof of “in fact tied”, i.e. the extent of exportation by the enterprise is not relevant for the required demonstration.  Rather, 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.

7.104 Australia notes that the United States argues that: “[r]ather, an export subsidy will exist when actual or anticipated exportation is merely one of several potential criteria influencing the bestowal of benefits.”[93]  (emphasis supplied by Australia)  Australia asserts that this is not what the text says, which is that the granting of the subsidy has to be in fact tied to actual or anticipated exportation or export earnings.This not only confuses what the United States might have wanted out of the Uruguay Round and what is in the SCM Agreement, but even seems to go well beyond it.  The idea that “potential criteria” might determine whether a measure was in breach of a treaty obligation would make a nonsense of a binding treaty.  Australia queries:Who would decide what are “potential criteria”?  Presumably, either the complainant or the panel.  There is no way in advance that a Member could decide what might be regarded as “potential criteria” by others when seeking to formulate its commercial policy in keeping with its treaty obligations.  The recognition by a government that an enterprise exports and that internationally competitive industries are desirable does not somehow convert a subsidy that does not favour exports into a prohibited measure. 

7.105 According to Australia, a logical conclusion of the United States' argument is that if a government gives an enterprise a subsidy in the knowledge that it exports, and does not expressly say that exportation is a bad thing, then the subsidy is prohibited.  The government of virtually every Member provides subsidies that knowingly go to some enterprises that export and these governments are normally on the record that they consider exports a good thing, and indeed are on the record praising successful export industries.  To suggest that suddenly all those measures fall within the scope of Article 3.1(a) of the SCM Agreement would be to radically upset the balance of obligations under the WTO Agreement and risk making the SCM Agreement, in particular, completely unworkable.

7.106 Australia maintains that the United States again seeks to widen the obvious meaning of the text through its argument that, by explicitly including a footnote emphasizing that subsidies are prohibited without having been made expressly contingent on export performance, the SCM Agreement recognizes that Members may well attempt to mask the export-orientation of particular benefits by claiming they are bestowed without explicit contingencies.  This is not a rule about “expressly contingent” or “explicit contingencies”.  The “in law” standard is about the requirement of export performance being just that, in law, e.g. in legislation.  The “in fact” standard is about “in fact tied” by some means such as an administrative instrument.  Indeed, in both cases, the tie must be explicit, either in law or in fact.  With respect to the United States' request that the Panel make a determination on the basis of the “facts and circumstances”, Australia asserts that the findings by the Panel on each measure before it will need to be made on “the facts”, not the “circumstances”, and whether “the facts” demonstrate unequivocally that the standard in footnote 4 of the SCM Agreement is met.

7.107 Australia submits that, in accordance with the principles of treaty interpretation, the Panel needs to look at the wording in the treaty in its own context.  The final text of the SCM Agreement is part of the balance of rights and obligations under the WTO.  This includes the strict limitation under footnote 4 of the SCM Agreement to the scope of “in fact”.  Negotiating countries did not sign on to, and would not have signed on to, the sort of open ended interpretation that the United States is now seeking to read into the text.  This provision must also be read in the context of Parts III and V of the SCM Agreement, where there is provision for multilateral and unilateral remedy from adverse effects allegedly being caused by subsidies.  Quite apart from this case, a widening of the scope of the meaning of “in fact” would have a potentially far-reaching impact on the balance of Members’ rights and obligations under the WTO.

7.108 Australia contends that the United States' arguments in this case regarding several measures in respect of a single enterprise can tend to obscure the substantial issues being dealt with.  Rules regarding prohibition must relate to the type of measure involved, rather than leaving discretion to a panel to decide on the situation.  Without that clarity, it would not be possible for Members to have any surety that they are complying with their treaty obligations.  This is quite different from a trade effects test where there is no breach of treaty obligation but rather a subsequent obligation to remove the non-violation nullification or impairment (including serious prejudice under the SCM Agreement), if demonstrated.

7.109 In Australia's view, if there were to be some undefined concept such as a high level of exports or the possibility that an enterprise would increase its level of exports, which would render a measure prohibited according to a Panel ruling, then the treaty would be unworkable and Members would be able to challenge measures capriciously.  Moreover, if an adverse interpretation were to rely upon there being only one enterprise in an industry, then this would be biased against smaller Members and would even potentially open the door to a future finding that the receipt by a sole domestic seller (which also exported) of any subsidy would be a prohibited measure.  Australia states that this would clearly not be the object and purpose of the discipline under Article 3.1(a) of the SCM Agreement.

7.110 On the other hand, Australia asserts, consider the case where there were, say, two enterprises in an industry, one of which was domestically-oriented and one of which was export-oriented.  The creation of a rule that meant that a subsidy programme was a prohibited measure when received by one company, but not when received by the other, would be a substantial move away from a sensible rules-based discipline.  It would be a bias against smaller Members and would upset the balance of rights and obligations negotiated under the WTO.  It would make the day-to-day provision of advice to governments on complying with their treaty obligations almost impossible to do with any certainty.  At the end of the day, this would be a degeneration into the situation of a large Member being able to threaten a dispute with any smaller Member that did not fully comply with its demands, since there would no longer be a framework of objective rules against which Members could act to obtain the safe haven of compliance.

7.111 Australia submits that once the Rubicon has been crossed of using a subjective level of exports test as being the determinant for “in fact”, the logical consequences become increasingly difficult to reconcile with a sensible regime.  As one example, Australia considers the situation of any non-specific subsidy programme, i.e. non-specific in the sense of Articles 2.1, 2, and 4 of the SCM Agreement.  Invariably, that subsidy will be being received by some enterprise that exports much of its product and indeed may even be wholly devoted to exports of some product.  Australia queries whether that would mean that that measure is, in the hands of that enterprise, a prohibited measure under Article 3.1(a) of the SCM Agreement and so specific under Article 2.3 of the SCM Agreement?  Would this then mean that the entire programme suddenly becomes specific?  Australia maintains that these types of consequences would make the Agreement incoherent and potentially unworkable.  Australia points out that, to put this in perspective, this is not an issue such as countervail, where there is a degree of discretion placed in the hands of the investigating authorities (at least in the first instance) to take decisions on such matters as the status of a measure.  This case is dealing with the issue of the conditions under which the granting or maintenance of a measure is inconsistent with treaty obligations.

7.112 Australia stresses that the concepts of “in law” and “in fact” should not be confused with de jure and de facto, especially de facto.  The text of the SCM Agreement could always have simply said “de jure or de facto” and left those terms undefined.  Indeed, the United States said that these were in the Tokyo Round Subsidies Agreement implicitly.