VII. Arguments of Third Parties ⁴⁸⁵

A. European Communities

1. Export contingency

7.1 The European Communities disagree with Brazil's interpretation of export contingency under Article 3.1(a) SCM Agreement which would include "export propensity" or "intent to increase exports". The European Communities state that under this approach whenever a benefit is conferred to an export-oriented undertaking with the explicit or implicit aim to increase its exports, the requirement of export contingency would be fulfilled, that is that benefits:

7.2 The European Communities consider that Brazil's approach is unjustifiably broad and puts all industrial promotion activities into the category of potential prohibited subsidies, and does not take into account that the SCM Agreement distinguishes three categories of subsidies: prohibited subsidies, actionable subsidies and non-actionable subsidies. The European Communities believe that Brazil's approach is in contradiction to this basic distinction by declaring even certain non-actionable subsidies to be prohibited.

7.3 According to the EC Article 3.1(a) of the SCM Agreement and its footnote provide for a much more limited definition of prohibited subsidies. For the European Communities, the plain meaning of the words "contingent" and "tied" require conditionality between the subsidies and exportation or export performance. The European Communities support Canada's view that the effect of a subsidy or the objective of a subsidy cannot on their own be sufficient to establish de facto export contingency under Article 3.1(a). The European Communities submit that exportation, or export earnings must be a condition for the grant of the subsidy, and that such a condition would be fulfilled in cases where exports arise out of the desire of companies to take advantage of a subsidy that can only be obtained if exports take place; in other words, it would cover cases where, although the subsidy is not specifically linked to export performance, in practice companies are obliged to export if they are to fulfil the requirements for obtaining the subsidy.

7.4 The European Communities submit that the language of Article 3.1(a) was the result of a long debate between the opposing views represented in the Uruguay Round negotiations. For the European Communities, Canada's explanation of the negotiating history demonstrates that the broad view being put forward by Brazil was excluded from the text through a succession of improvements in the wording. Thus, the European Communities argue what was called the "quantitative approach", as well as the "export propensity" test to determine whether a given measure was a prohibited subsidy were rejected in the context of the Negotiating Group on Subsidies and Countervailing Measures⁴⁸⁶, and similarly, the evolution of footnote 4 demonstrates the negotiator's rejection of an objective or intent-based test in favour of a conditions-based test.

7.5 The European Communities also agree with Canada's view that as a practical matter the following factors are useful in determining whether a subsidy is in fact contingent upon export performance:

7.6 Regarding a hypothetical example posited by the Panel, in which a WTO Member administered a subsidy programme eligibility for which was restricted de jure to enterprises which qualified, based on past performance, as "export-oriented", the European Communities remark that the problem becomes clearer when the case is even more hypothetical, i.e., where eligibility is restricted de jure to enterprises which exported a certain product in the year 1900. It would not in the view of the European Communities be within the intent of Article 3.1(a) of the SCM Agreement that this be considered a de jure export contingent subsidy in such circumstances. In the EC's view, therefore, the term "'export performance'" in Article 3.1(a) can only mean present or future export performance. The European Communities argue that this interpretation is supported by footnote 4 to Article 3.1(a) which refers to subsidies which are "'in fact tied to actual or anticipated exportation or export earnings'". The European Communities also consider that export performance within the meaning of Article 3.1 of the SCM Agreement must be measurable in some way.

7.7 The European Communities consider that the subsidy described in the example should probably be considered a prohibited subsidy as being de facto contingent, as in the real world, it is hard to see how a subsidy based de jure on past export performance would be granted for any other reason than to enhance anticipated exportation or export earnings in the future. Therefore, in the absence of other evidence to the contrary, for the European Communities it would be reasonable to make this assumption and consider the scheme in question to be a de facto export subsidy. This would in particular be the case if the scheme were kept in force for a period of time or was regularly repeated, as it would then constitute an incentive to all producers to start exporting to benefit from the subsidy.

7.8 Regarding the example posited by the United States (paras. 7.41-7.42), the European Communities in response to a question from the Panel indicate that the example is more instructive if slightly varied or clarified such that an eligibility criterion for a grant is that a firm must submit a plan explaining how the construction of the facilities will affect the firm's exports or export earnings. As there is no de jure link between the granting of the subsidy and future exports, in order to determine whether such a requirement constitutes a de facto export subsidy, the European Communities maintain that it would be necessary to examine how the scheme is applied in practice. For the European Communities, if the grant is granted whether the plan shows that export earnings will increase or decrease, it is clearly not contingent on export performance and not a prohibited subsidy; if the grant is discretionary and only in fact given to firms which will increase their export performance, it may be considered de facto export contingent. The European Communities note that future exports may not be according to the plan for some unforeseen reason without the subsidy being refundable, but that if it is because the plan was fraudulent, the subsidy will no doubt be recoverable and the scheme is therefore contingent upon export performance in the form of a good faith execution of the plan.

7.9 For the European Communities, the US example is misleading since it speaks of "'a plan explaining how the construction of such facilities will increase the firm's exports or export earnings'". Such an '"increase'" will in practice inevitably be measurable and the firm will be committed to a good faith execution of the plan. Therefore, in the view of the European Communities the US example sets a condition for the granting of the subsidy which is tied to anticipated exportation or export earnings and would fall squarely within the conditionality approach advanced by the European Communities; the subsidy will be de facto export contingent and prohibited.

7.10 The European Communities contend that the US example demonstrates the need to perform a more subtle analysis than proposed by the United States and examine how the eligibility criterion is applied, for example by examining whether applications for aid would be refused where the submitted plans showed that the subsidy (i) would not affect exports at all (i.e., they would remain at the current level), or (ii) would only affect exports in proportion to the overall increase in production (thus maintaining the current domestic/export sales ratio). If the application for aid was accepted in both cases, then in the view of the European Communities it is not necessarily an export subsidy as it is granted also to producers selling on the domestic market.

2. Annex I (k), first paragraph SCM Agreement

7.11 The European Communities comment on the "safe haven" provided by the second paragraph of Item (k) to Annex I of the SCM Agreement for export credit practices which conform to the conditions referred to therein.

7.12 The European Communities note that Canada does not defend the financing and loan guarantees of EDC on this basis but rather argues that EDC financed loan guarantees "no material advantage" in the field of export credit terms and that its finance is not on "concessionary terms".

7.13 For the European Communities, the OECD Guidelines on Officially Supported Export Credits to clearly satisfy the requirements of paragraph 2 of Item (k) of Annex I SCM Agreement. The European Communities submit that the importance of the OECD Guidelines derives from footnote 5 to Article 3.1 of the SCM Agreement, which states that:

7.14 The European Communities argue that reading this footnote together with paragraph 2 of Item (k) of Annex I SCM Agreement leads to the conclusion that export credit activities which conform with an international undertaking on official export credits, as described in paragraph 2 of Item (k) of Annex I SCM Agreement, and, therefore, all export credit activities which conform with the OECD Guidelines, are not prohibited under Article 3.1 or any other provision of the SCM Agreement. That is, for the purposes of the SCM Agreement, paragraph 2 of Item (k) of Annex I SCM Agreement creates a "safe haven" for Member export credit practices which conform to the OECD Guidelines.

7.15 The European Communities defend the principle of application of the OECD Guidelines on officially supported export credits to all the organizations which fall under its scope. It considers that the interest rates allowed by the OECD Guidelines should be used in the case of public financing support. The European Communities argue that publicly supported rates below those of the Arrangement fall outside the "safe haven" and are subject to the full rigours of the SCM Agreement. If they constitute a subsidy and are export contingent, they are prohibited.

7.16 In response to a Panel question regarding the EC's understanding of the term "'interest rate provisions'" of the relevant undertaking in item (k) of the Illustrative List of Export Subsidies, the European Communities reiterate that the first paragraph of Annex I(k) is to be considered an illustrative prohibition (i.e., it does not exhaustively define the scope of Article 3.1(a) in this sector), and that the second paragraph by contrast contains an exception, not only from the first paragraph but from the whole of the SCM Agreement (the OECD "'safe haven'").

7.17 For the European Communities, these are important principles to recall since the parties and the other third party do not appear to have correctly construed the provisions of item (k). Particularly noteworthy to the European Communities in this regard is the position of the United States (in para. 7.45) where the US asserts, without any reasoning and in contradiction to the clear text of the SCM Agreement that:

7.18 For the European Communities it is clear from the text of Article 3.1(a) ("'including those illustrated in Annex I [emphasis added by the European Communities]) and the title to Annex I itself ("'Illustrative List of Export Subsidies'" [emphasis added by the European Communities]), that in general the paragraphs of Annex I contain illustrative prohibitions. It is only otherwise where the Annex provides that a certain measure does not constitute an export subsidy. In such a case the measure is, by virtue of footnote 5 to Article 3, not prohibited under any provision of the SCM Agreement, according to the European Communities.

7.19 The European Communities maintain that this is the case of the second paragraph of item (k) to Annex I of the SCM Agreement which creates a "'safe haven'" for the export credit practices which conform to the conditions therein. The European Communities submit that the second paragraph of item (k) and in particular the term "'interest rate provisions'" must be interpreted in the light of the fact that it creates an exception to the whole SCM Agreement.

7.20 According to the European Communities, if these words were taken to refer, in the case of the OECD Arrangement, only to the provisions on minimum interest rates, any "'export credit practice'" which respected those provisions would be deemed not prohibited by the SCM Agreement. Since the term "'export credit practice'" can cover much else besides the provision of interest rates below those provided for in the Arrangement, the European Communities argue that these other practices would also be deemed not to be prohibited by the Agreement even if they did not comply with the Arrangement, defeating the object and purpose of the provision. It would for example be possible to increase the term of the loan, or alter the repayment profile (which can change the average term of the credit although the total length of two credits are the same) or provide for reductions of premia and fees (Arrangement interest rates are supposed to be for risk free lending - premia for insurance/guarantees is to be paid in addition) so as to reduce the effective cost of the loan in the same way as a reduction in the interest rate.

7.21 The European Communities consider that such a wide interpretation of the exception is not warranted and that the exception should be interpreted more narrowly, meaning that the term "'interest rate provisions'" must be taken to refer to all the provisions of the OECD Arrangement which are related to interest rates, and in particular the whole of Chapter II.

7.22 The European Communities consider that this would correspond to the object and purpose of the OECD Arrangement and us of the second paragraph of item (k) in Annex I of the SCM Agreement, namely to prevent export credits from being used to distort competition by harmonising their conditions. Therefore, the European Communities maintain, the priority is to ensure that export credit conditions are equal and the question of whether they are commercial rates is of less importance (although the European Communities consider the interest rates in the Arrangement to be broadly in line with the total costs of commercial loans with the same terms (credit length, etc.)). In the view of the European Communities, this objective of equalising conditions of competition in export credits would be defeated if export credit practices which can be translated into interest rates were not covered.

B. Submission of the United States

1. Applicability of the SCM Agreement to subsidies provided prior to the entry into force of the WTO Agreement

7.23 The United States argues that, contrary to Canada's argument (para. 4.74), the SCM Agreement does apply to subsidies provided prior to the entry into force of the WTO Agreement. In the view of the United States, Canada's arguments are wrong for two reasons. First, putting aside the question of a different intention in the SCM Agreement or the WTO Agreement, Article 28 of the Vienna Convention states that a treaty does not apply to "'any situation which ceased to exist'" before the entry into force of a treaty. In this case, the United States notes, the "'situation'" complained about by Brazil is subsidization. The United States argues that depending on the nature of the alleged subsidies provided under DIPP and SDI, it may be the case that subsidization did not cease as of 1 January 1995, the date on which the WTO Agreement entered into force with respect to Canada.

7.24 More specifically, the United States argues that it is well-accepted that the benefits of certain types of subsidies can last for a period of years, noting that this concept is recognized in Annex IV of the SCM Agreement, paragraph 7 of which provides as follows: "'Subsidies granted prior to the date of entry into force of the WTO Agreement, the benefits of which are allocated to future production, shall be included in the overall rate of subsidization'". (emphasis added by the United States).⁴⁸⁷ The Tokyo Round Subsidies Code Committee also recognized the concept when it adopted Guidelines on Amortization and Depreciation that called for the allocation of certain subsidies over time.⁴⁸⁸ Moreover, to the best of the US' knowledge, all major users of the countervailing duty remedy, including Canada, allocate certain subsidies over time, although the mechanics of allocation methodology may vary from country to country. Finally, for the United States, common sense dictates that, for example, the provision of a $100 million grant to a firm does not constitute a subsidy only with respect to merchandise produced by the firm on the day the grant is received. Instead, the grant benefits merchandise produced over a period of time.

7.25 The United States maintains that because certain subsidies bestowed in the past can be deemed to benefit current or future production, it follows that a situation of subsidization can exist long after a subsidy is initially bestowed. Where this is the case, in the United States's view, the fact that the action creating the situation of subsidization may have been taken prior to 1 January 1995 does not mean that the situation of subsidization is exempt from the obligations and remedies of the SCM Agreement if that situation persists after 1 January 1995.

7.26 For the United States, the second reason why Canada is wrong is that the SCM Agreement does, in fact, demonstrate that it applies to subsidies provided prior to 1 January 1995, recalling paragraph 7 of Annex IV, which expressly provides that pre-WTO subsidies must be included for purposes of Article 6.1(a). Thus, the United States maintains, Canada is clearly wrong when it states that the SCM Agreement "'does not . . . apply to events that took place prior to 1 January 1995.'"

7.27 The United States submits that under Article 28 of the Vienna Convention, the DIPP and SDI subsidies could be subject to the SCM Agreement.⁴⁸⁹ Therefore, in the view of the United States, this preliminary objection of Canada's is unfounded.

7.28 In response to a Panel question whether the distinction between the SCM Agreement's parts II and III is relevant to the question of temporal application of the part II prohibition (in light of the US argument based on the serious prejudice provisions including paragraph 7 of Annex IV), the United States replies that this distinction is not relevant. Here, the United States recalls the reference in paragraph 7 of Annex IV to subsidies "'the benefits of which are allocated to future production'" (emphasis added by the United States), and argues that the wording of paragraph 7 makes clear that insofar as the allocation of subsidies is concerned, the drafters did not intend paragraph 7 to be a special rule applicable exclusively to serious prejudice cases involving Article 6.1(a) of the SCM Agreement. Instead, the drafters took as a given the notion that the benefits of certain types of subsidies should be allocated to future production (i.e., should be allocated over time), and added paragraph 7 in order to clarify how these types of subsidies figured into the calculation of the ad valorem subsidy rate for purposes of Article 6.1(a). For the United States, the phrase "'the benefits of which are allocated'" connotes a proposition that is universally applicable, regardless of the context, and had the drafters intended otherwise, they would have used different language, such as the following:

7.29 Moreover, the United States maintains, even if the drafters had intended that paragraph 7 function as an acknowledgement of the propriety of allocating subsidies over time for purposes of Article 6.1(a), the fact that paragraph 7 expressly recognizes, for purposes of Article 6.1(a) of the SCM Agreement, that the benefits of subsidies can last for a period of years does not mean that in other contexts the benefits of subsidies cannot last for a period of years. Put differently, the fact that the drafters expressly recognized in one portion of the SCM Agreement the concept of allocating subsidy benefits over time does not mean that the drafters intended to preclude the application of this concept in other portions of the Agreement.

7.30 The United States also notes that it did not cite only paragraph 7 of Annex IV in its third party submission, but also referred to experience under the Tokyo Round Subsidies Code, the countervailing duty practice of Members (including Canada), and common sense, the latter probably being the most important factor of all.

7.31 Finally, the United States notes that it also cited paragraph 7 of Annex IV for purposes of responding to Canada's across-the-board assertion that the SCM Agreement does not apply to subsidies provided prior to 1 January 1995. If nothing else, the United States argues, the existence of paragraph 7 effectively rebuts such a sweeping assertion.

To continue with Canada's interpretation of "export subsidy"

⁴⁸⁵ The footnotes and citations and the emphasis in the text are the third parties'.

⁴⁸⁶ Note by the Secretariat, Negotiating Group on Subsidies and Countervailing Measures, Meeting of 27-28 March 1990, MTN.GNG/NG10/17 at para. 3.

⁴⁸⁷ Annex IV deals with the calculation of the total ad valorem subsidization for purposes of Article 6.1(a) of the SCM Agreement.

⁴⁸⁸ BISD 32S/154. These guidelines were applicable to countervailing duty proceedings.

⁴⁸⁹ Whether those subsidies are, in fact, subject to the SCM Agreement raises a factual question on which the United States does not opine. To answer this question, the Panel would have to determine (1) whether these subsidies are of the type that should be allocated over time; and (2) if they are, the number of years over which they should be allocated.