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WORLD TRADE
ORGANIZATION

WT/DS126/RW
21 January 2000

(00-0227)

  Original: English

AUSTRALIA - SUBSIDIES PROVIDED TO
PRODUCERS AND EXPORTERS OF
AUTOMOTIVE LEATHER -

RECOURSE TO ARTICLE 21.5 OF THE DSU BY THE
UNITED STATES


REPORT OF THE PANEL

(Continued)


ANNEX 2-5

AUSTRALIA'S ANSWERS TO WRITTEN QUESTIONS OF THE PANEL

AND THE UNITED STATES

(1 December 1999)

ANSWERS TO QUESTIONS FROM THE PANEL TO AUSTRALIA

1. (a) Australia says, at para. 32 of its first submission, that "the subsidies contingent on export performance are presumed to be expensed on actual exports, paid either in advance or in arrears". How would Australia approach the question of remedy where the contingency was expressed simply as "something must be exported". That is, a grant would be provided on the assumption that the recipient would export, with no performance targets or time-period specified. In Australia's view, would this mean that no action would be needed either to "withdraw the subsidy" or, in Australia 's terminology, to "bring the subsidy into conformity"? If so, on what basis?

Answer 1(a):

If a grant were to be provided simply on the "assumption that the recipient would export", then this would not fall under SCM Article 3.1(a). That would amount to a very weak export propensity test. For example, if a firm exported even a minor proportion of its production, say 10%, there could be an assumption that there would be some exports in the future, but the subsidy would hardly fall under SCM Article 3.1(a).

It is difficult to imagine a government imposing a condition as simple as that "something must be exported". Presumably, that could be satisfied by exporting one widget out of a production of one million widgets. If there was an explicit condition to export at least one widget and if that were to be removed before the one widget was exported, then the measure would be in conformity. Similarly, if the one widget had been exported already, then that condition would no longer apply and the measure would be in conformity. Of course in a real situation, a panel might find that the measure was in breach of SCM Article 3.1(a) as the result of factors other than "something must be exported". In that case, further action might need to be taken to withdraw the measure and bring it into conformity.

(b) How would Australia approach the question of remedy where the contingency was exclusively, although in a general way, based on past exports? For example, the contingency might be expressed in very general terms, such as "past export success" or "last year's good export performance". In such cases, would Australia argue that nothing would need to be done to "withdraw the subsidy" or "bring the subsidy into conformity"? If so, on what basis?

Answer 1(b):

Again, this would depend on the actual circumstances. For example, if this was no more than a random reward where there was no expectation by the recipient of receiving money, then it is highly questionable whether the money should be considered to fall under SCM Article 3.1(a) at all. However, it is unlikely that a government would provide money on such a simple basis and so the actual circumstances would have to be looked at. In any case, if the payment was simply based on past exports, then it would have gone and so there would be no subsidy to withdraw.

If this was part of a programme so that a company knew in advance, or had a reasonable expectation, that there would be a reward for export performance, then the action required would be to terminate the programme providing subsidies in this way.

There is nothing unusual or untoward in GATT and now WTO practice in not having some form of retroactive punishment for breaching a rule. The WTO is an agreement between sovereign states and there is a presumption that Members will try to follow the rules. There is no provision for dealing with one-off cases of past breaches.

(c) Is Australia effectively arguing that only export subsidies that are expressly conditioned on specific, explicit performance targets covering future periods would require any action to be taken by the subsidizing government in order to be "withdrawn" or "brought into conformity"? If so, on what basis?

Answer 1(c):

No. The quote in the chapeau to this question was simply stating that for a finding of inconsistency with SCM Article 3.1(a) a panel must find a tie to actual or anticipated exports and so the money is tied to those exports. This is consistent with the Panel's questions on export subsidies being presumed to cause adverse trade effects - the reason for that is the presumption that the money is tied to exports, which are what cause the adverse effects. The quote did not prejudge what would happen in any particular case. However, in this case the grant payments were found to be tied to the sales performance targets over 1 April 1997 to 30 June 2000, which in turn effectively created export performance targets.

(d) Would not the implication of such an approach be that a subsidizing government could provide (even de jure) export subsidies with complete impunity simply by omitting any specific performance requirements as to export levels and time periods in the expression of the export contingency? If not, why not?

Answer 1(d):

Not applicable.

(e) Would not such an approach be equivalent to saying that the only thing really prohibited under Article 3.1(a) is specific export performance requirements (that is, that an export subsidy is completely "safe" so long as it is not associated with any explicit export performance requirements)? If not, why not? If so, on what basis can such an approach be justified?

Answer 1(e):

Not applicable.

2. Australia argues that trade effects are irrelevant in the context of export subsidies, where, according to Australia, the question is not one of trade effects, but rather one of conformity with a rule. What, in Australia's view, is the purpose or rationale underlying the prohibition on export subsidies? Would Australia disagree that the reason that export subsidies are prohibited is because they are irrebutably presumed to cause adverse trade effects? Please explain the basis for any disagreement. In Australia's view, if such a presumption exists, is it relevant to this dispute? Why or why not?

Answer 2:

The rules in the WTO on export subsidies are there primarily because of their potentially damaging trade effects. However, there is a distinction between the reason for having a rule and the basis for determining conformity with it. For example, tariffs are considered to cause adverse trade effects and hence the provision for bindings under GATT Article II. However, in order to demonstrate a violation of GATT Article II, the complainant does not have to demonstrate adverse trade effect. It would only have to do that in a non-violation case.

Similarly, the complainant does not have to demonstrate adverse trade effect, for a subsidy to be found to fall under SCM Article 3.1(a). On the other hand, the fact that a subsidy causes adverse trade effect would not prove that it fell under SCM Article 3.1(a).

SCM Parts III and V, together with GATT 1994 Article II, are about adverse trade effect and injury complaints regarding subsidies.

Such a presumption (about causing adverse trade effects) is not relevant to the matter before the Panel, which is about conformity with SCM Article 3 not about trade effects. Australia is not arguing conformity on the basis that trade effects have not been proved. Australia's point is that the USA is arguing that it wants a particular trade outcome and argues that the Panel should reach a decision not based on the rules but on the USA's desire for a particular trade effect from this case. Australia's obligation was limited to implementing the Report's recommendation adopted by the DSB.

The USA is arguing that because the granting of the grant payments was found to be inconsistent with SCM Article 3.1(a), it is entitled to a remedy based on its own protectionist approach to subsidies under its countervailing regime. This approach is based on a concept of "benefit" aimed at extending the scope of any countervailing duty action. It argued in its First Submission that the remedy should have nothing to do with the basis why the subsidy was found to be inconsistent by the Report.1 Australia's argument is that the "export-contingent feature", to use the USA's words, is the only tool to use to measure how the subsidy should be allocated. The USA is arguing about its concept of "benefit", which it pursues from its view of trade effect, while Australia argues that this case is about rules. Even in the alternative, Australia considers that the grant payments are clearly allocable against the sales during 1 April 1997 to 30 June 2000.

3. Is not Australia itself introducing a "trade effects" and "trade outcome" test (which is one of its criticisms of the US approach to determining the amount of the subsidy to be withdrawn), when Australia argues that export performance targets are the sole determinant of the allocation period that it proposes and of whether and how much money needs to be "withdrawn"? Please explain.

Answer 3:

Australia's approach is a rules test, not a trade effect test. The issue is why the Report found the grant payments to fall under SCM Article 3.1(a). This was because the grant payments were tied to the sales performance targets in 1 April 1997 to 30 June 2000, which in turn effectively created export performance targets in the period 1 April 1997 to 30 June 2000. This was the key finding of the Report. Australia is arguing that the basis for the inconsistency must be the basis for the way in which Australia can bring the measure into conformity.

4. Australia, although arguing that Howe's interest rate is irrelev ant to this dispute, criticizes the US's estimate of that rate, derived from 1997 financial statements of Howe Leather (Australia's second submission at para. 51). What in Australia's view would be the commercial interest rate and loan terms that Howe would have been able to obtain on the market for long-term borrowing during each of the past three years? Please provide a full explanation and supporting documentation.

Answer 4:

The USA had simply taken the amount of interest and costs of other finance paid for ALH for the year 1996-97 and divided it by the borrowings shown under Current Liabilities in the balance sheet at the 30 June 1997.

The reality is that this is not comparing like with like. It compares total interest paid over 12 months with the borrowings on outstanding Current Liabilities on 30 June. No consideration is taken of the fluctuations in borrowings and interest costs under both Current and Non-Current Liabilities during the course of the fiscal year or the significant reduction in commercial borrowed funds during that same year.

The published accounts for ALH for the year 1997-98 and for subsequent years require full details of all loans and the averaged interest rate for those classes of loans for that year. For example, the published figures show that for the year ending 30 June 1997 ALH had an average interest rate for bills of exchange of 7.5 per cent and an overdraft rate of 9.25per cent See Tables 1 and 2 below.

TABLE 1    (Pdf.  formating)

TABLE 2   (Pdf.  formating)

5. How does Australia respond to the US argument that the repayment by Howe of part of the grant would not have occurred absent the 1999 loan, and that therefore provision of the loan made the withdrawal of the part of the grant a "sham"? In light of this argument, how in Australia's view are these transactions separate, and not so inextricably linked as to be inseparable in practical terms? That is, why can the "replacement measure" not be seen as part of the original measure, at least for purposes of the 21.5 proceeding? Is there any distinction to be drawn between an original dispute, where certain actions must be judged on their own merits as "separate measures", and an implementation dispute under 21.5 where all steps related to implementation must be examined for compliance with the DSB's recommendations? Please explain.

Answer 5:

Australia is entitled to provide a new WTO consistent subsidy to ALH. The 1999 Loan was to ALH, while the $8.065m. was repaid by Howe.

Even if the Panel considered that there was no distinction between ALH and Howe, Australia is entitled to reconfigure a prohibited measure. The Report agrees with that at paragraph 9.64 and the USA acknowledged it at Footnote 132 of the Report.

The matter before the Panel is whether Australia has brought itself into conformity with SCM Article 3.1(a). Australia considered that the 1999 Loan was not before the Panel but did not ask for any preliminary rulings on this and has provided the relevant documentation to the Panel. Clearly if the Panel considers that the 1999 Loan is before it, then it will need to assess it. However, Australia argues that the Panel should find that it is in conformity with SCM Article 3.1(a).

The Report considered the grant payments and the 1997 Loan separately even though they were a package of assistance. The Report found that the WTO status of the previous assistance measures was irrelevant to its assessment of the consistency of the grant payments and the 1997 Loan.

Any reconfiguration of an assistance measure that is WTO consistent is in a sense linked to the original measure. However, the assessment of conformity must be on the basis of what the current measures are. The 1999 Loan to ALH is a distinct, separate measure without any conditionality, in particular without any conditionality in respect of automotive leather. Given that the 1997 Loan was found to be consistent, no basis has been put forward by the USA why the 1999 Loan should fall under SCM Article 3.1(a).

An Article 21.5 proceeding is about whether the Member has brought a measure into conformity, in this case with SCM Article 3.1(a). The fact that a measure has been found to be inconsistent with SCM Article 3.1(a) does not reduce the Member's rights to provide WTO consistent subsidies to a company.

Australia considers that an Article 21.5 proceeding is about whether the inconsistent measure has been brought into conformity, and not that "all steps related to implementation must be examined for compliance".

The matters before the Panel are whether in the light of the Report Australia withdrew sufficient money from Howe and, if the Panel considers that the 1999 Loan is before it, whether in the light of the Report the 1999 Loan is WTO consistent. If the answer to both of those questions is yes, then the Panel should find that Australia has withdrawn the measures as required and so has brought the measure into conformity. Anything else would lead to the paradoxical finding that even though Australia had no measures in place that were inconsistent with the WTO, somehow Australia was nonetheless in breach of the WTO.

Regarding the issue of separate measures, Australia considers that no distinction should be drawn between an original dispute and an implementation dispute under Article 21.5 regarding the assessment of measures on their own merits.

The USA has not sought to provide any argument justifying its extraordinary new concept that a Member's rights are reduced when it is bringing itself into conformity after a dispute and that it should be subject to different rules before an Article 21.5 panel.

6. Does Australia agree that the logic of the remedies under SCM Agreement is that prohibited subsidies are subject to the most severe remedies, actionable subsidies the next most severe, and non-actionable the least severe? If not, why not and on what legal basis?

Answer 6:

This depends on what is meant by "severe remedies". Australia agrees that SCM Article 9 on non-actionable subsidies would be ineffective, since it relies on a consensus in the SCM Committee for action.

The time periods under SCM Article 4 are shorter than under SCM Article 7, and so to that extent the remedy is more severe.

Moreover, SCM Part II is about rules rather than trade effect which must be proven under SCM Part III (or at least is subject to rebuttal under SCM Article 6.3 in the event that there is a presumption of serious prejudice under SCM Article 6.1.)

How a Member would comply with recommendations under SCM Articles 4.7 and 7.8 would depend on the circumstances of the case.

For the purpose of this Panel, it is not a question of what is most severe. SCM Articles 4 and 7 deal with different situations. SCM Article 4 deals with the rul es set out in SCM Article 3, while SCM Article 7 deals with adverse effect. Subsidies falling under SCM Article 3 are also subject to SCM Article 7. Moreover, any reconfiguration of subsidies inconsistent with SCM Article 3 could also be subject to a complaint under SCM Article 7, unless it was non-actionable.

7. Australia argues at para. 22 of its second submission that "the concept [raised by the United States] of making a subsidy 'irremediable' is a misunderstanding of the purpose of a dispute under 3.1(a), which is a violation case and so is about conformity with a rule". Is Australia thereby saying that where a pure violation exists (i.e., an export-contingent subsidy under SCM 3.1(a)) but there are no explicit performance targets, the measure is already "in conformity" and therefore no remedy is required? Would this not be the same as saying that a measure was simultaneously "a violation" and "in conformity"? Please comment.

Answer 7:

No. Australia was saying that the issue is about bringing a measure into conformity. That is the remedy. The USA is focused on maximizing the amount of money to be withdrawn from Howe and objecting to the provision of a new subsidy to ALH. Its concept of remedy is not about conformity but about the outcome of a dispute in trade terms rather than rules terms.

If a subsidy has been brought into conformity with SCM Article 3, then the remedy of SCM Article 4 has been achieved.

A measure would not be simultaneously "a violation" and "in conformity". An assessment that a measure falls under SCM Article 3.1(a) is not simply about a sum of money but also about the contingency with export performance in the granting of that money. How a measure can be brought into conformity needs to be examined on a case by case basis. For example, in some cases this may be a matter of changing the conditions, which would in a legal sense amount to terminating the programme and replacing it with a consistent one.

Australia has not argued that there is a need for "explicit performance targets". It has argued that the Report found that the grant payments were tied to the explicit sales performance targets which the Report in turn found were effectively export performance targets. Thus, in this case, the grant payments were found by the Report to be tied to "explicit performance targets".

In addition, it is quite possible to have the situation that there was a measure in violation of SCM Article 3 but there no longer is a measure in violation of SCM Article 3. For example, suppose that there was a subsidy programme that was inconsistent with SCM Article 3 and it has been terminated. Then there has been a violation in the past but not in the present. There is no longer any measure, and so there is conformity only in the sense that there is no measure that is not in conformity.

8. What is Australia's theoretical basis for allocating the subsidy in this case, and if different from that in the countervail context, please explain. If there had been no performance targets in this case, would Australia have argued for subsidy allocation, and if so, over what period and why? If not, why not?

Answer 8:

Australia considers that the Report found that the grant payments were tied to the sales performance targets over 1 April 1997 to 30 June 2000. The critical factor in the finding on inconsistency with SCM Article 3.1(a) was the tie to the interim and aggregate sales performance targets. Accordingly, the Report allocated the grant payments to the sales in the period 1 April 1997 to 30 June 2000. Accordingly, given the weight put on the aggregate sales performance target by the Report, the approach in paragraph 46 of Australia's First Submission is to apportion, or allocate, the grant payments uniformly over the full period of the sales performance targets, i.e. 1 April 1997 to 30 June 2000. The alternative approach in paragraph 47 of Australia's First Submission is to apportion, or allocate, the grant payments over 1 April 1997 to 30 June 2000 on the basis of the interim sales performance targets.

Australia does not consider that the countervailing methodology is relevant here. Nonetheless, given that the grant payments were allocated to sales in this period, Australia considers that the same period for allocation should be used for countervailing purposes. If the money had been paid after the event on say a quarterly basis, then presumably not even the USA would argue about the allocation. Australia sees no reason why just because the money was paid in the first half of the period covered by the Grant Contract, albeit in three tranches in three separate fiscal years, that that should affect the period of allocation for countervail purposes.

If there had been no performance targets, then the Report would have cleared both the grant payments and the 1997 Loan, since the surrounding circumstances would have been identical. However, if there had been some other conditions that led to an adverse finding, that would have been a different case with different reasoning. In that situation implementation would have depended on what those other conditions were and the reasoning and findings of the panel.

Nonetheless, since the $30m. was to fill the period between the excision of automotive leather from the ICS and the entry into force of the new general industry programme, Australia would still have considered that the money should be allocated to sales in that same period, i.e. 1 April 1997 to 30 June 2000. See also the comments under the answer to Question 14(a) about "large" and "one-time".

9. Could Australia please explain the significance of its argument, in para. 45 of its second submission, that the assistance under the ICS was "recurrent" up to April 1997, and that the tranches of the grant payments were payable thereafter at certain intervals. Is Australia arguing that the grant payments were recurring? How is this relevant to the Panel's task in this dispute?

Answer 9:

This is a supplementary argument about allocation, which has already been touched on in the answer to Question 8. The USA has made an argument about recurrent and non-recurrent subsidies from its own, unilateral countervailing duty practice. Australia, while rejecting the relevance of the USA's approach, has noted that as a matter of fact the grant payments were part of a continuum of industry assistance to the textiles, clothing and footwear industries. Automotive leather was removed from eligibility of the ICS from 1 April 1997 and will not come back under the general industry programme until the entry into force of the new programme from 1 July 2000. The grant payments were to cover the period in between, i.e. 1 April 1997 to 30 June 2000. Thus they are allocable to that period alone, and so should not be treated as being non-allocable and so spread over an average asset life for the firm.

This confirms that, even in the absence of the sales performance targets, the grant payments are allocated over 1 April 1997 to 30 June 2000.

The grant payments were also paid in three tranches over three separate fiscal periods. The fiscal year 1999-2000 (July-June) is the only fiscal period in which there was not a grant payment.

Australia noted that assistance to the automotive leather industry, including the grant payments meets the definition of recurrent in the New Shorter English Oxford Dictionary - 1997 CD, i.e. "occurring frequently and periodically". It also meets the definition used by the USA in its own countervail regulations, i.e. allocable2

If by "recurring", the question means "allocable" the answer is yes. Moreover, the grant payments are part of a continuing system of assistance to the industry, albeit in a different form for automotive leather for 1 April 1997 to 30 June 2000.

The Report recognized this when at paragraph 9.65 it says:

"Howe earned significant benefits from its exports of automotive leather pursuant to those programmes [ICS and EFS]. Automotive leather was removed from eligibility under those programmes, and the government of Australia entered into the loan contract and the grant contract providing financial assistance at least in part to tide Howe over after it had lost eligibility for benefits related to automotive leather under these programmes".

In that context, the expression "tide Howe over" clearly indicates that the Report considered that the money was to cover sales, in replacement for the previous assistance, until the new programme came into force for automotive leather from 1 July 2000. Thus this was a genuine and not a contrived period for apportioning the grant payments.

The relevance to the Panel of this is that: on the one hand it puts to rest the straw men put up the USA regarding contrivances about the period to which export subsidies might be claimed to apply; and on the other it provides a supplementary argument why the grant payments are allocated to sales in the period 1 April 1997 to 30 June 2000. It also provides an argument in the alternative if the panel decided to accept the USA's argument about using the period to which the grant payments should be considered to be allocable for countervailing purposes. In this regard it also shows that that grant payments are not one-time or one-off payments (nor were they out of keeping with other assistance provided). See comments on "large" and "one-time" in the answer to Question 14(a).

10. Australia argues, in paras. 25 of its second submission, that "to bring the grant payments into conformity, Australia did not have to impose a punitive measure on an individual company, be it Howe or ALH. This matter is about Australia's rights and obligations as a Member"; and in para. 26 that "[t]he impact on Howe or ALH or any other Australian company is irrelevant: they are not Members, Australia is". How does Australia reconcile these arguments with the fact that, under Article 1 of the SCM Agreement, a necessary condition for a subsidy to exist is the conferral of a benefit, which by definition is a benefit to a recipient, and therefore has nothing to do with the Member itself? (See, Appellate Body report in Canada Aircraft (WT/DS70/AB/R) at paras. 153-161 for a discussion of the term "benefit" in SCM Article 1.)

Answer 10:

The obligation to bring the measure into conformity is that of Australia as a Member of the WTO. The WTO does not directly affect domestic law in Australia. So far as the WTO rules are concerned, the actual impact on the recipient of the subsidy of the withdrawal of the measure under SCM Article 4.7 is irrelevant. However, in some cases to bring a measure into conformity may require action that has a significant impact on the recipient. In this case, the withdrawal of $8.065m. has, in fact, had a major impact on the net income and equity structure of Howe. In some cases, the impact might be even greater. However, if a method of withdrawing a measure and bringing it into conformity were to be available that had no impact on the recipient, then that would still be an acceptable remedy, and there would be no basis for using the lack of effect as an argument about lack of conformity.

The use of the term "benefit" in SCM Article 1.1(b) is about determining the existence of a subsidy. That is distinct from the issues of whether the subsidy falls under SCM Article 3.1(a) and of how a measure might be withdrawn for the purpose of SCM Article 4.7.

Question 11

11. Related to the preceding question, when Australia is proposing "expensing" subsidy amounts, is it referring to subsidy "benefits" or to something else? Please explain.

Answer 11:

Australia is referring to the way the money has been found to be allocated by the Report in finding that the grant payments were tied to export performance in the period 1 April 1997 to 30 June 2000. The Report tied the grant payments to the sales performance targets, which ran over 1 April 1997 to 30 June 2000. Thus, the grant payments were considered to go to meeting those sales performance targets. On 14 September 1999 the only subsidy outstanding was any money allocated to sales over 15 September 1999 to 30 June 2000. This was the money covered by the withdrawal of the $8.065m. from Howe.

"Benefits" is an invention of the USA in the context of this Panel assessing whether Australia has implemented the Report's recommendations. The USA acknowledges, at least implicitly, in paragraph 40 of its First Submission that its approach of allocating supposed "benefits" over the life of assets using its own countervailing duty approach has no connexion with the question of contingency on export performance under SCM Article 3.1(a), i.e. the fundamental matter before the original Panel and this Panel. However, this whole case is about contingency upon export performance and the Report's finding. The Report found that the grant payments were tied to the sales performance targets in the period 1 April 1997 to 30 June 2000. Thus, that is the basis for implementation of the Report's recommendations.

12. The Panel recalls that in a communication dated 1 November, Australia provided a response to, inter alia, a question posed by the United States at para. 54.7 of the US's first submission, specifically, a request by the US for "any written calculation of the amount of the $A13.654 million loan communicated to or by Howe or its related entities to or by the Australian Government", and "an explanation of how the $A13.65 million was calculated or determined." Australia's response to this question was in part that there was "none", which the Panel understands to mean that there was no "written calculation" communicated between Howe or its related entities and the Australian Government. Australia offered no speci fic explanation or derivation of the amount of the loan. In footnote 26 of its second submission, the United States refers to a calculation which it has used to derive the $A13.654 million loan amount. Could Australia please comment on this calculation. Could Australia please explain, and provide calculations demonstrating, how the $A13.654 million amount was determined/derived.

Answer 12:

The USA's calculation is interesting. Of course, virtually any number could be derived by the appropriate choice of interest rate. It does not take any account of other issues such as taxation implications.

The final figure was a negotiated one. A wide range of figures was discussed. It would not be factual to present the Panel with a methodology that purported to be the way in which the figure was derived. The options for the treatment of taxation and interest rates can give rise to virtually any figure. Note that the reason for the $54,000 was not the result of a precise calculation but the addition of the amount for stamp duty to the negotiated figure.

13. (a) Does Australia see no difference at all between the term "withdraw the subsidy" within the meaning of Article 4.7 of the SCM Agreement and the term "bring the measure into conformity" within the meaning of Article 19.1 of the DSU? If so, how does Australia reconcile this view with the fact that Article 4.7 of the SCM Agreement is a special or additional dispute settlement provision which, pursuant to Article 1.2 of the DSU "shall prevail" over any different provisions in the DSU? In your answer, please take into consideration the report of the Appellate Body in Brazil - Export Financing Programme for Aircraft, WT/DS46/AB/R, at para. 191, where the Appellate Body stated:

"We note that Article 4.7 of the SCM Agreement is listed in Appendix 2 to the DSU as a "special or additional rule or procedure" on dispute settlement. We note also that Article 4.7 contains several elements which are different from the provisions of Articles 19 and 21 of the DSU with respect to recommendations by a panel and implementation of rulings and recommendations of the DSB. For example, Article 19 of the DSU requires a panel to recommend that the Member concerned bring its measure "into conformity" with the covered agreements. In contrast, Article 4.7 of the SCM Agreement requires a panel to recommend that the subsidizing Member withdraw the subsidy. In addition, paragraph 1 of Article 21 of the DSU requires "prompt compliance with recommendations or rulings of the DSB", and paragraph 3 of that Article allows an implementing Member "a reasonable period of time" to implement the recommendations or rulings of the DSB, where it is impracticable to comply immediately. In contrast, Article 4.7 of the SCM Agreement requires a panel to recommend that a subsidy be withdrawn "without delay"."

Answer 13(a):

The Appellate Body did not say in the text cited what it thought "withdraw the subsidy" means. The ruling by the Appellate Body was in respect of the determination of the time period for withdrawal.

Australia has never said that there was no obligation to "withdraw the subsidy". However, Australia considers that the phrases "withdraw the subsidy" and "withdraw the measure" in SCM Article 4.7 must be read in the context of DSU Article 19 to interpret them against the object and purpose of the WTO Agreement. The object and purpose is to have a Member bring an inconsistent measure into conformity. The SCM Agreement was negotiated as a stand-alone agreement and this language reflects the nature of the measure. DSU Article 19 could not have "withdraw the measure" since this would not fit all potential inconsistent measures. For example, a tariff in breach of a binding will remain in the same form by being reduced rather than withdrawn. Normally, withdrawing the subsidy/measure will be achieved by terminating a programme, or equivalently modifying it so that it no longer falls under SCM Article 3.1(a). However, as with most WTO disputes, the approach to bringing a measure into conformity, needs to be considered on a case by case basis. The object and purpose of the WTO would not be served by an interpretation of a provision, which made implementation not merely impracticable but also impossible in many cases. The purpose of disputes under WTO rules is to remove current inconsistencies, not to punish Members for past inconsistencies and provide a basis for retaliation or compensation in perpetuity after the inconsistencies have disappeared.

(b) Under what circumstances would Australia see repayment of subsidy amounts as indispensable to fulfill the Article 4.7 obligation?

Answer 13(b):

It is difficult to set out a complete set of parameters for this, which would have to be examined on a case by case basis. However, one example might be the following (which in itself could have many variants). Suppose that there is a large custom built item, e.g. a transformer, where the government pays the manufacturer money to allow it to win a tender in an export market, and suppose for simplicity that the date for withdrawal is before the item is exported. Then it is difficult to see how the subsidy could be withdrawn by the due date without withdrawing money.

14. (a) Assume Member X grants a large, one time, in law export subsidy payment to a company, explicitly conditioned on export sales over a two-year period. Assume further that a dispute settlement proceeding is commenced after the two year period over which the contingency applies has expired. Is it Australia's view that an amendment to the law, eliminating the contingency ex post facto, is all that would be required to "withdraw the subsidy"?

Answer 14(a):

The answer would depend very much on the particular circumstances. For example, if the panel found that the measure was inconsistent with SCM Article 3.1(a) simply and only because the granting of the subsidy was "explicitly conditioned on export sales over a two-year period", then there would be nothing to remove after that two-year period. There would be no need to amend the law "eliminating the contingency ex post facto". Indeed there may be no more export sales after the two-year period, or the subsidy might have been for some particular item exported in that two-year period. If there were no more sales tied to the subsidy, then there would be no more export subsidy with or without an amendment. So there would be no subsidy or measure to withdraw.

It is unclear what is meant by a "large" subsidy and why that qualification has been included. "Large" would need to be defined, in particular whether this somehow relates to it being a contrivance. Note that in the matter before the Panel, the grant payments are not "large" when measured against any reasonable criteria. The basis of the sales performance targets was that the level of subsidy from the grant payments should not exceed 5% ad valorem. The after tax level of subsidy was much less. It is clear from the paragraphs 7.170-7.172 of the Report that the $30m. is considerably less that the rate of assistance under the ICS and EFS, which even the USA would regard in its language as being "recurrent" and allocated to the actual sales.

Similarly, the grant payments were not a "one-time" payment. Apart from the fact that there was assistance before 1 April 1997 and will be after 30 June 2000, the grant payments were paid in three tranches over three fiscal years (July/June) with compliance assessment during that period under the Grant Contract. These were hardly one-time payments in normal parlance.

(b ) Would your answer to part (a) of this question be different if the dispute settlement proceeding is commenced before the two year period over which the contingency applies has expired, but the Panel's report is adopted after that period has expired? Please explain.

Answer 14(b):

No. For example, under the scenario in the first paragraph of the answer to Question 14(a) above, the measure would still be a matter under SCM Article 4 when the dispute was commenced, but the measure would have gone by the time the panel report was adopted.

15. Assume a large one-time subsidy granted to a company on the basis of a business plan that it submits to the government. Assume further that a panel finds that this subsidy was granted because the company had demonstrated an "adequate commitment to export", and therefore the panel found the subsidy was tied to anticipated exports. In Australia's view, would any action need to be taken by the subsidizing government in order to "withdraw" the subsidy after the adoption of the panel's report?

Answer 15:

Again there are the issues of what are meant by "large" and "one-time", as addressed in the answer to Question 14(a).

This is difficult to answer because in Australia's view a panel should not find that a measure fell under SCM Article 3.1(a) solely because of a phrase such as "adequate commitment to export". The panel would have to have a demonstrable tie to actual or anticipated exports. Particularly in smaller economies, a wide range of companies export and may have to export to be viable. This in turn would probably be reflected in a business plan. For a panel to then go on and say that this meant that any subsidy to such a company fell under SCM Article 3.1(a) would not be consistent with Australia's interpretation of this article.

The action required of the government concerned would depend on what other conditions the panel took into account in reaching its decision, including any time frame the panel found for the anticipated exports on which it based its conclusion that the measure fell under SCM Article 3.1(a).

ANSWERS TO QUESTIONS FROM THE PANEL TO BOTH PARTIES

1. Both parties have proposed a calculation methodology to determine what they refer to as the "prospective" amount of the subsidy to be repaid. Given that the subsidy itself was entirely paid before the Panel's report was adopted, in what sense can any amount of repayment be considered "prospective"?

Answer 1:

Australia's position is that there is no prospective amount payable, but in order to finalize the dispute, it has withdrawn $8.065m.

The issue is whether, given the Deed of Release, some part of the $30m. of grant payments remained tied to exports of automotive leather by Howe between 15 September 1999 and 30 June 2000, and, if so, how much.

2. On what legal basis do the parties base the argument that the phrase "withdraw the subsidy" has "prospective" effect only. One interpretation of the phrase "withdraw the subsidy", which is not argued by either party, would be that it means "repay in full" or "take back" the financial contribution to the recipient. Please comment on this possible interpretation, with specific reference to the text, context, and object and purpose of Part II of the SCM Agreement.

Answer 2:

As Australia understands the question, this issue is not a matter of dispute between the two parties and Australia wonders therefore whether it is an issue before the Panel.

The term "subsidy" is used in different ways in the text of the SCM Agreement. At times it could be read as being limited to money, but often it is clear from the text, that it includes the conditionality of the granting, e.g. "prohibited subsidy" in SCM Article 4.1 and "nature of the subsidy" in SCM Article 4.2. Moreover, in SCM Article 4.7, "subsidy" is used as being synonymous with "measure". In SCM Part II, it is not the money as such that is prohibited, but the combination of the money and the conditionality. Accordingly, withdraw the subsidy/measure in SCM Article 4.7 means the termination of a programme, including a modification of a programme to remove the reason for the inconsistency. This includes the termination or modification of in law and in fact contingency.

In some situations, this may be able to be done by removing the offending conditions without stopping a flow of money to industry, though the impact on industry's behaviour would usually be modified by the lack of, or different, conditions being imposed. The termination of the conditions is the "withdrawal of the subsidy". Past payments do not have to be repaid, or the flow of money does not have to be stopped. However, it is possible that the conditions may not be able to be terminated in some cases, e.g. see the answer to Question 13(b) to Australia.

Australia considers that through the Deed of Release, it has withdrawn the subsidy and brought the measures into conformity. However, Australia decided to take the precautionary step of withdrawing sufficient money to cover alternative interpretations. This was based on the possibility that while the critical factor was the sales performance targets in the Grant Contract, the Panel might consider that these targets continue to apply for the remainder of 1 April 1997 to 30 June 2000 despite the Deed of Release. In such a case the ongoing programme is the portion of the remaining money tied to the sales performance targets over the residual of the period 1 April 1997 to 30 June 2000.

On the question of "withdraw the subsidy" meaning "repay in full" or ' "take back" the financial contribution to the recipient', it is clear from the above that Australia does not agree with that interpretation. However, what is clear is that if that interpretation were to apply to the current matter, then it would have to apply to all cases falling under SCM Article 3.1(a) and (b).

This would be at odds with all past practice in the GATT and the WTO about remedy.

Such an interpretation could mean that, where a programme has been in place for a number of years, huge amounts of irretrievable money could be involved. The consequences for the WTO system would be extremely adverse and would result in giving retaliation rights to Members, which could be in perpetuity.

The object and purpose of the WTO dispute settlement provisions are to have Members conform to the WTO Agreement. Where a panel finds that a Member has breached a rule, usually, as in this case, inadvertently because of differing interpretations of the rules, the aim is to have the breach removed. Withdraw the subsidy/measure, is simply the term used in the SCM Agreement regarding the achievement of that objective.

3. In European Communities - Regime for the Importation, Sale and Distribution of Bananas - Recourse to Arbitration by the European Communities under Article 22.6 of the DSU, the Panel noted that "any assessment of the level of nullification or impairment presupposes an evaluation of consistency or inconsistency with WTO rules of the implementation measures taken by the European Communities, i.e. the revised banana regime, in relation to the panel and Appellate Body findings concerning the previous regime." WT/DS27/ARB, 9 April 1999, at para. 4.3. The Panel further noted that both parties accepted that it was the consistency or inconsistency with WTO rules of the new EC bananas regime - and not of the previous regime - that had to be the basis for the assessment of the equivalence between the nullification suffered and the level of the proposed suspension, id. at para. 4.5, and that it would be the WTO-inconsistency of the revised EC regime that would be the root cause of any nullification or impairment suffered by the United Sates. Id. at para 4.8. Is there any relationship, or should there be, between the concept of "equivalence" of the nullification or impairment of benefits to the suspension of concessions under Article 22 of the DSU, and calculation of the relevant amounts, and the calculation of the amount to be withdrawn in accordance with Article 4.7 of the SCM Agreement?

4. Further to the preceding question, would your answer change in light of the provisions of Article 4.10 of the SCM Agreement? That is, Article 4.10 of the SCM Agreement provides for "appropriate countermeasures" in the event a recommendation of the DSB is not followed, that is, the subsidy found to be prohibited is not withdrawn. Article 9 provides that "appropriate" countermeasures does not allow countermeasures that are disproportionate in light of the fact that the subsides in question are prohibited. Does or should this have any relation to or consequences for the calculation of the amount to be withdrawn?

Answers 3 and 4:

Australia is not certain of the relevance of the questions in respect of DSU Article 22 to the matter before this Panel.

The matter before the Panel is about the existence and consistency with the SCM Agreement of the measure or measures taken by Australia to implement the recommendations adopted by the DSB.

Thus the issues are whether any money had to be withdrawn given the Deed of Release and, if so, whether Australia withdrew sufficient money to bring the measures into conformity.

If there is no inconsistency, then there is no nullification or impairment. In that case there cannot be any money to be withdrawn. This emphasizes that the objective is to get the respondent to bring measures into conformity so that there is no inconsistency. Linkages between the new and old measures are irrelevant.

SCM Article 4.10 does not change the answer, rather it reinforces it. Clearly it would be disproportionate to impose countermeasures when there is no inconsistency. Thus when measures have been brought into conformity, there can be no further money to be withdrawn.

5. Australia has argued, based on the Panel's original decision, that it is entitled to replace a prohibited export subsidy with a WTO-consistent subsidy, and that the 1999 loan at most falls into this category of replacement. Assuming the 1999 loan is not inconsistent with the SCM Agreement, it might nonetheless be argued that once the DSB had adopted a decision that a subsidy was inconsistent, that ruling could not be implemented simply be replacing the inconsistent subsidy with a consistent one. To implement a recommendation to "withdraw the [prohibited] subsidy" by repayment, and then immediately replace it with a WTO-consistent subsidy has no remedial effect, because the harmful trade effects presumed to have been caused by the prohibited subsidy in the first instance will necessarily continue. Would the parties please comment on this proposition.

Answer 5:

If a measure is brought into conformity with SCM Article 3.1(a), then the remedy provision of SCM Article 4 has been effective, i.e. there has been a remedial effect, the measure has been brought into conformity with the rules. It is not a matter of whether this provides a remedial trade effect. There is no basis for assuming that the act of bringing a measure into conformity with SCM Article 3.1(a) will of itself have any particular trade effect. Of course, depending on the circumstances, the complainant may then have a case under SCM Part III regarding adverse effect. However, that would be a separate dispute.

Since Australia has brought the measures into conformity with SCM Article 3.1(a), the issue of a trade remedial effect is irrelevant for this Panel.

In answer to the hypothetical question posed by the Panel, if a Member has brought a measure into conformity, then that is an end to the matter. A Member does not lose WTO rights because it has been in breach in the past. There is no basis for suggesting that such a Member would be in some sense on parole and lose its rights to provide WTO consistent assistance to its industry. If the measure has been brought into conformity, then the rules have worked.

Australia rejects the USA's extraordinary argument that a Member has less rights in introducing new measures as the result of losing a dispute, and that different rules apply to the responding Member under an Article 21.5 panel.

As explained in the answer to Question 2 to Australia, there is a distinction between why there is a rule prohibiting export subsidies and the basis for determining conformity with it. There is no basis for assuming that the remedy must remove "the harmful trade effects presumed to have been caused". The issue is one of conformity with rules, not a case of adverse trade effect, presumed or actual.

In most cases, it would be difficult for a Member to readily reconfigure assistance to be WTO consistent and to have exactly the same trade effect. It would be allowed to if it could. However, this would probably mean that the complainant had taken a case that was technical in nature and that the breach was a technical one. Where assistance contingent on export performance is causing harmful trade effects, the reconfiguration of that assistance away from export contingency would usually affect the behaviour of the recipient and would certainly remove the presumption of harmful trade effects coming from the inconsistency with SCM Article 3.1(a).

ANSWERS TO QUESTIONS FROM THE UNITED STATES

1. Does the grant contract state that the grant is to be " expensed" in achieving the sales targets? If so, where in the contract does it state this?

Answer 1:

The Deed does not use the actual term "expensed". However, the Report found that the Grant Contract tied the $30m. to the sales performance targets in the Grant Contract, and so allocated the grant payments to the achieving of those sales in the period 1 April 1997 to 30 June 2000.

2. On October 28, the Panel requested that Australia produce copies of certain documents identified in the U.S. First Submission or to object to their production. Among these was a request for

1. Any agreement, whether by formal agreement or by correspondence with Howe or its related entities, under which Howe agreed to repay, or repaid, A$8.065 million of the A$30 million provided in 1997 and/or 1998.

2. Any correspondence between the Government of Australia and Howe or its related entities that refers to the agreement to repay, or to the repayment of, the A$8.065 million referred to in request 1. above.

3.        (a) Any written calculation of the $A8.065 million communicated to or y Howe or its related entities to or by the Australian Government.

(b) An explanation of how the $8.065 million was calculated.

Australia did not object to the production of such documents, and responded with a document submitted as Exhibit AUS-2 (Letter confirming payment). That document references another document, stating: "The amount of the repayment is in accordance with the terms of our request to them [Howe & Company, Pty. Ltd.] for a partial repayment of the grant, we had previously provided to them."

(a) Could the Australian Government confirm that the latter referenced document has been submitted to the Panel as an exhibit, and, if so, identify it.

Answer 2(a):

AUS - BCI - 6 contains the request for the $8.065m. The reference to "the terms of our request " is limited to the first paragraph of AUS - BCI - 6.

(b) Could the Australian Government confirm that there are no other responsive documents that have not been submitted as exhibits?

Answer 2(b):

Yes.



1 Paragraph 40 of the USA's First Submission says:

"The grants amounted to an export subsidy because they were contingent on export performance. The export-contingent feature of the subsidy, however, is not a useful tool for measuring how the subsidy should be allocated."

2 See paragraph 38 and Footnote 24 of Australia’s Second Submission.


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