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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 1-1

FIRST SUBMISSION OF THE UNITED STATES

(27 October 1999)

TABLE OF CONTENTS

  1. INTRODUCTION
     
  2. PROCEDURAL HISTORY
     
  3. AUSTRALIA HAS NOT WITHDRAWN THE SUBSIDY WITHIN 90 DAYS
  1. THE AMOUNT THAT HOWE REPAID IS NOT A FULL WITHDRAWAL OF THE SUBSIDY. 
  1. To comply with Article 4.7 of the SCM Agreement and the Panel's recommendation, Australia should have recovered the full, prospective portion of the subsidy. 
     
  2. The prospective portion of the subsidy must be determined on a reasonable economic basis.
     
  3. Howe's partial repayment does not amount to a withdrawal of the subsidy. 
     
  4. The "prospective" element of the subsidy withdrawn should be calculated as of the date of adoption of the Panel Report. 
  1. HOWE'S REPAYMENT WAS NOT A WITHDRAWAL OF THE SUBSIDY TO THE EXTENT IT WAS REIMBURSED BY A NON-COMMERCIAL LOAN. 

  1. REQUEST FOR PRELIMINARY RULING THAT THE PANEL SEEK INFORMATION FROM AUSTRALIA
     
  2. CONCLUSION 

LIST OF EXHIBITS 


I. INTRODUCTION

1. This Panel already decided that Australia has provided a prohibited A$30 million export subsidy to its sole automotive leather company, and recommended that the subsidy be withdrawn without delay. Such a decision is meaningless unless Australia complies with the Panel's recommendations. Under Article 21.5 of the Dispute Settlement Understanding ("DSU") the Panel's task is to determine whether Australia has taken measures to comply with the Panel's recommendations and rulings and whether those measures are consistent with the Agreement on Subsidies and Countervailing Measures ("SCM Agreement"). The answer in this case is clearly no.

2. Purporting to withdraw the subsidy, Australia agreed to accept a repayment of only a modest prospective portion of the grant. In so doing, Australia has arbitrarily and unreasonably relegated the lion's share of its substantial and illegal capital infusion to the past, declaring it out of the reach of this Panel and the SCM Agreement. But that is not all. Australia has reimbursed even this modest repayment with an even larger, non-commercial loan.

3. In its submission to the Dispute Settlement Body ("DSB") on recourse to Article 21.5 (document WT/DS126/8), the United States cited the actions noted above, and stated:

The United States believes that these measures taken by Australia to comply with the recommendations and rulings of the DSB are not consistent with the SCM Agreement and the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). In particular, Australia's withdrawal of only $A8.065 million of the $A30 million grant, and Australia's provision of a new $A13.65 million loan on non commercial terms to Howe's parent company, are inconsistent with the recommendations and rulings of the DSB and Article 3 of the SCM Agreement.

Accordingly, because "there is a disagreement as to the existence or consistency with a covered agreement of measures taken to comply with the recommendations and rulings of the DSB" between the United States and Australia, within the terms of Article 21.5 of the DSU, the United States seeks recourse to Article 21.5 in this matter and requests that the DSB refer the disagreement to the original panel, if possible, pursuant to Article 21.5.

4. The terms of reference for this Panel are standard terms of reference as provided in Article 7. As the panel found in Ecuador's recourse to Article 21.5 of the DSU on the EC's banana regime, even in an Article 21.5 proceeding, the panel's terms of reference are defined by the measures and claims specified by the complaining party in its request for establishment of a panel1 Moreover, both of the measures cited by the United States in WT/DS126/8 were clearly "taken to comply" with the DSB's recommendations, as they both concern the subsidies received by the sole Australian automotive leather producer and exporter, Howe and Company Proprietary, Ltd. ("Howe"). In addition, a Panel determination concerning the consistency with the SCM Agreement of both of these measures will promote the prompt settlement of disputes, as noted by the panel in the Ecuador 21.5 proceeding2

5. Thus, the task that faces this Panel is to determine whether Australia has taken measures to comply with the DSB's recommendations and rulings, and whether the measures listed in WT/DS126/8 are consistent with the SCM Agreement. The answer to these questions no.

6. This Panel's findings on these points are critical if its Panel Report is to have any practical meaning. The United States urges the Panel to find that Australia has not withdrawn its illegal subsidy and thus has not complied with the Panel's recommendations.

II. PROCEDURAL HISTORY

7. The United States requests that this Panel, established pursuant to Article 21.5 of the Dispute Settlement Understanding ("DSU"), review whether Australia has implemented the Panel's recommendations in Australia - Subsidies Provided to Producers and Exporters of Automotive Leather, WT/DS126/R, Report of the Panel, Adopted 16 June 1999 ("Panel Report"). The parties have agreed that they will unconditionally accept this Panel's report and that there will be no appeal of this report. Both parties have also agreed to cooperate to ensure that this Panel can circulate its report within 90 days of its establishment. See Exhibit US-1.

8. This is a dispute with a long and troubling history3 In October 1996 - over three years ago - the United States requested consultations with the Australian Government regarding export subsidies made available to the Australian automotive leather industry under two programmes, the Australian Textiles, Clothing and Footwear Import Credit Scheme and the Export Facilitation Scheme. As a result of these consultations, the Australian Government agreed to remove automotive leather from eligibility for these export subsidy programmes, effective 1 April 1997.

9. On 9 March 1997, however, the Australian Government replaced these subsidy programmes with a A$30 million grant, also contingent on export performance4 to Howe, the sole Australian automotive leather producer and exporter. The United States once again requested consultations, this time with respect to the grant. Unable to reach a satisfactory resolution with Australia, the United States requested the establishment of a panel on 11 June 1998, to examine the consistency of Australia's grant with the SCM Agreement.

10. On 25 May 1999, the Panel issued a report sustaining the US view that Australia had bestowed a prohibited export subsidy - the A$30 million grant - on Howe in 1997-1998. In accordance with the SCM Agreement, the Panel recommended that Australia withdraw the subsidy without delay. The Panel gave Australia 90 days to comply. The Panel Report was adopted by the DSB on 16 June 1999, and was not appealed.

11. In a 20 September 1999, communication to the Chairman of the DSB, Australia claimed to have implemented the Panel recommendation by arranging for Howe to repay A$8.065 million of the A$30 million grant -- just under 27 per cent -- which Australia contended "covered any remaining inconsistent portion of the grants made under the Grant Contract"5 Exhibit US-2. According to an Australian Government media release issued on 15 September 1999, the repayment amount covered what Australia considered to be the "prospective element" of the grant -- namely, the "proportion of the grant monies found to be applied to the sales performance targets contained in the Grant Contract for the period from 14 September 1999 until the end of the Grant contract on 30 June 2000". Exhibit US-3.

12. In the very same press release, however, Australia announced that it intended to provide a new, A$13.65 million loan to Howe's parent holding company. This loan, which the United States understands is on non-commercial terms, effectively reimburses Howe and its parent for the grant repayment and, to this extent, turns Australia's purported withdrawal of the subsidy into a sham.

13. The United States submits to the Panel that Australia has not complied with the Panel's recommendations, in that (1) the A$8.065 million repayment, which accounts for less than 27 per cent of the prohibited export subsidy, does not amount to a full withdrawal of the subsidy; and (2) this small amount was not a even a partial withdrawal of the subsidy, to the extent it was reimbursed by the Australian Government through a loan on non-commercial terms.

III. AUSTRALIA HAS NOT WITHDRAWN THE SUBSIDY WITHIN 90 DAYS.

A. THE AMOUNT THAT HOWE REPAID IS NOT A FULL WITHDRAWAL OF THE SUBSIDY.

1. To comply with Article 4.7 of the SCM Agreement and the Panel's recommendation, Australia should have recovered the full, prospective portion of the subsidy.

14. This Panel found that "[t]he payments under the grant contract are subsidies within the meaning of Article 1 of the SCM Agreement which are contingent upon export performance within the meaning of Article 3.1(a) of that Agreement.6 Article 3.1(a) of the SCM Agreement provides that such subsidies "shall be prohibited"; Article 3.2 provides that "[a] Member shall neither grant nor maintain subsidies referred to [Article 3.1]." This Panel recommended, in accordance with Article 4.7 of the SCM Agreement, that Australia withdraw the prohibited subsidies - i.e., the "payments under the grant contract" - without delay7

15. There is no disagreement between the parties that the provisions of Article 4.7 of the SCM Agreement and the recommendations in the Panel Report call for Australia to withdraw only the prospective portion of the illegal subsidy. And indeed, this position is supported by the SCM Agreement and the DSU. Article 4.7 of the SCM Agreement provides that "if the measure in question is found to be a prohibited subsidy, the panel shall recommend that the subsidizing Member withdraw the subsidy without delay." However, Article 19 of the DSU provides that "Where a panel or the Appellate Body concludes that a measure is inconsistent with a covered agreement, it shall recommend that the Member concerned bring the measure into conformity with that agreement." The use of the phrase "bring the measure into conformity" indicates that the recommendations contemplated by Article 19 of the DSU include only recommendations calling for prospective corrective action by Members, not retrospective action. As the Appellate Body has stated in its decision in the Guatemala Cement dispute, "It is . . . only in the specific circumstance where a provision of the DSU and a special or additional provision of another covered agreement are mutually inconsistent that the special or additional provision may be read to prevail over the provision of the DSU.8 There is no inconsistency between withdrawal without delay of the prospective portion of a subsidy under Article 4.7 of the SCM Agreement, and bringing the subsidy into conformity with the obligations of Australia under Article 19 of the DSU.

16. Where there is considerable disagreement, however, is over Australia 's claim that Howe's partial A$8.065 million repayment should be viewed as a complete withdrawal of the prospective portion of the subsidy. It was only 18 to 30 months ago that Howe received the full A$30 million capital infusion. The benefit to Howe - and the resulting distortion to trade - will be felt in a substantial way for many years to come.

17. Australia has arbitrarily assigned the lion's share of its prohibited subsidy to the past, in an effort to declare it out of reach of the Panel and the SCM Agreement. It is worth recalling that in 1997 Australia sought to deal with US complaints regarding its blatantly illegal export subsidy by engaging in consultations, agreeing to remove the export subsidy from the automotive leather industry, and then simply swapping it for another equally illegal export subsidy. Now that the United States has proceeded through a full round of additional consultations and panel proceedings, and now that the Panel has ruled that the A$30 million grant is a prohibited export subsidy, Australia is seeking the Panel's permission to declare its illegal subsidy largely irremediable.

18. This cannot be permitted. The great bulk of Australia's A$30 million subsidy is attributable to the period after the adoption of the Panel Report. It is that amount that Australia must withdraw.

2. The prospective portion of the subsidy must be determined on a reasonable economic basis.

19. The Panel Report, at paras. 10.1(b) and 10.1(3), identifies the subsidies to be withdrawn "without delay" as "[t]he grant payments under the grant contract". Article 1.1 states, in parts relevant to this discussion, that a subsidy exists if (a) a government practice involves a direct transfer of funds (e.g., grants) and (b) a benefit is thereby conferred.

20. What should be withdrawn, therefore, is that portion of the Australian Government funds that continues to benefit the recipient after the adoption of the Panel Report. As discussed below, the SCM Agreement recognizes that significant, non-recurring grants must be allocated over time - generally over the useful life of production assets. A significant grant, which is available to purchase production assets (or to free up other funds to purchase such assets), provides a benefit that lasts over the life of those assets. Attributing all of such a grant entirely to the year of receipt, or to some other, arbitrarily short period, ignores economic reality9 It also would have the unintended result in many cases of placing such grants beyond the reach of panel recommendations under SCM Article 4.7. It could thus reduce SCM Articles 3 and 4 to inutility in the case of grants, and would convey the message to subsidizing Members that they can bestow any amount of subsidies, even explicitly conditioned on exports, with virtual impunity as long as the subsidies are in grant form.

21. The "prospective" portion of the benefits that Australia provided to Howe are those that are attributable to the period after the adoption of the Panel Report, which is the date on which Australia was to have withdrawn the subsidy "without delay". The United States submits that those benefits should be determined by allocating the grant over the useful life of Howe's production assets and by adding interest, which is also a benefit conferred with the grants, for the period 16 June 1999, to the date of repayment.

22. There is considerable support under the SCM Agreement for this approach. The practice of certain Members, including the United States, in calculating subsidy amounts under Part V (Countervailing Measures) of the SCM Agreement is instructive10 In calculating the amount of the subsidies in investigations conducted under Part V, the United States regulations require the allocation of significant, non-recurring grants over the number of years corresponding to the average useful life of the renewable physical assets. 19 CFR 351.11

23. Similarly, the EC recently notified its "Guidelines for the Calculation of the Amount of Subsidy in Countervailing Duty Investigations", G/SCM/N/1/EEC/2/Suppl.2 (8 January 1999), in which it states, at 9:

For non-recurring subsidies, which can be linked to the acquisition of fixed assets, the total value of the subsidy has to be spread over the normal life of the assets (Article 7(3)(of Regulation 2.26/97). Therefore the amount of the subsidy from, for example, a grant (for which it is assumed that it is used by the beneficiary to improve its competitiveness in the long term, and thus to purchase product assets of one kind or another), can be spread over the normal period used in the industry involved for the depreciation of assets. (Latter emphasis added).

24. The consequence of this approach is that "[a]s many subsidies have effects for a number of years, subsidies granted before the investigation period should also be investigated in order to determine what portion of such subsidy is attributable to the investigation period." Id.

25. Of note, under these approaches, is the fact that in applying the general principle that a significant, non-recurring grant should be allocated over the useful life of production assets, neither the EC nor the United States inquires whether the grant was actually used to purchase such assets. Rather, it is presumed that the grant is used to enhance the long-term competitiveness of the company, either because it is in fact applied to the purchase of such assets, or because the grant money frees up other corporate money for such purposes. Given the fungibility of money, it is unproductive and unrealistic to attempt to trace the use of grants in order to determine how they should be allocated.

26. The principles that Members have developed to calculate the amount of the subsidy (and its allocation over time) are revealing, not only because they recognize that grantees can reap long-term competitive benefits from significant, non-recurring grants, but also because these principles address a concern similar to that present in this proceeding. If significant grants can be allocated purely to the year in which they are bestowed (or on some other arbitrarily short period), Members would be precluded from imposing countervailing duties "in the amount of the subsidy" for any grant provided prior to the investigation period.

27. Similarly, if this Panel were to countenance the allocation of Australia's illegal A$30 million export subsidy over an arbitrarily short period of time, most of it in the past, as urged by Australia, the remedy of "withdrawal of the subsidy" would be severely undercut.

28. The SCM Agreement itself recognizes the principle that grants should be allocated to take account of their future effects. Paragraph 7 of Annex IV of the SCM Agreement (which provides guidance on the calculation of ad valorem subsidies in the context of determining the 5 per cent "serious prejudice" benchmark in cases of actionable subsidies (Part III)) provides that "[s]ubsidies 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."

29. The Informal Group of Experts ("IGE"), charged with recommending clarifications to Annex IV, stated, at para. 11 of their 1997 report, that large non-recurring subsidies should be allocated over time because such subsidies continue to have an impact beyond the year of bestowal: they will either be used to purchase fixed assets, or will free up company funds to do the same. The IGE recommendations continue, at para. 13.

As a general matter, it is recommended that the average useful life of all of the recipient's operational assets should be used as the allocation period for all types of subsidies except long-term loans, and possibly equity infusions.

30. In short, there is a consistent and well-accepted view under the SCM, both in the text of the Agreement and in Member practice, that significant non-recurring grants should be allocated over time based on the useful life of the production assets. When the grant at issue in this case is so allocated, it is apparent that most of the subsidy is attributable to the future. This is the portion of the grant that Australia must withdraw.

31. Howe received three payments in 1997 and 1998 worth A$30 million -- one-time, non-recurring grants that amounted to approximately one-third of Howe's 1997 sales12 With this money, Howe was able to construct a new tannery and a new finishing plant, increasing its efficiency and export capacity13 Howe used the grant to more than double its production capacity14 and to install state-of-the-art equipment. According to Howe's managing director, "[t]he [Rosedale] plant has been built around the latest computerized equipment, which gives us complete control over every step in in the production process.15 The new finishing facility at Thomastown was also completely automated, with new patterns fed into the computer and cut on the same day16 Howe's parent corporation predicted that the new processing facility "will enable [Howe] to make considerable savings in labour, raw materials, and working capital, and to have fewer rejects and re-works which will give higher yields.17

32. Plainly, the benefit of this significant A$30 million export subsidy - and, indeed, the distortive impact it has on trade - extends at least over the life of Howe's production assets.

33. Available information for Howe suggests that the useful life of its assets is 13 years. Exhibit US-10. The useful life of production assets in the leather industry, according to US Internal Revenue depreciation tables used by the US Department of Commerce to estimate useful life for the purpose of allocating subsidies, is consistent with this estimate, at 9-13 years. Exhibit US-11. Because Howe received A$17.5 million in July 1997 and A$12.5 million in July 1998118 the prospective portion as of July 1999 (the month following the adoption of the Panel Report) can be calculated based on the ratio of 11/13 of the A$17.5 million (since two years have now elapsed, and 11 remain) - or A$14,807,692 - plus 12/13 of the second grant of A$12.5 million, or A$11,538,462 - for a total of A$26,346,154.

34. Under a reasonable allocation of these grants, therefore, A$26,346,154, represents the "prospective portion" of the subsidy as of July 1999 that Australia must withdraw. To this amount should be added interest, at Howe's 1997 borrowing cost of 11.6 per cent for the period from July 1999 until Australia complies with the Panel's recommendatio19. Six months' interest, for instance, assuming Australia complies by the end of this year, would be A$1,528,077 (11.6 per cent of A$26,346,154 divided by two, to account for the half year) for a total of A$27,874,231.

35. By contrast to this reasonable allocation, Australia has entered into an agreement with Howe that requires Howe to repay a mere A$8.065 million.

3. Howe's partial repayment does not amount to a withdrawal of the subsidy.

36. Australia informed the DSB on 20 September 1999, that it had implemented the Panel's recommendation ("to withdraw the measures within 90 days") by accepting a repayment from Howe of A$8.065 million, which, according to Australia, "covered any remaining inconsistent portion or the grants made under the Grant Contract." The Australian Government also stated that it had "terminated all subsisting obligations under the Grant Contract.20

37. Although there was no explanation whatsoever in the 20 September communication of how the amount of repayment was determined, a media release issued on 15 September 1999, explained that A$8.065 million is the amount that Howe agreed to pay, and elaborated that:

This amount reflects the prospective element of the grant payment. It is the proportion of the grant monies found to be applied to the sales performance targets contained in the Grant Contract for the period from 14 September 1999 until the end of the Grant Contract on 30 June 2000. Exhibit US-3.

38. The US understands from this explanation that, because the grants were contingent on Howe's best efforts to achieve certain performance targets, including sales performance targets for the periods 1 April 1997, through 30 June 2000, the Australian Government deemed the subsidy to be in effect only during the roughly three-year period that the performance targets were in place, and then "withdrew" that proportion of the subsidy attributable to the period 14 September 1999 to 30 June 2000.

39. Australia's explanation confuses two legally distinct concepts: the elements of a subsidy and the duration or allocation of the subsidy. The Panel correctly found that the grants were an export subsidy because, inter alia, "[t]he sales performance targets set out in the grant contract, in conjunction with the other facts enumerated above, therefore [led the Panel] to the conclusion that the grant of the subsidies was conditioned on anticipated exportation".21

40. 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.

41. In particular, the time period established in a grant contract for performance requirements is not a reasonable measure of how long the benefits conferred by the subsidy lasts or for calculating the "prospective" portion. First, there is no necessary relationship between the criteria for an export subsidy -- such as export performance requirements -- and the actual duration of the benefit. Inventing such a relationship makes export subsidies open to manipulation. For instance, a Member could bestow a significant prohibited subsidy - sufficient for the recipient to build a large manufacturing facility with a useful life of 25 years - contingent on exports for a two-year period. By the time a dispute settlement panel could recommend that the subsidy be withdrawn, the two-year period could have lapsed. Yet the benefit of the subsidy would persist for over two decades. Under Australia's approach, there would be no "prospective portion" to withdraw. Members could structure their export subsidies in just this way, or through a series of smaller short-term subsidies, thus evading the disciplines imposed by the SCM Agreement.

42. Second, with respect to the grants at issue here, the Panel found that the sales (i.e., export) performance targets, "in conjunction with the other facts enumerated above" led the Panel to conclude that the subsidy was conditioned on anticipated exportation.22 The "other facts" included that the expanded production resulting from the grants and from the "required capital investments" would translate into increased exports.23 Plainly, such increased exports resulting from the required capital investments are not limited to the period of the sales performance targets. In addition, the grants were contingent on "best endeavours" to achieve the sales performance targets, and not purely on the achievement of those target.24. Both of these factors, specific to this case, militate against Australia's allocation of the grants over the sales performance targets.

43. In sum, the benefit to a recipient of receiving a significant grant cannot be calculated with reference to the criteria for qualifying for the grant. The "prospective" portion of the subsidy must be calculated in an economically reasonable manner that more accurately reflects the extent to which the subsidy persists over time. The subsidy should be allocated over the useful life of Howe's production assets, and the portion of that allocation that is subsequent to the adoption of the Panel Report should be repaid.

4. The "prospective" element of the subsidy withdrawn should be calculated as of the date of adoption of the Panel Report.

44. Article 4.7 of the SCM Agreement provides that if a prohibited subsidy is found, the subsidy should be withdrawn "without delay". The Panel Report, recommending that the subsidy be withdrawn without delay, was adopted on 16 June 1999. The Panel gave Australia 90 days to "withdraw the measures"25 On that date, the DSB declared Australia's grants to be a prohibited export subsidy for purposes of the SCM Agreement.

45. Although the Panel accorded Australia 90 days in which to comply, Australia was free to comply at any time within that period. Instead, Australia used the entire 90-day period, waiting until 14 September to put its remedy in place and then claiming that its withdrawal would be effective from that day forward.

46. The United States submits that the 90-day compliance period did not provide Australia with an additional three months during which it could continue to provide the prohibited export subsidy with impunity. Such an interpretation would reward -- and encourage -- delay in carrying out the Panel's recommendations. Rather, the date from which the prospective element of the subsidy should be derived is the date of the Panel Report. This approach, which would not discourage early compliance, would give effect to the express intent of Article 4.7, which calls for panels to recommend that the Member concerned withdraw the prohibited subsidy "without delay."

47. Consequently, any calculation of the so-called "prospective period" of the subsidy should start on 16 June 1999, the date of adoption of the Panel Report.

B. HOWE'S REPAYMENT WAS NOT A WITHDRAWAL OF THE SUBSIDY TO THE EXTENT IT WAS REIMBURSED BY A NON-COMMERCIAL LOAN.

48. By recouping from Howe a small fraction of the grant monies, Australia claims that it has now fully withdrawn the prohibited subsidy. But the small sum which Australia collected with one hand it immediately reimbursed with the other, through the extension of loan to Howe's parent holding company, Australia Leather Holdings, Ltd. ("ALH"), for a far greater amount.

49. The United States understand that this loan was provided on non-commercial terms, which is not surprising, given the history of Australia's actions in this dispute, as well as the governmental, as opposed to commercial, source of the funds. Under these circumstances, Australia cannot be credited with having "withdrawn" any portion of its prohibited export subsidy. It has simply restructured a small portion of the subsidy by providing a loan with concessionary repayment terms. Australia's actions defeat the purpose of Article 4.7, which calls for prohibited subsidies to be withdrawn in order to ensure that subsidy recipients no longer enjoy their benefits. In this instance, Australia has not so much removed the any part of the benefits it provided through its A$30 million grants as modified part of them through the replacement of one form of subsidy by another: Article 1.1 of the SCM Agreement defines subsidies to include loans, as well as grants, that confer a benefit.

50. Australia asserts in its media release that its earlier loan to ALH "was not found in breach of the WTO", presumably implying that this new loan is not contrary to the SCM Agreement. However, the issue is not whether the loan itself should be condemned as a prohibited subsidy, but whether its bestowal nullifies Australia's purported withdrawal of the subsidy that this Panel found to be inconsistent with the SCM Agreement. The simultaneous announcement of both the partial repayment by Howe and the much larger loan back to Howe's parent holding company, tied together in the same media announcement, demonstrates that the non-commercial loan is linked to -- indeed, intended to -- offset the so-called "withdrawal".

51. Australia's lame declaration in its media announcement that the loan has no "link" to automotive leather is difficult to credit. The recipient of the loan is none other than Howe's holding company parent, which, since it is a holding company, does not produce anything itself. It bears repeating that Howe is not just any Australian manufacturer randomly selected to receive government largess. Howe became a major automotive leather exporter precisely because of a series of blatantly SCM-illegal subsidy programmes.

52. Moreover, the link to Howe's illegal subsidy is made plain by the fact that Australia announced the loan in the same document, indeed on the same page, as its announcement of the partial subsidy repayment. Tellingly, Australia provided no independent reason for the loan, leaving little doubt that it was intended to offset the partial grant repayment.

53. Together, these facts and circumstances dictate the conclusion that Australia has not fully complied with its obligation to "withdraw" its subsidy. Australia's non-commercial loan to ALH should be seen for what it is - a partial or complete perpetuation of the prohibited subsidy that this Panel condemned.

IV. REQUEST FOR PRELIMINARY RULING THAT THE PANEL SEEK INFORMATION FROM AUSTRALIA

54. The United States requests, pursuant to paragraph 17 of the working procedures in this proceeding and Article 13 of the DSU, that the Panel request Australia to produce authentic copies of the following documents and the following information for review by the Panel and the United States, no later than Friday, 29 October 1999:

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 by Howe or its related entities to or by the Australian Government.

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

4. Any document by which the Grant Contract was terminated and any document terminating any performance requirements by Howe pursuant to that Grant Contract.

5. The loan contract between the Australian Government and Australia Leather Holdings providing for the "additional loan of $13.65 million" to Australian Leather Holdings referred to in Australia's Joint Media Release 99/291, dated 15 September 1999.

6. Any documents referring to or related to the loan contract or the loan referenced in request 5 above, including but not limited to any correspondence between Howe or its related entities and the Australian Government.

7.(a) Any written calculation of the amount of the $A13.65 million loan communicated to or by Howe or its related entities to or by the Australian Government.

(b) An explanation of how the $A13.65 million was calculated or determined.

8. Any documents created by the Australian Government related to the authorization of the Australian Government to (a) issue a new A$13.65 million loan referenced in request 5 above, and/or (b) terminate the Grant Contract and request repayment of A$8.065 million of the subsidy.

55. This information and documentation are crucial to the Panel's determination under Article 21.5 of the DSU. The United States has relied in this first submission on published statements and submissions of the Australian Government to establish that (a) Australia's method of determining the prospective portion of the grant is arbitrary and results in inappropriately putting most of the grant beyond the reach of the SCM Agreement remedies; and (b) the loan was simply a reimbursement on non-commercial terms of the purported withdrawal of the A$8.065 million repaid by Howe.

56. The information and documents listed above contain facts and information that have a direct bearing on the issues in this proceeding. The information and documents should reveal in detail the circumstances under which the repayment by Howe was made, how that amount was agreed to or calculated, and whether there was any reimbursement or quid pro quo for the repayment. Similarly, given that the loan is obviously linked to the partial repayment of the grant, documentation and information pertaining to this loan are critical to a clear understanding of its relationship to the grant and grant repayment at issue. In addition, the exact terms of the loan, and the conditions for its issuance, are highly relevant to whether, and the extent to which, Australia is simply funding Howe's reimbursement out of its own pocket.

57. The United States requested these documents and information of Australia at the first organizational meeting of the Panel, on 18 October 1999, but has received nothing as yet, despite today's deadline for the filing of the US first submission. Therefore, this request should come as no surprise to Australia, and Australia should have no trouble meeting a Friday, 27 October 1999, deadline. It is important that these documents and information be provided on this schedule, to permit the United States to review them prior to Australia's first submission, so that relevant information can be incorporated into the United States' second submission.

V. CONCLUSION

58. The United States urges this Panel to determine that Australia has not withdrawn its illegal subsidy without delay, and thus has not complied with Article 4.7 of the SCM and the Panel's recommendations.

59. The United States further urges the Panel to request that Australia provide the information and documents described in section III above by Friday, 27 October 1999.

LIST OF EXHIBITS

Exhibit US-1 Agreement Between US And Australia On Article 21.5 Procedures, WT/DS/126/8, 4 October 1999
 
Exhibit US-2 Status Report By Australia, WT/DS/126/7, 20 September 1999
 
Exhibit US-3 Media Release: "Automotive Leather Dispute", 15 September 1999
 
Exhibit US-4 "Sacred Cows vs The Hide of Howe," The Weekend Australian, 20-21Sept. 1997
 
Exhibit US-5 Australian Leather Holdings Ltd., Australian Leather Holdings (c. 1995)
 
Exhibit US-6 Howe, Howe Leather, Dec. 1994
 
Exhibit US-7 "Picking Winners," Business Review 1997, 13 Oct. 1997
 
Exhibit US-8 "Howe Impressive", Leather, Aug. 1998
 
Exhibit US-9 Schaffer Corporation, Ltd., Chairman's Address, 19 Nov. 1997
 
Exhibit US-10 Calculation of Average Useful Life Of Assets for Howe
 
Exhibit US-11 US Internal Revenue Service's 1977 Class Life Asset Depreciation Range System (Rev. Proc. 77-10, 1977-1 C.B. 548 (RR-38)), as updated by the Department of Treasury
 
Exhibit US-12 Australia Leather Holdings Ltd, 1997 Financial Statement (exerpt)



1 European Communities - Regime for the Importation, Sale and Distribution of Bananas - Recourse to Article 21.5 by Ecuador, WT/DS27/RW/ECU, para. 6.7.

2 Id. at para. 6.9.

3 The facts of the procedural history are recounted in the Panel Report, paras 2.1-3.2.

4 Australia also provided a loan to the company in 1997, which is not relevant to this Article 21.5 compliance proceeding.

5 WT/DS126/7

6 Panel Report, para. 10.1(b).

7 Panel Report, para. 10.3.

8 Guatemala - Anti-dumping Investigation Regarding Portland Cement From Mexico, WT/DS60/AB/R, para. 66.

9 By contrast, on-going, recurring subsidies provide only current benefits that are not allocated to future production. In the terminology of subsidy calculations, such recurring subsidies are “expensed” - attributed entirely to the period in which they are received - and are not allocated forward in time. See infra, note 11.

10 Although the export subsidies in this proceeding were not pursued under Part V, Part V does provide that Members are to calculate the “amount of the subsidy” and impose countervailing duties that do not exceed the amount of the subsidy. Article 19 of the SCM Agreement. Where the same terms and concepts are used throughout the SCM Agreement, they should be interpreted consistently throughout the Agreement. The Appellate Body in Canada - Measures Affecting The Export Of Civilian Aircraft, WT/DS70/AB/R, Report of the Appellate Body, (2 August 1999), adopted September 1999 (para. 158), in considering whether certain measures were prohibited export subsidies, used principles set out in Part V, Article 14, to determine whether the measures constituted a subsidy under Article 1.1, describing Article 14 as “relevant context in interpreting Article 1.1(b).”

In particular, where Members have set out detailed rules for calculating the amount and duration of the subsidy, pursuant to Article 14 of the SCM Agreement, such rules should be taken into account by the Panel in determining the prospective portion of the subsidy that should be withdrawn.

11 G/SCM/N/1/USA/1/Suppl. 4 (29 March 1999), pages 129-131. For the sake of consistency, the United States uses the same assumptions regarding asset lives in the subsidies context as for other purposes such as the Federal income tax. The average useful life used is presumptively that listed in the US Internal Revenue Service’s 1977 Class Life Asset Depreciation Range System (Rev. Proc. 77-10, 1977-1 C.B. 548 (RR-38)), as updated by the Department of Treasury. 19 CFR 351.524 (d)(2)

By contrast, 19CFR 351.524(a) provides that the Department of Commerce “will allocate (expense) a recurring benefit to the year in which the benefit is received.”

12 “Sacred Cows vs The Hide of Howe,” The Weekend Australian, 20-21 Sept. 1997 (reporting that Howe’s sales in 1997 were expected to be A$88.6 million). Exhibit US-4.

13 Panel Report, para. 2.3 n.4.

14 Australian Leather Holdings Ltd., Australian Leather Holdings (c. 1995) (“Howe Leather turns out more than 10,000 premium quality hides every week for market throughout Australiasia, Asia, the United States and Europe”); Howe, Howe Leather, Dec. 1994, at 2 (noting a total automotive capacity of 600,000 hides per year, or 11,538 hides per week); “Picking Winners,” Business Review 1997, 13 Oct. 1997 (“The new facility will allow the value of exports to increase to nearly $200 million and the company will be able to process 1.1 million cattle hides. ..“). Exhibits US-5, US-6, and US-7.

15 “Howe Impressive”, Leather, Aug. 1998, at 29, Exhibit US-8.

16 Id. The plant utilized 14 different types of new equipment, as well as an automatic conditioning system which sprayed fine droplets of moisture into the atmosphere when the relative humidity fell below requisite levels.

17 Schaffer Corporation, Ltd., Chairman’s Address, 19 Nov. 1997, Exhibit US-9.

18 These are approximate dates, relying on the facts as set forth in Panel Report, para. 2.3.

19 Howe’s borrowing cost is derived from the 1997 financial statements of Australia Leather Holdings, Ltd., at pages 7 and 9. Total interest and financial charges divided by borrowings is A$3,647,000/A$31,373,000 = 11.6 er cent interest rate. Exhibit US-12.

20 WT/DS126/7, dated 20 September 1999 (Exhibit US-2).

21 Panel Report, para. 9.71.

22 Panel Report, para 9.71.

23 Id., para. 9.67.

24 Id., para. 2.3.

25 Panel Report, para. 10.7.


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