What's New?
 - Sitemap - Calendar
Trade Agreements - FTAA Process - Trade Issues 

español - français - português
Search

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 1-2

REBUTTAL SUBMISSION OF THE UNITED STATES

(15 November 1999)

REDACTED AUSTRALIAN BUSINESS CONFIDENTIAL INFORMATION INDICATED BY DOUBLE BRACKETS - [[ ]]

TABLE OF CONTENTS

  1. INTRODUCTION. 
     
  2. THE $8.065 MILLION REPAYMENT IS NOT A WITHDRAWAL OF THE SUBSIDY. 

"[I]T IS ILLOGICAL TO CLAIM THAT THE ALLOCATION OF THE SUBSIDY CAN BE DONE IN TWO DIFFERENT WAYS FOR THE SAME CASE." 
"EITHER SUBSIDIES ARE 'TIED TO' EXPORTS OR THEY ARE NOT." 
"IF THEY ARE SUBSIDIES CONTINGENT UPON EXPORT PERFORMANCE (I.E. PROHIBITED EXPORT SUBSIDIES IN LAW OR IN FACT), THEN THEY ARE EXPENSED IN ACHIEVING THE CONTINGENT EXPORT SALES." 

  1. AUSTRALIA SHOULD WITHDRAW THE GRANT AS OF THE DATE OF ADOPTION OF THE PANEL REPORT.
     
  2. THE NEW LOAN NULLIFIED THE PARTIAL WITHDRAWAL OF $8.065 MILLION. 
     
  3. CONCLUSION. 


I. INTRODUCTION

1. The first submission of the United States demonstrated that Australia failed to withdraw its export subsidy, as recommended by this Panel. Instead, Australia recovered only a modest repayment of the grant from the beneficiary, Howe and Company Proprietary, Ltd. ("Howe"), and then immediately reimbursed even that meager sum. In response, Australia argues that the minor repayment that Howe made was both unnecessary and more than sufficient to withdraw the subsidy. Australia also argues that only the repayment, but not its reimbursement by the Government of Australia, was part of the implementation of the recommendations, so that the reimbursement is not "covered by the Panel's terms of reference." Australia is wrong on both counts.

2. Australia's interpretation raises fundamental questions about the continued viability of the Agreement on Subsidies and Countervailing Measures ("SCM Agreement"). Australia's position could, if sustained, effectively render the obligations in Article 4.7 of the SCM Agreement meaningless. Australia's interpretation means that Members who provide significant illegal, prohibited export subsidy grants can easily relegate most or all of those grants to the past, declaring them outside the reach of the SCM Agreement remedies. Further, such Members are, according to Australia, free to "comply" with the requirement that such subsidies be withdrawn by engaging in any number of bookkeeping manoeuvres to which panels would be required to turn a blind eye. For example, under Australia's approach, Members in breach of their export subsidy obligations may "comply" with those obligations by having the recipient of the subsidy repay an arbitrary part of the subsidy, at least on paper, while the government simultaneously pays the recipient the same or greater amounts of money. This new payment may even be expressly linked to the repayment of the subsidy, according to Australia, but panels must ignore this linkage.

3. Australia's interpretation is not supported by the SCM Agreement and should not be endorsed by this Panel. This Panel should determine that Australia has not complied with the SCM Agreement and the recommendations of the Dispute Settlement Body ("DSB").

II. THE $8.065 MILLION REPAYMENT IS NOT A WITHDRAWAL OF THE SUBSIDY.

4. The first submission of the United States, filed 27 October 1999, explained that (1) Howe should repay the entire amount of the $30 million grant that is prospective as of the date of adoption of the Panel report and that (2) to determine the prospective portion of the grant, the grant should be allocated in an economically reasonable manner, such as over the useful life of Howe's production assets. This means that most of the $30 million grant remains prospective and must be repaid.1 The amount that should be repaid, as calculated in the US first submission, is $26,346,154, plus interest.2

5. In contrast, Australia claims that, less than two years after providing $30 million in illegal export subsidy grants to Howe, it has fully withdrawn the subsidy by recouping just one quarter of the amount it provided.

6. In fact, Australia also claims, at para. 20, but does not seriously argue, that it need not have recovered a single dollar, since, according to Australia, merely terminating Howe's sales performance requirements under the Grant Contract would have been sufficient to implement the DSB's recommendations. This view is wrong, and not even Australia seems to credit it, since Australia's submission then proceeds to determine what Australia itself calls the "required" repayment amount.3 Nonetheless, to prevent any confusion, the United States responds to Australia's assertion in the footnote below.4 Australia suggests that for purposes of calculating how much it was required to recoup from Howe, the $30 million grant should be allocated exclusively over the period that the performance requirements were to be in effect. Based on Australia's view, only the portion of the $30 million that is attributable to the period that the performance requirements were to remain in effect after the end of Australia's compliance period has to be withdrawn.5 Australia calculates that amount as either $8.065 million or $6.602 million, depending on whether the allocation is weighted by the sales target quantities set in the Grant Contract.6 Not surprisingly, under Australia's theory, the requisite withdrawal amount is quite modest, since most of the sales performance period fell prior to the 14 September 1999, compliance deadline.

7. Australia supports its view by stating that the Panel itself made a "finding that the allocation of the grant payments was in respect of sales performance targets and hence applied over the period 1 April 1997 to 30 June 2000..7 Australia states that "the Report explicitly linked the grant payments to the sales performance targets8 and "[t]he Report considered that the grant payments were tied to export performance in the period 1 April 1997 to 30 June 2000 because of the sales performance targets, and were to be used, i.e., expensed, in achieving those targets.9

8. In fact, however, the Panel made no findings whatsoever on how the export subsidy should be allocated and never addressed how the grants should be expensed. Plainly, the sales performance requirements were an important factor - one among several - that led the Panel to find that the $30 million grant was a prohibited export subsidy. Only in this sense did the Panel "link" the sales performance targets to the $30 million subsidy. The Panel did not say, however, that this link should be the basis on which to determine how the grant should be allocated for purposes of calculating the amount that Australia was required to withdraw.

9. In fact, it appears that Australia draws its conclusion, not from any finding of the Panel, but purely through semantic confusion and the inappropriate melding of two distinct concepts. The core of Australia's argument appears in paragraph 29 of its First submission:

[I]t is illogical to claim that the allocation of the subsidy can be done in two different ways for the same case. The USA is saying that the conditions on which a subsidy is provided are critical to determining whether it is in breach [sic.] SCM Article 3.1(a), but that, once that subsidy has been found to be in breach, the conditions and nature of the subsidy suddenly change when the issue of remedy is addressed . . . Either subsidies are "tied to" exports or they are not. If they are subsidies contingent upon export performance (i.e. prohibited export subsidies in law or in fact), then they are expensed in achieving the contingent export sales.

10. As the United States stated in its First submission, at para. 39, the Australian position confuses two legally distinct concepts: the elements of an export subsidy and the duration or allocation of the subsidy. If, in the words of the Panel, a subsidy is conditioned on anticipated exportation, it is an illegal export subsidy. That legal conclusion does not address the wholly separate question of how the subsidy is allocated over time, which is at issue in this Article 21.5 proceeding but was not relevant in the earlier proceeding. Australia has provided no basis for its assertion that the allocation of the illegal export subsidy — which is the key question in determining how much of this subsidy must be withdrawn — can be determined solely on the basis of one of the export elements associated with the subsidy.

11. Because Australia's paragraph 29, quoted above, appears to encapsulate Australia's argument in this proceeding, the United States responds below to each of the points in that paragraph.

"[I]t is illogical to claim that the allocation of the subsidy can be done in two different ways for the same case."

12. Contrary to Australia's characterization, the United States does not claim that there are two different ways to allocate the $30 million grant at issue. The United States is presenting only one way of allocating this grant for withdrawal purposes, and that is the economically reasonable way explained by the United States in its first submission. What Australia deems a second allocation method in fact has nothing to do with allocation. Rather, it is the threshold inquiry into whether a grant is an export subsidy, based on whether it is provided because of actual or anticipated exportation.

"Either subsidies are 'tied to' exports or they are not. "

13. With this statement, Australia simply interjects semantic confusion. The Panel used the phrase "tied to" to analyze whether the grant at issue was an export subsidy (which was the only issue before it).10 The Panel was not opining — and indeed there was no reason for it to opine —- on whether the grant was to be allocated over the time-period associated with one of the performance targets established under the Grant Contract.

14. The nature of the Panel's enquiry, and of its findings, is obvious from the language of Article 3.1(a) itself. Article 3.1(a) defines prohibited export subsidies as those "contingent, in law or in fact, . . . upon export performance." The "in fact" language is explained in footnote 4 to Article 3.1(a) as follows:

This standard is met when the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings.

It is plain that the "tied to" language in Article 3.1(a) footnote 4 is directed at the issue of whether the subsidy is, in fact, "contingent" upon export performance, and, therefore, prohibited. It is not directed at the issue of how a subsidy should be allocated or expensed.11

"If they are subsidies contingent upon export performance (i.e. prohibited export subsidies in law or in fact), then they are expensed in achieving the contingent export sales."

15. There is no basis for the assertion that grants contingent upon export performance must be allocated over the period set for achieving those sales. Australia more fully articulates this argument, at para. 32, asserting that the prohibition on export subsidies arises

because the subsidies contingent upon export performance are presumed to be expensed on actual exports, paid either in advance or in arrears. The grant payments are necessarily allocated to the sales performance targets on which they were contingent, i.e. to the period 1 April 1997 to 30 June 2000.12

Once again, Australia points to no authority in the SCM Agreement or elsewhere for either its presumption or its conclusion. Nor can it, because, as discussed above, Australia continues to confuse the allocation of a grant with the conditions that make it an export subsidy. Yet, Australia immediately draws from its own, unfounded conclusion to assert that if an allocation based on sales performance targets is not appropriate in this case, it would never be appropriate, no matter how different the circumstances.13

16. Again, there is no basis for that conclusion. Some export subsidy programmes may pay small sums on a recurring basis. For such programmes, withdrawal might mean simply ceasing the export contingent payments, i.e, withdrawing the subsidy programme. Under such a program, there may be no need for any allocation over time because the export subsidy may be expensed as the sales occur. There can be a wide variety of export subsidy programmes. For purposes of determining whether or how the subsidy is to be allocated over time in any particular case, WTO panels will need to undertake a fact-specific review of the subsidy's structure and implementation, based on the specific facts and the specific programme before the panel. The purpose of this Article 21.5 proceeding is not to determine how all subsidies should be allocated or withdrawn, but simply to determine whether Australia's non-recurring $30 million grant to Howe has been withdrawn.

17. Indeed, Australia goes a step farther in arguing that export subsidies must be allocated over a specific sales period. Australia is apparently asserting that the only way a significant lump sum grant can be contingent upon export performance, in the sense of Article 3.1(a) of the SCM Agreement, is for it to be specifically contingent on particular export levels over a particular period of time. This is the only possible explanation for Australia's assertion that an export grant has to be allocated or "expensed on actual exports.14 This position is clear from Australia's unsupported claim, at para. 26, that

[I]f the money was not allocated over the period 1 April 1997 to 30 June 2000 on the basis of anticipated export in this period, then it would not have been in breach of SCM Article 3.1(a). Such subsidies would have been a case for Parts III or V of the SCM Agreement, not Part II.

18. Nowhere does the SCM Agreement impose such a requirement. Nor does the SCM Agreement suggest that an export subsidy remains illegal only for so long as any export sales performance goals associated with the subsidy subsist. Under the SCM Agreement, a measure is an illegal export subsidy if, at the time of its bestowal, it is contingent upon actual or anticipated export performance — which might or might not be directly and specifically linked to specific sales quantities or over a particular period of time.

19. Further, it is untrue that "but for" a purported allocation of the grant over the period April 1997-June 2000, there would have been no finding of an export subsidy. First, as stated above, there was no Panel finding that money was allocated over the performance period on the basis of anticipated exports in this case. Second, the sales performance targets were based on "best efforts" and were one of many facts which, weighed together, led the Panel to conclude that the $30 million was an export subsidy.15 Contrary to Australia's claim, therefore, it was not just the sales performance requirements over a specific period of time that led the Panel to find an export subsidy. Several other facts were considered as well. Further, the Panel's conclusion, stated at several points in its report, was that "the grant of the subsidies was conditioned on anticipated exportation,16 not conditioned directly and exclusively on exports in specific amounts through June 2000.

20. As the United States pointed out in its first submission, para. 41, there is no necessary relationship between the criteria for an export subsidy — such as export performance requirements - and the allocation of the subsidy for purposes of determining how it is to be withdrawn. Imposing such a relationship only invites abuse. A Member could grant a significant subsidy, sufficient to build a large manufacturing facility with a useful life of 25 years, but make it contingent on export increases over the first two years. The Member could be confident that it had "jump-started" long-term export increases over the useful life of the assets, but because it chose only to monitor the first two years of exports, it escapes the SCM Agreement entirely. By the time a dispute settlement panel could recommend that the subsidy be withdrawn, the two-year period would likely have lapsed.17 Yet the subsidy — which the SCM Agreement prohibits in its entirety — would have a financial and economic impact for over two decades. Under Australia's view, however, no portion of that subsidy would need to be withdrawn.

21. For these reasons, the subsidy that should be withdrawn in this case cannot be calculated with reference to the sales performance targets, which was only one of the facts that made the grant an export subsidy. Rather, the "prospective" portion of the subsidy must be calculated in an economically reasonable manner that 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 Howe should repay that portion attributable to the period after the adoption of the Panel Report.

22. Finally, although the United States does not wish to give any credence to the various creative allocation calculations advanced by Australia at paras. 37 - 49, it is plain that Australia's suggestion that the amount of repayment can be reduced by 10 per cent, a figure representing assumed domestic sales, is completely unsupportable. The Panel found that the domestic market could not expand, so that the $30 million grant was contingent on export performance.18 The Panel did not find that 90% of the $30 million was an export subsidy; it found that 100 per cent of the $30 million was an export subsidy. Therefore, there is no basis for claiming that only 90 per cent of the prospective amount of the export subsidy need be repaid.

III. AUSTRALIA SHOULD WITHDRAW THE GRANT AS OF THE DATE OF ADOPTION OF THE PANEL REPORT.

23. Australia claims, at para. 33, that to require the repayment of the prospective portion of the grant as of the date of adoption of the Panel Report is to impose "retroactive action" and that

[t]he rationale for requiring the repayment of money is that that money has not been expensed at the time of implementation and so needs to be repaid to bring the Member into conformity at that date, not the date of adoption of the Panel Report. To interpret it otherwise, would be to make the concept of the implementation period meaningless.

24. Not at all. The Panel recommendation under the SCM Agreement was that the subsidy should be withdrawn "without delay". It is reasonable, as Australia says, to allow some implementation period in which the offending Member can take the necessary measures to withdraw the subsidy. This does not, however, mean that, when considering what portion of the grant is "prospective", the implementation period can "eat away" at the prospective portion that should be withdrawn.19 Nor does it mean that, should the Panel agree in this Article 21.5 proceeding that the grant should be allocated over the useful life of production assets, the prospective portion would then be calculated as of the date of the Panel's report in this proceeding. It is entirely reasonable to allow a Member time to implement its withdrawal. It is not reasonable to allow that time to reduce the amount of the subsidy that should be withdrawn.20

25. Further, it is reasonable to calculate the illegal subsidy that must be withdrawn as including interest on the amount that should be withdrawn starting on the date of adoption of the Panel report until the amount is repaid. Plainly, the subsidy that should be withdrawn is not only the face value of the subsidy, but also the interest that the company would otherwise have to pay — but did not - to obtain those funds in the market. Both of these elements are part of the prohibited benefit to Howe and are therefore part of the repayment of the prohibited benefit.

26. Withdrawing the grant as of the date of adoption of the Panel Report is not "retroactive action". The amount withdrawn is prospective, in that it is the amount allocated to the time-period after the date of adoption of the Panel report. The amount is "retroactive" only in the sense that it is allocated in part to a period prior to the implementation deadline. The implementation period, however, is only a practical necessity to allow the party to take the necessary action to comply. It is not a "free pass" that allows even more of the subsidy to escape withdrawal.

27. Australia is wrong in arguing, at para. 35, that the US position — that the withdrawal amount should be calculated as of the date of adoption of the Panel Report — would apply to all other cases under the WTO, and would require, for instance, that illegal tariffs collected after the panel report adoption date be refunded. First, the SCM Agreement, unlike other agreements under the WTO, provides as a remedy that the offending Member should "withdraw the subsidy." By contrast, disputes under other agreements require that the Member's measure be brought into compliance, and do not require that anything be "withdrawn."

28. Second, even with respect to disputes under the SCM Agreement, cases involving a significant, non-recurring export subsidy grant are different from cases involving recurring subsidies in which the subsidy might not be allocated over a period of time, but might be expensed when received.21 In the latter case, it may be that a subsidy can be withdrawn fully by withdrawing the subsidy programme itself, i.e., discontinuing the provision of subsidies.22 In the case of significant, non-recurring grants, by contrast, simply promising not to provide more significant grants is not a withdrawal, because the grant already provided endures over a period of years. In such a case, "withdrawal" can be effected through the refund of the prospective portion of the grant. In this case, but not necessarily in the case of recurring subsidies, the issue arises of what event triggers the "prospective" portion. In the case of grants, this event is the adoption date of the Panel report.

IV. THE NEW LOAN NULLIFIED THE PARTIAL WITHDRAWAL OF $8.065 MILLION.

29. Australia claims, at paras. 50-54, that the 1999 Loan was not part of the implementation of the Panel's recommendations (because it was not notified to the DSB) and is not part of the Panel's terms of reference, "which relate to the implementation" of the Panel's recommendations. Australia also asserts that the 1999 Loan is simply a legal subsidy that replaced an illegal one, and must be considered on its "individual merits" without reference to the illegal subsidy.

30. Australia's claims are wrong. The DSB's recommendation, in accordance with SCM Agreement Article 4.7, was that Australia should withdraw the subsidy. Under Article 21.5, this Panel is to consider "the existence or consistency with a covered agreement of measures taken to comply with the recommendations and rulings." Plainly, if this Panel can determine the "existence" of measures taken to comply with the recommendations, it can consider whether the measures purportedly taken to comply were effectively rendered non-existent.

31. In this case, the repayment of the $8.065 million was part of Australia's implementation of the Panel 's recommendations, and the concessional 1999 Loan was a critical and necessary part of that repayment package. Without the 1999 Loan, there would have been no repayment, and without the repayment, there would have been no 1999 Loan.23 That Australia chose to notify the DSB of only a part of its implementation package has no bearing on what, in fact, the full implementation package was.

32. The simple facts - hinted at in public statements but conspicuously omitted from the DSB notification - are that (1) Australia negotiated a modest repayment amount of $8.065 million with Howe's holding company parent, Australian Leather Holdings ("ALH")24 in a transaction in which ALH acknowledged receiving "valuable consideration" in exchange for the repayment25 (2) on the very same day, and [[ ]], Australia agreed to provide a highly concessional $13.654 million loan to that same company, ALH, [[ ]]26 (3) the 1999 Loan Agreement makes specific that the $13.654 million [[ ]27 and (4) these arrangements were made between the identical two parties: the Australian Government on the one hand, and ALH, on the other.28

33. Under these facts, it is plain that there was no repayment of $8.065 million. In substance, on the day that the DSB recommendations and rulings were to be implemented by withdrawing the subsidy, ALH repaid $8.065 million to the Australian Government, and, [[ ]], the Australian Government transferred $8.065 million right back to ALH. Under these circumstances, for Australia to say that the $8.065 repayment was part of Australia's implementation, but that the [[ ]] reimbursement was not, is specious. There would not have been one without the other. Both are part of Australia's so-called "implementation", and the reimbursement cancels out the repayment such that no part of the subsidy was withdrawn.

34. Australia claims that the 1999 Loan has to be considered on its own merits, citing Panel statements that "each subsidy has to be evaluated on its own terms in deciding consistency with the SCM Agreement" and the Panel's "agreement" that a prohibited subsidy can be replaced with a non-prohibited subsidy.29 Australia also tries to "bootstrap" the 1999 Loan onto the 1997 Loan that the Panel had found not to be an export subsidy in the underlying proceeding.

35. Australia conveniently neglects to remind the Panel that, immediately following the language it cites, the Panel analyzes the totality of the circumstances surrounding the $30 million export subsidy grant, including the fact that it was paid to compensate Howe for its exclusion from two previous export incentive programmes.30 On the basis of all of these facts, the Panel determined that the $30 million was an export subsidy. Plainly, in considering whether a subsidy is an illegal subsidy, the Panel may look, not just to the subsidy measure in isolation, but at the totality of the circumstances giving rise to the subsidy measure.

36. Similarly, it is not sufficient for Australia to say that the 1999 Loan was "modelled" on the 1997 Loan that the Panel found not to be an export subsidy, and that, therefore, the 1999 Loan is similarly "legal". First, the US does not believe that the Panel has to reach a conclusion that the 1999 Loan is, itself, an export subsidy in order to find that Australia has not complied with the Panel's recommendations. To comply with the Panel's recommendation that the subsidy be withdrawn, Australia should have required the repayment of the correct prospective portion of the subsidy. It did not do this: it set up a paper transaction under which ALH appeared to, but did not, repay part of the subsidy. This is plainly not compliance with the Panel's recommendations.

37. Second, neither in form nor in substance is the 1999 Loan similar to the 1997 Loan. [[ ]]. One crucial difference is that the 1999 Loan is [[ ]]. If the $8.065 million portion of the $30 million is contingent on export performance, and the $13.654 million 1999 Loan [[ ]], it follows logically that the 1999 Loan is contingent on export performance and is, therefore, a prohibited export subsidy under SCM Article 3.1(a). In this sense, the 1999 Loan is very different from the 1997 Loan. The Panel found no direct links to export contingencies in the 1997 Loan; the 1999 Loan, by contrast, is directly contingent on export performance through the reimbursement of the export subsidy.

38. As noted above, under Article 21.5, this Panel is to consider "the existence or consistency with a covered agreement of measures taken to comply with the recommendations and rulings." Plainly, as discussed above, the 1999 Loan was part and parcel of the measures taken to comply with the recommendations of the DSB. The question is therefore properly before the Panel whether the 1999 Loan itself is a prohibited export subsidy under SCM Article 3.1(a). Australia appears to admit -- as it must -- that the 1999 Loan is a subsidy.31 This Panel has already determined that the $30 million grant was a prohibited export subsidy, because it was "in fact tied to Howe's actual or anticipated exportation or export earnings".32 The $8.065 million repayment was part of that $30 million. The $13.065 million 1999 Loan, which Australia admits - as it must -- was a subsidy, is a direct replacement for the export subsidy, [[ ]]. That 1999 Loan, therefore, steps into the shoes of the export subsidy that the Panel has already analyzed and is itself a prohibited export subsidy.

39. In light of the above facts, this Panel should find that the 1999 Loan is part of the measures taken by Australia to comply with the DSB's recommendations, and that the 1999 Loan improperly nullifies Australia's purported withdrawal of $8.065 million and itself provides a replacement export subsidy which is inconsistent with SCM Agreement Article 3.1(a).

V. CONCLUSION.

40. For the above reasons, this Panel should conclude that the measures taken by Australia to comply with the DSB's recommendation are not in compliance with that recommendation and are inconsistent with the SCM Agreement.



1 See US First Submission, paras 19 - 35. For the sake of brevity, these explanations will not be restated here.

2 Id., paras. 34 - 35. All dollar amounts in this submission are in Australian dollars.

3 E.g., Australian First Submission, paras. 38, 42.

4 Australia states, at para. 20 of its first submission, that

“the termination of all subsisting obligations under the Grant Contract, and hence the termination of any sales performance requirement on Howe, would have been sufficient for Australia to implement the recommendations adopted by the DSB, given that there is now no obligation on Howe in respect of sales.”

This assertion is illogical and contrary to the SCM Agreement. First, the DSB’s recommendation under Article 4.7 of the SCM Agreement was that Australia should withdraw the subsidy - which the Panel defined as the grant - without delay. Australia - Subsidies Provided to Producers and Exporters of Automotive Leather, WT/DS126/R, Report of the Panel, Adopted 16 June 1999 (“Panel Report” ), paras. 10.1(b) and 10.3. On its face, this calls for Australia to remove the subsidy itself, not certain of the export-related elements associated with the subsidy.

Australia’s assertion, in addition to being contrary to the plain language of the SCM Agreement and the DSB’s recommendation, would produce a perverse result. If Australia’s view were to be credited, not only would the recipient of an illegal non-recurring subsidy be entitled to retain the entire benefit conferred by the subsidy, it would be able to enjoy a further benefit -- namely, relief from any obligations imposed as a condition of the subsidy. Such a result is plainly at variance with the notion of “withdrawal” of the subsidy, which necessarily contemplates the removal of benefits, not the conferral of further benefits.

Second, as this Panel has recognized, the decision whether a grant is contingent on export performance, and therefore is an export subsidy, must be made on the basis of the facts that existed at the time that the contract establishing the conditions for the grant payments was concluded. Panel Report, para. 9.68. The $30 million grant is an export subsidy because the grant was contingent, at the time it was provided, on export performance. The prospective “termination of any sales performance requirements on Howe” cannot change the fact that, when the $30 million was provided, it was contingent upon export performance, and therefore illegal. Attempting to change some of the obligations now does not affect the nature of the illegal subsidy, and it does not, by itself, withdraw the subsidy. This conclusion is reinforced by the fact that, regardless of what Australia says about sales performance requirements, Howe has already used the illegal export subsidy to make significant capital improvements that will benefit Howe’s exports for many years to come.

Moreover, even if it were possible to withdraw the prohibited export subsidy by removing, ex post facto, the export-contingent features of the subsidy, Australia has not succeeded in doing so in this case. The $30 million grant was contingent on exports, not based solely on the sales performance requirements of the grant contract, but also based on various other facts, “weighed together”. Panel Report, para. 9.71. The Panel also noted the capital investment performance requirements that Australia imposed on Howe, observing that the expanded production resulting from the grants and from the “required capital investments” necessarily translated into increased exports. Howe apparently completed most of these required capital investments -- aimed at promoting exports -- before the Panel Report was adopted. Panel Report, para. 2.3 n.4. These investments, required by the illegal export subsidy grant, will continue to support exports regardless of what happens to Howe’s sales performance requirements.

In addition, the Panel also found that:

(1) Howe had earned significant benefits from its exports of automotive leather pursuant to two automotive and textile export incentive programmes -- programmes from which Howe was excluded following a US request under the SCM Agreement for consultations regarding the programs -- and that the $30 million was to compensate Howe for these lost benefits (Panel Report, para.9.65);

(2) Australia was aware that the overwhelming majority of Howe’s sales were for export, thanks to the benefits of the export incentive programs, and sought, through the provision of the grant, to ensure that Howe remained in business after its exclusion from the export incentive programs (this point alone made it clear to the Panel that “continued exports, that is, anticipated exportation, was an important condition in the provision of the assistance”) (Panel Report, para. 9.66); and

(3) The grant money was provided to the one Australian leather company that exported, while other Australian leather producers were excluded (Panel Report, para. 9.69).

Howe’s sales performance targets under the grant contract were, therefore, only one of several factors that led the Panel to conclude that the $30 million subsidy is “in fact tied to Howe’s actual or anticipated exportation or export earnings.” Panel Report, para. 9.71. Even if Australia could somehow withdraw the subsidy by removing its export contingent nature, Australia has not achieved that result simply by relieving Howe of its sales performance requirements. Australia did nothing to address the other factors that led to the Panel’s conclusion.

Finally, Howe’s obligation under the Grant Contract was to make “best endeavours” to achieve the sales targets. Panel Report, para. 2.3. In other words, Howe did not have to achieve the sales targets in order to receive the grant money, but only had to try to achieve them. Further, Australia itself conceded that “the grant funds cannot be taken back by the government once the payments are made” and that “a change in Howe’s level of exports would not affect the disbursement of the funds”. Panel Report, para. 9.70. In light of these facts, Australia has not “implemented” anything by terminating “the sales performance requirements on Howe,” so that “there is now no obligation on Howe in respect of sales.” Under the Grant Contract, Howe could apparently keep the $30 million regardless of its actual sales performance. The situation after Australia’s so-called implementation is unchanged.

5 E.g., Australian First Submission, paras. 20, 37 - 49.

6 Id., paras 37 - 49.

7 Id., para. 20.

8 Id., para. 21.

9 Id., para. 25.

10 E.g., Panel Report, para. 9.71.

11 The Appellate Body has been very clear that “the legal standard expressed by the word ‘contingent' is the same for both de jure or de facto contingency. There is a difference, however, in what evidence may be employed to prove that a subsidy is export contingent.” Canada - Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, Report of the Appellate Body, (2 August 1999), para 167. Indeed, the Appellate Body (in para. 171) has explicitly stated that the phrase “tied to” relates to whether the subsidy is contingent or conditioned upon exports: “The ordinary meaning of ‘tied to’ confirms the linkage of ‘contingency’ with ‘conditionality’ in Article 3.1(a).” The phrase “tied to” exportations or export earnings means conditioned or contingent upon export performance, not allocated over specific anticipated exports.

12 Australian First Submission, para. 32.

13 Australia’s reference to the US Foreign Sales Corporation law in this regard is of course not relevant. The programme is not an export subsidy. Furthermore, not only are there no adopted DSB recommendations or rulings on this law, the United States has already indicated an intention to appeal the panel report in that dispute.

14 Australian First Submission, para. 32.

15 See supra, note 4.

16 Panel Report, para. 9.71.

17 Australia's position would also appear to be that if, during the period established by a panel pursuant to Article 4.7 of the SCM Agreement, the Member were to amend the export sales requirements so that they all expired before the end of that period, then the subsidy would have been “withdrawn,” an equally illogical result.

18 Panel Report, para. 9.67.

19 Indeed, Australia’s approach implies that a Member would be free to continue to provide new subsidy amounts, or even to increase the amount of the subsidy, during this period of time. There is no basis for such an approach in the text of the SCM Agreement.

20 The United States emphasizes that such decisions as to how particular subsidies should be withdrawn, and how the withdrawal amount should be calculated, are fact-specific. What might be appropriate in the case of one subsidy, such as the lump-sum grants at issue here, may be entirely inappropriate in other cases.

21 This distinction between non-recurring and recurring subsidies is recognized, for instance in the practice of the United States and the EC in connection with subsidy investigations under SCM Agreement, Part V. See US First Submission, paras. 22 - 23.

22 Given the wide variety of possible subsidy programmes, a determination of how such a subsidy should be withdrawn should be arrived at based on the particular facts at issue.

23 Among other things, this is apparent from Australia’s Media Release on this subject, Exhibit US-3.

24 Note that, although Australia makes much of the fact that the repayment was by Howe and the 1999 Loan was to ALH, the actual documents show that the agreement to repay was made by ALH as well as Howe. Exhibit AUS-1, page 5 (execution of repayment agreement by ALH).

25 Exhibit AUS-1, para. 2.

26 Exhibit AUS-BCI-3, [[ ]].

27 Exhibit AUS-BCI-3, para. 2.3.

28 Exhibits AUS-1, US-3.

29 Australian First Submission at para. 53.

30 See, e.g., Panel Report, para. 9.65, 9.71.

31 Australia argues only that it is entitled to provide subsidies to ALH, and concedes that the 1999 Loan is “concessional”. See, e.g., Australian First Submission, paras. 6 and 12. See also AUS-BCI-3, [[ ]].

32  Panel Report, para. 9.71.


To continue with ANNEX 1-3

Return to Table of Contents