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21 January 2000


  Original: English







(23 November 1999)

1. Good morning. My name is Dan Mullaney. I am Assistant General Counsel at the Office of the United States Trade Representative, and I am appearing today on behalf of the United States.

2. The Panel's task is to decide whether the requirement under SCM Article 4.7 to "withdraw the subsidy" means anything at all in the case of large, lump-sum grants. Australia says no. Australia says that after having provided a prohibited export subsidy - the worst and most trade-distorting form of subsidy there is - it can simply arrange for temporary repayment of a small portion of that subsidy and then immediately pay it back. That is why we are here: the United States urges the Panel to give real meaning to the Article 4.7 remedies in this case and to reject Australia's invitation to make it toothless.

The Allocation of the Grant

3. I'd like to turn to the question of how the $30 million grant should be allocated for purposes of withdrawal. But first, I'd like to clear up one point. The issue of how the grant should be allocated is important because the remedy for an illegal export subsidy is that is has to be "withdrawn". Webster's Third New International Dictionary defines "withdraw" as "to take back or away (something bestowed or possessed). The portion of a significant export subsidy grant that is allocated to prospective periods has to be removed, taken away, "withdrawn" from the recipient. It is only the prospective portion that has to be withdrawn, because the nature of the WTO remedies is prospective.


4. Australia has done and argued everything conceivable to avoid this obvious and straight-forward remedy of withdrawal of the subsidy. Australia has even argued, despite the specific remedy in the SCM Agreement, that the appropriate remedy is that the subsidy measure should be brought into conformity, and has specifically avoided talking about the only remedy at issue here: withdrawal, without delay, of the subsidy. Instead, virtually all of Australia's arguments are designed to show that the subsidy has somehow been brought into conformity with the agreement, not that it has been withdrawn.

5. Australia says that it does not matter that an Article 3.1(a) subsidy is irremediable. It says that remedies are not the issue, that the issue is only "conformity with a rule" and "how a Member can reconfigure assistance to be consistent with SCM Article 3.1(a)." Australia's position is wrong.

6. SCM Article 4 is entitled "Remedies". Article 4.7 specifically provides for the "remedy" of withdrawal of the subsidy without delay, not "reconfiguration of the assistance" and not "bringing the measure into conformity." Article 1.2 of the DSU is very clear that Article 4.7, as a special rule, prevails. Therefore, the normal DSU approach - that the measure be brought into conformity — is not the remedy in this case, and it is not what the Panel recommended. Article 4.7 could have, but did not, provide that the measure should be brought into conformity. Instead, it provides very specifically that the subsidy be withdrawn.

7. We understand why Australia wants to avoid the required SCM remedy of withdrawal of the subsidy. It is a strong remedy reserved for the most serious form of impermissible subsidy. Nevertheless, it is not a "punitive" measure imposed on an individual company. Under Article 1.1 of the SCM Agreement, by definition, a subsidy provides a benefit to a recipient. Plainly, then, what must be withdrawn is the benefit conferred on the recipient. This is not a punishment; the government is required to take back what should not have been bestowed in the first place. It is hard to conceive of any company, particularly in this instance, having a legitimate expectation of being able to keep an illegal subsidy. ALH and Howe have been on notice, since at least October 1996, that the United States regarded the export benefits it was receiving as illegal export subsidies. It took the $30 million subsidy anyway, obviously aware that it would come under scrutiny as an export subsidy.

8. In any case, the SCM Agreement says that the subsidy should be withdrawn, and this means effectively - not nominally - withdrawn from the recipient.

Allocation Period

9. So, the subsidy must be withdrawn. The issue in this proceeding is exactly how much of the subsidy should be withdrawn. This is determined by how this grant is allocated over time, because only that portion of the grant attributable to prospective periods is withdrawn. The exercise is only to calculate the value of what the recipient still has. That is what needs to be withdrawn. To the extent that Australia admits that anything at all has to be withdrawn, this appears to be a principle on which both parties agree. The evolution of Australia's reasoning on the allocation issue in this case is interesting. In the original proceeding, Australia argued that there was no tie whatsoever between the $30 million subsidy and export performance: I quote from Australia's argument in the Panel Report: "the money is gone and there is no connection with future sales, including sales for export". Now, Australia is asserting that the $30 million grant is so specifically connected to export performance that each dollar of the $30 million can be directly attributed to specific export sales. The truth is at neither extreme: the subsidy was contingent on export performance, and was therefore a prohibited export subsidy; but it was not attributed specifically to individual sales or to a particular time-period.

10. It is our position that, for these purposes, this grant must be allocated over the useful life of Howe's assets. Why? Because that is how long the benefit of the subsidy lasts. When a company purchases a significant capital asset, it does not charge the entire cost of that asset to its financial statement in the year of purchase. Rather, recognizing that the asset will last for a period of some years, the company depreciates the asset - that is, allocates the cost of the asset - generally, over its useful life. Similarly, when a company receives a grant significant enough to use in capital investments to enhance its long-term competitiveness, that grant continues to benefit the recipient over the life of those assets. In the absence of this grant, the company would have had to pay for the asset itself and depreciated that cost on its books over the life of the asset. Thus, from the point of view of the recipient, the subsidy lasts for the useful life of the asset.

11. This accounting treatment is common sense: The benefit of a subsidy that permits a company to make a significant capital investment, lasts, from the point of view of the recipient, for as long as the capital asset does. Further, Article 3.1(a) does not exist in a vacuum. The reason that export subsidies are prohibited is that they presumptively distort trade. An export subsidy that permits capital investments endures and distorts trade for as long as the resulting asset remains in use.

12. This key point distinguishes a significant grant from a smaller, recurring subsidy. When a government makes a small subsidy payment for each unit of exports, each such payment only distorts trade with respect to that particular unit: it does not necessarily impact other exported units at all, or extend into the future. Such a subsidy would not be allocated over time for purposes of withdrawal.

13. That is why, as we described in our First Submission, the expert opinion and Member practice under the SCM Agreement is that small recurring subsidies are not allocated, but that significant lump sum grants are allocated over the useful life of assets. Significant grants are allocated this way because such an allocation reflects the economic reality of how long such a subsidy lasts and how long it will affect exports. Conversely, a recent significant grant, if not allocated over the useful life of assets, could completely escape the SCM remedies, even though the recipient continues to benefit from it.

14. These are precisely the reasons for allocating the $30 million grant at issue in this case in the same way.

15. Australia, in its second submission, articulates why it believes the $30 million - which it once argued had no connection whatsoever to future sales - now is so directly linked with the sales performance targets that it is "expensed" in achieving those targets. Australia's main argument appears to be that the $30 million grant was a replacement, as of April 1, 1997, for the ICS export subsidy programme, which was scheduled to provide export subsidies through 30 June 2000. Australia also asks rhetorically why it should make a difference to the allocation whether Australia paid the export subsidy as a recurring subsidy, in each quarter through 30 June 2000, or paid the entire amount up front.

16. Let's examine this argument. The $30 million was provided in part to compensate Howe for being excluded from the ICS and EFS export subsidy programmes. The EFS programme lasts through 31 December 2000, and the ICS programme lasts through 30 June 2000. Nothing in the grant, however, says that, because the grant was given in part instead of ICS and EFS export subsidies, that the "duration" of the grant itself was somehow limited by those previous programmes. Indeed, Australia argues that the duration of the grant was limited by the duration of the ICS programme alone, but, curiously, not the EFS programme. The only conclusion one can draw from these facts, and the only conclusion this Panel reached, is that Howe was excluded from the ICS and EFS programmes, and that the $30 million grant was provided to compensate Howe for this exclusion. Nothing in this conclusion limits the "duration " of the $30 million subsidy to 30 June 2000.

17. Finally, it is not helpful to speculate on what the result in this case would have been had Australia paid the $30 million little by little instead of in lump sums. If the subsidy were structured differently the result in this case may well have been different. If Australia had decided to provide quarterly benefits based purely on export performance targets, Australia might have provided smaller quarterly benefits over a longer period of time than through 30 June 2000, and Howe might have received less grant money before the compliance deadline than the U.S. has calculated. Further, there might have been no capital investment performance requirements under such a hypothetical programme, since the payments would not have been large enough to justify such a requirement. The point is that, yes, if Australia had established a subsidy programme different from significant lump-sum payments, the manner in which a withdrawal of the subsidy could be effected under SCM Article 4.7 might be different. But that is not our situation.

18. In any case, taking Australia's hypothetical at face value, there is a big difference to a recipient between receiving a lump sum payment today, which is immediately available to purchase major capital assets - in fact, earmarked for such capital assets - and receiving periodic payments of much smaller amounts over a longer period of time.

19. What else is wrong with Australia's proposed allocation method? Because it is divorced from economic reality, it is subject to abuse. What if Australia had provided the $30 million subsidy contingent on best efforts to achieve export and investment targets through 16 June 1999, instead of through 30 June 2000? The same $30 million would have been provided; it plainly would have been, in its entirety, an export subsidy; the same amount would have been invested in capital assets, and Howe would have benefitted to the same extent as it has now. In terms of the prohibited benefit to Howe, that $30 million export subsidy would be indistinguishable from the $30 million export subsidy we are considering today. Yet, under Australia's interpretation, there would be nothing whatsoever to withdraw in the former case, because it all would have been "expensed" as of16 June 1999. The same prohibited subsidy, the same impact on Howe, but a completely different result from the point of view of Article 4.7 remedies.

20. Obviously, Australia's position is a virtual blueprint for how to grant significant export subsidies without having to worry about the WTO consequences.

The Reimbursement Through The Subsidy of the 1999 Loan.

21. Let's talk now about the 1999 Loan, which Australia admits is a subsidy. Picture, if you will, this scenario. ALH and the Australian Government meet in a conference room on 14 September to discuss how to comply with the Panel's recommendations. The Australian Government says: "We're sorry, but we have to take back part of the $30 million grant, because the WTO Panel said we had to withdraw the subsidy". ALH protests, "but we don't want to repay this money, we need it for our automotive leather operations". The Australian Government replies, "don't worry, just hand the $8 million to us, and we'll hand it right back to you. We'll even sign an agreement to that effect. ALH, quite rationally, agrees, and the deal is done.

22. When ALH and the Australian Government walk out of that conference room, would anyone seriously argue that ALH had repaid $8 million of the subsidy, or that the Australian Government had withdrawn that portion of the subsidy? No. Yet, in substance, that is precisely what happened here.

23. I'm going to simplify the discussion by talking about round numbers. The Australian Government agreed to give ALH $13 million, specifically conditioned on ALH giving the Australian Government $8 million, and asks only that ALH pay back the $13 million in 13 years, with no interest. ALH takes $13 million, returns $8 million to the Government, and invests the balance at a modest 7.5 per cent rate of return. In 2012, ALH has enough money to pay the Australian Government back in full. These transactions, which all happened on the same day, 14 September 1999, are the exact equivalent of the "conference room" scenario I just described.

24. Now, Australia will tell you that this is not what happened. They say that Howe received the $30 million and paid back $8 million of it, and that ALH, a completely different company with a broader product line, received the loan subsidy. They say that the $13 million loan is a "separate measure" from the grant or its repayment. They say that the $13 million loan is identical in conditions to the $25 million loan in 1997 that the Panel found not to be an export subsidy, and is therefore perfectly WTO-consistent.

25. None of these assertions is accurate.

26. ALH is a common party throughout these transactions; it is a holding company, and Howe is its wholly-owned subsidiary. ALH received the original $30 million grant to use for its automotive leather operations. ALH was the recipient of the $13 million loan. ALH arranged for the repayment of the $8 million grant, and it was ALH that agreed with the Australian Government that the 1999 Loan subsidy would be conditioned on the repayment. Technically, the $8 million came out of Howe's funds (and was then immediately reimbursed), because that is where the subsidy went. Australia simply cannot credibly argue that the repayment and its reimbursement are two separate transactions involving two separate parties.

27. Second, the $13 million non-commercial loan is plainly not a measure that is separate from the grant repayment. Far from it. This loan is directly and specifically contingent on the grant repayment. There would not have been one without the other. By Australia's logic, if the Panel saw me go to a restaurant for dinner tonight, it would have to conclude that I was receiving a free dinner. My payment to the restaurant at the end of the meal, by Australia's logic, would be a completely separate transaction that the Panel would be urged not to take into account.

28. Third, and finally, Australia cannot plausibly claim that the 1999 Loan is just like the 1997 Loan, and is, therefore, a separate WTO-consistent measure. As I have said, the 1999 Loan subsidy was a directly contingent reimbursement for the repayment of the $8 million subsidy. This alone makes it very different from the 1997 Loan, because the 1999 Loan was intended to, and did, reimburse and therefore nullify the partial repayment.

29. In addition, however, since the $13 million loan subsidy was a direct reimbursement of the $8 million repayment, and was specifically contingent on the repayment that loan steps into the shoes of the $8 million grant repayment. In the conference room scenario I described a few minutes ago, ALH repays $8 million to the Australian Government, and the Australian Government, by prior arrangement, pays it back. Nothing has happened to the $8 million portion of the export subsidy to make it any less of an export subsidy. It was an export subsidy when it was returned to Australia, and it remains an export subsidy when the Australian Government gives it back.

30. Australia would probably respond that, when the export subsidy was returned to ALH, it was returned (1) as a loan subsidy and (2) without the same export-related strings attached. This is the same, however, as Australia's argument that all it had to do to withdraw the subsidy was remove the sales performance obligations. Australia is attempting to "cleanse" the original subsidy by removing, ex post facto, the export conditions for that subsidy. This does not implement the Panel's recommendations because Article 4.7 says to withdraw the subsidy, not remove some of the features of the subsidy.

31. Another way of looking at this is that because the $8 million portion of the export subsidy was contingent on export performance, the subsidy provided through the 1999 Loan is also contingent on export performance, because it is linked to, and, but for accounting differences, becomes the same as, the original export subsidy. In this respect, the subsidy provided through the 1999 Loan is, itself, an export subsidy.

32. In addition, Australia itself noted that the facts and circumstances surrounding the 1997 Loan examined in the underlying proceeding were identical to those surrounding the $30 million grant, except for a specific link to export performance. This link to export performance, according to Australia, was the difference that made the $30 million grant an illegal export subsidy and the 1997 Loan not. The 1999 Loan, unlike the 1997 Loan, has a direct link to export performance, in that it is linked specifically to the repayment of an export subsidy. Therefore, the 1999 Loan is itself inconsistent with Article 3.1(a).

33. Either way one looks at the reimbursement represented by the 1999 Loan subsidy, it is plain that Australia has not complied with the recommendation of this Panel and the DSB that the subsidy be withdrawn.

Starting date for the "prospective portion"

34. I want to turn now to the issue of the starting date for calculating the prospective portion of the grant - that portion that must be withdrawn. The SCM Agreement calls for withdrawal of the subsidy "without delay". The Panel Report making this recommendation in this case was adopted on 16 June 1999. In our view, in the case of the withdrawal of the prospective portion of a grant, this is the starting date for calculating the "prospective portion": grant monies allocated to periods on or after 16 June 1999, should be withdrawn. In this way, the entire prospective portion of the subsidy is withdrawn, and no Member benefits by delaying implementation.

35. Australia's response is instructive. Australia believes that, after a formal export subsidy finding is made, with every day that passes, more and more of the prohibited subsidy becomes untouchable by the SCM remedies. Revealingly, Australia says that the measure "comes into conformity" automatically at the end of the allocation period as a consequence of the monies having been expensed. In other words, even after the formal finding of a prohibited export subsidy, a Member can avoid withdrawing anything at all simply by delaying implementation and waiting out the clock.

36. There is no reason for this result under the SCM Agreement and it only rewards postponing implementation. In some cases, there is a practical need for some period of time in which a Member decides how to implement the withdrawal of an allocated grant. No matter how long that time-period is, however, the prospective portion to withdraw should be calculated as of the date of adoption of the Panel Report. The obligation to withdraw the subsidy becomes effective on that date. There is no reason that the amount to be withdrawn should decline with every day that passes after the DSB adopts a Panel Report finding an export subsidy.

37. Australia protests that if the amount is never withdrawn, then at the end of the allocation period, the Member would still have to withdraw the original amount outstanding, together with interest. This is precisely true. If the Member does not withdraw the subsidy as recommended, that Member should not receive a credit against withdrawing the subsidy, simply because of the passage of time. In other words, the lapse of time does not excuse a Member from its obligation, which accrued on the adoption date of the Panel Report, to withdraw the subsidy. This is not "punitive action", as Australia characterizes it. It is the remedy - that the subsidy be withdrawn without delay - that the SCM Agreement mandates.

38. As for Australia's claim that, if the Member does not withdraw the subsidy, it would be subject to retaliation or compensation forever, this raises a question that is not at issue here. This proceeding is not under Article 22.6, and is not about appropriate countermeasures.

39. Australia also says that the withdrawal should not include interest, and disparages the use of ALH's actual borrowing rate in 1997 to calculate this interest. This criticism is misplaced. Plainly, the subsidy that should be withdrawn prospectively includes not only the allocated portion of the grant, but also the interest that the company saved by not having to borrow the money. That is the total benefit to ALH that should be withdrawn. The 1997 borrowing cost is no accident: Since ALH received $30 million in 1997 - 98 for free, in lieu of having to borrow it at its 1997 cost of borrowing, the interest saved currently is the interest that ALH would have incurred to borrow the funds in 1997.


40. To sum up, this Panel is called upon to decide a very important issue, which is whether an export subsidy is effectively irremediable, which is the upshot of Australia's arguments, or whether it has to be meaningfully withdrawn, as required by the SCM Agreement.

41. Thank you very much for your attention.



(24 November 1999)

1. As we said at the outset of this meeting yesterday, the Panel's task in this proceeding is to decide whether the requirement under SCM Article 4.7 to "withdraw the subsidy" means anything at all in the case of large, lump-sum grants. Under Australia's interpretation of the Agreements, it does not. Under Australia's interpretation, the issue is whether its previously bestowed grant can somehow be brought into conformity with the agreement, or reconfigured, or revised ex post facto, to remove the export contingency. Respectfully, none of these possible responses is appropriate. Article 4.7 simply and expressly requires that the subsidy be withdrawn. Further, the Member must really withdraw the subsidy, not simply go through the motions.

2. We submit that there are only a few key issues that the Panel need analyze in reviewing Australia's compliance in this proceeding.

3. First, Article 3.1(a) only provides that, if a subsidy is contingent on export performance, it is a prohibited export subsidy. Article 3.1(a) does not and cannot define how an export-contingent grant is allocated over time.

4. Second, a significant grant which is an export subsidy should be allocated over time on some reasonable economic basis that reflects the length of time that the subsidy, and its benefits to the recipient, last. This allocation period should be based on meaningful, objective criteria. The allocation period should not be defined by the subsidizing Member's own arbitrary view — contained in the grant contract or elsewhere — on how long the grant subsidy should be deemed to last. The allocation period certainly should not be defined by only one of the several conditions — the sales performance targets — that made the grant an export subsidy in this case. A large, lump-sum grant objectively provides a benefit to the recipient that lasts over the useful life of the recipient's production assets, and its allocation should reflect this.

5. Third, the 1999 Loan subsidy to ALH, which was directly contingent on ALH's arranging for the repayment of part of the export subsidy, effectively nullified any purported withdrawal of a small portion of the $30 million export subsidy. It rendered what might have been a partial withdrawal completely non-existent.

6. Finally, the obligation to withdraw the subsidy accrued the day this Panel Report was adopted. On that day, Australia's obligation with respect to the prospective portion of the principal amount of the $30 million grant was fixed, and on that day, the prospective portion of the subsidy to be withdrawn started to include the interest that the recipient saved by virtue of not having to borrow the principal amount. Delays in withdrawing the subsidy do not decrease the amount to be withdrawn; indeed, because of the interest component of the benefit, the prohibited benefit increases over time.

7. The answer to these few questions will determine whether an export subsidy is effectively irremediable, which is the upshot of Australia's arguments, or whether it has to be meaningfully withdrawn, as required by the SCM Agreement.

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