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WORLD TRADE
ORGANIZATION

WT/DS126/RW
21 January 2000

(00-0227)

  Original: English

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

RECOURSE TO ARTICLE 21.5 OF THE DSU BY THE
UNITED STATES


REPORT OF THE PANEL

(Continued)


ANNEX 2-1

FIRST SUBMISSION OF AUSTRALIA

(3 November 1999)

TABLE OF CONTENTS

EXECUTIVE SUMMARY 

  1. INTRODUCTION
     
  2. PRELIMINARY RULING
     
  3. WITHDRAWAL OF SUBSIDIES UNDER THE GRANT CONTRACT 

Who should repay the money? 

Time period for the allocation of the $30m of grant payments 

Time period for determining unexpensed subsidies ("Withdrawal Period") 

Calculation of amount required to be withdrawn 

Options for calculation

  1. 1999 LOAN
     
  2. CONCLUSION 

ATTACHMENT A - Calculation of amount to be withdrawn 

EXECUTIVE SUMMARY

1. Australia has implemented the recommendations of the Panel Report Australia - Subsidies Provided to Producers and Exporters of Automotive Leather (WT/DS126/R) ("the Report") in good faith on the basis of the reasoning and findings of the Report itself. Australia implemented the Report's recommendations on 14 September 1999 by withdrawing $8.065m1 from Howe and Co. ("Howe"). At the same time it terminated all obligations under the Grant Contract of March 1997 ("Grant Contract"), including those under the sales performance targets. This termination was contingent upon the repayment of the $8.065m. by Howe.

2. Australia considered that the termination of all obligations under the Grant Contract would by itself have been sufficient to bring Australia into conformity. However, to provide greater certainty in resolving this case, Australia also withdrew $8.065m. from Howe. This amount exceeded the amount required to be withdrawn for implementation. Australia has complied with its obligations under the Agreement on Subsidies and Countervailing Measures (SCM Agreement) and the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU).

3. The Report found the grant payments under the Grant Contract to be contingent upon export performance on the basis of the sales performance targets in the Grant Contract over the period 1 April 1997 to 30 June 2000. These sales performance targets applied to all sales by Howe, not just sales of automotive leather and so certainly were not limited to exports of automotive leather. Accordingly, they included not only domestic sales of automotive leather by Howe but also all other sales by Howe. The grant payments were tied to those sales and the amount withdrawn, $8.065m., exceeded the unexpensed part of the $30m. attributable to automotive leather exports at the implementation date of 14 September 1999.

4. The Report found that the concessional loan provided in 1997 to Howe and ALH ("1997 Loan") is consistent with SCM Article 3.1(a). The "factor" that distinguished between the findings on the 1997 Loan and the grant payments was the sales performance targets under the Grant Contract. The Report found that the grant payments were tied to actual and anticipated exports because of the sales performance targets, which the Report found were effectively export performance targets.2 Without the "factor" of the sales performance targets the Report found that for the 1997 Loan " … there is not a sufficiently close tie between the loan and anticipated exportation or export earnings.3 The Report clearly considered that the grant payments were tied to export performance in the period 1 April 1997 to 30 June 2000 and so were to be expensed in achieving these export targets arising from the sales performance targets.

5. The loan provided to Australian Leather Holdings Ltd (ALH) in 1999 ("1999 Loan") is not within the terms of reference of the Panel. If the Panel decides to consider the 1999 Loan, then clearly it is consistent with SCM Article 3.1(a) and the USA has not sought to prove otherwise.

6. Australia is entitled to provide subsidies to ALH, so long as they are consistent with the WTO. Even if the 1999 Loan were to be regarded as replacing all or part of the subsidies to Howe, despite them being different entities with ALH's subsidiaries as a whole producing a broader product range, there would be nothing wrong with that under WTO rules. The Report says that "[I]t is, therefore, necessary that each subsidy be evaluated on its own terms in deciding whether it is consistent with the SCM Agreement4 and that no conclusion can be drawn about the status of a subsequent subsidy from the status of the preceding one.5

7. Therefore, Australia has complied with the DSB's recommendation by withdrawing $8.065m. from Howe by 14 September 1999, and, as a separate matter, the 1999 Loan is consistent with the WTO.

I. INTRODUCTION

8. Australia has implemented the recommendations of the Panel Report Australia - Subsidies Provided to Producers and Exporters of Automotive Leather (WT/DS126/R) ("the Report") in good faith on the basis of the reasoning and findings of the Report itself. Australia decided that the best way of resolving this dispute was to accept the Report (without making an appeal) and to implement on the basis of the Report.

9. The Report was adopted by the Dispute Settlement Body (DSB) on 16 June 1999 and so Australia had 90 days, i.e. until 14 September 1999, to implement the recommendations and rulings adopted by the DSB. It did so by having Howe and Co. ("Howe") repay $8.065m. of the grant payments on 14 September 1999. At the same time it terminated all obligations under the Grant Contract of March 1997 ("Grant Contract"), including those under the sales performance targets. This termination was contingent upon the repayment of the $8.065m. by Howe. The Deed of Release and the letter confirming receipt of the $8.065m. are at Exhibits 1 and 2.

10. The $8.065m. repaid by Howe exceeds the amount required to be withdrawn for implementation. As shown below this amount represents more than the portion of the grant payments unexpensed at 14 September 1999 on the basis of the sales performance targets contained in the Grant Contract.

11. Accordingly, Australia requests the Panel to find that it has fully implemented the recommendations of the DSB of 16 June 1999 (WT/DS126/5).

12. A concessional loan ("1999 Loan") of $13.654m. was made to Australian Leather Holdings Ltd (ALH) with terms derived from those for the 1997 Loan.

13. The terms of reference of the Panel under Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) limit it to the examination of whether Howe has repaid a sufficient amount of money, since the recommendation of the Report was limited to the issue of withdrawal of the grant payments to Howe. The 1999 Loan to ALH is not covered by the terms of reference of the Panel.

14. The USA has not provided any argument that the 1999 Loan to ALH is inconsistent with Article 3.1(a) of the Agreement on Subsidies and Countervailing Measures (SCM Agreement). Indeed at paragraph 50 of the USA's first submission, it says that "the issue is not whether the loan itself should be condemned as a prohibited subsidy." The USA could hardly argue otherwise, since the 1999 Loan clearly is consistent. In any case on the basis of the Report's conclusion on the Loan provided in 1997 to Howe and ALH ("1997 Loan") there could be no inconsistency with SCM Article 3.1(a). Moreover, consistent with the Report, a Member is permitted to provide a new subsidy without prejudice to its WTO status and the WTO consistency of any such subsidy has to be assessed on its own terms.6 The issue of whether Australia has brought itself into compliance in respect of the grant payments under the Grant Contract and the consistency of the 1999 Loan are separate issues and need to be addressed individually. Accordingly, the 1999 Loan does not affect the matter of implementation before the Panel.

II. PRELIMINARY RULING

15. At the request of the Panel under its preliminary ruling on 2 November 1999, Australia has provided as exhibits documents on the 1999 Loan and a letter from the Department of Industry, Science and Resources to ALH. These are provided under the protection of the Business Confidential Information (BCI) procedures for this panel and without prejudice to Australia's view that the 1999 Loan does not come within the Panel's terms of reference and that the USA has not laid adequate foundation why it should be considered by the Panel.

III. WITHDRAWAL OF SUBSIDIES UNDER THE GRANT CONTRACT

16. The amount of $8.065m., which was withdrawn from Howe, exceeds the amount required for implementation. The following sets out the requirements on Australia for implementation.

Who should repay the money?

17. The Report is clear that it considered the money to have been paid to Howe, e.g. at paragraphs:

"9.62 … the terms of the grant contract are specifically directed at Howe, and more particularly at Howe's automotive leather operations. … ."

and

"9.63 … the fact that the government of Australia was providing assistance to Howe … ."

18. Accordingly, consistent with the Report, Australia withdrew the money from Howe.

Time-period for the allocation of the $30m of grant payments

19. In its first submission, the USA states that withdrawal of a subsidy under the SCM Agreement does not mean that all of a subsidy has to be repaid by way of a retrospective remedy.7 Moreover, the USA's position in the Brazil Aircraft Panel was that subsidies should be withdrawn in respect of the period to which that they are " properly allocated".8

20. Australia considered that the termination of all subsisting obligations under the Grant Contract, and hence the termination of any sales performance requirements 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. However, to ensure an end to this dispute, Australia withdrew a substantial sum on money from Howe based on the Report's finding that that the allocation of grant payments was in respect of the sales performance targets and hence applied over the period 1 April 1997 to 30 June 2000. Accordingly, Australia decided to withdraw an amount that would cover the "anticipated exports" over the remaining period from the date of implementation to the end of the sales performance requirements under the Grant Contract on 30 June 2000.

21. The Report explicitly linked the grant payments to the sales performance targets under the Grant Contract.9 The period covered by the sales performance targets under the Grant Contract's was 1 April 1997 to 30 June 2000.10 The Report found that the grant payments were contingent upon export performance because of the sales performance targets and the linkage of those payments to the sales performance targets.11 The Report's finding was that the anticipated exports were those imposed by the sales performance targets. Those targets applied only to the period 1 April 1997 to 30 June 2000.

22. The Report found that the 1997 Loan is consistent with SCM Article 3.1(a)12 and this conclusion has been adopted by the DSB. This conclusion was based on the Report's finding that:

"There is nothing in the loan contract that explicitly links the loan to Howe's production or sales, and therefore nothing in its terms, the design of the loan payment, or the repayment provisions that would tie the loan directly to export performance, or even sales performance.13

Moreover, although "other factors" in relation to the granting of the assistance package to Howe were

"relevant to our consideration of the nature of the loan contact ... there was nothing in the terms of the loan contract itself which suggests a specific link to actual or anticipated exportation or export earnings, as there is in the terms of the grant contract.14

This led the Panel to the view that there

"is not a sufficiently close tie between the loan and anticipated exportation or export earnings.15

This conclusion was accepted by the USA, since it did not appeal it.

23. The Report concluded that the concessional 1997 Loan was not contingent upon export performance, either in law or in fact. Under the 15 year 1997 Loan, no interest was payable for the first 5 years. Thus the first payment of interest is on 1 February 2003 far beyond the end of the period for the sales performance targets of 30 June 2000. While the interest payable after the 5 year grace period is 2 per cent above the 10 year government bond rate, that rate was considered by the USA to be concessional16 This was not disputed by Australia and was not questioned by the Panel in the Report. The existence of an ongoing subsidy to Howe in respect of automotive leather after 30 June 2000 was thereby found not to be contingent upon export performance. It was only the grant payments that were found to be tied to exports of automotive leather and that depended critically on the sales performance targets, which only ran to 30 June 2000.

24. The Panel looked at all the facts surrounding the provision of the subsidies to Howe.

"In our view, the concept of 'contingent… in fact … upon export performance', and the language of footnote 4 of the SCM Agreement, require us to examine all the facts that actually surround the granting or maintenance of the subsidy in question.17

It was the Panel's consideration of all these facts that contributed to the Report's findings, but it was the sales performance targets that tipped the scales and led to the grant payments being found to be export subsidies. All the other facts combined applied equally to the 1997 Loan but without the sales performance targets they were not considered by the Report to represent a "sufficiently close tie" to anticipated exports.

25. The fundamentally different findings on the grant payments and the loan subsidies result from the existence of the sales performance targets. The findings mean that any argument by the USA that the grant payments should be allocated over a period beyond 30 June 2000 is not sustainable. The 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. It does not make sense to say that a subsidy is tied to exports over a specific period, then, having found the subsidy to be in breach because of that fact, expense it over a much longer period.

26. The USA sought to argue before the original Panel both that the subsidies extended over a long time and that they were directly tied to the sales performance targets.18 Australia pointed out that the USA could not have it both ways.19 If the money was not allocated over the period 1 April 1997 to 30 June 2000 on the basis of anticipated exports 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. The issue of implementation of the Panel's recommendations is not one of trade or production effect but one of complying with WTO rules. The USA has to seek remedy against measures it considers to be in breach of a Member's obligations on the basis of WTO rules.

27. The Report accepted the USA's argument that the grant and loan subsidies were a replacement for the Import Credit and Export Facilitation Schemes, which terminate in 2000. The main scheme for automotive leather was the Import Credit Scheme, which terminates on 30 June 2000 to be replaced by new assistance arrangements for the textiles, clothing and footwear industries: this is why the grant payments and the sales performance targets only ran until 30 June 2000.

28. The Panel concluded that the three tranches of grant payments were paid in advance of performance of actual and anticipated sales performance for the period 1 April 1997 to 30 June 2000.20 This is supported by the USA in paragraph 40 of its first submission, which reads:

"The grants amounted to an export subsidy because they were contingent on export performance."

The USA then goes on to claim that:

"The export-contingent feature of the subsidy, however, is not a useful tool for measuring how the subsidy should be allocated."

29. The point being made in those statements by the USA is not clear but it 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 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. There is nothing in the WTO to support that view and the USA certainly has not presented anything to do so. Indeed the USA recognizes in paragraph 15 of its first submission that, to the contrary, the issue for implementation is one of coming into conformity with the rule that has been breached. 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. If they are not contingent on exports, then they are expensed in other ways and are subject to different disciplines and remedies under the SCM Agreement.

30. The only way to try to make some sense of the USA's approach is to assume that only monies allocated to the period 1 April 1997 to 30 June 2000 were found to be inconsistent with SCM Article 3.1(a) while monies allocated on the basis of the USA's 12.8 year scheme to the period after 30 June 2000 were not. This would mean that all Australia was required to do was withdraw the monies allocated to the remaining "prohibited subsidy" period (15 September 1999 to 30 June 2000). This would amount to some $1.9m21, which Australia has exceeded.

31. There is some confusion between the USA's approach on allocating on the basis of assets life and on the other hand its comment at paragraph 25 of its first submission where it says:

" … 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."

32. There is a prohibition on export subsidies because they are contingent upon export performance, i.e. tied to export performance. The prohibition 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. The income from any one type of export subsidy programme is no more or less fungible than the income from any other type of export subsidy programme. There would be no more reason for treating the grant payments in the way suggested by the USA than export subsidies under a programme such as the USA's Foreign Sales Corporations. The Panel in the Report on which this implementation dispute is based found that the grant payments were contingent upon sales performance over the period 1 April 1997 to 30 June 2000. Accordingly, the allocation period was 1 April 1997 to 30 June 2000 for the purpose of implementing the DSB's recommendations.

Time-period for determining unexpensed subsidies ("Withdrawal Period")

33. The USA has argued in paragraphs 44-47 of its first submission that that the monies unexpensed at the date of adoption of the report have to be withdrawn rather than the amount unexpensed at the date of implementation. To require the withdrawal of monies that have been allocated prior to the date of withdrawal would be retroactive action. The 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. This is also the only interpretation consistent with paragraph 15 of the USA's first submission, which interprets SCM Article 4.7 in light of DSU Article 19. The DSU provides that the obligation is for a Member to bring a measure into conformity within a specified period provided for in DSU Article 21, and for the SCM Agreement, SCM Article 4.7.

34. The USA's argument is based on SCM Article 4.7, which applies to all prohibited subsidies. If it were to be found that the Withdrawal Period for the grant payments should start at the date of the adoption of a Panel Report, then the finding would apply to all prohibited subsidies and would also require the withdrawal of all monies paid between that date and the date of implementation for any prohibited subsidy programme. This would mean that for an export subsidy programme where payments are made after the performance, e.g. the USA's Foreign Sales Corporations, all monies paid between adoption of the Panel Report and the termination of the legislation would have to be repaid.

35. Since the USA has argued at paragraph 15 of its first submission that this is an issue of bringing into conformity, the same reasoning would also apply to many other cases under the WTO. For example, by analogy in the case of an illegal tariff, all monies collected between the date of adoption and the date of implementation would have to be refunded. Indeed it would be much easier for a government to repay monies in the tariff example than to recover monies from industry in a subsidies case, but that has not been required under GATT 1947 and WTO practice and law. There is no basis for singling out subsidies contingent in fact upon export performance for such punitive treatment.

36. Accordingly, all monies allocated to the period on or before 14 September 1999 have been expensed for the purpose of implementation by 14 September 1999. Thus the period for determining the amount to be withdrawn is 15 September 1999 to 30 June 2000 ("Withdrawal Period") for the purpose of this Panel.

Calculation of amount required to be withdrawn

37. The amount of $8.065m. withdrawn from Howe does not represent the amount that Australia considers was required to be withdrawn, but rather a figure that exceeded all sensible options. Australia recognized that there may be differing views on what the appropriate level should be, and so negotiated a high figure with Howe in order to finalize this dispute.

38. The parameters used were:

  • the period for allocation of the $30m. is 1 April 1997 to 30 June 2000

®         This has been demonstrated above.

  • the unexpensed amount for 15 September 1999 to 30 June 2000 was to be withdrawn

®         This has been demonstrated above.

  • only the amount allocated to exports of automotive leather was required to be withdrawn.

Only the amount allocated to exports of automotive leather was required to be withdrawn

39. Since the $30m. was allocated over 1 April 1997 to 30 June 2000 and since the amount allocated to the period 1 April 1997 to 14 September 1999 had been expensed for the purpose of implementation, the issue is how much was allocated to the Withdrawal Period (15 September 1999 to 30 June 2000).

40. Since the case is about subsidies contingent upon exports of automotive leather, only those subsidies tied to exports of automotive leather were found to be inconsistent. Accordingly, only the unexpensed proportion of such subsidies were required to be withdrawn. Paragraph 9.67 of the Report concluded that:

" … in order to expand its sales in a manner that would enable it to reach the sales performance targets (interim targets and the aggregate target) set out in the grant contract, Howe would, of necessity, have to continue and probably increase exports. … "

It was the subsidy attached to those exports (of automotive leather) that was found to be in fact tied to exports. The monies paid in respect of actual or anticipated domestic sales of automotive leather (or indeed any other sales by Howe) could not have been inconsistent with SCM Article 3.1(a) in respect of automotive leather.

Options for calculation

41. The above leaves two important questions to be answered:

(a) what portion of the $30m. is to be allocated to the period 15 September 1999 to 30 June 2000 (the "Withdrawal Period")

(b) what portion of that should be allocated to exports of automotive leather.

42. Taken together, these will give the amount required to be withdrawn.

43. At paragraph 9.67 the Report says:

"… we conclude that, in order to expand its sales in a manner that would enable it to reach the sales performance targets (interim targets and the aggregate target) set out in the grant contract, Howe would, of necessity, have to continue and probably increase exports. At the time the contract was entered into, the government of Australia was aware of this necessity, and thus anticipated continued and possibly increased exports by Howe. In our view, these facts effectively transform the sales performance targets into export performance targets. … " [Emphasis added.]

44. Again at paragraph 9.71 the Report says:

"… These payments are conditioned on Howe's agreement to satisfy, on the basis of best endeavours, the aggregate performance targets. The second and third grant payments are, in addition, explicitly conditioned on satisfaction, on a best endeavours basis, of interim sales performance targets. Given the export-dependent nature of Howe's business, and the size of the Australian market, these sales performance targets are, in our view, effectively, export performance targets. … " [Emphasis added.]

45. Moreover, the Report says at paragraph 9.68 that:

"… However, we must make our determination on the facts that existed at the time the contract establishing the conditions for the grant payments was entered into. Thus, the fact that the anticipated exports may not have come to pass in the volumes anticipated does not affect our conclusion. … "

46. Thus the Report concluded that the obligation on Howe was in respect of the aggregate of the sales performance targets over 1 April 1997 to 30 June 2000. The Withdrawal Period is 290 days and 1 April 1997 to 30 June 2000 is 1186 days. This means that the portion of the $30m. allocated to the Withdrawal Period is 30 times 290/1186, i.e. about $7.336m.

47. While this seems to Australia be the appropriate approach most in line with the Report, Australia also considered the alternative of allocating the $30m. on the basis of the schedule of sales performance targets. Taking that approach, the amount of the $30m. allocated to 1999-2000 (July-June) is $11.31m. and so the amount allocated to the Withdrawal Period is $8.961m.22

48. The second question was how to allocate this to exports of automotive leather. As the Report notes, the sales performance targets were not achieved for automotive leather. Indeed as pointed out by Australia the sales performance targets were not for automotive leather alone but overall sales by Howe. The USA used a figure of 90 per cent as the proportion of Howe's exports of automotive leather. Australia could have pursued the argument regarding the proportion of automotive leather exports of the actual total sales of Howe covered by the sales performance targets. Some figure approaching this level was implicitly accepted by the Panel in its Report. Accordingly, rather than revisiting this issue with the Panel, Australia simply took this 90 per cent figure.

49. For the preferred approach this would mean that $6.602m23 was required to be withdrawn and for the alternative approach $8.065m.24 A more detailed explanation of this calculation is at Attachment A.

IV. 1999 LOAN

50. The 1999 Loan is not part of the implementation of the recommendation adopted by the DSB. Australia did not notify it to the DSB in WT/DS126/7.

51. Australia considers that the 1999 Loan to ALH alone is not covered by the Panel's terms of reference, which relate to the implementation of the recommendation of the Report, i.e. to withdraw the grant payments from Howe.

52. The USA has not sought to show that the 1999 Loan is inconsistent with SCM Article 3.1(a), and indeed says that that is not an issue.25 This is presumably because it recognizes that the 1999 Loan is clearly consistent and that this is reinforced by the Report's findings and conclusion on the 1997 Loan.

53. The Report at paragraph 9.61 said that each subsidy has to be evaluated on its own terms in deciding consistency with the SCM Agreement.26 Moreover, at paragraph 9.64, the Report agreed with Australia that a prohibited subsidy can be replaced with a non-prohibited subsidy.27 In this case the money is paid by Howe and the loan was to ALH without any reference to automotive leather.28 How companies choose to organize their business is not a matter for government obligations under the WTO. In any case, even if the 1999 Loan to ALH were to be considered to replace all or part of the grant payments to Howe, it would need to be considered on its individual merits.

54. Australia is entitled to provide subsidies to ALH, so long as they are consistent with the WTO. Even if the 1999 Loan were to be regarded as replacing all or part of the subsidies to Howe, despite Howe and ALH being different entities with ALH's subsidiaries as a whole producing a broader product range, there would be nothing wrong with that under WTO rules. The Report says that "[i]t is, therefore, necessary that each subsidy be evaluated on its own terms in deciding whether it is consistent with the SCM Agreement29 and that no conclusion can be drawn about the status of a subsequent subsidy from the status of the preceding one.30

V. CONCLUSION

55. Australia has implemented the Report's recommendations and rulings in good faith by closely following the reasoning and findings in the Report.

56. Australia requests the Panel to find that in withdrawing $8.065m. from Howe by 14 September 1999:

Australia has fully implemented the recommendation of the DSB of 16 June 1999 (WT/DS126/5).

ATTACHMENT A

CALCULATION OF AMOUNT TO BE WITHDRAWN

PREFERRED OPTION

Amount to be repaid: $6.602m.

Calculation

Contract Period:
           1 April 1997 - 30 June 2000: 1186 days.

Withdrawal Period:
           15 Sept 1999 - 30 June 2000: 290 days.

Proportion of period after implementation:
          290 / 1186.

Amount not expensed at implementation date:
           $30 x [290/1186] = $7.336m.

Amount allocated to exports of automotive leather on the basis of 90% exports not expensed at implementation date:
           90% of $7.336m. = $6.602m.

ALTERNATIVE OPTION

Amount to be repaid: $8.065m.

Calculation

Aggregate sales performance targets under the Grant Contract: $567.5m.

Sales performance target for 1999-2000 (July-June):
           $214.0m.

Proportion of $30m. allocated to 1999-2000:
           214.0/567.5 = 0.377

Amount allocated to 1999-2000:
           37.7% of $30m. = $11.31m.

Withdrawal Period:
           15 Sept 1999 - 30 June 2000: 290 days.

Withdrawal Period as proportion of 1999-2000:
           290/366

Amount not expensed at implementation date:
           $11.31 x [290/366] = $8.961m.

Amount allocated to exports of automotive leather on the basis of 90% exports not expensed at implementation date:

           90% of $8.961m. = $8.065m.

  PREFERRED OPTION ALTERNATIVE OPTION
     
Amount covering all domestic and export sales, including automotive leather $7.336m. $8.961m.
     
Amount covering 90% of total sales $6.602m. $8.065m.
     

* * * **

LIST OF EXHIBITS

AUS-1 Deed of Release

AUS-2 Letter confirming payment

EXHIBITS BUSINESS CONFIDENTIAL INFORMATION (BCI)

AUS-BCI-1 Grant Contract

AUS-BCI-2
1997 Loan Contract

AUS-BCI-3
A$ Loan Agreement

AUC-BCI-4
Fixed and Floating Equitable Charge

AUS-BCI-5
Deed Variation

AUS-BCI-6
Letter from the Department of Industry, Science and Resources to ALH


1 Australian dollars are used throughout this submission.

2 At paragraph 9.71 of the Report.

3 At paragraph 9.75 of the Report.

4 At paragraph 9.61 of the Report

5 At paragraph 9.64 of the Report.

6 The Report at paragraph 9.64 says:

" … WTO Members cannot be prevented from replacing purported prohibited export subsidies with other measures that are not prohibited, thereby bringing themselves into compliance with their multilateral obligations under the SCM Agreement. We agree that, even assuming the ICS and EFS were prohibited export subsidies (a question on which we draw no conclusions), this would not, ipso facto, mean that any subsequent subsidy granted to a company that had previously benefited from those programmes would be a prohibited export subsidy."

The Report at paragraph 9.61 says:

"We agree with Australia that we must consider the challenged measures individually to determine their consistency with the SCM Agreement. Merely because all the challenged subsidies form part of a single "package" of assistance to Howe does not mean that all of them are perforce either prohibited export subsidies or not. In this regard, we note that, in our view, it is perfectly possible for a Member to construct a package of subsidies to aid domestic industry, of which some are consistent with the SCM Agreement, and others are not. It is, therefore, necessary that each subsidy be evaluated on its own terms in deciding whether it is consistent with the SCM Agreement."

7 At paragraph 15 of the USA's first submission:

"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. … "

8 See paragraph 5.26 of WT/DS46/R:

" ... The United States agrees with the proposition that remedies in the WTO dispute settlement system are not retroactive. However, in the case of a subsidy that is properly allocated over several years (as appears to be the case with respect to PROEX subsidies in question), the withdrawal of that portion of the subsidy allocated to future time periods would not constitute a retroactive remedy or retroactive implementation. .

9 For example, the Report at paragraph 9.62 says:

" … the terms of the grant contract are specifically directed at Howe, and more particularly at Howe's automotive leather operations. The contract provides for an aggregate sales performance target for the period 1 April 1997 - 31 December 2000, broken down into four interim sales targets. [Footnote 207: Howe is obligated to submit reports of its performance against the interim performance targets for each of the periods ending 30 June 1997, 1998, 1999 and 2000, as well as final report in September 2000.] … "

10 Note that in the reference in Footnote 9, the Report said 1 April 1997 to 31 December 2000 rather than 1 April 1997 to 30 June 2000. This is clearly a typographical error given that Footnote 207 of the Report (also incorporated in Footnote 9) specifies the correct date of 30 June 2000 with the final report under the Grant Contract being due in September 2000.

11 In the Report see, for example:

"9.67 … Therefore, we conclude that, in order to expand its sales in a manner that would enable it to reach the sales performance targets (interim targets and the aggregate target) set out in the grant contract, Howe would, of necessity, have to continue and probably increase exports. At the time the contract was entered into, the government of Australia was aware of this necessity, and thus anticipated continued and possibly increased exports by Howe. In our view, these facts effectively transform the sales performance targets into export performance targets. We thus consider that Howe's anticipated export performance was one of the conditions for the grant of the subsidies. … "

"9.68 We note that confidential business information provided by Australia indicates that, in fact, the proportion of Howe's sales going to export has not increased. However, we must make our determination on the facts that existed at the time the contract establishing the conditions for the grant payments was entered into. Thus, the fact that the anticipated exports may not have come to pass in the volumes anticipated does not affect our conclusion. … "

"9.71 … these sales performance targets are, in our view, effectively, export performance targets."

12 The Report at paragraph 10.1(a) says:

"The loan from the Australian government to Howe/ALH is not a subsidy which is contingent upon export performance within the meaning of Article 3.1(a) of the SCM Agreement".

13 At paragraph 9.74 of the Report.

14 At paragraph 9.75 of the Report.

15 At paragraph 9.75 of the Report.

16 At paragraphs 2.4 and 7.48-7.50 of the Report.

17 At paragraph 9.56 of the Report.

18 For example, at paragraph 7.290 of the Report, the USA said:

' … as the Australian government itself indicates, the continued payment of the grant was tied to the volume of "sales." … '

19 At paragraphs 7.67 and 7.68 of the Report.

20 At paragraph 9.71 the Report says:

"All of the facts, weighed together, lead us to conclude that the three subsidy payments under the grant contract are in fact tied to Howe's actual or anticipated exportation or export earnings. [Footnote 215: ] We note that our conclusion matches the understanding of the recipient of the subsidy payments. In March 1997, Schaffer Corporation, the parent of Howe and ALH, reported that the Australian government had "finalised a compensation package" for Howe/ALH, consisting, inter alia of "A grant of [A]$30 million based on projected exports and paid on performance criteria". Schaffer Corporation Limited Half Yearly Results to December 1996, Exhibit 1 to United States first submission, at page 2.] These payments are conditioned on Howe's agreement to satisfy, on the basis of best endeavours, the aggregate performance targets. The second and third grant payments are, in addition, explicitly conditioned on satisfaction, on a best endeavours basis, of interim sales performance targets. Given the export-dependent nature of Howe's business, and the size of the Australian market, these sales performance targets are, in our view, effectively, export performance targets. The sales performance targets set out in the grant contract, in conjunction with the other facts enumerated above, therefore lead us to the conclusion that the grant of the subsidies was conditioned on anticipated exportation. … "

21 $30m. x [290/366]/12.8 = $1.9m. This is based on the 12.8 year period claimed by the USA. The period 15 September 1999 to 30 June 2000 is 290 days.

22 The sales performance target for 1999-2000 was $214.0m and the total over the period 1 April 1997 to 30 June 2000 was $567.5m. Thus the allocated amount of the grant payments for 1999-2000 was 30x[214/567.5] = $11.31m. Accordingly, the allocated amount of the grant payments for the Withdrawal Period was 11.31 x [290/366] = $8.961m.

23 7.336 x 0.9 = 6.602.

24 8.961 x 0.9 = 8.065.

25 See paragraph 50 of the USA's first submission.

26 See at Footnote 6.

27 See at Footnote 6.

28 The 1997 Loan was for purposes relating to automotive leather.

29 At paragraph 9.61 of the Report

30 At paragraph 9.64 of the Report.


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