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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 2-2

REBUTTAL SUBMISSION OF AUSTRALIA

(15 November 1999)

TABLE OF CONTENTS

EXECUTIVE SUMMARY 

  1. INTRODUCTION 
     
  2. KEY POINTS 
     
  3. USA'S FIRST SUBMISSION 

(a) Bringing into conformity 

(b) "Reimbursement"

(c) Allocation period

(d) Allocable versus non-allocable

(e) Countervailing duty methodology and practice 

(f) SCM Annex IV 

IV. CONCLUSION 

EXECUTIVE SUMMARY

1. This submission rebuts the USA's attempt to introduce a trade effect and trade outcome approach to assessment of conformity with Article 3.1(a) of the Agreement on Subsidies and Countervailing Measures (SCM). Instead, the USA should be focussed on the matter before the Panel of whether Australia has brought the grant payments into conformity with SCM Article 3.1(a) in accordance with the Panel Report Australia - Subsidies Provided to Producers and Exporters of Automotive Leather (WT/DS126/R) ("the Report").

2. The finding by the Report on the grant payments was that these were tied to the sales performance targets under the Grant Contract over the period 1 April 1997 to 30 June 2000. This is the period during which the grant payments were expensed.

3. Australia demonstrates that the USA's argument, that subsidies are no longer expensed after the date of the adoption of panel reports and even accumulate interest ad infinitum, is inconsistent with WTO law and GATT 1947 and WTO practice in having Members bring themselves into conformity.

4. In withdrawing $8.065m1 on 14 September 1999 from Howe and Co., Australia has done more than is necessary to comply with the recommendations of the Report and meet its WTO obligations by bringing the grant payments into conformity with SCM Article 3.1(a).

I. INTRODUCTION

5. In the absence of third party submissions, this rebuttal limits itself to a brief recapitulation of key issues and then goes on to comment on aspects of the USA's First Submission.

II. KEY POINTS

6. The sales performance targets under the Grant Contract show that the grant payments were expensed during the period 1 April 1997 to 30 June 2000. The Panel Report Australia - Subsidies Provided to Producers and Exporters of Automotive Leather (WT/DS126/R) ("the Report") found that the grant payments were contingent upon export performance because of the sales performance targets. The grant payments were in any case provided to automotive leather as part of ongoing assistance arrangements for the period in which automotive leather was not eligible for assistance under the general textiles, clothing and footwear programmes. Automotive leather was excised from the current Import Credit Scheme (ICS) from 1 April 1997. The ICS was to terminate on 30 June 2000 and will be replaced by the new general textiles, clothing and footwear programme coming into force on 1 July 2000. This programme will include automotive leather.

7. In accordance with WTO rules, as well as practice under GATT 1947 and the WTO, a Member is only required to bring a measure into conformity on the date of implementation. The Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) is not a punitive mechanism and does not have retroactive effect. Any subsidy that is allocated over time, continues to be expensed over the allocation period until the Member brings the measure into conformity by withdrawing the amount of money still outstanding. Alternatively, the measure comes into conformity automatically at the end of the allocation period as a consequence of all of the monies having been expensed.

8. Australia has withdrawn more than was necessary for it to comply with the Report's recommendations and bring the grant payments into conformity with Article 3.1(a) of the Agreement on Subsidies and Countervailing Measures (SCM Agreement) by 14 September 1999.

The grant payments were tied to sales performance targets during the period 1 April 1997 to 30 June 2000.

® The grant payments were expensed during the period 1 April 1997 to  30 June 2000.

® Only the money tied to exports of automotive leather had to b e withdrawn.2

® $8.065m3 was withdrawn from Howe and Co. (Howe) on 14 September 1999.

® Australia's First Submission proved that this amount exceeded any reasonable calculation of money from the grant payments tied to actual or anticipated exports over the rest of the period 1 April 1997 to 30 June 2000.

® The grant payments to Howe are separate measures from the concessional loan provided to Australian Leather Holdings Ltd (ALH) in 1999 (1999 Loan).

® The matter before the Panel is whether the grant payments have been brought into conformity with SCM Article 3.1(a).

In the alternative.

® Nothing stops the Australian Government providing new, WTO consistent subsidies to Howe, ALH or any other company.

® If the panel decides to consider the 1999 Loan, then it needs to be examined as a separate measure and assessed on its own merits under SCM Article 3.1(a).

® While the 1999 Loan to ALH is a subsidy, it is consistent with SCM Article 3.1(a).

III. USA'S FIRST SUBMISSION

9. Following are some comments on specific aspects of the USA's First Submission.

(a) Bringing into conformity

10. The USA at paragraph 15 in its First Submission said that:

"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." [Emphasis added.]

and

'… Article 19 of the DSU provides that "Where a panel or the Appellate Body concludes that a measure is inconsistent with a covered agreement, it shall recommend that the Member concerned bring the measure into conformity with that agreement." The use of the phrase "bring the measure into conformity" indicates that the recommendations contemplated by Article 19 of the DSU include only recommendations calling for prospective corrective action by Members, not retrospective action.'

11. Australia considers that the Deed of Release4 was sufficient to bring Australia into conformity because it terminated any obligations under the Grant Contract. However, to finalize this dispute, Australia decided to withdraw more than would be required under any reasonable alternative interpretation, i.e. $8.065m.

12. It appears to be common ground with the USA that:

® the issue is one of the Member bringing a measure into conformity with SCM Article 3.1(a); and

® where a subsidy has been expensed, it does not have to be withdrawn.

However, Australia considers that

® where an amount of the subsidy is expensed prior to the date that a Member brings the measure into conformity, then that amount does not have to withdrawn; and

® only the amount considered to be tied to exports of automotive leather has to be withdrawn, not amounts tied to domestic sales of automotive leather or other sales.

13. Where a subsidy is allocated over a period, then only that part of the subsidy allocated to the period beyond the date of implementation has to be withdrawn to bring the measure into conformity at the date of implementation. As time passes the amount to be withdrawn becomes smaller and goes to zero at the end of the period over which the subsidy is allocated. Of course, if a Member does not bring the measure into conformity by the date recommended by a panel under SCM Article 4.7, then the complainant may have compensation or retaliation rights until the measure comes into conformity. However, that cannot increase, or halt the reduction over time of, the amount of subsidy to be withdrawn to bring the measure into conformity. By analogy, if the measure was a tariff rather than a subsidy, the USA's approach would entail that not only would the tariff have to be brought into conformity, the monies collected to the date of implementation would have to be refunded to the importers of record with interest. The DSU is not supposed to be a punitive instrument but rather a mechanism:" … providing security and predictability to the multilateral trading system. … 5

14. Australia disagrees with the approach taken by the USA in its First Submission that:

® the amount to be withdrawn is the amount outstanding at the time of the adoption of the Report (i.e. 16 June 1999);

® the amount to be withdrawn by the end of the 90 days (i.e. 14 September 1999) includes interest for the period between 16 June 1999 and the date of withdrawal; and

® the amount to be withdrawn keeps on increasing until the date on which some much larger number is withdrawn.

15. The USA has not made any argument for this beyond saying:

® "Although the Panel accorded Australia 90 days in which to comply, Australia was free to comply at any time within that period. Instead, Australia used the entire 90-day period, waiting until September 14 to put its remedy in place and then claiming that its withdrawal would be effective from that day forward.6

and

® "The United States submits that the 90-day compliance period did not provide Australia with an additional three months during which it could continue to provide the prohibited export subsidy with impunity."

and then goes on to make the assertion, not based on any WTO provision, that

® 'Such an interpretation would reward—and encourage-delay in carrying out the Panel's recommendations. Rather, the date from which the prospective element of the subsidy should be derived is the date of the Panel Report. This approach, which would not discourage early compliance, would give effect to the express intent of Article 4.7, which calls for panels to recommend that the Member concerned withdraw the prohibited subsidy "without delay."7

16. The provisions of the DSU, including SCM Article 4.7, do allow a Member time to bring a measure into conformity "with impunity". The purpose of the DSU is to have measures brought into conformity, not to punish the Member in some way. When a measure has been brought into conformity the object and purpose of the DSU has been served.

17. In paragraph 46 of its First Submission, the USA appears to be saying that that there is a distinction between "without delay" in SCM Article 4.7 and the period recommended by the original Panel for Australia to bring the grant payments into conformity. This conflicts with the wording of SCM Article 4.7, which says:

"… withdraw the subsidy without delay. In this regard, the panel shall specify in its recommendation the time-period within which the measure must be withdrawn." [Emphasis added.]

Thus under SCM Article 4.7, it is the task of a panel to recommend what time-period is meant by "without delay" in the case being considered. In this regard, paragraphs 10.6 and 10.7 of the Report say:

"… Moreover, we do not, as a factual matter, believe that a period of seven and one-half months can reasonably be described as corresponding to the requirement that the measure must be withdrawn "without delay". … In light of the nature of the measures, we consider that a 90-day period would be appropriate for the withdrawal of the measures. We therefore recommend that the measures be withdrawn within 90 days."

18. Thus the period provided for under SCM Article 4.7 allows the Member "with impunity" to withdraw the measures at any time between the date of adoption and the end of the period recommended by the panel. There is nothing wrong in a Member using the time that it has been given. Where a Member has an export subsidy programme, which pays exporters at the time of export, there is nothing to suggest that such a Member would have to clawback the money it provided between the date of adoption and the date the programme was terminated. There is no basis for treating an in fact export subsidy paid in advance in a punitive way.

19. If the outstanding part of a subsidy did not continue to be expensed over whatever period it is allocated, then the amount to be withdrawn would never decline. Indeed, if the USA's punitive approach on interest were to be adopted, it would increase. This would mean that at the end of the allocation period, even though there would no longer be any benefit to the company involved, the Member would still have to withdraw the original outstanding amount, together with interest, to bring the measure into conformity. Indeed on this line of argument, if a Member could not, for whatever reason, withdraw the money, then it could never bring the measure into conformity, and presumably would be subject to compensation or retaliation forever despite there being no continuing benefit to the company concerned. That approach would rightly hold the WTO up to ridicule.

20. Indeed, if Australia had not withdrawn $8.065m. and if the $30m. is allocated over the entire period of 1 April 1997 to 30 June 2000, the amount to be withdrawn by Australia to bring the grant payments into conformity would have declined over time until it became zero on 30 June 2000. By the time that this Panel's report is adopted on say 14 February 2000, the amount of the subsidy that would have been left8 would have been about $3.5m9 under the preferred approach set out in Australia's First Submission10 and $4.2m11 under the alternative approach.12 Taking exports of automotive leather at no more than 90 per cent of sales13, this would have left $3.1m. or $3.8m., respectively, to be withdrawn at that date for Australia to bring the grant payments into conformity.

21. The USA's First Submission, is apparently seeking to invent a new legal concept for assessing conformity with SCM Article 3.1(a) based on trade effect and trade outcome.

22. For example, it says:

"This Panel's findings on these points are critical if its Panel Report is to have any practical meaning." [Emphasis added.]14

" … Australia is seeking the Panel's permission to declare its illegal subsidy largely irremediable. … This cannot be permitted. … " [Emphasis added.]15

"The prospective portion of the subsidy must be determined on a reasonable economic basis" [Emphasis added]16

Australia submits that the task of a panel under the WTO system is to:

" … make an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the relevant covered agreements … .17

SCM Article 3.1(a) is not about adverse effect under SCM Article 5 or some other non-violation issue. The matter before this Panel is whether Australia has brought the measures in question into conformity with SCM Article 3.1(a), and, if not, why and how it has not implemented the findings and recommendations of the Report.

The concept of making a subsidy "irremediable" is a misunderstanding of the purpose of a dispute under SCM Article 3.1(a), which is a violation case and so is about conformity with a rule. The key issue to implementing a recommendation in respect of a subsidy inconsistent with SCM Article 3.1(a) is why it was found to be inconsistent. That provides the basis for how a Member can reconfigure assistance to be consistent with SCM Article 3.1(a).

(b) "Reimbursement"

23. Paragraph 13 of the USA's First Submission says:

" … this small amount was not a [sic] even a partial withdrawal of the subsidy, to the extent it was reimbursed by the Australian Government through a loan on non-commercial terms." [Emphasis added.]

24. The 1999 Loan is a separate measure from the grant payments. As determined by the Report, if it were considered necessary to look at the consistency of the 1999 Loan, that would need to assessed separately from the matter before the Panel of whether the grant payments have been brought into conformity with SCM Article 3.1(a).

25. In paragraph 9 of its First Submission, the USA agrees with the Report that the grant payments were to Howe.18 The 1999 Loan was to a different company, ALH, with a wider product range. Even if the 1999 Loan had been to Howe/ALH like the 1997 Loan, Australia considers that it would have brought the grant payments into conformity with SCM Article 3.1(a). Such a loan would have itself been consistent with SCM Article 3.1(a), given that the 1997 Loan is consistent. To bring the grant payments into conformity, Australia did not have to impose a punitive measure on an individual company, be it Howe or ALH. This matter is about Australia's rights and obligations as a Member.

26. Australia was found to be in breach of the WTO by the original Panel and accepted that ruling without appealing. It has now brought the grant payments into conformity within the time-period provided for by the Report. SCM Article 3.1(a) is not a trade effect or trade outcome test but a rule about whether money is tied to actual or anticipated exportation. The impact on Howe or ALH or any other Australian company is irrelevant: they are not Members, Australia is. That said, there is a significant impact on Howe and on ALH through repaying the $8.065m. This is an asset loss on the balance sheet. The equity of Howe and ALH has been reduced by this amount. While a concessional loan (1999 Loan) was provided to ALH, this does not affect the capital structure. The 1999 Loan is a liability and will have to be paid back. Its benefits will only come over the life of the loan. There is a clear distinction between the impact on capital and liabilities from providing a grant and from providing a concessional loan.

27. Paragraph 12 of the USA's First Submission says that the 1999 Loan to ALH turns withdrawal into a "sham". ALH and its associated companies produce a wider range of products than automotive leather. ALH can do whatever it wants with the money under the 1999 Loan. It is under no obligation to put one cent of it towards the production or sale of automotive leather. The Report found that the grant payments were inconsistent with SCM Article 3.1(a) but that the 1997 Loan to Howe and ALH for purposes related to automotive leather was consistent. The Report (and the US19) also agreed that there was nothing wrong in a government replacing one subsidy with another that is consistent. What Australia has done is called, in WTO parlance, "bringing a measure into conformity", not a "sham".

28. Australia has a right to provide further subsidies to Howe and ALH provided that they are WTO consistent. The 1999 Loan to ALH is a separate measure from the grant payments and its consistency with SCM Article 3.1(a) would need to be assessed separately from the matter of whether Australia has brought the grant payments into conformity with SCM Article 3.1(a) by withdrawing sufficient money from Howe to comply with the Report's findings and recommendations

(c) Allocation period

29. The issue before the Panel is the actual period of allocation of the $30m., which was the key factor for the finding in the Report that the grant payments were inconsistent with SCM Article 3.1(a). The issue of what an economist might say about "benefit - and the resulting distortion to trade20 is irrelevant to the matter before the Panel.

30. The USA says in paragraph 17 of its First Submission referring to the $30m. that:

"… agreeing to remove the export subsidy from the automotive leather industry, and then simply swapping it for another equally illegal export subsidy. … ."

This statement supports the fact that the $30m. was to be expensed during the period 1 April 1997 to 30 June 2000. The agreement between Australia and the USA was in respect of the removal of automotive leather from the ICS from 1 April 1997.21 The ICS only runs until 30 June 2000 because the legislation is sunsetted. Producers of automotive leather will be eligible to receive subsidies under the new general textiles, clothing and footwear programme from 1 July 2000. Thus the grant payments were simply allocated to fill in the gap from 1 April 1997 to 30 June 2000, and the Report found that this amount was tied to the sales performance targets for this period, which the Report found effectively created export targets for this period.

31. In paragraph 40 of its First Submission, the USA says:

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

32. In paragraph 41 of its First Submission, the USA says:

"… the time-period established in a grant contract for performance requirements is not a reasonable measure of how long the benefits conferred by the subsidy lasts or for calculating the "prospective" portion."

33. The USA is saying that the grant payments are on the one hand allocated to the period of the sales performance requirements for the purposes of being found to be inconsistent with SCM Article 3.1(a), but then somehow they were not expensed over that period.

34. In paragraph 41 of its First Submission, the USA also says:

"… there is no necessary relationship between the criteria for an export subsidy — such as export performance requirements - and the actual duration of the benefit. Inventing such a relationship makes export subsidies open to manipulation."

The USA is saying that a measure can be found to be an export subsidy on the basis of a tie to exports in a specific period (i.e. "the criteria") but that the period of allocation for bringing the measure into conformity can be something quite different. The USA gives no explanation for this except that it wants more of the subsidy withdrawn. It is difficult to understand the USA's reasoning behind this, but clearly the fact that a subsidy is found to be inconsistent because of performance requirements is hardly "[I]nventing such a relationship". Similarly, using the criteria set out by a panel as being critical to its finding of inconsistency with SCM Article 3.1(a) cannot be said to make "export subsidies open to manipulation." The relationship is the basis of the inconsistency and so is crucial to the matter of bringing a measure into conformity.

35. Regarding paragraph 42 of the USA's First Submission, the tie to the sales performance targets was the critical difference between the grant payments and the 1997 Loan. While the sales performance targets were not the only factor, they were the only factor that did not apply also to the 1997 Loan, which was found to be consistent with SCM Article 3.1(a). The second sentence in paragraph 42 of the USA's First Submission is misleading. It reads:

"The "other facts" included that the expanded production resulting from the grants and from the "required capital investments" would translate into increased exports." [Footnote reference to paragraph 9.67 of the Report not included.]

To the extent that this "other fact" was relevant, it was equally true for the 1997 Loan. The 1997 Loan required that the monies be used for purposes related to automotive leather. Also paragraph 7.244 of the Report says that:

'In its half yearly report, Schaffer ... stated that the loan was given "to assist with the capital programme." '

It is clear from paragraph 9.67 of the Report22 that the key factor was the anticipated export performance during the period covered by the sales performance targets, i.e. 1 April 1997 to 30 June 2000.

36. Paragraphs 26 and 27 of the USA's First Submission put up a straw man for this dispute. The period involved for the expensing of the grant payments (1 April 1997 to 30 June 2000) is not "arbitrary". The sales performance targets in relation to this period were the key to the case. Clearly each situation would have to be addressed individually. If a Member nominated 6 months or a year or some obviously fictitious period, this would be taken into account by any panel in making its judgement. However, in this case the period is clear-cut and genuine, and was the basis for the findings in the Report. It is a nonsense that action by a Member to bring an inconsistent measure into conformity should be regarded as an action that "severely undercut" the rules. SCM Article 3.1(a) is not about removing adverse effect or about injuring the recipients of subsidies, but rather about the form of the subsidy involved and compliance with Members' obligations. Even the USA admitted this to the original Panel at Footnote 132 of the Report-23

(d) Allocable versus non-allocable

37. The USA uses the language of recurrent and non-recurrent subsidies to seek to justify its approach. The USA provides no justification for its assertion that practice on countervailing and work being done on SCM Article 6.1(a) under Footnote 62 to SCM Annex IV should be indicative of how a measure should be assessed for the consistency with SCM Article 3.1(a).

38. Even in its own countervailing duty regulations, the USA notes that: 'Section 351.524 retains the distinction between "recurring" and "non-recurring" benefits. Although more precise terms might be "non-allocable' and "allocable" … .24

39. The term "allocable" means "able to be allocated".25 Clearly the grant payments are able to be allocated, since they are tied to the sales performance targets. The fact that the sales performance targets may not have been actually achieved does not affect this, given the finding of the Report at paragraph 9.68 that: "[t]hus, the fact that the anticipated exports may not have come to pass in the volumes anticipated does not affect our conclusion. "

40. The rationale for the concept of recurrent and non-recurrent is to deal with large one off subsidy payments for the purposes of serious prejudice and countervailing where there is no actual tie to production or sales in a particular period. Thus the asset life approach to allocation is used as a default because there is no tie to another period.26

41. The situation is quite different for a case under SCM Article 3.1(a) where there must be a tie between the granting of the subsidy and the actual or anticipated exportation of the product concerned, if a breach is to exist. The task of the panel concerned is to determine whether such a tie exists. The basis for the panel's finding will determine the period over which the subsidy is allocated. In this case it is the period 1 April 1997 to 30 June 2000. Moreover, unless it is an explicit part of the factual record, it will not be possible to say what a company will be producing in the future or how much it exports, let alone that the money was tied by the granting government to such anticipated exports.

42. To make an assumption that money paid to Howe in return for sales performance during 1 April 1997 to 30 June 2000 should somehow be allocated as being an export subsidy on automotive leather for the next 10 years is fanciful. The money was paid for performance during 1 April 1997 to 30 June 2000, and so was allocated to that period and expensed during that period. This is also consistent with the approach in paragraphs 171 and 172 of the Appellate Body's Report on Canada Aircraft (WT/DS70/AB/R).

43. The 1997 Loan provided a concessional loan out to 2012 with no interest payable until 1 February 2003. The Report found that that was not inconsistent with SCM Article 3.1(a), even for the period to 30 June 2000, let alone out beyond that date. The only factor missing from the 1997 Loan that was present for the grant payments was the interim and aggregate sales performance targets over the period 1 April 1997 to 30 June 2000. Thus any part from the grant payments that was allocable to a period beyond 30 June 2000 could not be contingent upon export performance in terms of SCM Article 3.1(a). In particular, suppose that the grant payments were allocated across the 13 years proposed by the USA. The money allocated outside of the period 1 April 1997 to 30 June 2000 would not be contingent upon export performance in terms of SCM Article 3.1(a) and so would not be inconsistent with SCM Article 3.1(a). In that case, the amount required to be withdrawn on 14 September 1999 would have been only $1.8m.27

44. The situation in the case of Howe and automotive leather is that:

® Howe benefited from the ICS (and in a minor way from EFS) for automotive leather until the removal of automotive leather from the schemes from 1 April 1997.

® The $30m. Grant Contract covered the period through to the termination of the ICS on 30 June 2000.

® automotive leather will be eligible for subsidy payments under the new general programme for the textiles, clothing and footwear industry from 1 July 2000.

45. Presumably even the USA would agree that the assistance under the ICS was recurrent up to 1 April 1997. The tranches of the grant payments were payable: $5m in March 1997; $12.5m. on the basis of sales performance over the next quarter; and another $12.5m. on the basis of performance over the subsequent 12 months. The Report found that these were also based on the aggregate sales performance target to 30 June 2000. After that date, there is a new general subsidy programme for the textiles, clothing and footwear industry. As was noted in paragraph 9.4 of the Report:

"The grant contract provides for a series of three grant payments totalling up to a maximum of A$30 million. The aggregate of payments under the grant contract was capped at A$30 million to limit the overall level of ad valorem subsidization of sales over the period to mid-2000 to approximately 5 per cent "

The USA did not challenge this. Against any reasonable assessment assistance on automotive leather has been and is recurrent in the sense of "occurring frequently or periodically.28 . The grant payments are allocable in the sense of being able to be allocated to sales over specific time periods. Where grants are in fact linked to sales in a particular period, any reasonable authority would expense them over the relevant period. In this case, assistance was given to automotive leather over a lengthy period, albeit in different forms for the three periods in question.29

46. The Report found that the grant payments were made on anticipated sales, i.e. paid in advance, as well as on past sales, and so were tied to the aggregate sales performance target, as well as the interim sales performance targets. This did not affect the Report's conclusion that the grant payments were tied to those sales performance targets.

47. Suppose that the interim targets had been set on a quarterly basis with the grant payments also paid quarterly after the event. Presumably the original Panel would still have found that the payments where in breach of SCM Article 3.1(a). Australia could simply have made the last payment on 14 September 1999 and it would have been in conformity. The subsidy would have been withdrawn and none of the money paid prior to 14 September 1999 would have had to be withdrawn from the company. There is no basis in the SCM Agreement, or the DSU, or GATT 1947 and WTO practice, that more money should be withdrawn because a subsidy is paid in advance than if it is paid after the fact.

48. The USA talks about the allocation of benefits over 13 years. If a recipient is obliged as a condition of receiving the subsidy to expense it to achieve sales in a particular period, then the money and benefits are expensed on those sales. In such a case the subsidy is increasing the income stream of the company, but the subsidy cannot be spent twice. The overall income stream of the company may go to investment in the same product, or it may go to investment in another product, or it may go to dividends, or anywhere else. The point about SCM Article 3.1(a) is that the purpose for which the subsidy is given is not fungible. It has to be tied in law or in fact to the export performance of the product concerned. The Report found the sales performance targets to be the critical factor with the grant payments tied to the interim and aggregate sales performance targets. Australia has implemented in good faith on the basis of that finding.

49. In any case, the future income and profit streams from automotive leather after 30 June 2000 are unclear. Currently Howe produces automotive leather at its plant at Thomastown in Melbourne. The tannery at Rosedale in eastern Victoria does not produce any finished leather let alone automotive leather - it is a tannery. Thomastown could shut or change to producing leather coats, and Rosedale could still go on.

50. The Rosedale tannery can produce inputs for any leather products, e.g. for shoes, upholstery, automotive, garment and accessories purposes. This is a matter for good management, including quality control, and delivering what the market wants. Similarly, at the Thomastown plant, while it actually produces automotive leather at the moment, there is little of its machinery apart from some specialized cutting equipment that is specific to automotive leather. It could use the machinery to produce leather for anything from shoes to couches. Even the cutting equipment can be adjusted for products other than car seats. The value in respect of automotive leather is in the quality control and business relationships. When the fashions change for car seats, as they will, then companies such as Howe will refocus on other lines as well. The USA is implicitly asserting that Rosedale will only produce for Thomastown; Thomastown will only produce automotive leather for the next 10 years; and all of that product will be exported. USA has not provided any argument for what is an unjustifiable claim.

51. Regarding paragraphs 33 and 34 of the USA's First Submission, the issue of an appropriate interest rate is irrelevant for this Panel. However, Australia notes for completeness that the USA has not provided any sensible data on what should be an appropriate interest rate as of 1999 or 2000. The USA has simply resubmitted an exhibit from the original Panel regarding ALH's 1997 financial statements. The USA has made no attempt to justify what an appropriate interest rate would be now, whatever the purpose might be. The data related to payments are also obviously inaccurate.30

(e) Countervailing duty methodology and practice

52. The treatment by the countervailing authorities in the USA or the EC has no probative value for the Panel. In any case, this Panel is about SCM Article 3.1(a) and not countervailing practice. The reference to Canada Aircraft (WT/DS70/AB/R) in Footnote 10 of the USA's First Submission was in respect of the existence of a subsidy and not the issue of conformity with SCM Article 3.1(a), which is being addressed by this Panel. The Appellate Body found that the guidelines under SCM Article 14 were relevant context for assessing whether a benefit arose for the purposes of SCM Article 1.1(b). The guidelines of SCM Article 14 do not address the issue of allocation across asset life. Australia disputes that the countervailing practice of the USA should be considered to be dispositive of an interpretation of aspects of SCM Part V, let alone SCM Article 3.1(a).

(f) SCM Annex IV

53. This is a different part of the SCM Agreement. The USA has laid no foundation for arguing that an approach taken to one type of grant under SCM Article 3.1(a) should be dealt with in the same way as a quite different type of grant under SCM Article 6.1(a).

54. The report of the Informal Experts Group has no formal status and has only been noted by the SCM Committee. It has not been adopted as an Understanding as provided for under SCM Footnote 62 for the purposes of SCM Article 6.1(a). In any case, the report by the Group31 makes it completely clear that each situation will have to be dealt with on a case by case basis by the panel involved.

"Fourth, the Group does not view the report as exhaustive of every potentially relevant issue under Article 6.1(a) and Annex IV. Thus, the fact that the report may not refer to a given issue or given measure is not meant to imply that such an issue is irrelevant in this context, or that such a measure should not be included in any calculation under Article 6.1(a) and Annex IV.32 [Emphasis added.]

"… the applicability and usefulness of any of the Group's recommendations to a particular situation should be assessed on a case-by-case basis.33 [Emphasis added.]

"The illustrative table reflects the Group's conclusions regarding a number of points. First, the table indicates that certain types of subsidies (e.g., grants) may be either expensed or allocated, depending on the circumstances.34 [Emphasis added.]

"The table and cover note reflect certain additional recommendations, as well. The first of these is that research subsidies be presumptively allocated, unless expensing is demonstrated to be more appropriate in a given case. Similarly, it is recommended that non recurring and/or large subsidies be presumptively allocated, unless expensing is demonstrated to be more appropriate in a given case.35 [Emphasis added.]

"Similarly, non-recurring subsidies should be presumptively allocated, except where it is demonstrated that this would be inappropriate.36 [Emphasis added.]

"The table includes a category for export-related subsidies, notwithstanding that the relevance of the question of expensing versus allocating in the context of such subsidies might be limited, at least with respect to those export-related subsidies that are export subsidies in the sense of the Agreement.37 [Emphasis added.]

The only entries in the table for export-related subsidies are in the expensing column.

55. SCM Part III, SCM Annex IV, and the work of the Informal Group of Experts have no probative value for the interpretation of conformity with SCM Article 3.1(a). Moreover, these excerpts shown clearly that even under SCM Part III and SCM Annex IV, the tie of the grant payments to the period 1 April 1997 to 30 April 2000 would require that they be expensed during that period.

IV. CONCLUSION

56. Australia complied with the Report's recommendations and brought the grant payments into conformity with SCM Article 3.1(a) by withdrawing $8.065m. from Howe on 14 September 1999.

® The grant payments were tied to sales performance targets, and expensed, during the period 1 April 1997 to 30 June 2000.

® $8.065m. was withdrawn from Howe on 14 September 1999.

® Only the money tied to exports of automotive leather had to be withdrawn.

® $8.065m. exceeded any reasonable calculation of money from the grant payments tied to actual or anticipated exports over the rest of the period 1 April 1997 to 30 June 2000.

® The concessional 1999 Loan to ALH has to be assessed as a separate measure from the grant payments and the matter whether sufficient money has been withdrawn from Howe - the 1999 Loan is consistent with SCM Article 3.1(a).



1 Australian dollars are used throughout this submission.

2 That is, money allocated to domestic sales of automotive leather and other sales did not have to be withdrawn, since that money was not tied to actual or anticipated exports of automotive leather.

3 Australian dollars are used throughout this submission.

4 AUS-Exhibit 1.

5 At DSU Article 3.2.

6 At paragraph 45 of the USA's First Submission.

7 At paragraph 46 of the USA's First Submission.

8 i.e. if the $8.065m. had not been withdrawn on 14 September 1999.

9 Preferred linear approach: 137 days would be left in 1999-2000 (July-June) and there are 1186 days in 1 April 1997 to 30 June 2000; and so the allocation would be 30 x [137/1186] = $3.5m.

10 See paragraph 46 of Australia's First Submission.

11 On the basis of the sales performance target for 1999-2000: 30 x [214/567.5] x [137/366] = $4.2m.

12 See paragraph 47 of Australia's First Submission.

13 See paragraphs 48 and 49 of Australia's First Submission.

14 At paragraph 6 of the USA's First Submission.

15 At paragraphs 17 and 18 of the USA's First Submission.

16 The title of Subsection III.A.2 of the USA's First Submission, which is reflected in the subsequent paragraphs.

17 At DSU Article 11.

18 "On 9 March 1997, however, the Australian Government replaced these subsidy programmes with a A$30 million grant, also contingent on export performance, [Footnote 4 omitted.] to Howe, the sole Australian automotive leather producer and exporter. ... "

19 At Footnote 132 of the Report:

" … the United States acknowledged that a prohibited export subsidy could be replaced by another form of assistance that is not tied to export performance and a Member could thus bring itself into conformity with the SCM Agreement. … "

20 At paragraph 16 of the USA's First Submission.

21 A small amount of assistance was also provided under the Passenger Motor Vehicle Export Facilitation Scheme (EFS), which terminates on 31 December 2000.

22 For example:

" ... 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. ... "

23 See Footnote 19.

24 Federal Register Vol. 63, No. 227 at page 65392, or at page 83 of G/ADP/N/1/USA/1/Suppl.4 - G/SCM/N/1/USA/1/Suppl.4.

25 New Shorter English Oxford Dictionary - CD - January 1997.

26 Of course allocation across asset life can also be subject to abuse by countervailing authorities for protectionist reasons.

27 $30m. x [290/366]/13 = $1.8m (there being 290 days from 14 September 1999 to 30 June 2000).

28 New Shorter English Oxford Dictionary - CD - January 1997.

29 Prior to 1 April 1997; 1 April 1997 to 30 June 2000; and post 30 June 2000.

30 For example, see paragraphs 2.2 and 2.3 of the Report.

31 G/SCM/W/415/Rev.2 and Suppl.1.

32 At second full paragraph on page 2 of G/SCM/W/415/Rev.2.

33 At paragraph 5 of G/SCM/W/415/Rev.2/Suppl.1.

34 At paragraph 5 of G/SCM/W/415/Rev.2.

35 At paragraph 6 of G/SCM/W/415/Rev.2.

36 At paragraph 2 of Recommendation 1 of G/SCM/W/415/Rev.2.

37 At paragraph 7 of G/SCM/W/415/Rev.2


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