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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 2-3

ORAL STATEMENT OF AUSTRALIA

(23 November 1999)

I. INTRODUCTION

1. In this statement Australia first summarizes the key points proving that it has brought the grant payments into conformity with SCM Article 3.1(a) within the time-period recommended by the Report of the original Panel (WT/DS126/R), subsequently referred to as "the Report". It will then comment on several aspects of the USA's Second Submission.

2. When Australia received the Report, it examined it closely, and decided that its recommendations could be implemented in full by following its findings and reasoning, which cleared the 1997 Loan while finding that the grant payments were tied to actual or anticipated exports. Accordingly, Australia did not appeal the Report but accepted its adoption on 16 June 1999. By not appealing the Report, the USA also accepted that implementation should be based on the Report.

3. The USA's position from its First Submission is that the issue is one of bringing the grant payments into conformity. Australia agrees with that. This means that there is nothing special or punitive about implementing a recommendation in respect of prohibited subsidies. The obligation is simply to bring the measure into conformity.

II. MAIN POINTS

4. The issues for the Panel are:

(1) How much money needed to be withdrawn by Australia in order to bring the measures into conformity?

(2) Was sufficient money withdrawn?

II.1. How much money needed to be withdrawn by Australia in order to bring the measures into conformity?

5. Australia submits that given the reasoning and findings of the Report

(a) the grant payments were tied to the period of the sales performance targets, i.e. 1 April 1997 to 30 June 2000,

and consequently the Panel should find that

(b) the grant payments were allocated to the period of 1 April 1997 to 30 June 2000.

Australia submits that the Panel should also find that:

(c) only the monies paid to Howe that were tied to exports of automotive leather were required to be withdrawn

(d) Australia was not required to withdraw monies allocated to the period prior to the date of implementation in order to bring the grant payments into conformity.

II.1(a). The grant payments were tied to the period of the sales performance targets, i.e. 1 April 1997 to 30 June 2000.

6. The one factor in the Report that distinguished the grant payments from the 1997 Loan was the sales performance targets, aggregate and interim. All the other factors that surrounded the granting of the assistance package by the Australian Government applied equally to the granting of the 1997 Loan. Even on the issue of investment, the USA in paragraph 7.244 of the Report quoted from a half yearly report by Schaffer that: 'the loan was given "to assist with the capital programme." ' If investment had been the key, or if the Government's knowledge of Howe's export propensity or expectation about future exports had been the key, then the 1997 Loan would have been inconsistent also, since that was for purposes of automotive leather.

7. Given the difference in findings on the grant payments and the 1997 Loan, the sales performance targets were the crucial factor that made the grant payments inconsistent with SCM Article 3.1(a). Accordingly, the grant payments were tied to the period of the sales performance targets, i.e. they were tied to the period from 1 April 1997 to 30 June 2000.

8. Clearly the Report considered that facts about Howe's operations and investment were not sufficient to create the tie to exports required to meet the "in fact" test under SCM Article 3.1(a) for the 1997 Loan. The sales performance targets were the necessary fact to create the tie for the grant payments because they effectively created export performance targets.

9. Accordingly, the grant payments were tied to the period of the sales performance targets, i.e. 1 April 1997 to 30 June 2000.

II.1(b) The grant payments were allocated to the period of 1 April 1997 to 30 June 2000

10. The consequence of the tie of the grant payments to the sales performance targets is that the grant payments have been allocated to the period in question, i.e. the period to 30 June 2000. There were no sales performance targets beyond that date. The grant payments were to be expensed during that period for the purpose of achieving the sales performance targets. Australia understood that the significance put on the aggregate sales performance target by the Report, in particular paragraph 9.671, meant that the expensing should be made uniformly across the period, i.e. Australia's preferred option in paragraph 46 of its First Submission. Thus $7.336m. of the grant payments was outstanding at 14 September 1999.

11. There is nothing in the history or detail of this case that could in any way suggest that the period of 1 April 1997 to 30 June 2000 was a contrived period for expensing the grant subsidies. The use of the grant payments to achieve export sales in this period was the key to the Report's finding of the tie under SCM Footnote 4. Moreover, there was nothing artificial about this period. It was simply the gap between the date of the removal of automotive leather from the current textiles, clothing and footwear programme to the entry into force of the new programme on 1 July 2000.

12. It is not a question in this case of having to establish a future export stream as the basis on which to calculate the level of subsidy to be withdrawn. The grant payments were tied to specific sales performance targets over a specific period. Moreover, and most importantly, it was this tie that led to the finding that the grant payments were inconsistent with SCM Article 3.1(a).

II.1(c). Only the monies that were paid to Howe tied to exports of automotive leather were required to be withdrawn

13. The prohibition under SCM Article 3.1(a) is about monies paid on exports of the product, the good, that is the subject of the complaint. In this case, it is exports of automotive leather.

14. As far as SCM Article 3.1(a) is concerned, there is nothing stopping Australia paying money on domestic sales of automotive leather, or on sales of other goods. Of course, Australia is not saying that this can be used as a subterfuge to circumvent the in fact provision of SCM Article 3.1(a). However, that is clearly not the case here, and the USA has not made any suggestion that this should be regarded as being the case.

15. While the sales performance targets were crucial to the Report's finding of the tie to exports of the grant payments, the Report nevertheless recognized that these targets included sales other than exports of automotive leather. The Report did not say that Howe was expected to achieve $567.5m. worth of export sales of automotive leather. It did conclude, however, that in the light of the level of Howe's domestic sales of automotive leather (as well as other sales) a large percentage of this target was exports of automotive leather. It was the tie to those exports that was found to be inconsistent with SCM Article 3.1(a).

16. Suppose that in 1997 the Australian Government had given Howe $27m. on the basis of achieving specified export sales of automotive leather and $3m. for achieving a specified volume of other sales, both to be achieved over 1 April 1997 to 30 June 2000. Then the $27m. would have been unambiguously contingent in law upon export performance and so inconsistent with SCM Article 3.1(a). However, the $3m. would have been consistent with SCM Article 3.1(a). There is no basis for having a harsher treatment of a subsidy found to be contingent in fact than one found to be contingent in law upon export performance.

17. Therefore, Australia was only obliged to withdraw monies found tied to exports of automotive leather to bring the grant payments into conformity with SCM Article 3.1(a).

II.1(d) Australia was not required to withdraw monies allocated to the period prior to the date of implementation in order to bring the grant payments into conformity

18. The issue here is whether, at the date on which a Member claims t o have implemented a recommendation of the Dispute Settlement Body, there are any further outstanding monies that are inconsistent with SCM Article 3.1(a). Where the monies have been paid out, the amount outstanding will decline over time until the end of the allocation period. It does not make any sense to suggest that the act of the adoption of a panel report somehow freezes the expensing of a subsidy, and even increases the amount outstanding through interest, as suggested by the USA.

19. A Member is given a period by the panel under SCM Article 4.7 to bring the measure into conformity. If it does not, then the complainant may have compensation or retaliation rights. However, establishing this implementation period cannot affect the way in which the monies are being expensed and the continuing decline in the amount of outstanding monies throughout this period.

20. The USA's Second Submission seeks to argue this freezing of expensing would only apply to payments made in advance and not to subsidies under ongoing export subsidy programmes.2 It is unclear why the USA considers that there should be a more punitive regime for advance payments and why there should be an obligation to take faster action against advance payments. The USA appears to have modified its position between its First and Second Submissions on this, following the raising by Australia of the implications of its position for the Foreign Sales Corporations dispute.

II.2 Was sufficient money withdrawn?

21. The facts of the case are:

® Howe repaid $8.065m. to the Australian Government on 14 September 1999

® the Report said that new subsidies could be given to a company in place of a prohibited subsidy

φ the USA agreed that this is true3

® the Report found that measures must be examined individually and separately to assess their compliance with SCM Article 3.1(a)

® the Report found that the 1997 Loan was consistent as part of a package of assistance provided to Howe and ALH

® since the 1997 Loan is consistent, given its terms, the 1999 Loan must also be consistent.

φ the USA has not sought to present any argument that the 1999 Loan is itself inconsistent with SCM Article 3.1(a).

22. Thus, Australia was entitled to provide a new WTO consistent subsidy to ALH in the process of bringing the grant payments into conformity with SCM Article 3.1(a). In addition the 1999 Loan is consistent with SCM Article 3.1(a). The fact that this is a dispute under DSU Article 21.5 does not affect Australia's right to provide WTO consistent subsidies to an Australian company.

23. Australia has withdrawn $8.065m. from Howe. This withdrawal had the effect of a substantial reduction in Howe's net income for the period and a reduction in Howe's equity position.

III. COMMENTS ON USA'S SECOND SUBMISSION

24. Australia will not go through the USA's Second Submission point by point, since it has dealt with all the important issues contained in it, and rebutted them already. However, it may be useful for the Panel if Australia comments on a few aspects of it.

25. The USA's approach is one based on trade outcome and effect. This includes its claim that the Panel should adopt an approach that is "economically reasonable". Essentially what the USA is seeking is a remedy that may have been "economically reasonable" if a finding had been made against Australia on the basis of export propensity alone or on the basis of a factor that meant the subsidy should be applied over the life of the company's assets. This was not the finding in this case. In this case, the remedy consistent with the Report's findings and "economic reasonableness" is to withdraw the amount tied to the prospective export sales targets.

26. The issue is what the rules are. This Panel has to consider what Australia's obligations were in bringing the grant payments into conformity, while acknowledging Australia's right to provide a new subsidy to an Australian company provided that the subsidy is consistent with SCM Article 3.1(a).

27. A recurrent theme of the USA in this dispute is that if it does not get its way, it would:

"… effectively render the obligations in Article 4.7 of the SCM Agreement meaningless. Australia's interpretation means that Members who provide significant illegal, prohibited export subsidy grants can easily relegate most or all of those grants to the past, declaring them outside the reach of the SCM Agreement remedies."4

28. That is clearly a nonsense. The approach does have implications for the status of the period between adoption and implementation, where even the USA has agreed with Australia's position as far as an ongoing programme such as the Foreign Sales Corporations is concerned.5

29. There is no "Australia's interpretation" for the main aspects of implementation at issue here. It is the Report's approach that Australia has followed. Under that approach, even where money has been paid out in advance of performance, implementation would depend on the circumstances and on the reasons why a panel found against the measure. Implementation must necessarily be judged on a case by case basis.

30. For example, if a grant was found to be inconsistent with SCM Article 3.1(a) because it was tied to a specific long-term export contract of, say, 10 years duration, then the panel might find that the money was allocated over the 10 years. How much money would have to be withdrawn would depend on when the dispute was taken. Moreover, if the contract continued, then the recommendation of the panel may not be able to be implemented in a way analogous to this case, since new subsidies may be found to be still tied to the original contracts. If that tie was the basis of the finding of the panel, then some cosmetic cover, such as having the government's arrangement with the company nominally only tied to the first two years, would not get around the problem. The finding of the panel would set the framework for implementation. The responsibility of the panel is to determine what are the critical factor or factors, which create the tie to exports. Once that is determined, then the Member can implement the recommendation. If there were to be no relationship between the reasons for a panel's findings and the basis for implementation, then a Member would have no idea what its rights were or how it should implement to satisfy an Article 21.5 panel.

31. The Panel's task is to determine whether Australia has implemented the Report's recommendations in the light of the Report.

32. The key to bringing into conformity is to remove the tie "to actual or anticipated exportation or export earnings." How a Member can do this will depend on the findings by a panel. But what is clear from the Report and supported by the Canada Aircraft Appellate Body Report (WT/DS70/AB/R), in particular at paragraphs 171 and 172, the tie has to be demonstrated and not some proxy for an export propensity test as pushed by the USA. This means that there has to be a demonstrable tie to actual or anticipated exports. This would not have to be a short-term tie - that would depend on the circumstances found by the panel. In this case the finding was based on the sales performance targets over the period 1 April 1997 to 30 June 2000. That was the concrete tie found by the Report.

33. The Report did not find that the money was tied to some ongoing export propensity or to any ongoing expectation that there would be a continued high level of exports. It found that there was a concrete tie created by the Australian Government's conditions on Howe over the period 1 April 1997 to 30 June 2000. In the absence of those conditions, the Report must have cleared both the grant payments as well as the 1997 Loan. There was no difference between them as part of the package of assistance that went to fill the temporary gap between the removal of automotive leather from the Import Credit Scheme (ICS) and the new textiles, clothing and footwear programme coming into force from 1 July 2000. The USA continues to emphasize the fact that the grant payments were provided to Howe and not to other leather manufacturers. As has been explained before the original Panel, the reason for that is that there was only one manufacturer of automotive leather. All leather was eligible for assistance. However, between 1 April 1997 and 30 June 2000 automotive leather alone was not eligible under the ICS. If there had been other manufacturers of automotive leather, then they also would have received assistance outside the ICS. This reinforces the fact that the grant payments were allocated to the period 1 April 1997 to 30 June 2000.

34. Australia notes that the USA has not argued that the preferred option set out in paragraph 46 of Australia's First Submission is incorrect in the context of the period 1 April 1997 to 30 June 2000, i.e. that $7.336m. was allocated to the Withdrawal Period of 15 September 1999 to 30 June 2000. Accordingly, Australia submits that the Panel should find that that approach is consistent with the Report, in which case the issue of withdrawing 90% rather than 100% becomes irrelevant, since $8.065m. was withdrawn.

35. While the Panel will of course assess the factual nature of the USA's submissions, it may be useful to comment on a few points. For example, paragraph 32 of the USA's Second Submission implies that Australia has done something underhand. The Australian Government informed the USA's government in advance about the terms of the 1999 Loan, i.e. before 14 September 1999. The USA made no subsequent request for information prior to its demand on 18 October 1999, at the first organizational meeting of the Panel. Because this deals with only two companies, Howe and ALH, it was not appropriate to make all commercial details public. However, there has never been any suggestion that the 1999 Loan was not concessional. The documents available to the Panel (and the USA) make it clear that the repayment of the $8.065m. was by Howe and the 1999 Loan is to ALH and is unencumbered by any reference to automotive leather. Australia would note that it does not consider that this separation was necessary to bring the measure into conformity, but it sought in all aspects to exceed what was required by the Report.

36. Australia also notes that at paragraph 32 of its Second Submission the USA states that: 'ALH acknowledged receiving "valuable consideration" in exchange for the repayment [Footnote 25: Exhibit AUS-1, para.2.]'. This statement is inaccurate and Australia does not understand the reason for this misrepresentation. It is clear from the Deed that "valuable consideration" this does not refer to the 1999 Loan but to the removal of any subsisting obligations on Howe and ALH, including reporting obligations, under the Grant Contract.

37. Paragraph 33 of the USA's Second Submission says that Australia transferred $8.065m. back to ALH. Clearly this is inaccurate. The USA is entitled to make claims about the benefit of the 1999 Loan to ALH over the life of the loan when compared to the $8.065m. repaid by Howe, provided that it does so primarily as BCI. In Australia's view that is irrelevant to the matter at hand. However, the USA's Second Submission presents an inaccurate picture, an impression which would be heightened by its redacted version. Apart from the fact that the repayment was by Howe and the 1999 Loan was to ALH, there is a major difference to companies between making a large repayment such as made by Howe and receiving a concessional loan such as that provided to ALH. The repayment affects the income as well as the equity position of Howe. A loan has a major impact on the balance sheet of ALH, in particular the increase in liabilities. While the concessional nature of the 1999 Loan will provide a stream of benefits to ALH through to 2012, this is over time with the bulk of the benefits necessarily occurring some years out. A loan of this sort is not able to be traded and must be repaid at the end of the period. It also can be devoted to any of ALH's operations.

38. It is clear from paragraph 36 of the USA's Second Submission that the USA considers that the 1999 Loan itself is consistent with SCM Article 3.1(a). Accordingly, the Panel should reject the USA's argument in its paragraph 38. The Report determined that the 1997 Loan was consistent with SCM Article 3.1(a), where it was explicitly part of a package of assistance with the Grant Contract. As noted above the USA acknowledged to the original Panel that: "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."6 At paragraph 38 of its Second Submission, when the USA says that the 1999 Loan "steps into the shoes" of the amount withdrawn, it must mean that the withdrawn grant payments have been being replaced by another form of assistance, the 1999 Loan. However, the USA does not dispute that the 1999 Loan itself is consistent with SCM Article 3.1(a). Therefore, the USA has already acknowledged in the Report that Australia was entitled to reconfigure the assistance in this way to bring itself into conformity with SCM Article 3.1(a).

IV. CONCLUSION

39. Australia considers that it has implemented the Report's recommendations in good faith in light of the Report and has brought itself into conformity with SCM Article 3.1(a). Accordingly, it asks the panel to find that it has brought the grant payments into conformity with SCM Article 3.1(a) within the 90 day period recommended by the Report.

ANNEX 2-4

FINAL ORAL STATEMENT OF AUSTRALIA

(24 November 1999)

1. Australia and the USA agree that any part of the monies that are allocated to the period before the adoption of the Report are gone and are no longer a matter for the WTO. They do not have to be withdrawn.

2. Australia disagrees with the USA that any remaining money is frozen and indeed has interest added. This means that that money is not allocated after the date of the adoption of the Report. This is inconsistent with even the USA's basis for allocating subsidies over time. It is saying that there is money outstanding but that it is not allocated after the adoption of the Report. Apart from having no foundation in the WTO, this approach leads to inherent inconsistencies with a Member potentially remaining in breach with large outstanding amounts of money to be withdrawn indefinitely when even on the USA's approach the money in question would have been spent or the assets fully depreciated.

3. The USA is arguing that its approach to allocation is "economically reasonable", but by ceasing to allocate money after the date of adoption it throws any pretence of economic reasonableness out of the window. Under the USA's approach an even greater amount would have to be withdrawn in 2010 than on 17 June 1999 even though under its own countervailing methodology the calculated benefit would decline over time and then vanish at the end of the period. Apart from the fact that the USA has not attempted to give a legal justification of this, it has no pretence of being "economically reasonable" .

4. SCM Article 3.2 makes it clear that the obligation is not to grant or maintain subsidies inconsistent with SCM Article 3.1(a). Where part or all of the monies have been spent, they are no longer being maintained. Indeed where the monies are allocated over a particular period, the level of outstanding monies continues to decline until they go to zero by the end of the period. Moreover, where an outstanding subsidy is not contingent upon export performance, then it does not fall under SCM Article 3.1(a) and so Australia would not be maintaining a subsidy in breach of SCM Article 3.2.

5. The Report found that the granting of the grant payments fell under SCM Article 3.1(a) because of the sales performance targets. Accordingly, the grant payments applied to the period of the sales performance targets, i.e. 1 April 1997 to 30 June 2000. This meant that they were used in seeking to meet those sales performance targets. Thus the money is allocated on that basis.

6. The USA's approach of having a division of the money at the date of the adoption of the Report on the basis of 13 years is just as much tying the expensing of the money to a particular period. Its period, however, is based on its own objectives of maximizing the protectionist effect of countervail, which have nothing to do with this case involving SCM Article 3.1(a). In this case, the basis for the allocation is set out in the Report, i.e. the sales performance targets over the period 1 April 1997 to 30 June 2000.

7. There has been no finding in the Report or any evidence before this Panel about what Howe will be doing beyond 30 June 2000 and over the longer term. There is no basis for assuming that existing assets will be used for maintaining exports of automotive leather or even for producing automotive leather. There is no claim, or any basis for a claim, that Howe will continue to concentrate on automotive leather at its Thomastown plant. Next year it could be producing some other form of upholstery leather or shoe leather. While the original Panel had evidence before it relating to the period 1 April 1997 to 30 June 2000 it had nothing before it concerning the period after 30 June 2000 and neither has this Panel. The Report's finding on the grant payments was for the period 1 April 1997 to 30 June 2000. By contrast the Report cleared the 1997 Loan, which stretched to 2012.

8. The USA has not provided any argument based on SCM Article 3.1(a) how the Panel could find that part of the $30m. is being spent in some sense over a 13-year period. It refers to the USA's and the EC's countervail practices. These are for quite different purposes and the USA has been unable to establish any legal link to SCM Article 3.1(a).

9. Domestic legislation in areas such as countervail and competition policy, e.g. EU State Aids practice, do not provide guidance in this case. In the case of State Aids the issue is the treatment of money that has been given illegally under EU law and the focus is subsidization distorting competition in the EU's own market. SCM Article 3.1(a) is about the form of the granting of the subsidy not about the level of money provided. Moreover, there is nothing illegal about the subsidies in this case. The Australian Government acted legally, as did Howe and ALH. A breach of the WTO does not make the granting of a subsidy illegal under Australian law. This is a matter of Australia's international obligations.

10. Arguing in the alternative about the allocation period, if the Panel found that the grant payments should be allocated over a period beyond 30 June 2000, then the Panel should take into account that there has been no finding of contingency upon export performance beyond 30 June 2000. If money is allocated and so considered to be expensed after that date, then that money could not be found to be tied to export performance. In this circumstance the Panel should find that the only money that had to be withdrawn was the money allocated to 15 September 1999 to 30 June 2000. As shown in Australia's two submissions this amounts to less than $2m. Therefore, Australia would have withdrawn far more than was required and so would have fully complied with the recommendations of the Report.

11. In withdrawing $8.065m., Australia has withdrawn the amount of monies outstanding at 14 September 1999. Indeed in Australia 's view more than sufficient to cover that. That was the subsidy that was being maintained at that time.

12. Moreover, the Deed of Release terminated all remaining obligations under the Grant Contract and hence in respect of the grant payments.

13. Therefore, Australia has withdrawn the measures and brought the m into conformity with SCM Article 3.

14. The USA has not disputed that the 1999 Loan itself does not fall under SCM Article 3.1(a). It could hardly do so given that the Report cleared the 1997 Loan. However, the USA's argument is in essence that a Member when implementing the recommendation of the DSB has less rights than other Members. This is also translated by the USA to mean that such a Member is subject to different interpretations of WTO rules under an Article 21.5 Panel. The USA has not put forward any basis for this extraordinary approach to international law, except the attainment of its own narrow trade objectives. Adoption of such an approach by panels would have severe adverse consequences for the WTO system.

15. The Report found at paragraph 9.64 that Members can replace inconsistent subsidies with consistent ones and thereby bring themselves into conformity. The USA also acknowledged that at Footnote 132 of the Report. The Report found that the Grant Contract and payments under it had to be examined separately from the 1997 Loan even though they were part of the one package of assistance. Australia is entitled to be able to rely on the Report when implementing its recommendations. Australia was entitled to provide the 1999 Loan, which is in conformity with SCM Article 3.1(a).

16. While not claiming that the 1999 Loan is inconsistent in itself, the USA has claimed that the 1999 Loan is inconsistent because it is linked to the repayment of an export subsidy, the $8.065m. The USA agreed in the Report that an inconsistent measure could be reconfigured but somehow now if there is a contingency with the repayment of export subsidy money a measure becomes an export subsidy itself. No reasoning is given for this.

17. A measure is an export subsidy if it is contingent upon export performance, not if it is contingent upon the repayment of money whether or not that money is linked in some way to money provided as an export subsidy in the past. The USA has not claimed that the 1999 Loan is contingent upon export performance. It could not have done so because clearly the 1999 Loan is not contingent upon export performance. Moreover, even putting to one side the issue of the allocation of the grant payments, the USA does not dispute that the Report only found that the grant payments were contingent upon export performance over 1 April 1997 to 30 June 2000. The Report did not find any link to export performance after 30 June 2000. Moreover, the stream of benefits from the 1999 Loan only comes over time to 2012, since they derive from the concessional interest rate. The USA has not sought to argue any contingency upon export performance of automotive leather in respect of the 1999 Loan. There is no such contingency. Indeed ALH can use the 1999 Loan for any purpose with no link to automotive leather. Accordingly, the Panel should find that the 1999 Loan does not fall under SCM Article 3.1(a).

CONCLUSION

18. There seems to be agreement between Australia and the USA that the grant payments were found to be export subsidies because of the sales performance targets in the Grant Contract created the necessary tie required by SCM Footnote 4. At the very least there does not seem to be a disagreement between Australia and the USA that the existence of this tie was required for the finding in the Report that the subsidies fell under SCM Article 3.1(a) and so were prohibited.

19. Having acknowledged this tie, the USA then says that this tie bears no connection or relationship to remedying the breach of the rules that has been found. The USA says that it is the subsidy allocated to production that flows from the investment base of the company over the life of the productive assets that has to be withdrawn. It does this without any basis of what those assets might be used for in the future, and even whether automotive leather would be produced by those assets. The USA cites no evidence from the Report to support its argument, and not surprisingly is mute on the 1997 Loan. The flaw in the USA's argument is that if the USA was correct that this was the remedy required, the Report would have had to have given some clue that the subsidy should be seen in this way. It gave none. If the subsidies had been tied to productive assets over their life rather then to the sales performance targets, then there would not have been a sufficiently close tie between the granting of the subsidy and anticipated exportation or export earnings for the subsidy to fall under SCM Article 3.1(a).

20. This is not an assumption or a hypothesis on Australia's part. This is the plain reading of the findings and reasoning of the Report. The Report looked at precisely the sort of measure that the USA is addressing, i.e. it looked at the 1997 Loan, and found that the granting of the subsidies in these circumstances did not "suggests a specific link to actual or anticipated exportation or export earnings".1 They did not fall under SCM Article 3.1(a) and did not have to be "withdrawn ".

21. The only justification that the USA provides for allocating the grant payments over the life of Howe's assets is that the period for which these subsidies were specifically provided is a contrivance. There is no evidence in the history of this case to even hint at such a contrivance. The Report does not have any such finding. No evidence has been put to this Panel by the USA that it was a contrivance. It is absolutely clear from everything that this Panel and the original Panel have seen or heard that the assistance package was to "tide Howe over after it had lost eligibility for benefits related to automotive leather under these programmes.2

22. The report found that the grant payments were provided to Howe to assist the company to achieve the sales performance targets for the period 1 April 1997 to 30 June 2000. The Report found that these sales performance targets were effectively export performance targets. The Report found that the granting of these subsidies were "tied to" these targets and so were export subsidies. There have been many definitions of "tied to" suggested in this case, but the one accepted by the original Panel in the Report that was sufficient to demonstrate that there was, and had to be, a "close connection between the grant or maintenance of a subsidy and export performance.3 The Report found the close connection in the grant payments because of the sales performance targets. The Report found that there was not a "close connection" for the 1997 Loan subsidy although the loan was for automotive leather purposes and was used to" assist with the capital programme."

23. Australia has implemented the Report's recommendations adopted by the DSB in good faith in light of the Report. Australia was entitled to rely on the Report for determining how it could implement its recommendations.

24. Therefore, Australia asks the Panel to reject the claims by the USA and to find that Australia has withdrawn the subsidies and brought the measures into conformity with SCM Article 3.



1 The Report says at paragraph 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 possible 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. Australia argues that this consideration would lead to a result that would penalize small economies, where firms are often dependent on exports in order to achieve rational economic levels of production. Nevertheless, in the specific circumstances of this case, we find this consideration compelling evidence of the close tie between anticipated exportation and the grant of the subsidies."

2 See paragraph 16 of the US's Second Submission.

3 The Report says at Footnote 132 that:

"In the course of the Panel proceedings, 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."

4 At paragraph 2 of the US's Second Submission.

5 At paragraph 28 of the US's Second Submission.

6 At Footnote 132 of the Report.


1 At paragraph 9.75 of the Report.

2 At paragraph 9.65 of the Report.

3 At paragraph 9.55 of the Report.


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