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WORLD TRADE
ORGANIZATION

WT/DS194/R
29 June 2001
(01-3175)
 
  Original: English

UNITED STATES - MEASURES TREATING
EXPORTS RESTRAINTS AS SUBSIDIES



Report of the Panel

(Continuation)



5.248 Canada asserts that contrary to US arguments, Canada has not said that the Illustrative List prohibits government measures that are not subsidies within Article 1.1. Rather, Canada submits, items on the Illustrative List are to be interpreted consistent with the coverage of the definition of "subsidy." Also, in Canada's view, subparagraph (iv) will apply to the functions illustrated in subparagraph (iii) where there is an entrustment or direction to provide goods or services or to purchase goods, a test that export restraints do not meet.

H. SECOND ORAL STATEMENT OF THE UNITED STATES

5.249 The United States argues that if "bad facts make bad law", "no facts make worse law." The United States argues that Canada is asking the Panel to rule, in the absence of facts, that a particular category of measures can never, under any circumstances, constitute a financial contribution. For the United States this is a recipe for not only bad law, but "worse" law. In the US view, the Panel can avoid making "worse" law by finding that the so-called "measures" identified by Canada do not require the DOC to treat export restraints as subsidies. Such a finding is dispositive of this dispute, and is the only finding the Panel could make that would be supported by evidence.

5.250 For the United States, Canada's assertion that it is not asking for an "advisory opinion" is nonsense. The United States argues that according to Canada, even if the Panel finds that Canada is not entitled to any relief, the Panel nonetheless must make findings on the status of export restraints, notwithstanding that any such findings would be of no legal effect. In the view of the US, that is the essence of a request for an "advisory opinion."

5.251 The United States asserts that Canada tries to slip in the notion that the US bears the burden of proving that the "measures" at issue do not require WTO-inconsistent action, and argues that Canada is wrong for at least two reasons. First, Canada has made the factual allegation that the "measures" at issue require the DOC to treat export restraints as subsidies (or financial contributions). As the complainant, Canada bears the burden of substantiating this allegation, both in terms of the burden of coming forward and the ultimate burden of persuasion. Second, the Appellate Body did not find in the 1916 Act case that the mandatory/discretionary doctrine is an "affirmative defense." Thus, the United States submits, nothing in the 1916 Act case relieves Canada of its burden of proving its allegation that the "measures" at issue require the DOC to treat export restraints as subsidies.

5.252 Turning to the mandatory/discretionary doctrine itself, the United States notes that Canada asserts that in each of the cases cited by the United States, the panel ruled in favor of the defending party only because that party had either applied discretionary legislation in a GATT-consistent manner or was "in some sense committed to do so." In the US view, Canada has ignored the GATT and WTO cases cited by the United States that directly contradict Canada's assertion. In EEC Parts, the panel found that the EEC's application of its anti-circumvention legislation was inconsistent with Article III:2, but found that the legislation, as such, was not GATT-inconsistent because it did not require GATT-inconsistent action. In Canada Aircraft, the panel found that particular debt financing under the Canada Account constituted a prohibited subsidy, but found that the Canada Account, as such, was not WTO-inconsistent because it did not mandate the provision of export contingent subsidies. Notwithstanding that the panel found that Canada had applied the Canada Account in a WTO-inconsistent manner, the panel found that "[i]n light of the distinction that GATT/WTO panels have consistently drawn between discretionary legislation and mandatory legislation, we find that we may not make any findings on the Canada Account programme per se."

5.253 According to the United States, another erroneous Canadian proposition is that a Member must be allowed to challenge whether a Member has "curtailed its discretion" not to violate a WTO commitment. In the US view, there is no authority for this proposition, as previously recognized by Canada. In Canada Aircraft, Canada stated: "There is no basis in the findings of the Panel or the Appellate Body, the SCM Agreement, or international law for imputing to Canada an obligation to prove that discretionary laws could not possibly be used to grant export subsidies." (emphasis added). The United States notes that Appellate Body agreed with Canada.

5.254 Turning to the application of the mandatory/discretionary doctrine to the "measures" at issue, the United States asserts that Canada appears to be upset that the United States has not acknowledged in this dispute that if there is a Lumber IV, the DOC will find Canadian log export restraints to be subsidies. According to the United States, none of the members of the US delegation at the Panel meeting - indeed, no employee of USTR or the DOC - is in a position to state what might happen if there ever were to be a Lumber IV. Moreover, as a legal matter, what the DOC might do in a future case is irrelevant. What is relevant for the United States is what, if anything, US law mandates the DOC to do. In this regard, it is the opinion of the United States that if the Assistant Secretary for Import Administration should determine in an actual CVD proceeding that a provincial log export restraint does not constitute a financial contribution, no US court or NAFTA binational panel would overturn that determination on the grounds that the SAA, the Preamble, or some amorphous "administrative commitment" require a different result.

5.255 Turning to Canada's discussion of the SAA, the United States argues that no US court would read the proviso out of existence the way Canada does. Moreover, in its comments to the DOC in connection with the DOC's rulemaking proceeding, the United States recalls that Canada took the position that the statute and the SAA did not require the DOC to treat export restraints as subsidies, and that Canada also took this position in the 1999 Live Cattle case, as reflected by US-32. For the United States, Canada's brief in Cattle also calls attention to another important portion of the SAA not discussed so far in this case; namely, the paragraph at the top of page 925 of the SAA. According to the United States, this portion of the SAA sets forth the general intent of Congress and the Administration that prior DOC practice regarding the definition of "subsidy" continue only to the extent that it is consistent with the new, WTO-consistent definition of "subsidy" set forth in the statute.

5.256 With respect to the Preamble, in the view of the United States, Canada improperly equates the Preamble with a regulation. The United States argues that Canada has yet to cite any case that says the DOC is bound by anything other than a regulation. The United States notes that Canada asserts that "U.S. courts regularly find agency statements in preambles that interpret a statute to be controlling and reviewable like any regulation ...", and states that as authority, Canada simply refers to cases that the United States has previously explained are either distinguishable or do not support the proposition for which they are submitted.

5.257 The United States notes that Canada cites Professor Davis for the proposition that publication in the CFR should not constitute evidence that an agency statement is, or is not, a rule. According to the United States, Canada is inviting the Panel to undermine the credibility of its own report by taking the views of academics regarding how US law ought to be over the opinions of a federal appellate court regarding what US law is. Moreover, referring to US-33 and US-34, the United States argues that when one considers what else Professors Davis and Pierce have to say, it is apparent that they are not of the view that a legislative rule need not be published in the CFR. In addition, the United States maintains, if one were to apply the American Mining Congress test without the criterion of publication in the CFR, the Preamble would not qualify as a valid, binding legislative rule. Finally, the United States states, Canada's citation to the Wiggins Brothers, Inc. case (CAN-124) is not on point, because the court made clear that the preamble could not be disregarded because it constituted part of the "legislative history" of the regulation that was being construed. The court did not say that the preamble in question was itself a binding, legislative rule, which is the status that Canada attempts to accord the DOC Preamble at issue in this case. Also, continues the United States, Canada has not addressed the case of Clean Air Implementation Project v. EPA (US-26), which stands for the proposition that a preamble is not a "binding statement of agency policy" where the agency does not consider the preamble as such.

5.258 In the Preamble to the proposed rules, according to the United States, the DOC expressly stated that it was not promulgating a regulation on "indirect subsidies" in order to preserve its "flexibility and discretion." In the Preamble to the final rules, the United States notes, the DOC expressly stated that "the phrase 'entrusts or directs' could encompass a broad range of meanings. As such, we do not believe it is appropriate to develop a precise definition of the phrase for purposes of these regulations." Thus, for the United States, the DOC's explanation in the portion of the Preamble at issue here makes it clear that the DOC did not intend to bind itself on the topic of indirect subsidies by promulgating a regulation. The United States argues that it is simply absurd to assert, as Canada does, that at the same time as the DOC was expressing an intent not to bind itself by means of a regulation, it simultaneously intended to bind itself by means of a preambular statement explaining why the DOC was not binding itself.

5.259 For the United States, the fact that the DOC may cite the Preamble in a particular determination does not transform the Preamble into a binding regulation any more than would a citation to a law review article transform the article into a binding regulation. The United States does not dispute the fact that courts and agencies rely on regulatory preambles for purposes of interpreting agency regulations. In this case, however, the United States argues, there is no regulation to interpret. Moreover, Canada has not identified a single instance in which the DOC stated that it was following a principle articulated in the Preamble because it was legally bound to do so. For the United States this is a critical point. There is a big difference between citing the Preamble as a shorthand explanation of the reasons why the DOC is making a particular determination, and citing the Preamble as binding authority. The United States argues that in the first situation, the DOC, as a matter of discretion, is citing reasoning set forth in the Preamble because it finds that reasoning to be persuasive. In the second situation, the DOC would be following the Preamble because it has no discretion to do otherwise. Likewise, the United States maintains, Canada has been unable to cite a single case where a court has said that a portion of a DOC regulatory preamble unrelated to a regulation has the force of law.

5.260 The United States argues that in respect of DOC "practice" - whatever that may be - Canada has not been able to cite a single US court decision standing for the proposition that agency practice in general, or DOC practice in particular, is binding. Moreover, according to the United States, Canada's assertion that an agency may depart from prior precedents only in "narrow circumstances" is contradicted by the very US administrative law experts on which Canada has relied in this case. The United States argues that as set forth in US-34, Professors Davis and Pierce are of the view that an agency may freely overrule its precedent.

5.261 For the United States, Canada's reference to the so-called Subsidies Appendix is worthy of a brief comment, because the history of the Subsidies Appendix totally contradicts Canada's arguments in this case. The Subsidies Appendix was attached to a 1984 final CVD determination which announced new DOC practice on a host of CVD methodological issues at a time when there were no regulations. Although the DOC had not generated the Subsidies Appendix through the type of notice-and-comment process required by the Administrative Procedure Act ("APA") for a valid, binding legislative rule, the DOC nonetheless began to treat the Subsidies Appendix as if it were a legislative rule. In 1988, the US Court of International Trade put a halt to this, as explained in the preamble to the DOC's 1989 proposed regulations (CAN-5). The DOC's reviewing court told it that it could not act as if its administrative practice was binding, because under established US principles of administrative law, it was not. The court told the DOC that if it wanted to make its practice binding, it would have to codify it in the form of regulations.

5.262 The United States notes that Canada claims that Article 10 of the SCM Agreement applies to this dispute because Article 10 imposes an obligation "to 'take all necessary steps to ensure . . .' that the imposition of countervailing duties is consistent with the SCM Agreement and Article VI of the GATT 1994." According to the United States, Canada claims that Article 10 (and the provisions related thereto) itself imposes an obligation on a Member to ensure the conformity of its countervailing duty law with the SCM Agreement and Article VI. When one considers Article 10 in full, however, it is apparent to the United States that Article 10 was intended to apply to the actions of Members in individual countervailing duty proceedings. The reference in the first sentence to "imposition" is suggestive of a case-specific determination, as is the reference in the second sentence to "investigations initiated and conducted". Moreover, the United States argues, if Canada's interpretation were accepted, Article 10 would be redundant of Article 32.5, which expressly imposes an obligation to ensure the conformity of laws, regulations and administrative procedures. In the view of the United States, Canada has implicitly recognized this in all of its prior submissions in this dispute. Article 10 and Article 32.5 can each be given meaning by interpreting Article 10 as governing actual actions taken by a Member in an actual CVD proceeding, and Article 32.5 as governing the conformity as such of a Member's laws, regulations and administrative procedures.

5.263 According to the United States, putting aside the issue of whether the SAA, the Preamble, and the DOC's alleged "administrative commitment" constitute "measures", even if one assumes arguendo that these "measures" should be considered together, Canada has yet to cite any authority for the proposition that, under US law, "measures" that individually do not require an agency to do a particular thing do so require when considered together.

5.264 With respect to the phrase "entrusts or directs", the United States asserts that Canada simply asks the Panel to ignore the dictionary definitions of "direct" that undermine its case. Canada claims that the determination of whether an export restraint constitutes a "financial contribution" is a legal, rather than a factual, issue. However, the United States maintains, this is true only if one ignores the ordinary meaning of "direct." All of the dictionaries referred to in this dispute include definitions with a causal element. For the United States, it is significant that Canada has conceded that an export restraint constitutes government "direction", and simply argues that the "direction" is "to not export." In the view of the United States, this is nothing more than a semantic game.

5.265 Finally, the United States argues, Canada reiterates its tired argument that "the freedom of producers to adapt to the imposition of an export restraint" means that there is no entrustment or direction within the meaning of subparagraph (iv). The United States submits that Canada's alleged "freedom of producers" to adapt is unsupported by any factual evidence. In an effort to gloss over its evidentiary failings, asserts the United States, Canada misrepresents the position that the US has taken in this case, asserting that the US is arguing that an export restraint is subject to subparagraph (iv) "because it might result in greater domestic availability of a product ... ." The United States indicates that its prior submissions make clear that the US position is that an export restraint might be subject to subparagraph (iv) only if it did result in greater domestic availability. In the US view, it is Canada which bases its position on theoretical speculation as to what an export restraint might do, because it fears what the facts might reveal in actual cases.

5.266 Finally, what the United States sees as the emptiness of Canada's argument regarding the "freedom of producers" is revealed by the last sentence of its answer to Question 6 (Second Set), in which it states that a producer would have the freedom to "elect to reduce or terminate its production"; i.e., go out of business. For the United States, if this is the type of "freedom" that removes a government measure from the scope of subparagraph (iv), then subparagraph (iv) is truly meaningless. In a scenario in which a government directs a producer to sell a product to identified domestic customers on pre-determined conditions (a scenario which both Canada and the EC concede ought to fall under subparagraph (iv)), the producer would have the same "freedom" to go out of business.

5.267 With respect to the phrase "private body", to the United States it is now entirely unclear what Canada's position is with respect to this phrase. In its answer, Canada says that "a law, regulation, or administrative directive requiring 'all bankers' to lend (in lieu of the government lending) X percent of their loanable funds to the widget industry might make bankers a 'private body' ... ." The United States fails to see any substantive difference between this scenario and a scenario in which a government, by means of an export restraint, directs producers of an input to sell only to domestic customers.

5.268 With respect to the language in subparagraph (iv) that begins with the phrase "normally vested in", the United States argues, as indicated in its response to Question 26(a), that because the DOC has yet to address this language, the United States does not have a definitive position on the meaning of this language. However, it appears to the United States that this language was drawn from the 1960 Article XVI:5 Report, which referred to the functions of taxation and subsidization. Thus, to the United States this language suggests that the appropriate inquiry is whether the practice that a private body is directed to perform falls within the types of practices that a government normally engages in for purposes of delivering a subsidy.

5.269 It appears to the United States that there are several possible interpretations of the "normally vested in" language. Based on the fact that the functions in subparagraphs (i) through (iii) are expressly recognized as mechanisms used by governments directly to provide financial contributions, one possible interpretation of the "normally vested in" language is that it recognizes that the functions listed in (i) through (iii) are normally vested in the government and places that same limitation on functions of the same "type". As a result, under this interpretation, subparagraph (iv) encompasses the functions in (i) through (iii), which are normally vested in the government, and functions of that "type", provided that they are also normally vested in the government.

5.270 Another possible interpretation, according to the United States, is that the "normally vested in" language serves to screen out government actions that, at first blush, might appear to be government direction to perform a function illustrated in subparagraphs (i)-(iii). For example, using Canada's example of a government action to break up a monopoly, looked at superficially, one might say that this could result in the type of government-directed provision of a good at reduced prices that qualifies as a subsidy. However, when considered from a different perspective, one could say that governments typically do not provide subsidies by breaking up cartels and restoring normal market conditions.

5.271 Finally, the United States notes, there is Canada's interpretation, which, as the United States understands it, is that the language requires that the government in question have ordinarily performed the function that the private body is directed to perform.

5.272 The United States argues that it is not uncommon for multilateral negotiations to produce legal documents that reflect less than ideal drafting. With all due respect to the drafters, the United States would admit that the "normally vested in" language is not a model of clarity, which makes recourse to its negotiating history all the more important.

5.273 However, in the US view, the Panel does not have to resolve the precise meaning of this language, because even under Canada's interpretation, Canada must still lose. Canada has not shown, as a factual matter, that there are not and never will be situations in which a government that has historically provided a good directly also restrains exports of that good in a manner that causes a private body to begin to provide the good.

VI. ARGUMENTS OF THE THIRD PARTIES

6.1 The arguments of the third parties the European Communities, and India are set out in their submissions and oral statements to the Panel, which are attached to this Report in Annex B. Australia did not make a written submission or an oral statement. (See List of Annexes, page v, supra).

VII. INTERIM REVIEW

7.1 The Panel issued its interim report to the parties on 27 April 2001. On 11 May 2001, both parties submitted written requests for review of specific aspects of the interim report. On 16 May 2001, the parties submitted comments on one another's interim review requests. Neither party requested an interim review meeting.

7.2 Canada argues that we have inaccurately reflected its position concerning the mandatory/discretionary distinction. We have expanded the quotation from Canada's response to a question in paragraph 8.6 as well as reflected its response to another question in paragraph 8.8 to provide a more complete context for our understanding of Canada's position.

7.3 Canada also suggests slight wording changes in paragraphs 8.23 and 8.50 to reflect more accurately its arguments. The United States proposes an alternative in respect of paragraph 8.50. We have adjusted the drafting in these paragraphs.

7.4 Canada also suggests deletion of a word in paragraph 8.75 as unnecessary, and makes a general comment in respect of our use of the phrase "independent operational status" in paragraphs 8.85, 8.99, 8.113, and 8.126. We disagree with the first comment, and have thus made no change to paragraph 8.75. We do not believe that Canada has asked for a particular change to the other cited paragraphs, nor do we feel that one is necessary. Thus, we have made no change to those paragraphs either.

7.5 The United States requests that we expunge Sections VIII.B.2 and VIII.B.3 of our findings, i. e., the part of the findings that address Canada's claims under SCM Article 1. In the view of the United States, similarly to what they had argued throughout the Panel proceedings, these sections are not necessary given our finding in Section VIII.B.4 that the US legislation does not require the DOC to treat export restraints as a subsidy. The United States further maintains that this aspect of the report, if followed by other panels, will have extremely serious and unfortunate consequences for the WTO dispute settlement system. Canada disagrees, and notes that we have considered whether the treatment complained of constitutes a violation of WTO obligations and then whether the measures at issue mandate such treatment. Moreover, Canada points out that the Appellate Body has criticised panels for failing to complete their analysis where panel findings on certain issues have been overturned. We have explained the reasons for the approach we have taken and the precedents for this approach. We have not made any change to these sections.

7.6 The United States makes further specific comments on Section VIII.B.3 in the event that we decide to maintain it. First, the United States indicates that we have misunderstood its position regarding the object and purpose of the SCM Agreement, and that we have not reconciled our interpretation of Article 1 with the object and purpose of the SCM Agreement. We have completed the quotation of Article 32 of the Vienna Convention in paragraph 8.64 following Canada's response to this US comment. We have also made some drafting changes to paragraphs 8.62 and 8.63 to clarify the US position, and to clarify our views on the relationship between our analysis of Article 1 and the object and purpose of the Agreement.

7.7 The United States indicates that we have misconstrued its arguments concerning dictionary definitions of the word "directs", and that we have only partially addressed in our findings dictionary definitions pertaining to the word "directs" in the particular grammatical construction that is used in Article 1.1(a)(1)(iv). We have redrafted paragraph 8.27 to reflect more fully the US argument, and have clarified our grammatical point in paragraph 8.28. We have also slightly redrafted paragraph 8.44 to clarify our response to the US argument.

7.8 The United States argues that we have incorrectly characterised its position as failing to recognise "financial contribution" as a separate and meaningful legal element of a subsidy. We have expanded the quotation from US responses to questions to clarify better its position on this point, and have clarified the drafting in paragraph 8.39 concerning our views as to the implications of the US position. The United States also questions the placement of footnote 135 of the report. We have made no change in response to this comment.

7.9 The United States also argues that we have mischaracterized its arguments concerning the phrase "type of functions" in paragraphs 8.51-8.52. We have redrafted our description of the US arguments in these paragraphs, as well as our concluding sentence on this issue in paragraph 8.55, to reflect more accurately the US argument, and have made consequential drafting changes in paragraph 8.53.

7.10 The United States also identifies clerical errors in footnotes 177, 186, and 187, which we have corrected.

7.11 We have also introduced clerical and technical corrections in Sections IV and V, and wording changes in paragraph 8.6 and the heading to Section VIII.B.4(a).

VIII. FINDINGS

A. REQUEST FOR PRELIMINARY RULINGS

8.1 We recall that the United States has requested the Panel to dismiss Canada's claims by making the following preliminary rulings (See Section IV.A, supra):

(a) That, as neither Section 771(5), the SAA, the Preamble, nor any DOC "practice" requires US authorities to treat export restraints as subsidies, these alleged measures, as such, do not violate US obligations under any of the provisions cited by Canada in its request for a panel;

(b) That US "practice" - whether past, present, or future - does not constitute a measure properly before this Panel;

(c) That, because Canada did not include US "practice" under Section 771(5) in its request for consultations, the parties did not actually consult on US "practice", and Canada's panel request fails to adequately identify the US "practice" in question, Canada's claims regarding US "practice" fail to conform to Articles 4.7 and 6.2 of the DSU, and are not properly before this Panel; and

(d) That, because Canada's panel request did not identify the SAA or the Preamble as measures, and because, in any event, neither the SAA nor the Preamble is a measure, Canada's inclusion of the SAA and the Preamble as separate measures in its First Written Submission fails to conform to Article 6.2 of the DSU, and Canada's claims regarding the SAA and the Preamble are not within the Panel's terms of reference.

8.2 We consider that the United States' preliminary objections, particularly as to what constitute the measures at issue and whether these measures are mandatory or discretionary in respect of the alleged treatment of export restraints, go to the substance of the matter before us. We therefore do not consider it appropriate to address the objections raised by the United States as threshold issues. Rather, we address these issues as part of our substantive analysis of the claims.


Continuation: B. Claim under Article 1 of the SCM Agreement