B. CLAIM UNDER ARTICLE 1 OF THE SCM AGREEMENT - WHETHER THE TREATMENT OF EXPORT RESTRAINTS AS FINANCIAL CONTRIBUTIONS IS INCONSISTENT WITH THE SCM AGREEMENT AND WHETHER US LAW REQUIRES SUCH TREATMENT

8.3 The measures at issue in this case are laws of the United States: its legislation, instruments by reference to which that legislation is to be construed, and practice pursuant to that legislation. Canada does not challenge a particular instance in which an export restraint was the subject of a CVD investigation. Canada maintains that the contested US measures operate separately and together to require a certain treatment of export restraints in CVD investigations, contrary to the United States' obligations under the WTO.

1. The type of legislation that can be found as such to be inconsistent with WTO obligations

8.4 There is a considerable body of dispute settlement practice under both GATT and WTO standing for the principle that only legislation that mandates a violation of GATT/WTO obligations can be found as such to be inconsistent with those obligations. This principle was recently noted and applied by the Appellate Body in United States - Anti-Dumping Act of 1916 ("1916 Act"):

"[T]he concept of mandatory as distinguished from discretionary legislation was developed by a number of GATT panels as a threshold consideration in determining when legislation as such - rather than a specific application of that legislation - was inconsistent with a Contracting Party's GATT 1947 obligations."¹⁰⁷

. . .

"[P]anels developed the concept that mandatory and discretionary legislation should be distinguished from each other, reasoning that only legislation that mandates a violation of GATT obligations can be found as such to be inconsistent with those obligations."¹⁰⁸

8.5 Prior to 1916 Act, the Panel in United States - Measures Affecting the Importation, Internal Sale, and Use of Tobacco ("United States Tobacco") summed up the practice of GATT panels in the area as follows:

"[P]anels had consistently ruled that legislation which mandated action inconsistent with the General Agreement could be challenged as such, whereas legislation which merely gave the discretion to the executive authority of a contracting party to act inconsistently with the General Agreement could not be challenged as such; only the actual application of such legislation could be subject to challenge."¹⁰⁹

8.6 In its request for preliminary rulings, the United States argues that the mandatory/discretionary distinction - which we refer to hereafter as the "classical test" - should be applied in this dispute. Canada does not challenge the continuing validity of the classical test (nor does the European Communities as third party to the dispute). That is, Canada does not argue that discretionary legislation can be found to be inconsistent with WTO obligations. To the contrary, Canada states explicitly that no violation could be found in such cases:

"As Canada has set out in its submissions, Canada believes that the measures it has identified taken together require the United States to treat export restraints as financial contributions within the meaning of Article 1 of the SCM Agreement. If, however, the measures merely authorised the treatment of export restraints as financial contributions in the sense that the measures in no sense committed the United States to interpret Section 771(5)(B)(iii) in a manner that treated export restraints as 'financial contributions', then the measures at issue should not be found to be inconsistent with the United States' WTO obligations".¹¹⁰

8.7 Further, Canada's arguments are framed in accordance with the classical test. That is, Canada argues that the measures identified by Canada (i. e., the US legislation) require a certain treatment of export restraints in CVD investigations, which treatment in Canada's view violates the SCM Agreement, thereby rendering the legislation inconsistent with the SCM Agreement and the WTO Agreement.

8.8 Finally, Canada presents two arguments concerning the mandatory/discretionary distinction: (i) that the statute "as interpreted by" the SAA and the Preamble is mandatory legislation that requires the DOC to violate its obligations under the SCM Agreement; and (ii) that, although the statute on its own is discretionary, in the sense that it would be possible to interpret it in a WTO-consistent manner, the SAA and the Preamble "curtail the discretion" of the DOC to act WTO-consistently. In response to our question whether these arguments represented two formulations of a single argument, or two different or alternative arguments, Canada states: "There is no difference between these arguments in that the result under either argument is that the US measures are not 'discretionary' within the meaning of the mandatory/discretionary distinction in GATT/WTO jurisprudence, i. e., that the United States has not demonstrated that it has sufficient discretion to conform with its WTO obligations"¹¹¹.

8.9 As noted, the classical test has longstanding historical support, and has quite recently been employed by the Appellate Body, in 1916 Act. More importantly, the distinction between mandatory and discretionary legislation has a rational objective in ensuring predictability of conditions for trade. It allows parties to challenge measures that will necessarily result in action inconsistent with GATT/WTO obligations, before such action is actually taken. Accordingly, we shall be applying the classical test in this dispute, in order to determine whether the US law is of the type that can be found as such to be inconsistent with WTO obligations, i. e., whether the law is mandatory in respect of the treatment of export restraints in CVD investigations.¹¹²

2. Order in which the issues will be addressed

8.10 While Canada does not challenge the classical test, it considers that whether or in what degree a challenged measure is discretionary with respect to an alleged violation of WTO rules is not properly characterised as a general procedural or jurisdictional issue. Canada's view is that, rather, the Appellate Body has confirmed, in 1916 Act, that this is an issue that may arise as part of a panel's examination of the legal claims made in a particular case. The United States, on the other hand, argues that any substantive ruling on the meaning of WTO provisions, where legislation is eventually found to be discretionary, would constitute an inappropriate or impermissible "advisory opinion"¹¹³ . It therefore contends that we must address whether the US law is mandatory or discretionary before considering the meaning of Article 1.

8.11 We are not aware of any GATT/WTO precedent that would require a panel to consider whether legislation is mandatory or discretionary before examining the substance of the provisions at issue. To the contrary, we note that a number of panels, in disputes concerning the consistency of legislation, have not considered the mandatory/discretionary question in the abstract and as a necessarily threshold issue. Rather, the panels in those cases first resolved any controversy as to the requirements of the GATT/WTO obligations at issue, and only then considered in light of those findings whether the defending party had demonstrated adequately that it had sufficient discretion to conform with those rules. That is, the mandatory/discretionary distinction was applied in a given substantive context.¹¹⁴

8.12 We consider such an approach to be appropriate in this case. In particular, identifying and addressing the relevant WTO obligations first will facilitate our assessment of the manner in which the legislation addresses those obligations, and whether any violation is involved. That is, it is after we have considered both the substance of the claims in respect of WTO provisions and the relevant provisions of the legislation at issue that we will be in the best position to determine whether the legislation requires a treatment of export restraints that violates those provisions.

8.13 Finally, we note that, whether or not a panel sees the mandatory/discretionary question as a necessarily threshold issue or, as suggested by Canada, as an issue that may arise as part of a panel's examination of the legal claims, it remains true - at least under the classical test which we shall be employing - that legislation as such cannot be found to be inconsistent with a Member's WTO obligations unless it is mandatory in nature. Thus, in any event, the order in which the two issues - the question of the type of legislation and the substance of the case - are addressed would not alter any eventual finding of consistency or lack thereof.

8.14 For the foregoing reasons, we shall first consider whether the treatment of export restraints as financial contributions is inconsistent with the SCM Agreement and then determine whether US law requires such treatment.

3. Whether the treatment of export restraints as financial contributions is inconsistent with the SCM Agreement

(a) Scope of rulings

8.15 It is important, before we consider whether the treatment of export restraints as financial contributions is inconsistent with the SCM Agreement, to indicate what exactly we understand the term "export restraint" to mean in this dispute. In other words, we must first consider the essential defining characteristics of the measure described as an "export restraint", which is the subject of the claims before us, as this measure determines the scope of both the claims before us and our rulings thereon.

8.16 Canada states that "[a]n export restraint is a border measure that takes the form of a government law or regulation which expressly limits the quantity of exports or places explicit conditions on the circumstances under which exports are permitted. Such measures could also take the form of a government-imposed fee or tax on exports of the product calculated to limit the quantity of exports".¹¹⁵ The United States, for its part, indicates that "the ordinary meaning of 'restraint' is 'the action or an act of restraining something or someone'. 'Restrain', in turn, is defined as 'hold back or prevent from some course of action'. Thus, an 'export restraint' would be an action or an act that holds back or prevents exports".¹¹⁶ We note that Canada and the United States do not have the same view as to the essential elements that make up an export restraint, although both seem to envisage the possibility that export restraints could take various forms (quantitative restrictions, taxes, etc.). In particular, the definition proposed by the United States' is broader, and arguably would encompass any action which results in the limiting of exports. The definition proposed by Canada, on the other hand, sets out additional elements and is therefore narrower in scope.

8.17 We agree entirely with the United States that "[i]t is neither practicable nor desirable for the Panel to attempt to define, in the abstract, a term that does not appear in the SCM Agreement"¹¹⁷. On the other hand, it is necessary to delineate clearly the scope of the issues before us. We note that, as in any dispute, the scope of the claims is determined by the complainant. We shall therefore apply the provisions of the SCM Agreement to the particular fact pattern cited by Canada, i. e., a border measure that takes the form of a government law or regulation which expressly limits the quantity of exports or places explicit conditions on the circumstances under which exports are permitted, or that takes the form of a government-imposed fee or tax on exports of the product calculated to limit the quantity of exports. It is these essential characteristics - which we shall refer to hereafter for convenience as an "export restraint" - that delineate the scope of Canada's claims and of our rulings thereon.

(b) Rules of treaty interpretation

8.18 Article 3.2 of the DSU indicates that Members recognise that the dispute settlement system serves to clarify the provisions of the covered agreements "in accordance with customary rules of interpretation of public international law". In this regard, the Appellate Body, in United States - Gasoline, refers to "a fundamental rule of treaty interpretation [which] has received its most authoritative and succinct expression in the Vienna Convention on the Law of Treaties ('Vienna Convention')"¹¹⁸, and cites Article 31.1 thereof¹¹⁹, which reads as follows:

ARTICLE 31

General rule of interpretation

1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.

The Appellate Body indicates that "[this] general rule of interpretation has attained the status of a rule of customary or general international law. As such, it forms part of the 'customary rules of interpretation of public international law'"¹²⁰. We shall therefore begin our analysis of Canada's claim under SCM Article 1 on the basis of the text of that provision in its context and in light of the object and purpose of the SCM Agreement.

(c) Definition of "financial contribution" in the SCM Agreement

8.19 Canada's claim under SCM Article 1 centres on whether an export restraint can constitute a "financial contribution" in the sense of SCM Article 1.1(a)(1). Canada argues that under its CVD law, the United States treats export restraints as financial contributions in the form of government-entrusted or government-directed provision of goods by a private body as provided for in SCM Article 1.1(a)(1)(iii) and (iv), and that if export restraints confer benefits, the United States treats them as countervailable subsidies. In Canada's view, such an interpretation of these provisions of the SCM Agreement is not permissible. The United States argues that export restraints can (at least in some factual circumstances) constitute government-entrusted or government-directed provision of goods by a private body. Thus, at the heart of Canada's claim is the definition in Article 1.1(a)(1) of "financial contribution", and in particular, the provisions of Article 1.1(a)(1)(iii) and (iv).

8.20 SCM Article 1.1 provides as follows:

1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:

(a)(1) there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as "government"), i.e. where:

(i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);

(ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits [footnote omitted];

(iii) a government provides goods or services other than general infrastructure, or purchases goods;

(iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments;

or

(a)(2) there is any form of income or price support in the sense of Article XVI of GATT 1994;

and

(b) a benefit is thereby conferred.

Thus, Article 1.1 makes clear that the definition of a subsidy has two distinct elements (i) a financial contribution (or income or price support), (ii) which confers a benefit. The Appellate Body emphasised this point in Brazil - Aircraft, stating that financial contribution and benefit are "separate legal elements in Article 1.1 . . . which together determine whether a 'subsidy' exists"¹²¹, which the panel in that case had erroneously blended together by importing the concept of benefit into the definition of financial contribution.

8.21 The issue under Article 1 as presented to us by the parties is limited to the definition of financial contribution. There is no issue in respect of benefit, inter alia, because the parties agree that an export restraint could confer a benefit.¹²² Thus, our analysis under SCM Article 1.1(a)(1) is limited to the question of whether an export restraint could constitute a "financial contribution" in the sense of that provision.

8.22 On this point, the view of the United States is that an export restraint can constitute a financial contribution in the form of government-entrusted or government-directed provision of goods in the sense of Article 1.1(a)(1)(iii) and (iv), in that a limitation or outright prohibition of exports of the product in question is different only semantically from an affirmative direction to a private entity to provide goods (to a greater degree than before or exclusively) to domestic producers. In other words, the United States argues, an export restraint is "functionally equivalent" to an entrustment of or direction to a private body to provide goods domestically.¹²³

8.23 In the view of Canada, by contrast, in light of the plain meaning of the words "entrust" and "direct", for government entrustment or direction of the provision of goods to exist, the government must explicitly and affirmatively instruct the private entity to provide the goods. For Canada, the US argument that the difference is only semantic is unpersuasive because, in the US scenario, the producers of the goods in question would, when faced with an export restraint, have only one option, namely to sell to domestic purchasers, while in Canada's view this would never be the case. Rather, a producer faced with an export restraint would have multiple options, which might include selling to domestic purchasers, but might also include, for example, vertically integrating or switching to another business altogether.

8.24 Thus, the specific issue before us is whether an export restraint could constitute a financial contribution in the form of government-entrusted or government-directed provision of goods in the sense of Article 1.1(a)(1)(iii) and (iv). It is to a detailed analysis of the text of these provisions that we now turn.

(d) Text and context of the elements of the definition of "financial contribution" in the SCM Agreement

8.25 The definition of financial contribution in Article 1.1(a)(1)(iv)contains five requirements:

(i) a government "entrusts or directs"

(ii) "a private body"

(iii) "to carry out one or more of the type of functions illustrated in" subparagraphs (i)-(iii) of Article 1.1(a)(1) (in this case the provision of goods)

(iv) "which would normally be vested in the government" and

(v) "the practice, in no real sense, differs from practices normally followed by governments"

According to Canada, in the case of treating export restraints as financial contributions, these required conditions are not fulfilled. For the United States, it is possible for an export restraint to meet all of the definitional elements set forth in Article 1.1(a)(1)(iv), and therefore Canada's "extraordinary request for an authoritative interpretation by the Panel of the SCM Agreement must fail as a matter of substance."¹²⁴

(i) A government "entrusts or directs"

107 1916 Act, Appellate Body Report, WT/DS136/AB/R-WT/DS162/AB/R, adopted 26 September 2000, para. 88.

108 Id., para. 60.

109 United States Tobacco, Panel Report, adopted 4 October 1994, BISD 41S/131, para. 118.

110 Response of Canada to question 5 from the Panel at the first meeting (emphasis in original).

111 Response of Canada to question 17 from the Panel following the second meeting.

112 We note that the Section 301 Panel found that even discretionary legislation may violate certain WTO obligations (See United States � Sections 301-310 of the Trade Act of 1974, Report of the Panel, WT/DS152/R, adopted 27 January 2000, para. 7.53).  We recall that the Panel's analysis in that dispute focused on the nature of the obligations imposed by Article 23.2(a) of the DSU.  Neither party has suggested that similar considerations apply in respect of the provisions of the SCM Agreement that Canada alleges were violated in this dispute.

113 Request for Preliminary Rulings by the United States, para. 55.

114 See, e. g., United States � Superfund: The scheme in question involved, inter alia, a discriminatory penalty tax that would be imposed if required information was not submitted by the importer.  The Panel first found that such a penalty tax, if imposed, would violate Article III:2, then went on to find that the Superfund Act did not in fact require imposition of the tax, as the law foresaw the possibility for the United States to adopt regulations that would eliminate the need to impose it (United States � Taxes on Petroleum and Certain Imported Substances ("Superfund"), Report of the Panel, adopted 17 June 1987, BISD 34S/136, para. 5.2.9); Thailand � Cigarettes: After finding that the discriminatory tax rates provided for under the law would violate GATT rules, the Panel went on to find that the Thai authorities both had sufficient regulatory discretion to implement the law consistent with the GATT, and had actually exercised that discretion in that way (Thailand � Restrictions on Importation of and Internal Taxes on Cigarettes, Report of the Panel, adopted 7 November 1990, BISD 37S/200, para. 84); United States � Tobacco: The US statute mandated that the US Department of Agriculture assess "comparable" inspection fees for imported and domestic tobacco, and the Panel first considered the meaning of the word "comparable" in light of the relevant GATT requirement that  such fees be "commensurate" with the cost of services rendered to imported tobacco.  The Panel then concluded that the United States had the discretion to interpret "comparable" as "commensurate" (and in practice had done so), i. e., that the legislation did not require a violation (United States � Measures Affecting the Importation, Internal Sale, and Use of Tobacco, Report of the Panel, adopted 4 October 1994, BISD 41S/131, para. 123).

115 Response of Canada to question 1 from the Panel to both parties at the first meeting.

116 Response of the United States to question 1 from the Panel to both parties at the first meeting (footnotes omitted, emphasis in original).

117 Id.

118 United States � Standards for Reformulated and Conventional Gasoline ("United States - Gasoline"), Report of the Appellate Body, WT/DS2/AB/R, adopted 20 May 1996, p. 16.

119 (1969), 8 International Legal Materials 679.

120 United States � Gasoline, Report of the Appellate Body, footnote 118, supra, p. 17 (footnote omitted).

121 Brazil � Aircraft, Report of the Appellate Body, WT/DS46/AB/R, adopted 20 August 1999, para. 157 (emphasis in original).

122 The United States argues, "[D]omestic purchasers of a restrained product may be able to purchase that product at a lower price than would otherwise be the case if the market for that product was not artificially limited by the government.  In such a case, domestic purchasers of the restrained product would receive a benefit in the form of lower costs for their inputs" (First Written Submission of the United States, para. 55). The United States further argues, referring to Canada's request for establishment, "Canada does not allege that an export restraint is incapable of providing a 'benefit' within the meaning of the SCM Agreement" (Response of the United States to question 1 from the Panel at the first meeting, citation omitted).  Canada submits, in its request for the establishment of a panel, "[U]nder US [CVD] law, an export restraint is considered to satisfy the 'financial contribution' element of the definition of 'subsidy' in Article 1.1 of the SCM Agreement.  This means that an export restraint that has a price effect beneficial to users of the restricted product in the restricted market will be subject to countervailing duties if the other requirements of US law are met (notably specificity and material injury)" (WT/DS194/2, emphasis added).  Canada also argues, "[T]he US claim that an export restraint on pineapples is the 'functional equivalent' of ordering the growers to sell to the juice industry at 'less than adequate remuneration' is nothing less than a claim that if there is a price effect, an export restraint may be presumed to be a financial contribution.  Put differently, this is an assertion that a benefit can 'confer' a financial contribution" (Oral Statement of Canada at the first meeting, para. 30, emphasis added).

123 The United States argues, for example, that an export restraint and an affirmative direction to provide goods domestically "are functionally equivalent � where a producer is faced with two options, a prohibition on one option is an affirmative direction to perform the other.   An export ban clearly directs producers not to export, thereby directing them to seek the only other purchasers available to them for the sale of their goods" (First Written Submission of the United States, para. 38).

124 First Written Submission of the United States, para. 5.

Continuation: Section 8.26