8.26 The United States argues that export restraints can fall within the Article 1.1(a)(1) definition of "financial contribution" on the basis that export restraints constitute (or can constitute) government "entrustment" or "direction" to a private body in the sense of Article 1.1(a)(1)(iv) (to "provide goods" in the sense of Article 1.1(a)(1)(iii)), because the United States sees no substantive difference, but only a semantic one, between a restriction on exporting a product and an instruction to sell that product domestically. For the United States, the two are "functionally equivalent". Canada takes issue with this interpretation of the concept of "entrusts or directs". According to Canada, the plain meaning of "entrusts or directs" is active, i.e., to order or commission someone to do something. For Canada, this ordinary meaning is reinforced by the terms that immediately follow the words "entrusts or directs" in Article 1.1(a)(1)(iv), namely "to carry out". In Canada's view, the term "entrusts or directs . . . to carry out" suggests the communication of a particular duty or instruction that is to be discharged or executed. Canada argues that an export restraint does not fit this definition, as it does not commission or charge or authoritatively instruct producers of the restrained good to do anything; to the contrary, it limits their ability to export.

8.27 The United States refers to a number of dictionary definitions of the words "entrust" and "direct" (some of which are broader than those used by Canada), including, "give responsibility to"; "cause to move in or take a specified direction"; "regulate the course of"; "guide (someone or something)"; "instruct (someone or something) with authority", "give authoritative instructions to; to ordain, order (a person) to do (a thing) to be done; order the performance of". For the United States, it cannot be said that no export restraint is capable of satisfying any of these definitions. At a minimum, according to the United States, an export restraint can "regulate the activities of" or "cause" a private body to carry out one of the enumerated functions of subparagraphs (i)-(iii) and thus provide a financial contribution. The United States submits that "[a]n export restraint is a direction to provide goods to domestic purchasers if it can be shown, as a factual matter, that there is a proximate causal relationship between the export restraint and the behaviour of the producers of the restrained product. Of course, whether such a causal relationship exists can only be assessed on a case-by-case basis".¹²⁵ In particular, the United States argues, if the restraint results in the producer having no practical or commercial choice but to sell (or to increase its sales) in the domestic market, the restraint is the same as a direction to sell in the domestic market. The United States further elaborates on this point, stating that "there would need to be a demonstrated causal relationship"¹²⁶ between an export restraint and a private body's action (e. g., the provision of a good) in order for there to be a financial contribution.

8.28 In our view, the requirement of "entrustment" or "direction" in subparagraph (iv) refers to the situation in which the government executes a particular policy by operating through a private body. The question in this dispute relates to the conditions under which the government can be considered to be operating through a private body as foreseen by subparagraph (iv). The dictionary meaning of the word "entrust" is, inter alia, to "give (a person, etc.) the responsibility for a task . . . Commit the . . . execution of (a task) to a person . . . ".¹²⁷ The word "direct" is defined, inter alia, as to "[g]ive authoritative instructions to; order (a person) to do . . . order the performance of".¹²⁸ In this regard, we consider significant the fact that, for "direct" when followed by "to" plus an infinitive (i. e., a verb), the dictionary gives as a meaning to "give a formal order or command to"¹²⁹, as this is precisely the construction used in subparagraph (iv) (". . . entrusts or directs a private body to carry out . . .").

8.29 It follows from the ordinary meanings of the two words "entrust" and "direct" that the action of the government must contain a notion of delegation (in the case of entrustment) or command (in the case of direction). To our minds, both the act of entrusting and that of directing therefore necessarily carry with them the following three elements: (i) an explicit and affirmative action, be it delegation or command; (ii) addressed to a particular party; and (iii) the object of which action is a particular task or duty. In other words, the ordinary meanings of the verbs "entrust" and "direct" comprise these elements - something is necessarily delegated, and it is necessarily delegated to someone; and, by the same token, someone is necessarily commanded, and he is necessarily commanded to do something. We therefore do not believe that either entrustment or direction could be said to have occurred until all of these three elements are present.

8.30 Having said that, it is clearly the first element - an explicit and affirmative action of delegation or command - that is determinative. The second and third elements - addressed to a particular party and of a particular task - are aspects of the first. Any assessment of whether delegation or command has occurred would necessarily be in reference to that which has been delegated or commanded and in reference to the one to whom it has been delegated or commanded. As aspects of and flowing from the first element of the definition, the second and third elements provide further support for our view that the action must be an explicit and affirmative act of delegation or command. We note, in this regard, that the "entrusts or directs" language in subparagraph (iv) is followed by the language "a private body to carry out . . . ", which is similar to that which we have used to describe the second and third elements of the definition of entrustment or direction. Thus, the subsequent language in subparagraph (iv) confirms our view of the requirement of an explicit and affirmative action.

8.31 Government entrustment or direction is thus very different from the situation in which the government intervenes in the market in some way, which may or may not have a particular result simply based on the given factual circumstances and the exercise of free choice by the actors in that market. Indeed, governments intervene in markets in various ways, and with various policy or profit objectives, and these interventions might have various results, including results that are not intended by, or that are even undesirable for, the government. We do not see how a scenario of this type would comprise the three elements that we consider to be germane to the definition of entrustment or direction. That is, the fact that two different government actions might happen to have the same result in a given situation does not transform the nature of the actions, i. e., it does not mean that the two actions are effectively one and the same. Otherwise put, the distinction that we make between entrustment or direction and a government intervention which might or might not have a particular effect in a particular market at a particular time is not merely semantic.

8.32 The phrase "entrusts or directs" in Article 1.1(a)(1)(iv) is immediately preceded by the phrase "a government makes payments to a funding mechanism or". We consider that these two phrases are aimed at capturing equivalent government actions. Both are government actions that substitute an intermediary (whether a funding mechanism or a private body) to make a financial contribution that otherwise would be made directly by the government. In other words, the action of a government making payments to a funding mechanism and that of it entrusting or directing a private body to carry out the functions listed in subparagraphs (i)-(iii) are equivalent government actions. This is further contextual support for our view that entrustment or direction constitutes an explicit and affirmative action, comparable to the making of payments to a funding mechanism.

8.33 Our understanding of the United States' view is that, where the effect of an export restraint is to induce domestic producers to sell their product (in greater quantities or exclusively) to the domestic purchasers/users of that product, this is the same as if the government had explicitly and affirmatively ordered the domestic producers to do so, and that thus there is a financial contribution in the form of government-entrusted or government-directed provision of goods. In forwarding this argument of "functional equivalence" or "conceptual equivalence", the United States focuses primarily on the effects or the results of a government action, rather than on the nature of the action, in order to determine whether that action constitutes a financial contribution. Thus, according to the US approach, the existence of a financial contribution in the case of an export restraint depends entirely on the reaction thereto of the producers of the restrained good, and specifically on the extent to which they increase their domestic sales of the restrained product because of the restraint. Under the US approach, the existence of a financial contribution in the case of an export restraint therefore actually cannot be determined from the nature of that action (the export restraint) as such.

8.34 We consider that it cannot be the case that the nature of a Member government's measure under the SCM Agreement is to be determined solely on the basis of the reaction to that measure by those it affects. Rather, the existence of a financial contribution by a government must be proven by reference to the action of the government. To determine whether a financial contribution exists under subparagraph (iv) solely by reference to the reaction of affected entities would mean in practice that a different standard would apply under that provision as compared to the standard under subparagraphs (i)-(iii), which involves consideration of the action of the government first. Similarly, we do not see how the reaction of private entities to a given governmental measure can be the basis on which the Member's compliance with its treaty obligations under the WTO is established.

8.35 Moreover, applying the "effects" approach to the question of whether a financial contribution exists would have far-reaching implications. In particular, it would seem to imply that any government measure that creates market conditions favourable to or resulting in the increased supply of a product in the domestic market would constitute a government-entrusted or government-directed provision of goods, and hence a financial contribution. While the United States does not appear to argue that this is the result it seeks, it points to no legal basis on which export restraints could be distinguished from other measures causing the same sorts of market effects. In response to a question as to what such a legal basis would be under the US approach, the United States submits:

"First, under the ordinary meaning of 'direct', there would have to be the requisite causal connection between the government measure and the behaviour of private actors in order for a financial contribution to exist . . . Thus, the legal basis is found in subparagraph (iv) itself. Second . . . it would be short-sighted to focus solely on the financial contribution element of an actionable subsidy . . . One must take into account the fact that the application of the concepts of 'benefit' and 'specificity' will weed out government measures that might arguably satisfy the definition of 'financial contribution'."¹³⁰

8.36 Thus, the only "legal basis" cited by the United States is the "causal connection between the government measure and the behaviour of private actors". Given that such a causal connection could exist in respect of a wide variety of government measures, by this argument the United States seems implicitly to acknowledge that, under its approach, any government measure that caused an increase in the domestic supply of a good would, for that reason alone, constitute government-entrusted or government-directed provision of goods and hence a financial contribution.

8.37 A hypothetical example better illustrates the difficulties of the US "effects" approach. Let us assume that a government imposes extremely high tariffs on imports of coal. It follows that the price of imported coal in the domestic market would increase and the supply thereof would perhaps decrease. Domestic downstream users of coal, such as steel producers, would probably find it more economical to purchase coal from domestic producers, who would thus see an increase in their sales volumes and would be likely to secure better terms of sale as well. A government action - the imposition of high tariffs on coal - would have benefited producers of coal by causing downstream users of coal to make a greater proportion of purchases from domestic producers vis-�-vis foreign producers as compared to the situation prior to the imposition of such tariffs. Surely this cannot be considered to be a situation where a government "entrusts or directs" a private body (users of coal) to purchase goods within the meaning of subparagraph (iii) - or "entrusts or directs" a private body (producers of coal) to provide goods within the meaning of subparagraph (iii) - and hence to constitute a financial contribution, although that is precisely the result that applying the US "effects" approach would yield. Were that to be the case, tariffs would constitute financial contributions and, given that they would necessarily confer a benefit on some actors in the market, tariffs would constitute subsidies within the meaning of Article 1 of the SCM Agreement.

8.38 In the above example of imposition of tariffs, there may well be a question as to consistency with Article II of the GATT 1994, which deals with Members' schedules of concessions. It is, however, doubtful that the concept of financial contribution contained in Article 1.1(a) of the SCM Agreement seeks to bring such government action within the ambit of the SCM Agreement. To the contrary, by introducing the notion of financial contribution, the drafters foreclosed the possibility of the treatment of any government action that resulted in a benefit as a subsidy¹³¹ . Indeed, this is arguably the principal significance of the concept of financial contribution, which can be characterised as one of the "gateways" to the SCM Agreement, along with the concepts of benefit and specificity. To hold that the concept of financial contribution is about the effects, rather than the nature, of a government action would be effectively to write it out of the Agreement, leaving the concepts of benefit and specificity as the sole determinants of the scope of the Agreement.

8.39 We note in this context that in the Uruguay Round the United States took the position that benefit was the key factor in the determination of the type of measure that constituted a subsidy.¹³² Similarly, in this dispute, the United States submits, in response to questions from the Panel concerning the determination of "entrusts or directs", and the legal significance, if any, of the concepts of "benefit" and "specificity" for interpretation of the term "financial contribution", that:

"[U]nder the ordinary meaning of 'direct', there would have to be the requisite causal connection between the government measure and the behaviour of private actors in order for a financial contribution to exist . . . ";¹³³

and that:

"The requirements of 'benefit' and 'specificity' are relevant [to the question of legal interpretation of the concept of 'financial contribution'] because Canada and the European Communities [] are attempting to induce the Panel to adopt an unwarrantedly narrow interpretation of subparagraph (iv) based on unsubstantiated allegations of a 'parade of horribles' that supposedly would occur if their narrow interpretation is not accepted. However, the fact is that the 'benefit' and specificity' elements will operate so as to render many alleged indirect subsidies non-actionable and, thus, non-countervailable."¹³⁴

We understand the United States' response to our question of legal interpretation to be primarily that the practical consequences of a broad interpretation of the concept of financial contribution would be limited because in practice such an interpretation will not convert enormous numbers of government regulatory measures into subsidies, in view of the probable absence in many cases of benefit and specificity.

8.40 But this response is not satisfactory; the requirements of "benefit" and "specificity" are separate legal questions from, and are not relevant to, the legal interpretation of the term "financial contribution"¹³⁵. The US effects-based approach implies that the "financial contribution" element is not a meaningful legal requirement and thus not a limiting factor in itself in respect of the determination of the type of measure that falls within the scope of the SCM Agreement, and that the only limiting factors are "benefit" and "specificity". This of course cannot be correct. Indeed, as noted above, the Appellate Body stated in Brazil - Aircraft that "the issues - and the respective definitions - of a 'financial contribution' and a 'benefit' are two separate legal elements in Article 1.1 of the SCM Agreement, which together determine whether a 'subsidy' exists".¹³⁶ We believe therefore that the US approach would effectively, and impermissibly, eliminate financial contribution as a "separate legal element".

8.41 We find further support in the reasoning of the Appellate Body in the appeal of the original Panel ruling in Canada - Aircraft for our view that the United States' "effects" approach (i. e., increase as a matter of fact in the domestic supply of the restrained good as a result of an export restraint) is an impermissible basis for determining the existence of a financial contribution under subparagraph (iv). In the Canada - Aircraft appeal, the specific definitional question under the SCM Agreement was the meaning of de facto export contingency in the sense of SCM Article 3.1(a) and footnote 4. The underlying principle was, however, similar. In particular, Canada argued in that case that, for a subsidy to be de facto contingent on export performance, it "must cause the recipient to prefer exports to domestic sales".¹³⁷

8.42 The Appellate Body rejected this argument and essentially agreed with Brazil and the United States that the focus of the SCM Agreement's obligations is on the granting government¹³⁸. The Appellate Body stated that "[i]t does not suffice to demonstrate solely that a government granting a subsidy anticipated that exports would result"¹³⁹ , and elaborated that, while "[a] subsidy may well be granted in the knowledge, or with the anticipation, that exports will result . . . that alone is not sufficient, because that alone is not proof that the granting of the subsidy is tied to the anticipation of exportation"¹⁴⁰. In other words, the Appellate Body found that a cause and effect relationship between the subsidy and actual or anticipated trends in exports was not sufficient to satisfy the "tied to" standard of conditionality for export contingency to exist.¹⁴¹ Similarly, in the case before us, for the "entrusts or directs" standard to be met, i.e., for there to be a financial contribution in the sense of subparagraph (iv), the government's action must be the focus, rather than the possible effects of the action on, or the reactions to it by, those affected, even if those effects or reactions are expected.

8.43 Nor are we persuaded by the parallel that the United States seeks to draw, in support of its cause-and-effect argument, between a certain statement in the Canada - Dairy Panel's findings in respect of item (d) of the Illustrative List of Export Subsidies¹⁴² (which findings in any event were rendered moot by the Appellate Body), and the "entrusts or directs" standard of SCM Article 1.1(a)(1)(iv)¹⁴³ . In particular, the panel statement cited by the United States is that it was not necessary "that the federal or provincial governments specifically direct a certain outcome or course of action to be achieved or taken" for the milk pooling system at issue to constitute provision of goods by a government "through government-mandated schemes" in the sense of item (d) of the Illustrative List. In fact, this statement by the Canada - Dairy Panel, when seen in its full context, leads to the opposite conclusion from that advanced by the United States. First, the general context for the statement was the Panel's finding that it was the government (and not marketing boards or other entities acting on their own) that decided which milk should be sold to which customers at which prices, and that enforced these decisions through a system of permits and other measures. Second, the immediate context for the cited statement of the Panel was that, even to the extent that the marketing boards and other entities had some discretion to make certain marketing decisions, that discretion had been explicitly delegated to them by the government and thus the exercise of that discretion (i. e., the situation where the government did not "specifically direct a certain outcome or course of action") did not alter the conclusion that milk was being provided through "government-mandated schemes". This is neither the same as nor analogous to the US approach and thus provides no support for the US argument that an increase in the domestic supply of a good which happens to result, as a matter of fact, from the application of some government intervention in the market for that good constitutes government-entrusted or government-directed provision of the good.¹⁴⁴ To the contrary, the Panel made this statement in reference to a market every aspect of the operation of which was explicitly and tightly controlled and managed by the government.

8.44 In sum, we consider that the ordinary meanings of the words "entrusts" and "directs" require an explicit and affirmative action of delegation or command. Moreover, we find that the "effects" test (i. e., a proximate causal relationship)¹⁴⁵ advanced by the United States as the definition of "entrusts or directs" has implications which in our view would be contrary to the intended scope and coverage of the SCM Agreement, in that it would effectively read out of the text of Article 1 the financial contribution requirement. Thus, we find that an export restraint in the sense that the term is used in this dispute cannot satisfy the "entrusts or directs" standard of subparagraph (iv).

(ii) "Private body"

8.45 In its initial submissions in this dispute, Canada takes issue with the idea that the individual producers of a good subject to export restraints could be considered to be a "private body". The essence of Canada's argument on this point is that the term "private body" connotes a "collectivity" which a disparate group of producers does not have. For Canada, a "private body" is an organised private group or collective entity that has a separate and independent existence. The fact that a given group of individuals can be described by a common characteristic (e. g., gold miners), would not transform the universe of such individuals into a "private body".

8.46 However, in its later submissions in this dispute, Canada seems to indicate that an explicit government direction or entrustment to a given producer or group of producers, whether individually or collectively, and no matter how identified or defined, would itself transform those producers into a "private body" in the sense of subparagraph (iv). According to Canada:

"In order for a government to entrust or direct someone to do something, there must be some sort of government communication with the person or group so entrusted. This could occur in a variety of ways . . . Whatever device is available or chosen would identify the person(s) to whom the entrustment or direction was given and would impose the obligation on that person(s) to carry out a specific financial contribution . . . "¹⁴⁶

According to Canada, the term "private body" is thus given meaning by the surrounding text in subparagraph (iv), which includes the function of government entrustment or direction.¹⁴⁷

8.47 The United States essentially submits that Canada's (original) argument would suggest that, even if the government in question were to command each of the many private producers of a given product to act in a certain way, these producers nevertheless could not be deemed to be "private bodies" in the sense of Article 1.1(a)(1)(iv), because they were not organised into a collective entity of some sort. In other words, for the United States, Canada seems to indicate that only an organised body or collective entity with a separate existence can in Canada's view be a "private body". The United States argues that nothing in the text implies such a limitation of the term "private body". In the US view, any private entity is a private body, whether or not organised as a "collectivity". Rather, any common characteristic in respect of a given group of individuals does transform the universe of such individuals into a "private body". For instance, in the case of an export restraint, producers of the good subject to the export restraint would constitute a "private body". Moreover, for the United States, as long as there is some entity that could constitute a private body, Canada has not discharged its burden of proof in respect of this element.

8.48 We note that the original argument by Canada is essentially supplanted by its argument as to the nature (i. e., explicitness) of a government action that is necessary for that action to constitute government "entrustment or direction" of a private body to do something. Canada thus appears effectively to have dropped its "organised" entity approach. To our minds, the difference of opinion between the parties on the definition of "private body" therefore hinges on the difference of opinion between them on the definition of "entrusts or directs". In other words, under the approach advanced by both parties, it is the nature of entrustment or direction that would define the composition of the relevant "private body", and the latter could only be identified as a function of the former.

8.49 We believe that the term "private body" is used in Article 1.1(a)(1)(iv) as a counterpoint to "government" or "any public body" as the actor. That is, any entity that is neither a government nor a public body would be a private body. Under this reading of the term "private body", there is no room for circumvention in subparagraph (iv)¹⁴⁸. As it is a government or a public body that would have to entrust or direct under subparagraph (iv), any entity other than a government or a public body could receive the entrustment or direction and could constitute a "private body". This is entirely logical. We do not consider that there is any need for a further definition of "private body", be it in reference to the nature of entrustment or direction or a common characteristic or some other factor. To the contrary, if there were such a further narrowing of the term "private body" in the Agreement, this would effectively exclude from any subsidy disciplines actions by some entities even if the entities in question had been explicitly and affirmatively ordered to take those actions by a government. For these reasons, we conclude that the companies or other entities affected by or reacting to an export restraint would be "private bodies" in the sense of subparagraph (iv).

(iii) "To carry out one or more of the type of functions illustrated in (i) to (iii) above"

125 Comment of the United States on question 9 from the Panel to Canada following the first meeting (italic emphasis in original, underline emphasis added).

126 Comment of the United States on question 11 from the Panel to Canada following the first meeting.

127 The New Shorter Oxford English Dictionary, Volume 1, 1993, Clarendon Press, Oxford.

128 Id.

130 Response of the United States to question 36(a) from the Panel following the first meeting.

131 See paras. 8.66 , infra, on negotiating history.

132 Submission by the United States, MTN.GNG/NG10/W/29, 22 November 1989, para. II.1(a) (Exhibit CAN-34).

134 Response of the United States to question 36(b) from the Panel following the first meeting.

135 We believe, in particular, that the appropriate way to conceive of "financial contribution" is purely as a transfer of economic resources by a government to private entities in the market, without regard to the terms of that transfer.  Such a transfer can be effected either by a government directly (subparagraphs (i)-(iii)) or indirectly through private bodies (subparagraph (iv)).  The question of the terms on which the transfer is made does not have to do with the existence of a financial contribution but rather goes to the separate issue of benefit, as Article 14 makes clear, by providing that to determine whether a benefit exists, the terms of the financial contribution need to be compared with the market terms.

136 Brazil � Export Financing Programme for Aircraft, Appellate Body Report, WT/DS46/AB/R, adopted 20 August 1999, para. 157 (emphasis in original).

137 Canada � Measures Affecting the Export of Civilian Aircraft, Report of the Appellate Body, WT/DS70/AB/R, adopted 20 August 1999, para. 20.

138 Id., para. 170.

139 Id., para. 170.

140 Id., para. 171.

141 Id., paras. 171-172.

142 SCM Agreement, Annex I.

143 First Written Submission of the United States, paras. 62, 65-66.

144 We note that the United States premises this argument on its view that item (d) of the Illustrative List, and the Canada � Dairy Panel's reasoning in respect thereof, constitute relevant context for the concept of government-entrusted or government-directed provision of goods in the sense of SCM Article 1.1(a)(1)(iii) and (iv), on the grounds that "indirect subsidies falling under item (d) must involve financial contributions within the meaning of Article 1.1(a)(1)(iv)".  Given that the passage from Canada � Dairy cited by the United States does not stand for the proposition asserted by the United States, we do not believe that it is necessary to consider, as such, the relationship between SCM Article 1 and the Illustrative List in SCM Annex I.

145 See para. 8.26, supra.

146 Response of Canada to question 26 from the Panel following the second meeting.

147 Id.

148 See paragraph 8.53, infra.

Continuation: Section 850