5. Comments On The US Submissions Regarding The SCM Agreement In The US Oral Statement

5.174 In Canada's view, the central issue in this dispute has been and remains whether the treatment of export restraints under the US measures is inconsistent with the definition of "financial contribution" in Article 1.1(a)(1) of the SCM Agreement, an issue that necessarily depends on interpreting that provision according to the ordinary meaning of its terms in their context and in light of the object and purpose of the Agreement. Canada argues that as it set forth in its first oral statement, the US effort to fit export restraints within the definition of financial contribution represents a deeply flawed attempt to apply these principles of treaty interpretation.

5.175 Canada asserts that the United States simply redefines the critical term "directs" to mean "causes" in the broadest of senses, a contention which relies on an extrapolation from dictionary meanings taken out of context. Canada states that the word "directs" in Article 1.1(a)(1)(iv) means that a government must give authoritative instructions to the "private body" to carry out a certain action, while the definition selected by the United States - "regulating the course of, or causing something or someone to move on a particular course" - has a quite different meaning. Further, Canada submits, as Canada pointed out in its first oral statement, an export restraint plainly does not meet even the US definition of "directs". More importantly, the word "causes" is simply not found in the text of subparagraph (iv).

5.176 In addition, Canada notes, the United States argues that whether a particular export restraint fulfilled all of the elements for a "subsidy under Article 1.1" could only be determined on the basis of a case-specific analysis of actual evidence. While to Canada it is true that whether "a benefit is thereby conferred" within Article 1.1(b) would require an evidentiary analysis, "benefit" is not at issue here. Canada submits that if the Panel agrees with it that an export restraint is not a "financial contribution" under Article 1.1(a)(1)(iv), the question of "benefit" would never arise, since no case alleging that an export restraint is a "subsidy" could ever properly be initiated.

5.177 Canada notes that the United States also claims that there is no "slippery slope" of finding a host of government regulatory measures encompassed under its interpretation of subparagraph (iv). In Canada's view, a simple example may demonstrate its error. In possible reaction to the reduction or elimination of a duty, importers might increase their imports of a product, potentially leading to increased domestic supply and, under certain economic conditions, to a reduced market price for the good to downstream users. Under the US interpretation of subparagraph (iv), as in its view of export restraints, Canada argues, the government, in reducing the duty, would have "entrusted or directed" the importers to "provide goods" to domestic users of the product. Under both Canadian and EC arguments, government actions such as a reduction in import duties are simply not within the forms of government actions that constitute a "financial contribution" under Article 1.1(a)(1).

5.178 Finally, Canada states, in response to both Canada's and the EC's arguments regarding the ability of producers subject to an export restraint to adapt to market conditions, the United States continues to argue that an export restraint is nonetheless a government "entrustment or direction" to "provide goods" that is countervailable if a benefit and specificity are found. Canada notes that the freedom of producers to adapt to the imposition of an export restraint highlights the lack of an entrustment or direction under Article 1.1(a)(1)(iv). In Canada's view, a direction by the government to not undertake one activity simply does not translate, under subparagraph (iv), into a direction to undertake another.

F. SECOND WRITTEN SUBMISSION OF THE UNITED STATES

1. Introduction

5.179 By way of an overview, the United States emphasizes that what is at issue is a category of measures - export restraints - that are regarded as "subsidies" in the normal, economic sense of the term. The United States submits that the WTO Secretariat and United Nations organizations, to name a few, have characterized export restraints as such. Notwithstanding this, Canada is seeking to prove that an export restraint can never, under any set of circumstances, constitute a subsidy under the SCM Agreement as a technical matter. In the US view, Canada advances this claim without offering any evidence regarding the nature and operation of actual export restraints as they exist in the real world. The United States asserts that Canada does so notwithstanding the fact that, as complainant, it bears the burden of proof, and, in this case, bears the burden of proving the negative.

5.180 Second, for the United States there is no real, tangible dispute here. Canada is not contesting the imposition of any countervailing duty. Indeed, in the post-WTO era, no countervailing duty has been imposed by the DOC in respect of an export restraint against Canada or any other Member. Nor is Canada arguing that there is a US law or regulation that, on its face, is inconsistent with any WTO agreement. Instead, the United States submits, what Canada is really arguing is that it believes that, if ever faced with the question, the DOC will interpret its WTO-consistent statute so as to encompass export restraints. However, such a challenge simply does not involve a challenge to a measure "taken" within the meaning of the DSU, according to the United States.

5.181 Third, the United States argues, notwithstanding the fact that this case should be dismissed on procedural grounds, and notwithstanding the abstract nature of Canada's challenge, Canada is wrong with respect to its substantive claims. The United States submits that it has demonstrated, based upon an analysis of the text, context, and object and purpose of the SCM Agreement, that Canada is wrong when it claims that an export restraint could never, under any set of circumstances, constitute a subsidy. Thus, while the United States believes the Panel need not and should not address Canada's substantive claims, should the Panel choose to do so, the United States believes that the Panel must reject them.

2. The Mandatory/Discretionary Doctrine

5.182 Significantly for the United States, neither Canada nor the EC challenges the continuing validity of the mandatory/discretionary doctrine. Thus, the only real question before the Panel is whether the so-called " measures" identified by Canada require the DOC to treat export restraints as subsidies.

(a) Section 771(5)

5.183 With respect to Section 771(5) of the Tariff Act of 1930, the United States notes that Canada concedes that the statute, on its face, "does not specifically address export restraints."⁷⁶ Canada has to concede this in the US view because, as it acknowledged in 1995 in its comments to the DOC, Section 771(5) "adopts a definition of 'subsidy' that is substantively the same as that of the Subsidies Agreement."⁷⁷ Thus, under the mandatory/discretionary doctrine, the United States asserts, Section 771(5) does not violate US WTO obligations.

(b) The SAA

5.184 The United States maintains that the parties also agree that the SAA is "authoritative" with respect to the interpretation of Section 771(5). However, the United States believes that it has demonstrated that all that the SAA "authoritatively" says is that the DOC must follow the standard set forth in Section 771(5), which Canada concedes is WTO-consistent.⁷⁸ Thus, under the mandatory/discretionary doctrine, even if the SAA were a separate measure, within the Panel's terms of reference, in the US view it would not violate US WTO obligations.

(c) The Preamble

5.185 The United States notes that the parties agree that a regulatory preamble can be used to interpret an agency regulation. More specifically, US case law shows that a regulatory preamble can be used as evidence of an agency's contemporaneous understanding of its proposed rules.⁷⁹ However, with respect to the preambular language at issue, the United States asserts, the DOC did not promulgate a regulation nor was the preambular language included in the Code of Federal Regulations. The United States states that it has demonstrated that, as a matter of US law, the Preamble at issue in this case is not binding on the DOC.⁸⁰

5.186 Moreover, lost in the debate over an obscure principle of US administrative law, the United States argues, is the fact that even if the Preamble were binding on the DOC, the Preamble does not reflect an interpretation by the DOC that Section 771(5) requires the DOC to treat export restraints as subsidies (or financial contributions). Rather, the Preamble simply expresses the tentative opinion that the statute "would permit" the DOC to treat an export restraint as a subsidy; i.e., that treating an export restraint as a subsidy would be one possible interpretation of the statute.⁸¹

5.187 Thus, under the mandatory/discretionary doctrine, the United States asserts, the Preamble does not violate US WTO obligations because (1) it is not binding on the DOC; and (2) even if it were binding, it does not require the DOC to treat export restraints as subsidies.

(d) US "Practice"

5.188 The United States notes that Canada does not dispute the fact that there is no post-WTO case in which the DOC has found an export restraint to be a subsidy. The United States further submits that Canada also does not dispute the fact that, even if there were such a case, as a matter of US law it would not be binding on the DOC.⁸² Thus, under the mandatory/discretionary doctrine, the United States argues, US "practice" - understood in the conventional sense of agency case precedent - would not violate any US WTO obligation not to treat an export restraint as a subsidy.

5.189 However, the United States argues, in the course of this dispute Canada's definition of "practice" has constantly evolved. In its latest incarnation, according to the United States, "practice" is an alleged "administrative commitment" to treat export restraints as subsidies; in other words, the DOC's alleged institutional state of mind. However, nowhere in any of its submissions has Canada explained how an "administrative commitment" - whatever that may be - is binding on the DOC as a matter of US law. Thus, even if this "administrative commitment" could constitute a measure for purposes of the DSU, in the US view Canada has failed to demonstrate that this "thing" requires the DOC to treat export restraints as subsidies.⁸³ Thus, under the mandatory/discretionary doctrine, the United States asserts, any such alleged "administrative commitment" does not violate US WTO obligations.

(e) The Measures Taken Together

5.190 The United States believes that Canada has argued that even if the documents it has identified do not individually require the DOC to treat export restraints as subsidies, the measures do so require when "taken together."⁸⁴ However, the United States argues, nowhere in any of Canada's submissions is there any explanation - let alone a demonstration - as to how, under US law in general, individual measures that do not require an agency to act in a particular manner collectively can constitute such a requirement. Nor is there any demonstration as to how, under US law, the particular documents at issue collectively require the DOC to treat export restraints as subsidies. For the United States, the reasons for this void in Canada's argument is that Canada's fundamental assertion is simply wrong, as a matter of US law. Thus, under the mandatory/discretionary doctrine, the United States submits, the measures taken together do not violate US WTO obligations.

3. None Of The Measures Cited By Canada Violate Any Of The Provisions Of The WTO Agreements That Canada Has Invoked

5.191 The United States recalls its explanation in paragraphs 44-51 of the US Oral Statement and in the US answer to Question 17 (Second Set), that most of the "measures" identified by Canada are incapable of violating any of the provisions of the WTO agreements that Canada has invoked in this case.

5.192 In the US view, none of the measures can violate Article 1.1, because Article 1.1 is a definitional provision which does not impose obligations as such. Likewise, none of the measures can violate Article 10 (or Articles 11, 17 and 19 as they relate to the requirements of Article 10), because these provisions pertain to actions taken in the context of actual CVD proceedings, and Canada is not challenging any such action. Article 32.1 is also inapplicable because it pertains to "specific action against a subsidy of another Member", and Canada is not challenging any such action.

5.193 Thus, the United States asserts, the only provisions that could conceivably apply to a challenge to measures "as such" are Article 32.5 of the SCM Agreement and Article XVI:4 of the WTO Agreement, both of which apply to "laws, regulations and administrative procedures." In general, to violate either of these provisions, a law, regulation or administrative procedure would have to violate some other provision of a WTO agreement. In the context of this case, the United States submits, a law, regulation, or administrative procedure would violate these provisions only if it mandated action inconsistent with Articles 1.1, 10 (or 11, 17 and 19), or 32.1 of the SCM Agreement.

5.194 In the US view, the only measure at issue in this case which potentially could fall under Article 32.5 or Article XVI:4 is Section 771(5), which is a "law". However, the United States argues, Canada concedes that Section 771(5) is, on its face, not inconsistent with any of the provisions it has cited, and the United States has demonstrated that this conclusion does not change if Section 771(5) is interpreted in conjunction with the SAA. Thus, the United States concludes, Section 771(5) does not violate either Article 32.5 or Article XVI:4.

5.195 With respect to the other "measures", the United States argues that they simply are not subject to Article 32.5 or Article XVI:4. Neither the SAA, the Preamble, nor Canada's amorphously defined "practice" constitutes a "law", a "regulation", or an "administrative procedure" within the meaning of these provisions.

4. Canada Has Failed In Its Attempt To Demonstrate That An Export Restraint Can Never, Under Any Set Of Circumstances, Constitute A Subsidy

5.196 Concerning Canada's claim that an export restraint can never, under any set of circumstances, constitute a subsidy under subparagraph (iv) of Article 1.1(a)(1), the United States reiterates its position that the Panel need not and should not reach this issue.⁸⁵ Should the Panel nonetheless choose to do so, the United States asserts that it has demonstrated that an export restraint is potentially capable of satisfying the standards of subparagraph (iv).

(a) "Entrusts or Directs"

5.197 The United States notes that the main thrust of Canada's argument relates to the "entrusts or directs" requirement in subparagraph (iv). The United States asserts, however, that it has previously demonstrated that an export restraint could, in appropriate circumstances, satisfy this requirement based upon the ordinary meaning of the terms. "Directs" means "cause to take a specified direction"; "to cause (something or someone) to move on a particular course".⁸⁶ According to the United States, Canada can point to nothing in these definitions that excludes export restraints from coverage.

5.198 The United States notes that Canada's case with respect to "entrusts or directs" essentially is focused on three arguments. First, Canada takes issue with the dictionary definitions of "directs" that employ a causal element, and seeks to insert an additional requirement that "an authoritative instruction to do something" affirmative, as opposed to refrain from doing something, is required.⁸⁷ Second, Canada, along with the EC, argues that an export restraint can never satisfy the "entrusts or directs" standard because the producer of the restrained product has options available to it other than selling the product domestically, such as producing another product, processing a downstream product, or going out of business. Third, Canada argues that if its preferred approach is not accepted, there will be a "slippery slope" leading to the countervailing of all government regulatory actions.

(i) "Authoritative Instruction"

5.199 With respect to Canada's first argument, the United States recalls that Canada asserts that, in the case of an export restraint, there is no specified direction to provide goods domestically, but rather the specified direction is "to not export." Significantly, asserts the United States, Canada concedes that export restraints constitute "direction."⁸⁸ Canada argues, however, that there must be an "authoritative instruction" or an "order . . . to do a thing" in order for "direction" to exist.⁸⁹ In the view of the United States, Canada cites no textual support for this proposition, but simply asserts that its preferred dictionary definitions should govern.⁹⁰

5.200 Moreover, the United States submits, Canada fails to account for the varying forms in which an export restraint may manifest itself (a problem which would not arise if Canada had brought a case based on real facts). Presumably, even under Canada's reading the "entrusts or directs" standard would be satisfied if an export restraint operated in conjunction with a governmental requirement that the restrained product must be processed domestically. At best, the United States asserts, Canada seeks to put form over substance. When a domestic producer is in the business of selling a product, the US view is that a restriction against exporting can be a direction to sell (i.e., provide goods) to domestic purchasers within any normal commercial setting.

5.201 Furthermore, according to the United States, the word "directs" as used in subparagraph (iv) does entail elements of causation, as recognized in Question 11(c) (Second Set). To the United States, whether or not an export restraint causes a producer to sell domestically is a factual question that can only be answered on a case-by-case basis. What is significant to the United States for purposes of this dispute is that both Canada and the United States appear to agree that an export restraint is capable of bringing about the requisite effect. Canada made the following assertion in its oral statement:

"More specifically, the United States alleges that when faced with an export restraint, a domestic producer has only one economic choice and that is to sell the restrained good to domestic purchasers of that good. From an economic perspective, this is simply incorrect. It does not inevitably follow that an export restraint will force a domestic producer of the restrained good to sell into the domestic market."⁹¹

5.202 To the United States, implicit in the phrase "it does not inevitably follow" is an acknowledgement by Canada that it "could" follow that an export restraint would force a domestic producer of the restrained goods to sell into the domestic market. The United States asserts that Canada is trying to have it both ways. On the one hand, it acknowledges that in theory an export restraint could force a domestic producer of the restrained good to sell in the domestic market. On the other hand, it essentially asserts that this could never happen in the real world, but fails to submit a scintilla of evidence to support this factual assertion.

(ii) "Alternative Choices"

5.203 The United States argues that Canada's second attempt to argue around the ordinary meaning of "entrusts or directs" is its "alternative choices" argument. Canada and the EC argue that, faced with an export restraint, producers can choose to produce another product, not produce at all, or become processors of the downstream product.⁹²

5.204 However, the United States submits, there may be situations in which, as a factual matter, the producer of the restrained product does not have such options. Indeed, as discussed in the preceding section, in the US view Canada implicitly acknowledges this possibility, and fails to provide evidence that there could never be a real life case where Canada's theoretical options do not exist.

5.205 In any event, according to the United States, with the exception perhaps of a command, nonmarket economy regime (something which need not be addressed in this case dealing with hypotheticals), a producer always has choices. If a government "orders" a bank to loan to a company, the bank always can refuse. The United States notes that there may be consequences to a refusal, but the bank still has a choice. For the United States, this commercial reality is no different in the case of an export restraint.

5.206 Indeed, the United States maintains, even applying the Canada/EC standard of an authoritative instruction to sell on pre-determined conditions, a producer would have the option of producing a different product, going out of business, or commencing production of the downstream product. However, if the presence of choices in this situation means that no subsidy can exist, then for the United States subparagraph (iv) truly would be a meaningless provision - there could be no such thing as a producer-financed subsidy.⁹³

5.207 In the US view, the argument that a subsidy cannot exist because of the existence of a theoretical choice stands the SCM Agreement on its head. The United States notes that Canada has stated that subsidies distort comparative advantage,⁹⁴ and for the United States that is precisely what an export restraint is capable of doing. The United States notes that it can only speak in the abstract because there are no facts in this dispute, but as an example posits that in a market based on comparative advantage and free of any export restraint, an input would be exported to a different market for processing there because it is more financially advantageous to do so. Because of an export restraint, the producer of the input (which could not otherwise economically justify processing) begins to produce the downstream product, thereby artificially enhancing production domestically at the expense of foreign producers. The United States asserts that Canada claims that none of this is of any concern under the SCM Agreement because the producer has choices.

5.208 For the United States, the real point is that an export restraint can cause the producer to provide goods to domestic processors that it otherwise would not have provided absent the export restraint. Thus, in the US view, the key question as reflected in Question 11(c) (Second Set) is whether there is a significant enough causal connection between the government's action in introducing and enforcing an export restraint and the domestic producer's provision of the good in a manner that would not have occurred in the market.

(iii) The "Slippery Slope"

76 Canada's First Submission, para. 32.

77  Request by the United States for Preliminary Rulings ("US  Request"), para. 43, quoting from US-11.

78 See, e.g., US  Request, paras. 35-39, 75-79; and US  Answers to Question 1 (First Set) and Questions 15, 27 and 31-33 (Second Set).

79 US  Request, para. 81 and cases cited therein.

80 Id., paras. 80-83 and cases cited therein; Oral Statement of the United States ("US  Oral Statement"), paras. 17-31 and cases cited therein.

81 US  Request, para. 80.

82 The United States refers, for a discussion of the non-binding nature of administrative agency precedents, to US  Request, paras. 84-85; and US  Answer to Question 16(d) (Second Set).

83 The United States refers to US  Answer to Question 16(d) (Second Set), explaining why an "administrative commitment" could not be binding as a matter of US  law.

84 Canada's Oral Statement, para. 8.

85 See, e.g., US  Answer to Question 39 (Second Set).

86 US First Submission, para. 31.  In this regard, the United States does not concede, as Canada suggests at paragraph 19 of Canada's Oral Statement, that the word "entrust" can be disregarded.  There may well be situations in which an export restraint constitutes the mechanism by which a government "entrusts" a private body to provide a financial contribution within the meaning of subparagraph (iv).  However, if, as the United States has demonstrated, an export restraint can satisfy the meaning of "directs", the word "entrusts" becomes a moot point insofar as Canada's claims in this dispute are concerned.

87 The United States argues that, significantly, this approach is inconsistent with Canada's own contemporaneous interpretation of "entrusts or directs", because Canada's CVD statute does not require "an authoritative instruction".  Instead, under the Canadian statute, a financial contribution exists if a government "permits or directs" a private body to do something.  See US  First Submission, para. 37, note 34.

88 Canada's Oral Statement, para. 20 ("Yet, the 'specified direction' in the case of an export restraint is not to provide goods, but rather is 'to not export.'") (emphasis in original).

89 Id., para. 21.

90 The United States asserts that Canada does try to argue that because the drafters also used the word "cause" elsewhere in the SCM Agreement, this means that they must have intended that "direct" have something other than its ordinary meaning.  With respect to this argument, the United States has three observations.  First, the Appellate Body has recognized that different words can have interchangeable or overlapping meanings.  European Communities - Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, Report of the Appellate Body adopted 25 September 1997, para. 203 (Appellate Body found that notwithstanding the use of different phrases in Article 1.3 of the Licensing Agreement and Article X:3(a) of GATT 1994, the two provisions had identical coverage).  Second, to the extent that Canada is arguing that the word "directs" as used in subparagraph (iv) has a special meaning, under customary principles of public international law, the burden of proof is on Canada to prove that the drafters had such an intent.  Vienna Convention on the Law of Treaties, Article 31(4).  Third, the United States notes that footnote 1 of the SCM Agreement demonstrates that the drafters knew how to exclude certain practices from the scope of Article 1.1, but did not do so in the case of export restraints.

91Canada's Oral Statement (18 January 2001), para. 42 (emphasis added).  The United States argues that of course, the United States has not asserted that an export restraint will always have the hypothesized effect.  The US position simply is that it cannot be said that an export restraint could never have the hypothesized effect.

92 Id., para. 40.  The United States notes that the EC adds the requirement that the good be provided on the basis of certain pre-determined conditions.  EC Submission, paras. 25-27.  The United States believes that it has adequately addressed this particular EC argument in its answers to the Panel's questions.

93The United States notes that Canada says that it has now abandoned its prior position that a cost-to-government is required in order for a subsidy to exist.  Id., para. 27.

94 CAN-106.

Continuation: Section 5.209