71. The Community submitted that the concessions granted by the Community in 1962 pursuant to Article II had since been repeatedly withdrawn and replaced by new tariff concessions in the course of successive enlargement renegotiations under Article XXIV:6 (following the procedures of Article XXVIII). These negotiations took place in 1973/74, 1981 and most recently in 1986/87 when the Schedule of Concessions of the Community currently in force was concluded. The Community considered that for the purposes of the present case the rights and expectations of the parties should be determined on the basis of the 1988 concessions currently in force.

72. The Community referred to the following matters relating to the 1986/87 negotiations under Article XXIV:6. On 13 February 1986 the CONTRACTING PARTIES were notified (L/5936/Add.2) that the Schedules of Concessions of Portugal, Spain and of the European Community of Ten had been withdrawn. A modified duty was proposed as an offer by the Community based on a weighted average of the duties previously applicable together with annotated "blanks" which indicated that the products in question, which included oilseeds and oilcakes, were subject to renegotiation in accordance with Article XXVIII procedures. The offer made by the Community was for a tariff quota equal to the quantities traditionally imported by the twelve Member States bound at a rate lower than the weighted average of the former rates, together with an unbound variable levy on imports in excess of the tariff quota. In the course of these negotiations the Community support arrangements and their extension to Portugal and Spain were not challenged by the United States. For reasons of overall balance the Community bound the duty on oilseeds and oilcakes at zero, without quantitative limitation, whilst fully maintaining its system of aid for oilseed production. A bilateral EC-US agreement was concluded on this issue, which specified that "the GATT bindings of the EEC-10 ... will be restored and extended in view of the United States' recognition of the benefits which would result for certain United States exports". Accordingly, the only rights or expectations the United States had with regard to the concessions granted by the Community were those stemming from the 1988 concessions.

73. The United States considered that the Community's arguments on this point were without basis in GATT law or precedents. In the view of the United States, such an interpretation would, as had been pointed out by Australia in its submission to the Panel (paragraphs 123 to 125 below), appeared to benefit none of the contracting parties except the Community. It would accord the Community a special status vis-à-vis other contracting parties notwithstanding the fact that the Community as such was not a member of the GATT and was permitted by other contracting parties to represent the Community Member States in tariff negotiations and in the publication of a common tariff schedule for these members. Moreover, the effect of the argument would be to permit the Community to impair concessions in a non-transparent and fundamentally inequitable manner. The United States noted that the argument that Community concessions had replaced as a result of Article XXIV:6 enlargement negotiations had been rejected in the EEC Canned Fruit case. Such an argument would also lead to the absurd result, for example, that the recent withdrawal and replacement of Schedules by a host of contracting parties in the context of the Harmonized System would have the effect of extinguishing the rights and expectations with respect to these Schedules without prior notice. The Community argument would furthermore put the burden on other parties in GATT tariff negotiations to bring and settle all nullification and impairment claims before permitting a party to introduce a new Schedule, since otherwise these claims would expire. The United States submitted that there was no GATT basis for such a position, which would have a fundamental effect on the GATT balance of rights and obligations.

74. The United States noted with respect to the 1986/87 negotiations that it had flatly rejected the Community's proposal for a tariff quota for oilseeds and oilseed products. Moreover, in the EEC/US bilateral agreement on the outcome of the 1986/87 negotiations the Community specifically agreed that the EC(10)'s GATT bindings would be "restored and extended" to Portugal and Spain. In the view of the United States this agreement accurately reflected the understanding of both parties that concessions were being "restored" rather than extinguished and replaced. The same agreement also noted that certain other bindings would not necessarily be restored but that the United States retained Article XXVIII rights in further negotiations. The United States submitted that the Community did not consider in that instance that prior rights had been extinguished, notwithstanding that, formally, the Schedule of the Community had been withdrawn.

75. The Community pointed out, with regard to the agreed terms for the bindings, that in the notification to the GATT of the 1987 bilateral Agreement in question, the term "replaced" had not been challenged by the United States. Furthermore, the notion of "withdrawal of the concession" which was subsequently "replaced" had been accepted by the United States delegation in the 1973 negotiations. The Community also considered that the points made with respect to the legal status of the Community in relation to the General Agreement were purely academic. The Community was not asking for special privileges, it merely stressed that like any customs union it has had to carry out renegotiations on the occasion of each enlargement. The renegotiations were not a purely formal exercise. The value of a concession stemmed not only from the rate of duty but also from the trade involved. The fact that a concession which bound six countries henceforth bound nine or twelve countries necessarily brought a change in the value of the concession. Hence a concession that is withdrawn or replaced has legally been renegotiated even if it is replaced by a concession at the same bound rate. The Harmonized System exercise was a purely technical matter relating to nomenclature, whereas Article XXIV:6 negotiations involved the renegotiation of concessions on the basis of the provisions of Article XXVIII by virtue of the formal withdrawal of the former tariff Schedules and the establishment of a new Schedule.

76. With regard to the United States comments concerning the text of the bilateral Agreement on the outcome of the Article XXIV:6 negotiations, the Community observed that it would be incorrect to interpret the expression "restored and extended" in the way the United States had done. The two parties were not in agreement on the point, and the preamble to the Agreement recognized that it was "without prejudice to the views of either party in respect of Article XXIV:6". The Community considered that the GATT bindings were "restored" in that the previous offers of a zero binding with quantitative limitations (a tariff quota) were withdrawn in favour of a binding without limitations and extended - geographically - to the new member States, Spain and Portugal. With regard to the reference to the United States retention of its initial negotiating rights in certain cases, this was due merely to the fact that, at the time, the Community had not completed the negotiations for its products with the supplier countries. In such cases, the Community recognized, as was customary in tariff negotiations, that the United States had certain rights regarding what should be agreed with other countries at a later stage. In the Community's view this did not therefore justify the United States interpretation.

77. With regard to the Canned Fruit Panel the United States pointed out that the subsequent introduction of a subsidy system had been held to impair a 1974 concession of the Community but not a 1979 concession on the same item which post-dated the introduction of the subsidy system. The Panel's conclusion was that rights in the earlier concession survived even where a concession at a lower rate of duty was granted subsequently.

78. The Community noted that the Canned Fruit Panel only considered that the 1974 concessions in that case (originally granted in 1962) had been impaired since they were the most recent concessions in relation to the period the Panel was examining.

79. The United States submitted, however, that the 1962 and 1967 concessions in that case were not at issue because the later (1974) concessions were more valuable.

80. The United States submitted that on the basis of the relevant principles and precedents, it could not reasonably have anticipated that the value of the 1962 concessions would be nullified and impaired, and that the onus was on the Community to overcome this presumption. The United States could not reasonably have anticipated at the time the EC granted the concessions on oilseeds and meal that the current production aid régime, or indeed anything even remotely resembling it, would be instituted. In 1962, there was no Community programme either in operation, or under consideration, to subsidize either oilseed production or processing. Oilseeds were not covered by the Common Agricultural Policy and proposals for future extensions of the CAP did not include a programme for oilseeds.

81. The Community submitted that, without prejudice to its position with regard to the legal status of the 1962 concessions, there were three points to be taken into account in evaluating the expectation which the United States may have had. Firstly, several Member States of the original Community applied support and protection arrangements for the production of oilseeds and in 1961 a broad debate was initiated with the submission of formal proposals by the Commission, both within and outside the Community, on a Common Organization of the market in the fats sector. Accordingly, as early as 1962 the United States could not ignore that the Community was preparing to introduce a Community system to replace the national systems. The draft Commission proposals were notified to the GATT and the United States was aware of this. For historical reasons connected with the establishment of the Community, the Common Customs Tariff was negotiated before the introduction of the Common Agricultural Policy, but the Community's partners and in particular the United States were not unaware that the concessions negotiated at the Conference on Tariffs in 1960-61 were negotiated having regard to future changes, in particular in agriculture. This was why a Joint EEC/US Declaration was signed in March 1962 and notified to the GATT alongside the grant of concessions. This Declaration contemplated the occurrence of subsequent events which "will be such as to modify appreciably the basic conditions that currently govern relations between the United States of America and the EEC in all fields, particularly in the agricultural field".

82. On this point the United States argued that the issues giving rise to the March 1962 Standstill Agreements did not relate to oilseeds and that at that stage the Community had not announced an oilseeds policy. It also pointed out that the full text of the excerpt from the 1962 Joint Declaration quoted by the Community, which in its view hardly constituted evidence that the United States "reasonably expected" the introduction of a Community subsidy programme on oilseeds, let alone a programme such as that which now confronted the United States, read as follows: "The European Economic Community and the United States of America consider a series of events will occur during the year 1962 which in all probability, will be such as to modify appreciably the basic conditions that currently govern relations between the United States of America and the EEC in all fields, particularly in the agricultural field, and which will make advisable a new examination of these relations" (portion not quoted by the Community underlined). The United States also noted that the first public reference to an EEC oilseeds programme did not appear until November 1961, more than a year after the EEC made its proposal for duty-free treatment of oilseeds. The reference was an oblique comment made in passing in the context of a long address on the general developments in the Community since the Treaty of Rome. It appeared from the speech that, at the time, proposals for a Community programme in the fats sector were in early draft stage and still under initial consideration and discussion. The EEC did not enact legislation for the oilseeds sector until 1966, and even then, there was no expectation by other countries that this EEC programme would cause EEC production of oilseeds to expand significantly above its historic levels.

83. Secondly, the Community contended that whatever the legal validity of the original expectation it was improper to claim definitively to "freeze" that legitimate expectation and maintain that the competitive relationship existing at the time of the negotiations was guaranteed and that any modification to the competitive relationship resulting from subsequent government measures should be presumed to come as a surprise to the party that negotiated that concession. Moreover, a competitive relationship may be affected not only by the country which granted the concession but also by the policies of the country which negotiated it, as in the case of United States price support and export assistance programmes on soyabeans. Expectations may also be affected by embargoes or threats of embargoes and could induce the party granting the concession to reassess the reliability of its principal suppliers and to enhance its own security of supply.

84. Thirdly, the Community pointed out that the expectations which the United States may have had in 1962 regarding the future development of oilseed imports into the Community, whatever method of assessment is used, had been more than satisfied by the actual trend of Community imports. These imports had quadrupled since 1966. The Community argued that its imports would have been significantly lower had the level of oilcake utilization in the Community not developed, because of an excessive level of consumption, to a point which was systematically 50 per cent higher than in the United States (see also paragraph 93 below). This was not intended to suggest that the value of tariff concessions should be frozen in terms of the original assessment or expectation obtaining at the time they were negotiated. It was however clear that just as a contracting party's expectation regarding the original value of a concession could not be fixed once and for all, it should equally not be possible to freeze definitively expectations regarding the original competitive relationship between imported and domestic products.

85. The United States noted that while Community imports had increased appreciably since 1962, the measure of a contracting party's reasonable expectations with regard to a concession was not a particular level of sales, but rather a question of "trading opportunities". A contracting party would not have legitimate grounds to complain in GATT if trade declined or was even eliminated because of national disaster, shifts in consumer preference or the development of new or better products. The corollary, however, was that a party granting a concession did not have the right (unless the provisions of Article XIX were invoked) to take measures to offset the concession where there is a large growth in trade. The United States also considered that whatever the causes underlying the expansion of Community oilseed imports since 1962, there was no basis for concluding that there was an "excessive" or a "correct" level of consumption of protein feeds in the EEC. The particular economic environments in the Community and in the United States simply dictated different patterns of protein feed usage. Moreover, the implications of the Community's thesis that a party granting a tariff concession could be permitted to determine when the level of consumption is "excessive" would be ominous for the continued proper functioning of the GATT system.

86. The Community submitted that the July 1973 embargo, in particular on exports of soyabeans by the United States, which was introduced without consultation with the United States' trading partners, was highly relevant to the question of reasonable expectations: (i) the embargo lasted from 28 June 1973 to 2 July 1973 but was replaced from 2 July by quantitative export restrictions which were applied up to 1 October 1973; (ii) the Community quoted official United States reports in which it is recognized that the measures taken by the United States undermined importing countries' confidence in the United States as a reliable supplier of oilseeds and prompted them to diversify their suppliers; and (iii) the Community stressed that the legislation currently in force in the United States (Food Security Act, 1985) enabled the United States to restrict and prohibit exports. It also noted that in 1977 the United States adopted but subsequently abolished export control regulations on soyabeans, that an embargo on exports of soyabeans and other agricultural products to the Soviet Union was introduced in 1980, and that the possibility of an embargo recurred in 1988.

87. The United States considered that the claim that the Community subsidy system was caused or justified by the 1973 embargo was without merit and not supported by the facts. Firstly, the Community subsidy policies were established seven years before the embargo with the explicit purpose of "offsetting" the value and benefits of the tariff concessions granted in 1962.

88. Secondly, the 1973 embargo lasted for a period of five days (27 June to 2 July 1973), following which exports were permitted subject to export licensing requirements and initially to certain quantitative restrictions. These requirements and all other restrictions were terminated on 1 October 1973. Neither the embargo nor the export controls had an appreciable effect on the total amount of United States exports to the Community. In 1972/73 United States exports to the Community increased by 4.95 million tons in the case of soyabeans, and by 80,000 tons in the case of soya meal. In fact, in 1972/73 there was neither drought or reduced production of soyabeans in the United States. In 1972/73 both yields and production increased in the United States, and world soyabean production reached a record high. Finally, the United States considered the assertion that matters came close to an embargo in 1988 to be completely without any basis in fact. Despite the severe drought conditions in the United States in 1988, there was no attempt whatsoever to limit exports of soyabeans or soyabean meal. Thus the facts simply did not support the Community argument that its subsidy practices were justified because the United States had been an "unreliable supplier".

89. The United States submitted that prior to the 1980s the effects of the Community system on production were modest relative to the overall growth in demand for oilseeds. Community production aids, while always generous, were not granted at levels high enough to induce producers to increase acreage or production of oilseeds and other protein ingredients in animal feeds. However, the 1980s have seen a dramatic surge in Community production, accompanied by a corresponding decline in the share of imports into the Community market. The detrimental effects of this subsidy system on imports became most conspicuous in the 1980s, when relative support levels were increased to the point of eliciting a very large surge in domestic production with consequent adverse effects on imports. The United States further submitted that there was ample evidence that the Community system of producer subsidies and processor incentives had upset the competitive relationship among domestic and imported oilseeds and other protein animal feed.

90. Specifically, the United States submitted that the EEC system of production and processing aids has upset the competitive position of imported oilseeds and oil meals vis-à-vis EEC domestic oilseed and animal feed proteins in five principal ways. Firstly, the EEC system has stimulated production of oilseeds and pulses to levels far in excess of those that prevailed before the incentives were established, with particularly large increases in the 1980s and with competing imports having been displaced. In the view of the United States these sharp increases were attributable largely to the system of incentives, both absolute and relative, that induced Community producers to devote substantially increased crop land to the production of oilseeds and pulses. Improved yields have contributed in only a minor way to the overall production increase. EEC oilseed production increased from approximately 300,000 tons in 1962 to more than 10 million tons in recent years. Production of pulses increased from 1 to 4 million tons.

91. The Community considered that the quantities produced in the Community and the trend in production were not sufficient in themselves to explain the trend in Community imports. Nevertheless, Community production of oilseeds had not displaced imports because in the period between 1966 and 1988: (i) an increase in oilseeds production over the previous year coincided with an increase in Community imports in fourteen cases (64 per cent of the total number of cases); (ii) an increase in Community production coincided with a fall in imports in five cases (23 per cent); (iii) a fall in production coincided with a fall in imports in two cases (9 per cent); and (iv) a fall in production coincided with an increase in imports in one case only.

92. In this regard the United States noted that an analysis of imports, production and consumption, as opposed to an analysis based on the absolute volume of imports, confirmed that imports had been losing market share over the past decade. This was illustrated, inter alia, by the detailed data reproduced in Annex E.

93. The Community submitted that the following factors must also be taken into account when attempting to explain objectively the trend in imports of oilseeds and oilcakes. Imports of oilseeds depend to a certain extent on the situation on the export markets for both oils and oilcakes. The Community has a crushing capacity greatly exceeding its internal needs. This capacity is mobilized - triggering off imports - when opportunities present themselves. Community imports of such products have been greatly stimulated by the rise in the consumption of compound feedingstuffs in the Community following the development of intensive stockfarming and the general improvement in the quality of animal feed. The trend in such imports was also the direct result of the price ratios existing between these products and other feeds (in particular cereals). The use of oilcakes to the detriment of other products was artificially encouraged by a series of determining factors. These included: price ratios within the Community between oilseeds and cereals which resulted in systematically higher levels of oilcake utilization in the Community (in the period 1980/81 to 1988/89 an estimated 8.2 million tonnes less oilcake would have been used in the EC-10 if the average incorporation rate for oilcakes in the Community were the same as in the United States); the trend in the structure of animal production (e.g. feedlot operations), which has meant that a higher protein content was required in animal rations; the development of cereal substitute imports with a low protein content also encouraged greater use of oilseeds (e.g. 7.5 million tons of manioc and sweet potato imports annually called for additional imports of nearly 2 million tons of oilcakes); and a similar phenomenon was associated with the current increase in the use of oils and fats with zero protein content in the manufacture of compound feedingstuffs.

94. The Community stressed the importance of taking quantitative factors into account. In this regard it submitted that an economic analysis of the situation in 1988, a year in which imports declined marginally, indicated that there was no cause-and-effect relationship between the decrease in imports and the increase in domestic production. In that year world production of oilseeds declined by 9.2 million tons (United States production declined by 10.6 million tons) and world prices of soyabeans and cake increased by 110 per cent. Because of price interrelationships this price increase discouraged the use of soyabeans in Community feedingstuffs. A decline in soya oil prices on the world market (attributable in the view of the Community to the United States Export Enhancement Program) reduced processors' margins in the Community and led them to cut their purchases of beans. Finally, Community exports of soyacake dropped substantially owing to the discontinuation of Community exports to the Soviet market. All these factors explain the fall in Community imports of soyabeans and cake in 1988, a fall which did not result from increased Community production since this in fact declined in 1988.

95. The United States suggested that the foregoing arguments with respect to the Export Enhancement Program were diversionary and flawed. EEP sales of vegetable oils were authorized in response to the blatant and excessive subsidies in the Community oilseed sector. These exceeded more than 3 billion dollars annually. In 1987/88 and 1988/89 combined 230,000 tons or about 14 per cent of total United States exports were subsidized under the Export Enhancement Program. EEP shipments in 1987/88 (208,000 tons) represented 1.1 million tons of soyabeans compared with a total United States soyabean crop of more than 50 million tons. It was submitted by the United States that the existence of the Export Enhancement Program did not explain why the share of all imports in the Community market had been declining throughout the present decade whereas the share of Community production had been increasing.

96. The Community considered that EEP subsidies had led to a drop in United States exports of oilseeds and oilcakes and to an increase in oil exports, as well as substantially altering the relationship between United States and Community prices of oils and oilcakes. In the Community's view, these two factors explained recent developments in the trade between the United States and the Community.

97. Secondly, the United States contended that the Community production aids in the form of minimum grower prices had upset the competitive relationship between domestic and imported products because such prices have consistently been set above world market levels, thus insulating Community production from world price movements (Annex D refers).

98. The Community responded that this contention called into question the very principle of subsidization, since it could not be disputed that by its very nature any subsidy insulated and protected domestic production from the world market to a greater or lesser extent. Consequently, the United States argument that subsidization insulated and protected domestic production, upset the competitive relationship between imported and domestic products and consequently affected the scope of the concession, would imply that the subsidization of bound products or products entering into competition with bound products was prevented. This argument was so novel and extreme that it contradicted the practice of most contracting parties, including that of the United States. Subsidizing domestic production at higher than world market prices has long been an established practice among contracting parties, as it was in compliance with Article XVI. The fact that the United States granted subsidies on nationally produced products imports of which were bound and that periodic adjustments of these subsidies took no account of the competitive relationship existing when the concessions were granted (since the levels of support were regularly re-evaluated in the United States) clearly showed the slight credence the United States attached to that argument and consequently deprived it of the right to call for its application and observance by other contracting parties.

99. Furthermore, the Community pointed out that the conditions governing observance of Article 16 obligations were spelled out in the provisions of the Subsidies Code, particularly in Article 8 which provided that, in assessing the adverse effects that may arise from subsidies, the existence or absence of import displacement must be taken into account. With regard to the methods for calculating Community aid, as perceived by the United States, the Community pointed out that there were no objective data constituting what the United States described as world rapeseed and sunflowerseed prices. The Community had cited several examples of situations where, de facto, no such prices existed. It pointed out that, furthermore, the price policy as applied by the Community authorities corresponded to a specific production structure in the Community and that the so-called world market price could not be considered a parameter to be taken into account in determining the policy. With regard to the United States' assertion that a minimum price was taken into account, the Community recalled that no such price existed for rapeseed and sunflowerseed.

100. Thirdly, the United States contended that Community aids to processors in the form of payments to oil crushers who purchase the overwhelming majority of domestic oilseeds, established an impenetrable margin of protection analogous to the production aids which were found in the 1985 Canned Fruit Panel to have upset the competitive relationship and to have nullified or impaired the benefits of the concessions in that case. As a result of the method employed in the calculation of payments to processors, imported oilseeds were unable to improve their competitiveness vis-à-vis domestic oilseeds in the Community processing market. The United States further argued that under the Community system a decline in the lowest obtainable price of the imported products was automatically converted into a correspondingly higher level of payments to processors.

101. The Community considered that the United States argument was unfounded. In its view, the Community had demonstrated, in relation to the complaint under Article III, both that the criteria for the calculation of the aid were devised simply to offset the extra cost to processors of using products of Community origin which were subject to higher internal production prices than those of imported products, and that the methods employed in making this calculation were neutral. The Community also recalled that the aids in question were paid at a later marketing stage for reasons of administrative convenience.

102. Fourthly, the United States contended that the method by which the level of processing aids was calculated by the Community was wholly artificial and provided a bonus payment to Community crushers for purchasing domestic rather than imported oilseeds. The spread between the institutional and fictitious market prices upon which the aid was calculated versus the difference between real transaction and actual world market prices, provided an additional impenetrable margin of protection for Community oilseeds and pulse producers, further impairing the value of the concessions by guaranteeing that Community products would always be purchased first, and in preference to, imports. Moreover, as growth in the Community oilseed production sector (spurred on by producer subsidies) had exceeded increases in demand, domestic oilseeds had captured an increasing share of the Community market.

103. The Community considered that this contention was at variance with the facts as demonstrated in connection with the complaint under Article III and that therefore the Community aid could not constitute an incentive for the purchase of Community oilseeds in preference to imported oilseeds. The Community also emphasized that, although there was a difference between the transaction price and the price used in calculating the aid, in practice, the first aim was to narrow the difference (see Annexes B and C). Furthermore, the difference between the two prices was also due to objective criteria concerning the state of the product, and the difference in presentation between farmgate products and imported products.

104. Finally in this regard the United States considered that the Community system of minimum grower prices for certain pulses and related incentive payments to feed compounders had substantially increased domestic production of these products and had led to the replacement of closely related and directly substitutable imported soyabean meals and meals produced from imported soyabeans, thus nullifying and impairing the benefits of the Community concessions on these products. The United States also considered that Community subsidy arrangements for the incorporation of skim milk powder by animal feed compounders also nullified and impaired the bindings.

105. The Community considered that the extension of the non-violation concept to prevent the subsidization of bound or unbound products that merely competed with imported oilseeds or oilcakes was not justified. With regard to milk powder, the Community pointed out that the extension of the non-violation concept to prevent the subsidization of unbound products was not justified. As regards high-protein products, the Community argued that since these products merely competed with imported oilseeds and oilcakes, the extension of the non-violation concept to the subsidization of high-protein products was also unfounded. The range of products to be considered in the present case should be limited to like products that were really comparable such as oilseeds and oilcakes. In this regard it was also noted that the 1955 Review Session Report referred to the much narrower concept of subsidies on "the product concerned".

106. The United States considered that the argument that pulses did not compete with imported oilmeals or meals derived from imported soyabeans was untenable given the objectives of the subsidy scheme, since it was noted in the preamble to the relevant EEC Regulations that "the removal of import barriers would leave the Community market in oilseeds, oleaginous fruit and their oils without defence against disturbances caused either by certain imports from third countries or by disparities, resulting from action by third countries, between prices for products derived from oilseeds and oleaginous fruit and prices for these seeds and fruit".

107. The Community reiterated that steps had been taken within the Community to remedy the situation resulting from the trends in consumption of oilseeds. Community production of the three oilseeds, which had reached 11.9 million tons before the introduction of stabilizers, would be 9.9 million tons in the current year. More significantly 500,000 hectares of land had gone out of production of oilseeds due to the effect of the stabilizers. In the Community's view there must be limits to the granting of aids to production linked to the requirements of Article III as regards over-compensation and limits as to the effects that production aids can have on imports. The rule of the Subsidies Code was that if there was no displacement or impedance then these "limits" had been respected. If there was displacement then action was required. This was in fact what the Community had done by introducing stabilizers which constituted an effective curb on the risks of displacement.

108. The United States considered that the Community system of stabilizers failed to address the fundamental issue of over-production and rejected the contention that the system of stabilizers constituted a remedy for the Community's over-production problem. In the view of the United States the system had, if anything, locked in levels of production more than sufficient to nullify and impair benefits accruing to the United States as a result of the 1962 concessions.

109. With respect to the relationship between Articles II and XVI of the General Agreement, the Community submitted that the criteria relating to upsetting the competitive relationship and reasonable expectation, which were based on 1950's cases that were concerned with very particular and proximate situations, would mean, if applied in the present case, that a contracting party would, de facto, be limited in granting subsidies on a bound product, or even on an unbound but competitive or closely related product, since such subsidization could give rise to non-violation complaints. This would therefore mean granting protection to tariff concessions under Article II that went far beyond the precise rules of that Article. It would amount to a re-writing of the GATT rules without any negotiation among contracting parties. However, this did not mean that a contracting party could make unlimited use of Article XVI, the essential point being that it was necessary to watch out for possible adverse effects that may arise when subsidies are granted.

110. The Community considered that the means for overcoming any conflict between the provisions of Articles II and XVI were provided by the Subsidies Code which was explicit on three points. First, it was drafted to "interpret the provisions of Articles VI, XVI and XXIII of the General Agreement". Secondly, the Code explicitly dealt with Article II tariff concessions since Article 8.3(b), which dealt with the specific problem of the effects of subsidies, provided in the footnote 24 thereto that: "benefits accruing directly or indirectly under the General Agreement include the benefits of tariff concessions bound under Article II of the General Agreement". In the Community's view it therefore provided that in the case of tariff concessions granted under Article II of the General Agreement the provisions of the Code should guide the interpretation to be followed. Thirdly, in Article 8 the Code sets out the criteria that should be used to assess the present complaint and to establish the adverse effects for third countries that may arise from the grant of a subsidy by a contracting party. It stated clearly that to judge these effects it was necessary to assess whether or not there has been displacement of imports. This was not to suggest that the present case should be dealt with through the machinery of the Code. A contracting party was free to choose the ground on which it wished to pursue its complaint, but the present case should be weighed up in the light of the provisions of the Code as being among the sources of law applicable to the present case. As between the parties that signed it the Code created in the Community's view a reasonable expectation as to the criteria that might be used to judge Article XXIII complaints. On the recognized principle of the hierarchy of legal texts, an international agreement such as the Code had at least as much value as a panel report and having been concluded in 1979 the Code took precedence over earlier panel reports and resolutions.

111. The United States submitted that it would be inappropriate and unprecedented for a GATT panel such as the present one to decide questions of GATT rights and obligations by applying the Subsidies Code. Although in the United States view the outcome of this complaint would not be different if brought to a Subsidies Code panel, the fact remained that the Panel's mandate in the present case was to examine the complaint in the light of the relevant provisions of the GATT. The United States and the EC were both signatories of the Subsidies Code, but most contracting parties to the GATT were not. Deciding disputes brought under the GATT differently based on whether some or all of the disputants (or others who might have rights in the matter) were also members of a Tokyo Round code could create a fractured GATT system. While the Subsidies Code could not be considered relevant for the above reasons, the Code was clearly not intended to reduce discipline over subsidies or to encourage their distortive effects relative to the GATT. Rather, the intent of the Subsidies Code, like other codes arising out of the Tokyo Round, was to reduce or eliminate non-tariff trade restrictions and distortions. The Subsidies Code recognized that subsidies can cause nullification or impairment, and notes that such nullification or impairment can arise, inter alia, from displacement of imports. Moreover, the United States did not share the view that Code provisions should be interpreted to narrow GATT rights.

112. The Community had stressed that it was not a question of "restricting" rights stemming from the General Agreement but rather of "specifying" them. The Code was an instrument accepted by both parties to the dispute for interpreting and applying the provisions of the General Agreement and in particular Articles II and XVI. In this case, it was a question of protecting "rights" stemming from Article XVI for the country granting the subsidy (and not of restricting them) while taking into account the "legitimate expectations" of the country which negotiated the concession (and not its rights in the strict sense) stemming from the grant of Article II concessions.

113. The Community submitted that the principles that are clearly set out in the texts and in the agreements that have been concluded should govern the present case and that recourse to the "non-violation" concept under Article XXIII:1(b) should remain exceptional, since otherwise the trading world would be plunged into a state of precariousness and uncertainty. It was furthermore no accident that the preamble to the Subsidies Code states that it is necessary to provide "greater certainty" and "greater uniformity" with regard to the interpretation of Articles VI, XVI and XXIII. This was not to say that one provision should be given precedence over another but rather that it was necessary to look at everything as a whole, to take account of all the elements which make up the delicate balance on which the General Agreement has been built and developed, and therefore to also take account of Article XVI.

114. The United States concurred in the proposition that non-violation nullification or impairment should remain an exceptional concept. Although this concept had been in the text of Article XXIII of the General Agreement from the outset, a cautious approach should continue to be taken in applying the concept. The United States did not consider that any change of governmental policies, even if it has harmful trade effects, constitutes non-violation nullification or impairment. A contracting party does not have a reasonable expectation that a contracting party which grants it a tariff concession will not change general income tax rates. The complaint in the present case, however, is well grounded in the traditional approach of the GATT to non-violation nullification or impairment since most past cases have, like the present case, concerned impairment of tariff concessions through significant changes in governmental subsidy policies or measures affecting the competitive position of the product concerned.

115. At a general level the Community submitted that the United States complaint raised two fundamental issues: one was the extent to which GATT tariff concessions were protected having regard to other provisions of the General Agreement and in particular Article XVI thereof; and the other was whether there were limits on the right to subsidize domestic production in competition with imported products in respect of which the tariff was bound. The Community considered that the 1955 Review Session Report and the related precedents were adopted at a stage in the evolution of GATT practice where an overall systematic reassessment of the schedules of concessions in relation to the expectations of the various parties occurred at relatively frequent intervals. At that stage, the problem of dealing with expectations which dated back several decades did not therefore arise. Moreover the reference in paragraph 14 of the 1955 Review Session Report to negotiations on matters, such as subsidies, which might affect the practical effects of tariff concessions clearly indicated, in the Community's view, that in the Working Party's mind protection afforded by concessions in relation to domestic subsidies was limited, temporary and negotiable. Whatever the scope of the original expectation of the country which negotiated the concession, it could therefore not be frozen once and for all nor shielded for an indefinite period from the legitimate rights recognized by the General Agreement.

116. The Community considered that the exercise of legitimate rights under relevant GATT provisions should not be considered unusual or unforeseeable since to do so would imply that there was an implicit renunciation of the exercise of legitimate rights or that there was a promise of reparations where such rights were exercised. Thus the view had been taken in the Panel Report on Chilean Apples (L/6491, April 1989) that imports of bound products could be restricted under Article XI:2 without giving rise to compensation. If therefore the exercise of a right to resort to otherwise specifically prohibited measures did not imply compensation, then a fortiori neither did the foreseeable exercise of the right to use subsidies under Article XVI. The Community submitted that for these reasons the protection of the benefits accruing from concessions could not be extended to the exercise of a right recognized by the General Agreement being affected de jure or de facto without a change in the relationships between the various Articles of the GATT and thus in the balance between the rights and obligations of contracting parties.

117. The Community also noted that the application of the concept of non-violation impairment in the case of subsidies posed special problems for the dispute settlement procedures. The pre-existing competitive relationship generally could not be re-established without discontinuing the subsidy and in the absence of specific recommendations the negotiation of compensation aimed at re-establishing the benefits impaired would be problematic. In the Community's view the concept of non-violation impairment in relation to subsidies affecting tariff concessions was superfluous and legally disputable, since it would involve the notion of rights and obligations being superseded by considerations of equity and subjective expectations. The matter should therefore be dealt with in accordance with Article XVI and the relevant principles governing its interpretation and application.

118. The United States noted that the Community's approach was that the most important GATT principle in this dispute was that Article XVI did not prohibit subsidies, that this absence of a prohibition should be converted into a right to subsidize and that other GATT provisions or interpretative precedents could not be applied to limit this right. The United States considered this approach to be patently incorrect on the grounds that the absence of a prohibition did not create an affirmative right, that there was no basis for claiming that the absence of a prohibition in one GATT Article should take precedence over rights and expectations of contracting parties with respect to other GATT provisions and negotiated commitments. Article XXIII itself recognized in clear terms that nullification or impairment may exist in the absence of any contravention of specific GATT obligations and GATT provisions and rulings established that a finding of nullification or impairment could and should be made in the present dispute. In essence what was claimed by the Community was that GATT provisions and rulings should be re-interpreted or rejected in order to facilitate subsidization and to make subsidization rather than tariff reduction GATT's highest principle.

119. Finally the United States noted that the CONTRACTING PARTIES had traditionally not recommended the elimination of impairing actions in non-violation cases and that compensation or retaliatory action were alternatives which would be less desirable for both parties. What the United States sought therefore was a remedy with respect to its non-violation complaint that would restore the benefit of the concessions.

120. Argentina considered that the system of subsidies under which oilseeds were produced in increasing quantities and marketed in the Community had resulted, inter alia, in the displacement of imports, particularly from 1980 onwards, and that this constituted prima facie nullification and impairment of tariff concessions negotiated by the Community within the framework of the General Agreement. Argentina also considered that the system of subsidies to processors was inconsistent with Article III:4 and 8(b).

121. Argentina considered that legal insecurity would result in regard to the rights accruing to contracting parties which have negotiated a concession in good faith if a concession guaranteeing market access could be modified substantially by subsequent regulations without this having been agreed or explicitly indicated. Otherwise the initial negotiating conditions could be unilaterally altered by internal regulations and this would be in contradiction with the principle of foreseeability and stability that constituted the basis of any international agreement. This expectation of foreseeability and stability of concessions had been confirmed in the 1955 Review Session Reports and is confirmed in various provisions of the General Agreement including Article XXIV. Negotiations under Article XXIV:6 had to fulfil the requirements of paragraph 5(a) of that Article concerning the non-impairment of the situation existing prior to the formation or enlargement of a customs union. This led to the conclusion that if the negotiating parties confirmed the concessions originally negotiated in 1962, without any explicit modifications, the principle of foreseeability and stability in regard to the maintenance of the regulations of commerce existing in the EEC at that date must prevail in order to protect the benefits deriving from the concession.

122. The Community considered that the argument relating to Article XXIV:5(a) was not admissible because the United States complaint did not address itself to Article XXIV:5. The Community also considered that it was incorrect to regard the Article XXIV:6 enlargement negotiations as a purely formal exercise or one that was confined to new concessions.

123. Australia considered that the Community subsidies to processors contravened Article III:4 and did not qualify for the exception in Article III:8(b). With regard to the status of the Community's 1962 concessions on oilseeds, Australia submitted that the Community's position could only lead to one of two logical conclusions. Either the EEC was claiming that it has a unique status in the GATT in that on each occasion that it adds additional members, it automatically abrogates all prior obligations entered into by itself, as an entity, or by individual Member States, or it believes that the unilateral act of withdrawal by any contracting party of its GATT schedule or an individual concession automatically has that effect even if that concession is subsequently reinstated through negotiations conducted under Article XXVIII procedures.

124. Australia considered that there was no basis for the Community claiming to have unique privileges or rights for itself or its schedules in the GATT. On the contrary, the status of the Community schedules in the GATT was somewhat obscure. Article II referred only to the schedules of contracting parties. As the EEC Member States individually were contracting parties, it must be presumed that the EEC has a single schedule for all twelve members by custom rather than by right.

125. Australia considered that the second proposition should also be rejected. If it were to be accepted that any contracting party or the EEC was able at any time of its choosing to abrogate all of its non-rate commitments by the act of withdrawing its schedule or individual concessions, obligations relating to Article II:1(b) and the expectations of other contracting parties that concessions would not be nullified or impaired by other measures, would be altered each time Article XXVIII was used to withdraw concessions, even though these may be replaced by alternative concessions. There would be an incentive for contracting parties to regularly withdraw and replace their schedules as this would enable them to clear existing non-rate obligations. The provisions of Article II are of fundamental importance to the GATT. To subordinate the intentions of this Article to a technical or strict legal interpretation could only have the effect of weakening the GATT.

126. The Community considered that the Australian argument, on the fact that the single Community schedule was merely a custom and not a right, was a purely academic one and led to a denial of the practical effect of recourse to Article XXIV:6 and even the legal existence of customs unions in GATT. In any case, it was without practical legal value insofar as all the Community's partners in GATT had agreed to negotiate on a single Community schedule in the course of three rounds of negotiations. Furthermore, it followed from this acceptance of renegotiations (and their conclusions) that a new balance of mutual advantages had been established within the meaning of Article XXVIII. Consequently, the legitimate expectations of the negotiations were those of the renegotiations, and it was not possible, as Australia did, to assimilate non-tariff commitments, negotiating "expectations" and "rights" under Article II:1(b). Furthermore, the fact that Australia wished to reject too strict a legal interpretation so as to ensure that Article XXVIII was not invoked in order to modify existing non-tariff obligations (including those stemming from initial negotiating expectations) resulted in the denial of the elementary rights stemming from Article XXVIII, whose precise purpose was to allow a renegotiation of commitments (inevitably implying a new assessment of negotiating expectations). Finally, the Community stressed that it was not seeking recognition of a special status for itself from the fact that on each of its enlargements it had had to engage in renegotiation of the tariff commitments undertaken earlier by the contracting parties constituting the enlarged Community. The fact that the Community had been enlarged on three occasions, which implied Article XXIV:6 negotiations, was merely a historical circumstance, and in no way a form of legal particularism.

127. Brazil considered that for foreign competitors the Community market had shrunk because of increased EEC production encouraged by subsidies and that exporters faced artificial disadvantages in relation to domestic producers because of the preferential absorption of their output. Processors were stimulated to pay guaranteed minimum prices regardless of conditions prevailing in the market. In 1986/87 European soyabean growers received at least US$548 per ton, whereas the amount paid to the processors enabled them to retain a margin of US$70 per ton. Brazil also considered that as a competitive exporter to world markets the difficulties it faced had been exacerbated by the United States Export Enhancement Program.

128. Canada observed that the Community oilseeds régime as it related to rapeseed had stimulated production within the Community and had substantially reduced the EEC market for imports. Furthermore, as indicated in an analysis of EEC prices presented by Canada, the system guaranteed higher profits to Community oil producers when they purchased rapeseed of EEC origin in preference to imported rapeseed enabling them to export their oil at more competitive prices on the world market.

129. Canada submitted that the requirements with respect to the lodging of securities in respect of imported rapeseed resulted in financial burdens which constituted an internal charge inconsistent with Article III and that the operation of the processor subsidy arrangements were inconsistent with Article III and were not covered by the exemption under Article III:8(b). In particular Canada considered that for the purposes of Article III:8(b) the term "producer" should be construed according to its common usage. (One is the "producer" only of the products one makes and sells. Raw material suppliers are not producers of the end product; rapeseed growers are not producers of rapeseed oil or meal, etc.) Thus, payment of the rapeseed crushing subsidy to oil/meal etc. producers did not allow the EEC to sustain an argument that the subsidy regulation qualified for the exemption provided under Article III:8. This exemption would allow for a payment of a subsidy exclusively to domestic producers, which in this case are the EEC rapeseed growers. Article III:8 thus did not provide the basis for limiting the granting of the subsidy to the purchase of EEC-produced rapeseed to the exclusion of imported rapeseed and the practice was clearly inconsistent with the stated national treatment obligations in Article III:4.

130. The Community considered that the argument raised with respect to import deposits raised a matter that was not brought to the attention of the CONTRACTING PARTIES when the Panel's terms of reference were established. These issues should be confined to matters raised by the parties to the dispute.

131. The legal issues before the Panel arise essentially from the following facts. In 1962, as an outcome of tariff negotiations with the United States and other contracting parties in the framework of the Dillon Round, the Community included in its Schedule of Concessions in accordance with Article II of the General Agreement duty-free tariff bindings for oilseeds and oilcakes (hereinafter referred to as "oilseeds"). The bindings were the result of general negotiations on the reduction of tariffs and of negotiations rendered necessary under Article XXIV:6 as a result of the creation of a common external tariff by the Community replacing the tariffs of the individual member States. On the occasion of each of its successive enlargements the Community conducted negotiations based on Article XXIV:6 and established a new Schedule of Concessions replacing the previous Community Schedule and the Schedules of the new member States, most recently in 1986/1987. The duty-free tariff bindings for oilseeds were maintained after each of these negotiations.

132. In 1966 the Community established a common organization of the market for rapeseed and sunflowerseed under Regulation No. 136/66. This Regulation has since been amended and complemented on numerous occasions but its principles have remained unchanged. The introductory clauses in Regulation No. 136/66 state that access to imported oilseeds duty free had made it easier for the Community processing industries to obtain raw materials at reasonable prices but that the Community producers of oils and fats "would be adversely affected if the effects of the removal of import barriers were not offset by other measures." The market organization for the oilseeds concerned is based on a price system, but it does not provide, in contrast to other market organizations, for any import levies. Under the Regulation the Community fixes a "target price" and an "intervention price" for oilseeds. The target price is established at a level which, according to Article 23 of the Regulation, "is fair to producers, account being taken of the need to keep the Community production at the required level". The intervention price determines the price level at which the intervention agencies established in the framework of the market organization have the obligation of buying domestic oilseeds. The intervention price, according to Article 24 of the Regulation, must be "as close as possible to the target price", allowing however for certain reductions to take account of adaptation to general and local market fluctuations and transport costs within the Community.

133. Article 27 of the same Regulation provides for subsidies to be paid on rapeseed and sunflowerseed harvested and processed within the Community, to make up for the difference between the target price and the world market price whenever the target price is higher than the world market price, which has generally been the case. According to Article 29, the world market price is "calculated" on the basis of the most favourable purchasing opportunities and may be adjusted to take the prices of competing products into account. In practice the amount of the subsidy is calculated using reconstructed prices and adjustment factors because, as explained by the Community, world market prices for these products are either unreliable or do not exist. Eligibility of oilseeds for the benefit of the subsidy provided for by Article 27 is currently determined by Council Regulation No. 1594/83, as amended. Under this Regulation subsidies are paid to oil processors and producers of animal feeds (hereinafter referred to as "processors") whenever they establish by documentary evidence that they have transformed oilseeds of Community origin. It appeared from the information provided to the Panel that the oilseeds market has functioned on the basis of the payment to processors, which has rendered intervention purchases largely superfluous.

134. In 1974, a guide/minimum price scheme based on the same principles was introduced for soyabeans under Regulation No. 1900/74. This scheme was subsequently replaced or amended and the relevant rules are found at present in Regulation No. 1491/85. In the introductory clauses of Regulation No. 1900/74 it was stated that appropriate measures of support should be provided to promote the development of the production of soyabeans which was subjected to direct competition from soyabeans imported from third countries duty free. Under Regulation No. 1491/85 subsidies are provided to make up for the difference between the "guide price" determined by the Community and the world market price for soyabeans. The payment of the subsidy to processors or first purchasers is conditional on the conclusion of contracts with Community producers providing for the payment of a price at least equal to the "minimum price".

135. The United States claims that the payments to processors are made on conditions that give them an incentive to purchase domestic rather than imported oilseeds. The United States considered this to be contrary to Article III:4 of the General Agreement which provides that:

The United States further claims that most of the economic benefits generated by the payments to processors accrue to the producers of oilseeds and that the resulting incentive to produce oilseeds in the Community has impaired benefits it could reasonably expect to accrue to it under the tariff concessions for oilseeds. The United States therefore considered that it was entitled to redress under the provisions of Article XXIII:1(b) and 2 dealing with the impairment of benefits accruing under the General Agreement. The Community considers both claims to be unfounded.

136. The Panel first examined the United States' claim that the payments to processors generate an incentive to purchase domestic rather than imported oilseeds inconsistently with Article III:4. The Panel noted that the Community considers the payments made to processors to be covered by Article III:8(b) which provides that Article III "... shall not prevent the payment of subsidies exclusively to domestic producers ...". The Community argues that the payments to processors are made conditional upon the transformation or purchase of domestic oilseeds sold at prices determined by the Community Regulations, are therefore passed on to the producers of domestic oilseeds and consequently constitute producer subsidies within the meaning of that provision.

137. The Panel noted that Article III:8(b) applies only to payments made exclusively to domestic producers and considered that it can reasonably be assumed that a payment not made directly to producers is not made "exclusively" to them. It noted moreover that, if the economic benefits generated by the payments granted by the Community can at least partly be retained by the processors of Community oilseeds, the payments generate a benefit conditional upon the purchase of oilseeds of domestic origin inconsistently with Article III:4. Under these circumstances Article III:8(b) would not be applicable because in that case the payments would not be made exclusively to domestic producers but to processors as well. The Panel noted that the payments may constitute the grant of a benefit to processors conditional upon the purchase of domestic oilseeds in two situations:

138. As to the first point it appeared from the evidence before the Panel that under the Community's intervention schemes for rapeseed and sunflowerseed, processors receive a subsidy based on a target price but they need not demonstrate that they in fact paid the target price to a Community producer. In all cases in which processors are able to purchase Community oilseeds at a price below the target price or the market price objective aimed at by the Commission (Annex B, Sections I and II, paragraph 5 refer), the subsidy payments are based on prices higher than the prices processors actually pay to producers. In the case of soyabeans the subsidy paid to producers is based on a "guide" price; however the processors obtain the subsidy whenever they demonstrate that they paid a price at least equal to a "minimum price" (Article 2 of Regulation No. 1491/85). Whenever the guide price is higher than the minimum price the subsidy payment creates an incentive to purchase Community rather than imported soyabeans. The minimum price is fixed "at a level guaranteeing sales for producers at a price as close as possible to the guide price, allowing in particular for market fluctuations and the cost of transporting the beans" (Article 2:3 of Regulation No. 1491/85) and must therefore be generally below the guide price. For these reasons the Panel concluded that the Community Regulations do not ensure that the payments to processors are based on prices processors actually have to pay when purchasing Community oilseeds.

139. As to the second point, the Panel noted that the prices which the Community authorities determine to be the import prices are those that prevailed in certain markets at a certain time. These prices are not necessarily the prices that prevail at the time the subsidy recipients decide to purchase domestic rather than imported products. The Community recognized this when it replied as follows to a question by the Panel: "It is true that there may always be some uncertainty relating to the difference between, on the one hand, the case-by-case decisions taken by an individual operator (who may furthermore take anticipatory or indeed speculative positions) and, on the other, an evaluation made by the public authorities based on market prices (involving the approximation inherent in the concept of prices)". The Panel further noted that for rapeseed and sunflowerseed the Community uses reconstructed prices to determine the subsidy payments and that the "world market price" implicit in the amount of the payment (namely the market price objective aimed at by the Commission less the subsidy payment) would not necessarily in all cases be the same as the price at which competing imports of these oilseeds are available to processors. The Panel found that due to these various factors, the Community Regulations do not ensure that the subsidy payments are based on prices that the subsidy recipients would actually have paid had they chosen to buy imported rather than domestic products.

140. For the reasons indicated in the preceding paragraphs, the Panel found that subsidy payments made to processors can be greater than the difference between the price processors actually pay to producers and the price that processors would have to pay for imported oilseeds. Whether such over-compensation creating an incentive to purchase domestic rather than imported products takes place depends on the circumstances of the individual purchase. The Community Regulations are thus capable of giving rise to discrimination against imported products though they may not necessarily do so in the case of each individual purchase.

141. Having made this finding the Panel examined whether a purchase regulation which does not necessarily discriminate against imported products but is capable of doing so is consistent with Article III:4. The Panel noted that the exposure of a particular imported product to a risk of discrimination constitutes, by itself, a form of discrimination. The Panel therefore concluded that purchase regulations creating such a risk must be considered to be according less favourable treatment within the meaning of Article III:4. The Panel found for these reasons that the payments to processors of Community oilseeds are inconsistent with Article III:4.

TO CONTINUE WITH EUROPEAN ECONOMIC COMMUNITY - PAYMENTS AND SUBSIDIES PAID TO PROCESSORS AND PRODUCERS OF OILSEEDS AND RELATED ANIMAL-FEED PROTEINS

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