ANNEX 3-2

SUBMISSION OF THE UNITED STATES

(17 January 2000)

TABLE OF CONTENTS

1. INTRODUCTION 
    
2. CANADA'S AMENDMENTS TO THE TPC PROGRAMME AND THE CANADA ACCOUNT

1. THE DETERMINATION OF WHETHER A SUBSIDY IS CONTINGENT IN FACT UPON EXPORT REQUIRES A PANEL TO EXAMINE ALL OF THE FACTS SURROUNDING THE GRANTING OF THE SUBSIDY
    
2. THE UNITED STATES DISAGREES WITH BRAZIL'S AND CANADA'S CHARACTERIZATIONS OF ITEM (K) OF THE ILLUSTRATIVE LIST

3. CANADA'S PROPOSAL FOR "VERIFICATION PROCEDURES"
    
4. CONCLUSION

I. INTRODUCTION

1. The United States welcomes this opportunity to present its views in the Article 21.5 proceeding that Brazil has requested to review Canada's implementation of the recommendations and rulings of the Dispute Settlement Body ("DSB") in Canada -- Measures Affecting the Export of Civilian Aircraft, WT/DS70/R, 14 April 1999 ("Panel Report"); WT/DS70/AB/R, 2 August 1999 ("Appellate Body Report"). As was the case before the Panel and the Appellate Body, the United States does not intend to comment upon the specific factual matters at issue in this dispute. Rather, the United States intends to limit its comments to certain fundamental interpretive issues relating to the proper legal interpretation of what constitutes a subsidy that is "contingent in fact" upon export performance and the proper approach for addressing claims involving item (k) of the Illustrative List. The United States will also comment briefly on Canada's proposal to establish "verification procedures" that it claims will "facilitate a definitive resolution of this dispute.¹ The United States does not comment at this time upon the other issues raised in this proceeding.

II. CANADA'S AMENDMENTS TO THE TPC PROGRAMME AND THE CANADA ACCOUNT

2. Brazil claims that Canada's amendments to the TPC programme and the Canada Account do not make the programmes consistent with the WTO Agreement on Subsidies and Countervailing Measures ("the SCM Agreement"), and do not constitute effective implementation of the DSB's recommendations and rulings. The United States takes no position on these issues. The United States does, however, wish to make certain brief observations that it hopes will assist the Panel in reaching its own determinations.

A. THE DETERMINATION OF WHETHER A SUBSIDY IS CONTINGENT IN FACT UPON EXPORT REQUIRES A PANEL TO EXAMINE ALL OF THE FACTS SURROUNDING THE GRANTING OF THE SUBSIDY

3. Brazil properly notes in its submission that the Panel and the Appellate Body each concluded that TPC assistance to the Canadian regional aircraft industry was contingent "in fact" (or "de facto") upon export performance.² As the Appellate Body explained, the purpose of the prohibition on export subsidies that are contingent in fact upon export performance is to prevent circumvention of the prohibition against export subsidies contingent in law upon export performance.³ Moreover, although the legal standard for demonstrating such contingency is the same for the two types of export subsidy, the types of evidence that may be employed to meet the legal standard may differ. The Appellate Body explained that proving de facto export contingency is much more difficult than proving de jure export contingency because:

There is no single legal document which will demonstrate, on its face, that a subsidy is "contingent . . . in fact . . . upon export performance". Instead, the existence of this relationship of contingency, between the subsidy and export performance, must be inferred from the total configuration of the facts constituting and surrounding the granting of the subsidy, none of which on its own is likely to be decisive in any given case.⁴

4. Thus, it is not enough merely to examine the legal criteria controlling an alleged de facto export subsidy. Nor is it enough simply to examine the formal, non-legal criteria that a Government considers in determining whether to grant the subsidy. Rather, a Panel must look at all of the facts surrounding the granting of the subsidy to determine whether - despite the absence of any formal requirements - the granting of the subsidy was in fact tied to actual or anticipated exportation.

5. In this sense, the United States noted before the Appellate Body that Canada's own approach for identifying de facto export subsidies under its domestic countervailing duty law views the intent of the subsidizing government as a primary consideration. Section 5.15.1.3 of the "Special Import Measures Act ("SIMA") Handbook⁵ contains the following discussion on "Guidelines on What Constitutes an Export Subsidy":

Sometimes . . . a subsidy may not be explicitly contingent on export performance but may have the same effect. For example, where a grant or concessional loan is provided to aid the establishment of an industry which will produce largely for export markets, the subsidy may be a "de-facto" export subsidy.

If the subsidy cannot be readily identified as an export subsidy, on the basis of a direct linkage to export performance, then it may be useful to examine other factors to determine whether there is an export linkage. These factors could include the granting authority's intention in establishing the programme gleaned from government statements or publications which announced or publicized the programme. The enabling legislation should also be reviewed to determine whether it indicates a linkage to export performance. However, if increased external trade and balance-of-payments considerations are incidental to national industrial or regional objectives, then the subsidy may not be intended as an export subsidy. Accordingly, the intention may be difficult to distinguish in practice. . . .

Trade impact is another factor in making the distinction. Domestic subsidies are introduced to relieve distortions in the domestic economic scene, whereas export subsidies are intended to have a major trade impact. Of course, any domestic subsidy will often have some indirect trade impact, however minor, and subsidies which lower the costs of industries producing tradeable goods are properly a matter for concern. Also, subsidies are rarely provided with one purpose in mind. Objectives such as sectoral, structural, scientific, or regional policies are also bound up in subsidy decisions.⁶

Thus, the SIMA Handbook recognizes the intent and objectives of the subsidizing government as relevant factors for determining whether a particular subsidy is a de facto export subsidy.

6. Moreover, the EC argued before the Appellate Body that "[o]ne circumstance in which an indication of de facto export contingency might arise is where the recipient is required to achieve certain minimum production and sales targets which in the light of the facts of the case can only be achieved through increased export effort and not from sales on the domestic market." The United States agrees wholeheartedly with the EC's statement. If there is something about the product itself, or the nature of the market for that product, which indicates that a recipient will have to export to fulfill the conditions of the subsidy, that would be persuasive evidence of de facto export contingency. This is not to say, however, that such a circumstance is the only circumstance that would indicate the existence of a de facto export subsidy.

7. Finally, Canada quotes the Appellate Body's statement that:

The second sentence of footnote 4 precludes a panel from making a finding of de facto export contingency for the sole reason that the subsidy "is granted to enterprises which export". In our view, merely knowing that a recipient's sales are export-oriented does not demonstrate, without more, that the granting of a subsidy is tied to actual or anticipated exports. . . . We agree with the Panel that, under the second sentence of footnote 4, the export orientation of a recipient may be taken into account as a relevant fact, provided that it is one of several facts which are considered and is not the only fact supporting a finding.⁷

Canada views the Appellate Body's statement as support for the proposition that the SCM Agreement does not prohibit the granting of subsidies to firms or industries that are export oriented, "including in circumstances where the government is aware of this export orientation.⁸ In the view of the United States, this statement is not quite accurate. As the above excerpt demonstrates, the Appellate Body in fact stated that the export orientation of a firm is not enough standing alone to support a finding of de facto export contingency. In the view of the United States, there is a fundamental difference between a government granting a subsidy to an enterprise which happens to export and a government granting a subsidy to an enterprise because it exports.

8. As noted at the beginning of this discussion, the United States takes no position on the issue of whether the amendments that Canada has made to the TPC programme comply with the rulings and recommendations of the DSB. The United States hopes, nonetheless, that its comments on the need to examine all of the facts surrounding the decision to grant the subsidy will prove useful to the Panel as it evaluates the complex issue at hand.

B. THE UNITED STATES DISAGREES WITH BRAZIL'S AND CANADA'S CHARACTERIZATIONS OF ITEM (K) OF THE ILLUSTRATIVE LIST

9. The second type of financing at issue in this proceeding is the "Canada Account." In challenging Canada's amendments to the Canada Account, Brazil notes Canada's statement that future transactions under the Account will be authorized only if they comply with the OECD Arrangement on Guidelines for Officially Supported Export Credits.⁹ The relevance of the OECD Arrangement to this issue is that the second paragraph of item (k) of the SCM Agreement's Illustrative List states that:

if a Member is a party to an international understanding on official export credits . . . or if in practice a Member applies the interest rates of the relevant undertaking, an export credit practice which is in conformity with those provisions shall not be considered an export subsidy prohibited by this Agreement.¹⁰

Brazil characterizes this language as an "affirmative defense" and argues that it is "not sufficient " for Canada merely to assert the defense in this proceeding.¹¹ While disputing whether it has an obligation to "do more" at the present time, Canada does not dispute Brazil's description of the cited language as an affirmative defense and, in fact, "agrees that it is the Member claiming an exception that must demonstrate its entitlement to that exception.¹²

10. The United States disagrees with Brazil's and Canada's characterization of the second paragraph of item (k) as an "affirmative defense" or an "exception" to the SCM Agreement. In the view of the United States, a complainant that challenges a practice contained in the Illustrative List has the burden of establishing that the practice constitutes an export subsidy. If the complainant establishes a prima facie case, the burden then shifts to the defendant to rebut the prima facie case. In the view of the United States, the items contained in the Illustrative List are not "exceptions" to the rest of the SCM Agreement, but rather are particular applications of the general standards in Article 1 to particular types of government practices.

11. The United States has no further comments to make on the issue of Canada's amendments to the Canada Account.

III. CANADA'S PROPOSAL FOR "VERIFICATION PROCEDURES"

12. Finally, the United States wishes to comment briefly on Canada's proposal to establish "verification procedures," which it asserts will "facilitate a definitive resolution of this dispute.¹³ Canada's willingness to accept these procedures is conditioned on Brazil's willingness to accept similar procedures with respect to the rulings and recommendations in Brazil - Export Financing Programme for Aircraft (PROEX).¹⁴ Canada claims that the "[e]ndorsement of this proposal for bilateral verification procedures would be consistent with the objectives of the DSU, and could be suggested by the Panel pursuant to Article 19.1 of the DSU."

13. In the view of the United States, if they so desire, Canada and Brazil certainly may agree to establish procedures that would enable each party to monitor the other's compliance with the rulings and recommendations applicable to the programmes at issue. However, the United States disagrees that Article 19.1 of the DSU would permit the Panel to suggest such procedures. By its plain terms, Article 19.1 permits a panel to suggest ways to implement the recommendations that it makes after concluding that a measure is inconsistent with a covered agreement. It does not permit - or even contemplate - that a panel may take further steps and play some role in monitoring the implementation process itself. As the Appellate Body stated in India - Patent Protection for Pharmaceutical and Agricultural Products:

[a]lthough panels enjoy some discretion in establishing their own working procedures, this discretion does not extend to modifying the substantive provisions of the DSU. . . . Nothing in the DSU gives a panel the authority to disregard or to modify other explicit provisions of the DSU.¹⁵

14. Furthermore, the United States observes that nothing would prevent Canada and Brazil from agreeing on "transparency" procedures under Article 25 of the DSU, which permits parties by mutual agreement to resort to arbitration as an alternative to dispute settlement. Article 25.2 of the DSU explicitly permits parties to agree on the procedures to be followed in that context.¹⁶

15. Lacking additional details, the United States is not in a position to comment upon the actual structure that the verification procedures would take. Once again, this presumably would be an issue for the parties to decide among themselves.

IV. CONCLUSION

16. In conclusion, the United States thanks the Panel for providing an opportunity to comment on the important issues at stake in this proceeding, and hopes that its comments will be useful.

ANNEX 3-3

ORAL STATEMENT OF THE EUROPEAN COMMUNITIES

(6 February 2000)

1. Introduction

1. The European Communities makes this third party submission because of its systemic interest in the correct interpretation of the SCM Agreement and the correct application of the DSU.

2. The EC is in particular most concerned by the fact that the recent Article 21.5 panel on Australia - Automotive Leather¹  has considered itself entitled to interpret the WTO Agreement as allowing retroactive remedies. Since similar issues may be involved in this case and the present Panel may have to confront the question, the EC feels it must devote some time today to explaining why the approach of the Article 21.5 panel on Australia - Automotive Leather is a serious error.

2. Panels may not decide ultra petitum

3. The Panel in this case ought not to reach the issue of retroactivity of remedies which proved so problematic in the Article 21.5 report by the Australia - Automotive Leather since the terms of reference of this Panel are carefully circumscribed² as covering only the measures that Canada has taken (or not taken) to amend the two programmes at issue - the Canada Account export credit financing and the operation of the TPC programme.

4. WTO dispute settlement is a member-driven process that can only be initiated by members and is continuously under the control of the parties who are free to choose the panellists they desire and to terminate the process when they wish. The DSU expressly states that the purpose of dispute settlement is to preserve the rights and obligations of Members, that it cannot add to or diminish those rights and that it should encourage amicable settlements and aim at a satisfactory resolution of disputes.

5. The Appellate Body made clear in India - Patent Protection³ that a claim that has not been made in the request for the establishment of the panel cannot be the subject of a finding by a panel and explained this inter alia on the grounds of procedural fairness.⁴

6. Although there is in principle no bar to the parties or the panel developing new arguments during the process, the EC considers that this does not allow new arguments to be developed by a panel which declare or assume the existence of rights that the parties have not claimed. Such action raises the same systemic and procedural fairness concerns as arise when a panel makes findings on a new claim.

7. The Panel may not therefore find in this case consider whether Canada has failed to implement the report retroactively since Brazil has only asked for a finding that the changes to the two programmes at issue have not implemented the Report.

3. The requirement to withdraw subsidies can only be prospective

8. However, since it cannot be excluded that arguments about retroactive remedies under the SCM Agreement may arise in this case and in view of the unacceptability of retroactive remedies for the EC, and we are sure for other Members, the EC will now set out its view and comment on the Australia - Automotive Leather report.

9. The EC agrees with the parties to this dispute and the other third party that the remedy under Article 4 SCM Agreement, like all other remedies under the WTO dispute settlement system, can only be, and were only intended by the Members to be, prospective in nature. They are not intended to and indeed cannot remove the effects of a trade distortion or restriction situated in the past.

3.1 The text and context of the relevant provisions

10. The terms "withdraw the measure" or "withdraw the subsidy" in Article 4.7 SCM Agreement do not require retroactive implementation any more than the term "bring the measure into conformity" in Article 19.1 DSU.

11. The term "withdraw" is a general term which may cover many different concepts including revocation, repeal, repayment of money, liquidation of an interest or a neutralisation of an effect. The definitions in the New Shorter Oxford Dictionary include⁵:

Take back or away (something bestowed or enjoyed). Cause to decrease or disappear. Remove (money) from a place of deposit.

12. The term "withdraw" is used in Article 4.7 precisely because there may be many ways of implementing a panel report concerning export subsidies - as the EC will discuss in more detail below.

13. "Withdraw" does not imply a retroactive remedy but rather in the context a prospective remedy. If an investment is withdrawn the investor may receive more or much less that he put in. A right, or even an obligation, to withdraw does not imply recovering exactly the sum originally invested. Indeed Articles 3.7 and 26.1(b) DSU also use the term "withdrawal of the measure" when referring to implementation in the sense of Article 19.1 DSU and this has been held to mean only prospective implementation in the report of the Article 21.5 panel in European Communities - Bananas - Recourse by Ecuador,⁶ where the panel held that:

In framing this issue for consideration, we do not imply that the European Communities is under an obligation to remedy past discrimination. Article 3.7 of the DSU provides that "� the first objective of the dispute settlement is usually to secure the withdrawal of the measures concerned if these are found to be inconsistent with the provisions of any of the covered agreements." This principle requires compliance ex nunc as of the expiry of the reasonable period of time for compliance with the recommendations and rulings adopted by the DSB. If we were to rule that the licence allocation to service suppliers of third-country origin were to be "corrected" for the years 1994 to 1996, we would create a retroactive effect of remedies ex tunc. However, in our view, what the EC is required to ensure is to terminate discriminatory patterns of licence allocation with prospective effect as of the beginning of the year 1999.

14. In the same way, the Article 22.6 Report on the recourse to Article 22 DSU by the US in EC -Bananas,⁷ considered that the level of nullification and impairment had to be assessed as it existed at the end of the reasonable period of time (which may, for a number of reasons, be different from that which existed before). This supports the view that the obligation to implement only relates to the future, not the past.

15. An additional element of context supporting the non-retroactivity of remedies in the WTO is the fact that both Articles 19.1 DSU and 4.7 SCM Agreement allow Members a period of time in which to implement panel reports. Since these provisions do not require immediate implementation, why should they be interpreted to require retroactive implementation?

3.2 The object and purpose of the WTO Agreement

16. The above interpretation is fully supported by a consideration of the object and purpose of the WTO Agreement.

17. The fundamental reason why WTO remedies are not retroactive is that the objective of the WTO Agreement is the removal of restrictions on trade, not compensation for past restrictions or the creation of rights to restrict trade in the future. This objective can only be achieved by ensuring that trade-restricting or trade distorting-measures are removed for the future. Past trade restrictions or distortions cannot be remedied. In particular, creating new restrictions and distortions in the future cannot eliminate the fact that trade was distorted or restricted in the past but in fact only frustrate the object and purpose of the WTO Agreement. The situation is very different from legal procedures that seek to provide monetary compensation.

18. Specifically, in the case of subsidies, a benefit and a corresponding trade advantage that has been enjoyed in the past cannot be removed. All that can be removed is the benefit that is yet to be enjoyed. A requirement to remove more than the prospective benefit in an effort to "punish" or "deter" or "compensate" would logically mean that the company concerned suffers a disadvantage for the future. This would not remove the earlier benefit and the resulting restrictions or distortions of trade but merely create new ones contrary to the fundamental objectives of the WTO Agreement.

19. Indeed, the Australia - Automotive Leather panel did itself recognise that there was no intent in the SCM Agreement that the remedy attempt to restore the status quo ante or to provide reparation or compensation when it ruled that there was no basis on which to add interest to the amount to be repaid.

20. An additional purpose of the WTO Agreement and in particular its dispute settlement system is to provide "security and predictability to the multilateral trading system" (Article 3.2 DSU). This purpose is also frustrated by retroactive remedies.

21. It is clear that the operation of the WTO Agreement can affect the rights and obligations of private operators even though, as international law, it cannot create rights and obligations for private operators except where this expressly provided for. The EC is firmly of the view that the WTO Agreement and the SCM Agreement in particular do not have direct effect in municipal legal systems - that is they are not "self-executing".⁸ This fact has consequences for the degree of interference in private rights that the WTO Agreement was intended to give rise.

22. The EC would observe more generally that under the SCM Agreement there is a distinction to be drawn between the interest of private parties in the continuation of a law or other general measure and the individual rights arising out of a particular act of a government, such as the grant of a subsidy. The former can be withdrawn, the latter cannot be simply be revoked under the constitutional systems of most WTO Members.

23. Consequently, the EC considers that the obligation to "withdraw" the prohibited export subsidy in Article 4.7 SCM Agreement can only be to withdraw the general measure or programme to the extent that it is contrary to the SCM Agreement and, as regard individual or "one-off" subsidies to withdraw that portion of it that corresponds to the future effects, that is the prospective benefit, and not that which corresponds to effects which have occurred in the past.

24. The panel in Australia - Automotive Leather relied in fact heavily on a different "object and purpose" argument to support its interpretation. This was that a retroactive remedy was necessary in order to allow an effective remedy.⁹

25. The Australia - Automotive Leather panel expressly states in paragraph 6.37: "we decline to read 'withdraw the subsidy' in a manner that does not give it effective meaning." Its motivation is explained in paragraph 6.35 as follows:

In our view, terminating a programme found to be a prohibited export subsidy, or not providing, in the future, a prohibited subsidy, may constitute withdrawal in some cases. However such actions have no impact and consequently no enforcement effect, in the case of prohibited subsides granted in the past.¹⁰

26. The Australia - Automotive Leather panel seems to be saying that its rigorous interpretation of the terms of the SCM Agreement would lead to a different conclusion to that it arrives at in that case where the defending party would have to take some other unpalatable action. It seems therefore that the basis for the Panel's finding is that the need for a deterrent effect in the SCM Agreement.

27. The EC would observe that this approach based on requiring an effective remedy or a deterrent effect might mean that a subsidy which is paid in regular instalments over, say, 10 years would be treated differently to a subsidy of equivalent value paid immediately in one lump sum. In the former case, if the Australia - Automotive Leather panel had been confronted with the former subsidy it might have considered that that cessation of future payments was sufficient withdrawal (on the basis that there would have been an "effective remedy"). In the latter case, it would have required repayment of the whole amount. This would treat equivalent subsidies differently for no good reason and elevate form over substance. The approach advocated by the EC and the parties in that case would allow the two cases to be treated consistently.

28. The EC contests that the SCM Agreement or any other part of the WTO Agreement is intended to have any deterrent effect. This is not only apparent from the object and purpose of the WTO Agreement, described above, but also from the fact that in the event of non-compliance, suspension of concessions under Article 22 DSU must be "equivalent" to the level of the nullification and impairment caused by the measure found to be WTO-incompatible and countermeasures under Article 4.10 SCM Agreement must be appropriate and not disproportionate. As the Arbitrators in EC - Bananas explained:

� the purpose of countermeasures to induce compliance. But this purpose does not mean that the DSB should grant authorisation to suspend concessions beyond what is equivalent to the level of nullification or impairment. In our view, there is nothing in Article 22.1 of the DSU, let alone in paragraphs 4 and 7 of Article 22, that could be read as a justification for counter-measures of a punitive nature.

29. If countermeasures are not to have a punitive or deterrent element, then nor should the voluntary compliance. Otherwise, voluntary compliance would be discouraged.

30. In any event, the "need for an effective remedy" argument of the Australia - Automotive Leather panel is misguided since the correct approach of withdrawing the prospective portion of the benefit of the financial contribution does provide an effective remedy. The Australia - Automotive Leather panel's reason for rejecting this approach was, apart from its wrong interpretation of the word "withdraw", simply that "the valuation of the benefit of a subsidy, its allocation over time, and the calculation of the "prospective portion" thereof, are complicated questions, for which there are no guidelines in the SCM Agreement."¹¹

31. This is not acceptable. WTO dispute settlement generally, and subsidy proceedings in particular, will often involve complex issues of fact but this is no reason for a panel to abandon its mission and require, for example, the repayment of the whole of the financial contribution rather than just a part. This is just as unacceptable as saying that since it is difficult to calculate a precise amount, no amount need be repaid.

3.3 Past practice

32. The absence of a remedy for past and consummated violations has always been a well-known feature of the GATT/WTO system. It is established and accepted that it can lead in some cases to there being no remedy at all for the complaining party. The EC considers that this established practice confirms the conclusions it reaches above.

33. A useful discussion of the practice of the GATT Contacting Parties is contained in the panel report under the Agreement on Government Procurement on Norway - Procurement of Toll Collection Equipment for the City of Trondheim.¹² In the WTO, panels have also always operated on the basis that remedies cannot be retroactive and the EC has already referred the Panel to the reports in the banana litigation.

3.4 Application to subsidies and the present case

34. There may be several ways of withdrawing a prohibited export subsidy in a particular case. The application of the above principles to the case of prohibited export subsidies must bear in mind that such subsidies are made up of three elements. First there must be a financial contribution. Second, for there to be a subsidy, the financial contribution must give rise to a benefit to the recipient. Third the subsidy is only prohibited if it is contingent upon export performance. Each of these elements may have components that are past and components that only arise in the future.

35. Withdrawing the measure or prohibited export subsidy may be achieved by effectively withdrawing any of these elements.

36. In some cases the choice may be constrained by the practical impossibility of withdrawing one or other of these elements. Thus the Australia - Automotive Leather panel noted that removal of the export contingency was not possible in that case since the contingency was found to exist at the date of grant which was in the past. But equally, withdrawal of effects that have already been manifested, including a benefit which has been enjoyed in the past, is also not possible. The only effects that can be prevented, that is the only benefit that can be withdrawn, is the benefit that is yet to be enjoyed in the future. Attempting to withdraw a benefit enjoyed in the past by ordering the repayment of the whole of the financial contribution paid simply imposes a penalty on the company (even though the panel attempts to deny this) for the future which may even create a new and additional distortion of trade contrary to the object and purpose of the WTO Agreement.