International and Regional Trade Law:
The Law of the World Trade Organization
J.H.H. Weiler
University Professor, NYU
Joseph Straus Professor of Law and European Union Jean Monnet Chair,
NYU School of Law
AND
Sungjoon Cho
Assistant Professor
Chicago-Kent College of Law
Illinois Institute of Technology
Unit XII: Anti-Dumping and Subsidies
© J.H.H. Weiler & S. Cho 2006
The Law of World Trade Organization
Unit XII: Anti-Dumping and Subsidies
Table of Contents
Guiding Questions .......................................................................................................................... 1
1. Introduction ............................................................................................................................. 2
1-1. Anti-Dumping Actions......................................................................................................... 2
Overview ................................................................................................................................. 2
Relevant Provisions ................................................................................................................. 4
Antidumping Annual Report 2003 .......................................................................................... 5
The US Antidumping Procedure ............................................................................................. 7
Standard of Review ............................................................................................................... 10
Byrd Amendment .................................................................................................................. 13
Current Debates (Friends of Anti-Dumping)......................................................................... 15
1-2. Subsidies and Countervailing Measures ............................................................................ 17
Overview: .............................................................................................................................. 17
Relevant Provisions ............................................................................................................... 19
The Concept of “Benefit” ...................................................................................................... 20
Peace Clause .......................................................................................................................... 24
Subsidies Annual Report (2003)............................................................................................ 26
Agricultural Subsidies Found Illegal..................................................................................... 28
1-3. The Doha Agenda on Antidumping and Subsidies............................................................ 29
2. Mexican HFCS (2000)........................................................................................................... 30
3. Foreign Sales Corporations (FSC) (2000) ............................................................................. 48
4.
Recent Developments ........................................................................................................ 71
4-1. Boeing – Airbus Dispute (2005) ........................................................................................ 71
4-2. U.S. – Cotton Subsidies (2005).......................................................................................... 74
4-3. EU – Sugar Subsidies (2005)............................................................................................. 77
4-4. U.S. – Zeroing (2006) ........................................................................................................ 79
Optional Reading .......................................................................................................................... 82
US – Steel (2001) ...................................................................................................................... 82
FSC II (2002) ............................................................................................................................ 92
US - URAA Section 129 (2002) ............................................................................................... 97
Canada – Diary Products (2002) ............................................................................................. 107
EU – Zeroing (2001) ............................................................................................................... 119
References ............................................................................................................................... 129
ii
Guiding Questions
1. Antidumping / Subsidies in General
a. Is the rationale (prevention of “predatory pricing”) behind the antidumping law plausible? Should
the antidumping law be replaced by the anti-competition law? Why should price differentiation be
penalized?
b. Who would win or lose as a result of the commencement and proceeding of antidumping
investigations as well as the final imposition of antidumping duties?
c. Would the standard of review enshrined in Article 17.6 of the WTO Antidumping Agreement be
similar with the one that is found in the Chevron doctrine in the US?
d. Would the government “cost” play a decisive role in determining a subsidy together with the
“benefit” that recipients enjoy?
e. Note both conceptual and remedial differences among the three types of subsidies (prohibited,
actionable and permtted) under the WTO Subsidies Agreement.
2. Mexican HFCS
a. Did the panel apply a more lenient interpretive stance to the issue of “initiation” of antidumping
investigation than in the issue of “determination” of injury or a threat of injury? See para. 7.97 of
the Panel Report.
b. Is this case law in general sovereignty-preserving or sovereignty-containing? Could you envisage
a decline of the use of domestic antidumping law thanks to the WTO Antidumping Agreement and
its jurisprudence? See “Antidumping Activities” (1-1) in this Unit. See also the main findings of
US-Steel (2002).
3. FSC
a. Note that the US adopts a unique “universal” system in the federal income / corporation tax law,
which produces “deferral” or “anti-deferral” rules. This is the root of this dispute.
b. The predecessor of this case is the “DISC” (Domestic International Sales Corporation) under the
old GATT, which choked the then GATT dispute settlement system for a quite long period of time.
Would such case be the so-called “wrong case” which had better not be filed before the WTO
dispute settlement system on account of its political sensitivity? (Cf. the emergence of FSC II)
Should Members self-limit the filing of such hot potatoes to protect the stability of the WTO system
as a whole? Should an intergovernmental cooperation be a better solution of such dispute?
c. Would the outcome in this case have been different had the US avoided taxing all the relevant
foreign economic processes in question, rather than exempting a certain portion of them as being
contingent of the export performance?
1
1.
Introduction
1-1. ANTI-DUMPING ACTIONS
Overview
http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm7_e.htm
If a company exports a product at a price lower than the price it normally charges on its own home
market, it is said to be "dumping" the product. Is this unfair competition? Opinions differ, but many
governments take action against dumping in order to defend their domestic industries. The WTO agreement
does not pass judgement. Its focus is on how governments can or cannot react to dumping - it disciplines
anti-dumping actions, and it is often called the "Anti-Dumping Agreement". (This focus only on the
reaction to dumping contrasts with the approach of the Subsidies and Countervailing Measures
Agreement.)
The legal definitions are more precise, but broadly speaking the WTO agreement allows
governments to act against dumping where there is genuine ("material") injury to the competing domestic
industry. In order to do that the government has to be able to show that dumping is taking place, calculate
the extent of dumping (how much lower the export price is compared to the exporter's home market price),
and show that the dumping is causing injury.
GATT (Article 6) allows countries to take action against dumping. The Anti-Dumping Agreement
clarifies and expands Article 6, and the two operate together. They allow countries to act in a way that
would normally break the GATT principles of binding a tariff and not discriminating between trading
partners - typically anti-dumping action means charging extra import duty on the particular product from
the particular exporting country in order to bring its price closer to the "normal value" or to remove the
injury to domestic industry in the importing country.
There are many different ways of calculating whether a particular product is being dumped heavily
or only lightly. The agreement narrows down the range of possible options. It provides three methods to
calculate a product's "normal value". The main one is based on the price in the exporter's domestic market.
When this cannot be used, two alternatives are available - the price charged by the exporter in another
country, or a calculation based on the combination of the exporter's production costs, other expenses and
normal profit margins. And the agreement also specifies how a fair comparison can be made between the
export price and what would be a normal price.
Calculating the extent of dumping on a product is not enough. Anti-dumping measures can only be
applied if the dumping is hurting the industry in the importing country. Therefore, a detailed investigation
has to be conducted according to specified rules first. The investigation must evaluate all relevant economic
factors that have a bearing on the state of the industry in question.
If the investigation shows dumping is taking place and domestic industry is being hurt, the exporting
company can undertake to raise its price to an agreed level in order to avoid anti-dumping import duty.
2
The present rules revise the Tokyo Round (1973-79) code on anti-dumping measures and are a
result of the Uruguay Round (1986-94) negotiations. The Tokyo Round code was not signed by all GATT
members; the Uruguay Round version is part of the WTO agreement and applies to all members.
The WTO Anti-Dumping Agreement introduced these modifications:
more detailed rules for calculating the amount of dumping,
more detailed procedures for initiating and conducting anti-dumping
investigations, rules on the implementation and duration (normally five
years) of anti-dumping measures,
particular standards for dispute settlement panels to apply in anti-dumping
disputes.
Detailed procedures are set out on how anti-dumping cases are to be initiated, how the
investigations are to be conducted, and the conditions for ensuring that all interested parties are given an
opportunity to present evidence. Anti-dumping measures must expire five years after the date of imposition,
unless an investigation shows that ending the measure would lead to injury.
Anti-dumping investigations are to end immediately in cases where the authorities determine that
the margin of dumping is insignificantly small (defined as less than 2% of the export price of the product).
Other conditions are also set. For example, the investigations also have to end if the volume of dumped
imports is negligible (i.e. if the volume from one country is less than 3% of total imports of that product although investigations can proceed if several countries, each supplying less than 3% of the imports,
together account for 7% or more of total imports).
The agreement says member countries must inform the Committee on Anti-Dumping Practices
about all preliminary and final anti-dumping actions, promptly and in detail. They must also report on all
investigations twice a year. When differences arise, members are encouraged to consult each other. They
can also use the WTO's dispute settlement procedure.
Data on use of anti-dumping measures can be found in the 1997 annual report
3
Relevant Provisions
Read in Primary Sources :
GATT Article VI, Ad Article VI (Interpretive Note)
Antidumping Code (Agreement on Implementation of Article VI of the GATT 1994) Articles 1-5, 7-11,
13-14, 17
Decision on Review of Article 17.6 of Agreement on Implementation of Article VI of the GATT 1994
4
Antidumping Annual Report 2003
WORLD TRADE
ORGANIZATION
G/L/653
28 October 2003
(03-5702)
Antidumping Annual Report (2003)
http://www.wto.org/english/tratop_e/adp_e/adp_e.htm
(emphasis added)
REPORT (2003) OF THE COMMITTEE ON
ANTI-DUMPING PRACTICES
(…)
II.NOTIFICATION AND EXAMINATION OF ANTI-DUMPING LAWS AND/OR
REGULATIONS OF MEMBERS
5.Article 18.5 of the Agreement provides that "Each Member shall inform the Committee of any changes in
its laws and regulations relevant to this Agreement and in the administration of such laws and regulations".
Pursuant to a decision of the Committee in February 1995, all Members having new or existing legislation
and/or regulations which apply in whole or in part to anti-dumping duty investigations or reviews covered
by the Agreement are requested to notify the full and integrated text of such legislation and/or regulations
to the Committee. Changes in a Member's legislation and/or regulations are to be notified to the
Committee as well. Pursuant to that same decision of the Committee, if a Member has no such
legislation or regulations, the Member is to inform the Committee of this fact. The Committee also
decided that Observer governments should comply with these notification obligations.
6.As of 24 October 2003, 104 Members had notified the Committee regarding their domestic
anti-dumping legislation.1 Of these 104 Members, 29 had notified the Committee that they had no
anti-dumping legislation. Members' communications in this regard can be found in document series
G/ADP/N/1/... . 26 Members had not, as yet, made any notification of anti-dumping legislation and/or
regulations. Annex A sets out the status of notifications concerning legislation under Article 18.5 of the
Agreement, and sets out the reference symbol of the document(s) containing each Member's current
notification in this regard. (…)
III.SEMI-ANNUAL REPORTS ON ANTI-DUMPING ACTIONS TAKEN BY MEMBERS
9.Semi-annual reports for the period 1 July-31 December 2002. As of 24 October 2003, semi-annual
reports of actions taken during this period had been submitted by 32 Members. 35 Members had notified
the Committee that they had not taken any anti-dumping actions during this period. The remaining
Members required to do so had not submitted a notification in this regard. The semi-annual reports were
circulated in document series G/ADP/N/98/... . At the Committee's regular meeting in May 2003, the
1In this report, the EC is counted as one Member.
5
Chairperson reported that it appeared that most Members taking actions had submitted semi-annual reports
in a timely fashion. Members who had not submitted reports, including Nil returns were strongly
urged to submit these reports. The Chairperson reminded Members that the Secretariat was available to
assist with the reporting format, and urged Members to bring problems with each others' reports to the
Committee. The Chairperson also urged Members to follow the guidelines for reports adopted by the
Committee and set out in document G/ADP/1. The status of semi-annual reports is set out in Annex B.
10.Semi-annual reports for the period 1 January-30 June 2003. As of 24 October 2003, semi-annual
reports of actions taken during this period had been submitted by 27 Members. 26 Members had notified
the Committee that they had not taken any anti-dumping actions during this period. The remaining
Members required to do so had not submitted a notification in this regard. The semi-annual reports were
circulated in document series G/ADP/N/105/... . At the Committee's regular meeting in October, the
Chairman reported that, although there continued to be some problems in the form of reports, Members had
clearly made an effort to submit reports in the format established by the Committee. The Chairman
reminded Members that guidelines for the format of semi-annual reports are set out in document G/ADP/1,
and that the Secretariat was available to assist Members with questions about the form of reports. The
Chairman strongly urged all Members to comply with the requirement to submit semi-annual
reports in a timely fashion in the future. The status of semi-annual reports is set out in Annex B. (…)
IV.REPORTS ON ALL PRELIMINARY OR FINAL ANTI-DUMPING ACTIONS
12.Pursuant to Article 16.4 of the Agreement, Members are to report without delay to the Committee all
preliminary and final anti-dumping actions taken. Reports of preliminary and final anti-dumping
actions during the period under consideration were received from Argentina, Australia, Canada, China,
Egypt, the European Communities, India, Korea, Malaysia, Mexico, New Zealand, Pakistan, Peru, Poland,
Singapore, South Africa, Chinese Taipei, Trinidad and Tobago, Turkey, the United States, Uruguay, and
Venezuela, as indicated in documents G/ADP/N/96, G/ADP/N/97, G/ADP/N/99, G/ADP/N/101,
G/ADP/N/102, G/ADP/N/103, G/ADP/N/104, G/ADP/N/106, G/ADP/N/107, G/ADP/N/108 and
G/ADP/N/109.
13.The Committee reviewed the notifications of preliminary and final actions at its regular meetings in May
and October 2003. At the Committee's meeting in May 2003, the Chairperson noted that there continued
to be a lack of full compliance in this area and highlighted the importance of this notification in the
Committee's role in monitoring and discussing actions taken by Members. At the Committee's
meeting in October 2003, the Chairman noted that there still continued to be a lack of full compliance in this
area, as some Members who submitted semi-annual reports indicating preliminary and/or final measures
had not submitted reports of preliminary or final actions taken, as reflected in Annex D of this report. The
Chairman pointed out that if the Committee was to carry out its role in monitoring and discussing actions
taken by Members, it was extremely important that Members notify their preliminary and final actions, as
required by the Agreement, and he strongly urged Members to do so.
(…)
6
The US Antidumping Procedure
An Introduction to U.S. Trade Remedies
From the U.S. Department of Commerce <http://ia.ita.doc.gov/intro/>
Unfair foreign pricing and government subsidies distort the free flow of goods and adversely affect
American business in the global marketplace. Import Administration, within the International
Trade Administration of the Department of Commerce, enforces laws and agreements to protect
U.S. businesses from unfair competition within the U.S. resulting from unfair pricing by foreign
companies and unfair subsidies to foreign companies by their governments.
What is Dumping?
Dumping occurs when a foreign producer sells a product in the United States at a price that is
below that producer's sales price in the country of origin ("home market"), or at a price that is
lower than the cost of production. The difference between the price (or cost) in the foreign market
and the price in the U.S. market is called the dumping margin. Unless the conduct falls within the
legal definition of dumping as specified in U.S. law, a foreign producer selling imports at prices
below those of American products is not necessarily dumping.
What is a Countervailable Subsidy?
Foreign governments subsidize industries when they provide financial assistance to benefit the
production, manufacture or exportation of goods. Subsidies can take many forms, such as direct
cash payments, credits against taxes, and loans at terms that do not reflect market conditions. The
statute and regulations establish standards for determining when an unfair subsidy has been
conferred. The amount of subsidies the foreign producer receives from the government is the basis
for the subsidy rate by which the subsidy is offset, or "countervailed," through higher import
duties.
How is Dumping or Subsidization Remedied?
If a U.S. industry believes that it is being injured by unfair competition through dumping or
subsidization of a foreign product, it may request the imposition of antidumping or countervailing
duties by filing a petition with both Import Administration and the United States International
Trade Commission. Import Administration investigates foreign producers and governments to
determine whether dumping or subsidization has occurred and calculates the amount of dumping
or subsidies.
What is the role of the International Trade Commission
The International Trade Commission determines whether the domestic industry is suffering
material injury as a result of the imports of the dumped or subsidized products. The International
Trade Commission considers all relevant economic factors, including the domestic industry's
7
output, sales, market share, employment, and profits. For further information on the International
Trade Commission's injury investigation, see http://www.usitc.gov. Both the International Trade
Commission and Import Administration must make affirmative preliminary determinations for an
investigation to go forward.
What relief is the end result of an Antidumping or Countervailing Duty Investigation?
If both Commerce and the International Trade Commission make affirmative findings of dumping
and injury, Commerce instructs the U.S. Customs Service to assess duties against imports of that
product into the United States. The duties are assessed as a percentage of the value of the imports
and are equivalent to the dumping and subsidy margins, described above. For example, if
Commerce finds a dumping margin of 35%, the U.S. Customs Service will collect a 35% duty on
the product at the time of importation into the United States in order to offset the amount of
dumping. Information on the U.S. Customs Service may be found at
http://www.customs.ustreas.gov.
How long does it take for Antidumping or Countervailing Duty Orders to be issued?
If both the International Trade Commission and Import Administration make affirmative
preliminary determinations (within 190 days of initiation of the antidumping investigation, or 130
days for countervailing duty investigation) importers are required to post a bond or cash to cover
an estimated amount for the duties which would be collected in the event that an AD or CVD order
is issued upon the completion of the investigations. Typically, the final phases of the investigations
by Import Administration and the International Trade Commission are completed within 12 to 18
months of initiation.
What are the requirements for filing an Antidumping or Countervailing Duty Petition?
Petitions may be filed by a domestic interested party, including a manufacturer or a union within
the domestic industry producing the product which competes with the imports to be investigated.
To ensure that there is sufficient support by domestic industry for the investigation, the law
requires that the petitioners must represent at least 25% of domestic production. The statute
requires the petition to contain certain information, including data about conditions of the U.S.
market and the domestic industry, as well as evidence of dumping or unfair subsidization.
Antidumping and countervailing duty trade remedies have been successfully pursued by a variety
of domestic industries, including producers of steel, industrial equipment, computer chips,
agricultural products, textiles, chemicals, and consumer products. Both the Import Administration
and the International Trade Commission have staff available to assist domestic industries in
deciding whether there is sufficient evidence to file a petition for antidumping or countervailing
duty investigations. The staff may also assist eligible small businesses with the filing process.
How can I learn more about filing a petition?
8
Contact the Import Administration, Office of Policy at (202) 482-4412 or by e-mail at
[email protected] Additional information can also be found at the Import
Administration web site: ia.ita.doc.gov
Note: This document is for general information purposes only. When interpreting and applying the
law, readers should refer to the Tariff Act of 1930, as amended, (19 U.S.C. 1671-1671h,
1673-1673h) and the related regulations in Title 19 of the Code of Federal Regulations.
9
Standard of Review
UNITED STATES – ANTI-DUMPING MEASURES ON CERTAIN HOT-ROLLED
STEEL PRODUCTS FROM JAPAN, WT/DS184/AB/R, 24 July 2001
http://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm
(…)
IV.Article 17.6 of the Anti-Dumping Agreement and Article 11 of the DSU: Standard of
Review
50Before turning to the issues raised on appeal, it appears to us useful to address certain general aspects of
the standard of review established by Article 17.6 of the Anti-Dumping Agreement, as this standard bears
upon each issue arising in this appeal. 2 Article 17.6 of the Anti-Dumping Agreement reads:
In examining the matter referred to in paragraph 5:
(i)
in its assessment of the facts of the matter, the panel shall
determine whether the authorities' establishment of the facts was proper
and whether their evaluation of those facts was unbiased and objective. If
the establishment of the facts was proper and the evaluation was unbiased
and objective, even though the panel might have reached a different
conclusion, the evaluation shall not be overturned;
(ii)
the panel shall interpret the relevant provisions of the Agreement
in accordance with customary rules of interpretation of public international
law. Where the panel finds that a relevant provision of the Agreement
admits of more than one permissible interpretation, the panel shall find the
authorities' measure to be in conformity with the Agreement if it rests upon
one of those permissible interpretations.
51Two threshold aspects of Article 17.6 need to be noted. The first is that Article 17.6 is identified in
Article 1.2 and Appendix 2 of the DSU as one of the "special or additional rules and procedures" which
prevail over the DSU "[t]o the extent that there is a difference" between those provisions and the provisions
of the DSU. (…)
2We have referred to Article 17.6 of the Anti-Dumping Agreement in previous Reports: Appellate Body
Report, European Communities – Anti-Dumping Duties on Imports of Cotton-type Bed Linen from India
("European Communities – Bed Linen"), WT/DS141/AB/R, adopted 12 March 2001, paras. 63-65;
Appellate Body Report, Thailand – Anti-Dumping Duties on Angles, Shapes and Sections of Iron or
Non-Alloy Steel
H-Beams from Poland ("Thailand – Steel"), WT/DS122/AB/R, adopted 5 April 2001, paras. 137 and 138;
and Appellate Body Report, United States – Lamb Safeguard, supra, footnote 28, para. 105 and footnote 63
thereto.
10
53The second threshold aspect follows from the first and concerns the relationship between Article 17.6 of
the Anti-Dumping Agreement and Article 11 of the DSU. Article 17.6 lays down rules relating to a panel's
examination of "matters" arising under one, and only one, covered agreement, the Anti-Dumping
Agreement. In contrast, Article 11 of the DSU provides rules which apply to a panel's examination of
"matters" arising under any of the covered agreements. Article 11 reads, in part:
… a panel should make an objective assessment of the matter before it,
including an objective assessment of the facts of the case and the
applicability of and conformity with the relevant covered
agreements … (emphasis added)
54Article 11 of the DSU imposes upon panels a comprehensive obligation to make an "objective
assessment of the matter", an obligation which embraces all aspects of a panel's examination of the "matter",
both factual and legal. Thus, panels make an "objective assessment of the facts", of the "applicability" of
the covered agreements, and of the "conformity" of the measure at stake with those covered agreements.
(…)
56Article 17.6(i) of the Anti-Dumping Agreement also states that the panel is to determine, first, whether
the investigating authorities' "establishment of the facts was proper " and, second, whether the authorities'
"evaluation of those facts was unbiased and objective" (emphasis added) (…) Thus, panels must assess if
the establishment of the facts by the investigating authorities was proper and if the evaluation of those
facts by those authorities was unbiased and objective. If these broad standards have not been met, a panel
must hold the investigating authorities' establishment or evaluation of the facts to be inconsistent with
the Anti-Dumping Agreement.
57We turn now to Article 17.6(ii) of the Anti-Dumping Agreement. The first sentence of Article 17.6(ii),
echoing closely Article 3.2 of the DSU, states that panels "shall" interpret the provisions of
the Anti-Dumping Agreement "in accordance with customary rules of interpretation of public international
law." Such customary rules are embodied in Articles 31 and 32 of the Vienna Convention on the Law of
Treaties ("Vienna Convention"). 3 Clearly, this aspect of Article 17.6(ii) involves no "conflict" with the
DSU but, rather, confirms that the usual rules of treaty interpretation under the DSU also apply to
the Anti-Dumping Agreement.
(…)
62Finally, although the second sentence of Article 17.6(ii) of the Anti-Dumping Agreement imposes
obligations on panels which are not found in the DSU, we see Article 17.6(ii) as supplementing, rather than
replacing, the DSU, and Article 11 in particular. Article 11 requires panels to make an "objective
assessment of the matter" as a whole. Thus, under the DSU, in examining claims, panels must make an
"objective assessment" of the legal provisions at issue, their "applicability" to the dispute, and the
"conformity" of the measures at issue with the covered agreements. Nothing in Article 17.6(ii) of
the Anti-Dumping Agreement suggests that panels examining claims under that Agreement should not
conduct an "objective assessment" of the legal provisions of the Agreement, their applicability to the
dispute, and the conformity of the measures at issue with the Agreement. Article 17.6(ii) simply adds that a
3Done at Vienna, 23 May 1969, 1155 U.N.T.S. 331; 8 International Legal Materials 679. See, Appellate
Body Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R,
adopted 20 May 1996, DSR 1996:I, 3 at 15; Appellate Body Report, Japan – Taxes on Alcoholic Beverages,
WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97
at 104-106.
11
panel shall find that a measure is in conformity with the Anti-Dumping Agreement if it rests upon one
permissible interpretation of that Agreement.
(…)
12
Byrd Amendment
WORLD TRADE
ORGANIZATION
WT/DS217/AB/R
WT/DS234/AB/R
16 January 2003
(03-0209)
Original: English
UNITED STATES - CONTINUED DUMPING AND SUBSIDY OFFSET ACT OF2000
AB-2002-7
Report of the Appellate Body
(…)
II. Factual Background
(…)
12. The CDSOA provides that the United States Commissioner of Customs ("Customs") shall distribute, on
an annual basis, duties assessed pursuant to a countervailing duty order, an anti-dumping duty order, or a
finding under the United States Antidumping Act of 1921, to "affected domestic producers" for "qualifying
expenditures". An "affected domestic producer" is defined as a domestic producer that: (a) was a petitioner
or interested party in support of the petition with respect to which an anti-dumping duty order, a finding
under the Antidumping Act of 1921, or a countervailing duty order has been entered; and (b) remains in
operation. The term "qualifying expenditures" refers to expenditures on specific items identified in the
CDSOA, which were incurred after the issuance of the anti-dumping duty finding, or order or
countervailing duty order. Those expenditures must relate to the production of the same product that is
subject to the anti-dumping or countervailing duty order, with the exception of expenses incurred by
associations which must relate to the same case.
(…)
VII. Article 18.1 of the Anti-Dumping Agreement and Article 32.1 of the SCM Agreement
(…)
242. In our view, the Panel was correct in finding that the CDSOA is a specific action related to dumping or
a subsidy within the meaning of Article 18.1 of the Anti-Dumping Agreement and Article 32.1 of the SCM
Agreement. It is clear from the text of the CDSOA, in particular from Section 754(a) of the Tariff Act, that
the CDSOA offset payments are inextricably linked to, and strongly correlated with, a determination of
dumping, as defined in Article VI:1 of the GATT 1994 and in the Anti-Dumping Agreement , or a
determination of a subsidy, as defined in the SCM Agreement . The language of the CDSOA is
unequivocal.
(…)
ASIL Insights
http://www.asil.org/insights/insigh144.htm
WTO Arbitration Decision on Retaliation Against the US over the Byrd Amendment
By Eliza Patterson
September 2004
13
Eight related World Trade Organization (WTO) arbitration decisions issued on August 31, 2004, [1] set the
amount of retaliation eight US trading partners (the “Requesting Parties”) may impose against the United
States for its failure to comply with a prior WTO Appellate Body ruling that the Continued Dumping and
Subsidy Offset Act (CDSOA) -- commonly known as the “Byrd Amendment” -- violated WTO rules. [2] In
that ruling, the Appellate Body, largely upholding a prior panel decision, held that the CDSOA violated the
Antidumping Agreement Article 18.4, the Subsidy and Countervailing Measures Agreement Article 32.5,
and the WTO Agreement Article XVI:4. [3] The reason for the violation was that the CDSOA provides
that duties assessed pursuant to a countervailing duty order or an antidumping duty order are to be
distributed on an annual basis to the affected domestic petitioners in the case and to those who supported the
successful petition, rather than being retained by the US government.
As a result of the US failure to bring the CDSOA into compliance, eight of the eleven complainants in the
dispute requested authorization under WTO Dispute Settlement Understanding Article 22.2 to suspend
concessions or other obligations (in common parlance, to retaliate) with respect to their trade with the
United States. Their requests led to the August decision, which is important for several reasons.
First, the decision confirmed the long-standing WTO norm that retaliation must be based on the amount of
trade damage caused by the law found to be in violation of WTO rules, and not on the extent or nature of the
illegality. [4] Specifically, the arbitrator rejected the Requesting Parties' argument that because each
disbursement under CDSOA violated the WTO, the total amount of disbursements, rather than the trade
impact, should be used to determine the level of retaliation.
Second, the decision held that the relevant trade damage for establishing retaliation rights is not the total
global trade effects of the illegal measure, but rather the more limited impact on the trade of the requesting
party. In other words, countries are only entitled to retaliate in amounts equal to the trade effects of the
illegal measure on their own exports regardless of the global effects of the illegal measure. This is so even
if less than 100% of the adverse trade effects are countered by retaliation. Specifically, the arbitrator
rejected the complainants’ claims that they should be allowed to consider not only the trade damage
suffered by their own exporters, but should additionally be allowed to allocate among themselves the trade
damage suffered by countries that did not participate in the case. [5]
(…)
14
Current Debates (Friends of Anti-Dumping)
Bridges Weekly Trade News Digest, Vol. 7, No. 11, Mar. 26, 2003
http://www.ictsd.org/weekly/03-03-26/story2.htm
(…)
New Submissions Tabled on Anti-Dumping
Discussions on anti-dumping continued to divide WTO Members at the Negotiating Group
meeting. While 15 "Friends of Anti-Dumping Negotiations" want to change WTO rules to prevent
abuse of anti-dumping measures and burdensome or unnecessary investigations, the US wishes to
maintain maximum flexibility in the use of trade remedies and focuses on closing loopholes in the
existing anti-dumping agreement.
During the Rules Negotiating Group meeting, the EU submitted a paper containing a proposal for
fast-track procedures with regard to unjustified anti-dumping and countervailing investigations
(TN/RL/W/67). The "Friends of Anti-Dumping Negotiations" -- Brazil, Chile, Colombia, Costa
Rica, Israel, Japan, Korea, Norway, Chinese Taipei, Switzerland, Thailand, Turkey and Hong
Kong, China -- made another proposal (TN/RLW/76). Their proposal suggests tightening the use
of sunset reviews, to prevent the extension of anti-dumping duty orders beyond the five years set
out under the WTO Antidumping Agreement. The 'Friends' groups said that in practice "an
expansive use of the exception [sunset reviews to continue the order] turns the continuation of the
order into a de facto practice". The US outrightly dismissed the proposal at the meeting.
The US submitted a paper on clarifying and improving subsidies disciplines, suggesting that the
category of prohibited government subsidies be extended to include large domestic subsidies,
subsidies to cover operating losses and government debt forgiveness (TN/RL/W/78). A second
submission proposed clarifying issues under the anti-dumping and subsidies agreements,
including investigations on perishable goods and persistently dumped and subsidised imports of
certain products (TN/RL/W/72). The US in the latter case referred, inter alia, to its steel industry.
Egypt, following the line taken by the US rather than the "Friends of Anti-Dumping Negotiations,"
stated that dumping, not measures to prevent dumping, are trade disruptive, and more rules making
anti- dumping measures more complicated would be counterproductive (TN/RL/W/27). This
paper, submitted by Egypt in February, stressed that many 'new users' of anti-dumping measures
were developing countries that would find it difficult and burdensome to deal with complex rules
put forth by some Members on anti-dumping. China tabled its first paper on anti-dumping during
the rules meeting. The paper called for stronger disciplines on anti-dumping actions, and for the
removal of a clause on "non-market economy" (TN/RL/W/66).
Meanwhile, a representative of the National Foreign Trade Council (NFTC), a US business group,
called on WTO Members to start from a "clean slate" in anti-dumping negotiations and to abandon
the current agreement. The group has presented its proposal to US trade negotiators. The proposal
15
suggests developing model regulations and instruments for national antidumping regimes -- based
on, inter alia, US regulations -- that countries could implement at the national level in order to be in
compliance with the WTO.
16
1-2. SUBSIDIES AND COUNTERVAILING MEASURES
Overview:
http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm7_e.htm
This agreement does two things: it disciplines the use of subsidies, and it regulates the actions
countries can take to counter the effects of subsidies. It says a country can use the WTO's dispute settlement
procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Or the country can
launch its own investigation and ultimately charge extra duty (known as "countervailing duty") on
subsidized imports that are found to be hurting domestic producers.
The agreement builds on the Tokyo Round Subsidy Code. Unlike its predecessor, the present
agreement contains a definition of subsidy. It also introduces the concept of a "specific" subsidy - i.e. a
subsidy available only to an enterprise, industry, group of enterprises, or group of industries in the country
(or state, etc) that gives the subsidy. The disciplines set out in the agreement only apply to specific subsidies.
They can be domestic or export subsidies.
As with anti-dumping, the subsidy agreement is part of the package of WTO agreements that is
signed by all members - the Tokyo Round "code" was only signed by some GATT members.
The agreement defines three categories of subsidies: prohibited, actionable and non-actionable. It
applies to agricultural goods as well as industrial products, except when the subsidies conform with the
Agriculture Agreement.
Prohibited subsidies: subsidies that require recipients to meet certain export targets, or to use
domestic goods instead of imported goods. They are prohibited because they are specifically designed to
distort international trade, and are therefore likely to hurt other countries' trade. They can be challenged in
the WTO dispute settlement procedure where they are handled under an accelerated timetable. If the dispute
settlement
procedure confirms that the subsidy is prohibited, it must be withdrawn immediately.
Otherwise, the complaining country can take counter measures. If domestic producers are hurt by imports
of subsidized products, countervailing duty can be imposed.
Actionable subsidies: in this category the complaining country has to show that the subsidy has an
adverse effect on its interests. Otherwise the subsidy is permitted. The agreement defines three types of
damage they can cause. One country's subsidies can hurt a domestic industry in an importing country. They
can hurt rival exporters from another
country when the two compete in third markets. And
domestic subsidies in one country can hurt exporters trying to compete in the subsidizing country's
domestic market. If the Dispute Settlement Body rules that the subsidy does have an adverse effect, the
subsidy
must be withdrawn or its adverse effect must be removed. Again, if domestic producers
are hurt by imports of subsidized products, countervailing duty can be imposed.
Non-actionable subsidies: these can either be non-specific subsidies, or specific subsidies for
industrial research and pre-competitive development activity, assistance to disadvantaged regions, or
certain types of assistance for adapting existing facilities to new environmental laws or regulations.
Non-actionable subsidies cannot be challenged in the WTO's dispute settlement procedure, and
countervailing duty cannot be used on subsidized imports.
17
But the subsidies have to meet strict conditions. Some of the disciplines are similar to those of the
Anti-Dumping Agreement. Countervailing duty (the parallel of anti-dumping duty) can only be charged
after the importing country has conducted a detailed investigation similar to that required for anti-dumping
action. There are detailed rules for deciding whether a product is being subsidized (not always an easy
calculation), criteria for determining whether imports of subsidized products are hurting ("causing injury
to") domestic industry, procedures for initiating and conducting investigations, and rules on the
implementation and duration (normally five years) of countervailing measures. The subsidized exporter can
also agree to raise its export prices as an alternative to its exports being charged countervailing duty.
Subsidies may play an important role in developing countries and in the
transformation of
centrally-planned economies to market economies. Least-developed countries and developing countries
with less than $1,000 per capita GNP are exempted from disciplines on prohibited export subsidies. Other
developing countries are given until 2003 to get rid of their export subsidies. Least-developed countries
must eliminate import-substitution subsidies (i.e. subsidies designed to help domestic production and avoid
importing) by 2003 - for other developing countries the deadline is 2000. Developing countries also receive
preferential treatment if their exports are subject to countervailing duty investigations. For transition
economies, prohibited subsidies must be phased out by 2002.
Data on use of anti-dumping measures can be found in the 1997 annual report.
18
Relevant Provisions
Read in Primary Sources:
GATT 1994 Articles III, para. 8 (b), XVI, Ad Article XVI (Interpretive Note)
Subsidy Code (Agreement on Subsidies and Countervailing Measures) Articles 1-11, 13, 15-21, 23, 25, 30
19
The Concept of “Benefit”
http://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm
WORLD TRADE
WT/DS70/AB/R
2 August 1999
(99-3221)
ORGANIZATION
Original: English
CANADA - MEASURES AFFECTING THE EXPORT OF CIVILIAN AIRCRAFT
AB-1999-2
Report of the Appellate Body
(…)
V. Interpretation of "Benefit" In Article 1.1(b) of the SCM Agreement
149. In interpreting the term "benefit" in Article 1.1(b) of the SCM Agreement, the Panel found that:
… the ordinary meaning of "benefit" clearly encompasses some form of
advantage. … In order to determine whether a financial contribution (in the
sense of Article 1.1(a)(i)) confers a "benefit", i.e., an advantage, it is
necessary to determine whether the financial contribution places the
recipient in a more advantageous position than would have been the case
but for the financial contribution. In our view, the only logical basis for
determining the position the recipient would have been in absent the
financial contribution is the market. Accordingly, a financial contribution
will only confer a "benefit", i.e., an advantage, if it is provided on terms
20
that are more advantageous than those that would have been available to
the recipient on the market.4 (emphasis added)
150. The Panel concluded that the notion of "cost to government" is not relevant to the interpretation and
application of the term "benefit", within the meaning of Article 1.1(b) of the SCM Agreement.5 The Panel
found contextual support for this reading of "benefit" in Article 14 of the SCM Agreement. It also found
that Annex IV of that Agreement does not form part of the relevant context of "benefit" in Article 1.1(b).
151.Canada appeals the Panel's legal interpretation of the term "benefit" in Article 1.1(b) of the SCM
Agreement. In Canada's view, the Panel erred in its interpretation of "benefit" by focusing on the
commercial benchmarks in Article 14 "to the exclusion of cost to government", and by rejecting Annex IV
as relevant context.6 Canada maintains that Annex IV of the SCM Agreement supports the view that "cost
to government", which is mentioned in Annex IV, is a legitimate interpretation of the term "benefit". In its
appellee's submission, Brazil agrees fully with the Panel's interpretation.
152.Under the heading "Definition of a Subsidy", Article 1.1 of the SCM Agreement provides, in relevant
part:
1.1
For the purpose of this Agreement, a subsidy shall be deemed to
exist if:
(a)(1)
there is a financial contribution by a government or any
public body within the territory of a Member (referred to in
this Agreement as "government") …
…
and
(b)
a benefit is thereby conferred. (emphasis added)
153.In addressing this issue, we start with the ordinary meaning of "benefit". The dictionary meaning of
"benefit" is "advantage", "good", "gift", "profit", or, more generally, "a favourable or helpful factor or
circumstance".7 Each of these alternative words or phrases gives flavour to the term "benefit" and helps to
convey some of the essence of that term. These definitions also confirm that the Panel correctly stated that
4Panel Report, para. 9.112. The Panel confirmed its interpretation in similar terms in its conclusion at para.
9.120 of the Panel Report.
5Ibid., para. 9.112.
6Canada's appellant's submission, paras. 98 and 102.
7The New Shorter Oxford English Dictionary, (Clarendon Press, 1993), Vol. I, p. 214; The Concise Oxford
Dictionary, (Clarendon Press, 1995), p. 120; Webster's Third New International Dictionary (unabridged),
(William Benton, 1966), Vol. I, p. 204.
21
"the ordinary meaning of 'benefit' clearly encompasses some form of advantage."8 Clearly, however,
dictionary meanings leave many interpretive questions open.
154.A "benefit" does not exist in the abstract, but must be received and enjoyed by a beneficiary or a
recipient. Logically, a "benefit" can be said to arise only if a person, natural or legal, or a group of persons,
has in fact received something. The term "benefit", therefore, implies that there must be a recipient. This
provides textual support for the view that the focus of the inquiry under Article 1.1(b) of the SCM
Agreement should be on the recipient and not on the granting authority. The ordinary meaning of the word
"confer", as used in Article 1.1(b), bears this out. "Confer" means, inter alia, "give", "grant" or "bestow".9
The use of the past participle "conferred" in the passive form, in conjunction with the word "thereby",
naturally calls for an inquiry into what was conferred on the recipient. Accordingly, we believe that
Canada's argument that "cost to government" is one way of conceiving of "benefit" is at odds with the
ordinary meaning of Article 1.1(b), which focuses on the recipient and not on the government providing the
"financial contribution".
155.We find support for this reading of "benefit" in the context of Article 1.1(b) of the SCM Agreement.
Article 14 sets forth guidelines for calculating the amount of a subsidy in terms of "the benefit to the
recipient". Although the opening words of Article 14 state that the guidelines it establishes apply "[f]or the
purposes of Part V" of the SCM Agreement, which relates to "countervailing measures", our view is that
Article 14, nonetheless, constitutes relevant context for the interpretation of "benefit" in Article 1.1(b). The
guidelines set forth in Article 14 apply to the calculation of the "benefit to the recipient conferred pursuant
to paragraph 1 of Article 1". (emphasis added) This explicit textual reference to Article 1.1 in Article 14
indicates to us that "benefit" is used in the same sense in Article 14 as it is in Article 1.1. Therefore, the
reference to "benefit to the recipient" in Article 14 also implies that the word "benefit", as used in
Article 1.1, is concerned with the "benefit to the recipient" and not with the "cost to government", as
Canada contends.
156.The structure of Article 1.1 as a whole confirms our view that Article 1.1(b) is concerned with the
"benefit" to the recipient, and not with the "cost to government". The definition of "subsidy" in Article 1.1
has two discrete elements: "a financial contribution by a government or any public body" and "a benefit is
thereby conferred". The first element of this definition is concerned with whether the government made a
"financial contribution", as that term is defined in Article 1.1(a). The focus of the first element is on the
action of the government in making the "financial contribution". That being so, it seems to us logical that
the second element in Article 1.1 is concerned with the "benefit… conferred" on the recipient by that
governmental action. Thus, subparagraphs (a) and (b) of Article 1.1 define a "subsidy" by reference, first,
to the action of the granting authority and, second, to what was conferred on the recipient. Therefore,
Canada's argument that "cost to government" is relevant to the question of whether there is a "benefit" to the
recipient under Article 1.1(b) disregards the overall structure of Article 1.1.
8Panel Report, para. 9.112.
9The New Shorter Oxford English Dictionary, (Clarendon Press, 1993) Vol. I, p. 474; The Concise Oxford
English Dictionary, (Clarendon Press, 1995), p. 278; Webster's Third New International Dictionary,
(William Benton, 1966), Vol. I, p. 475.
22
157.We also believe that the word "benefit", as used in Article 1.1(b), implies some kind of comparison.
This must be so, for there can be no "benefit" to the recipient unless the "financial contribution" makes the
recipient "better off" than it would otherwise have been, absent that contribution. In our view, the
marketplace provides an appropriate basis for comparison in determining whether a "benefit" has been
"conferred", because the trade-distorting potential of a "financial contribution" can be identified by
determining whether the recipient has received a "financial contribution" on terms more favourable than
those available to the recipient in the market.
158.Article 14, which we have said is relevant context in interpreting Article 1.1(b), supports our view that
the marketplace is an appropriate basis for comparison. The guidelines set forth in Article 14 relate to
equity investments, loans, loan guarantees, the provision of goods or services by a government, and the
purchase of goods by a government. A "benefit" arises under each of the guidelines if the recipient has
received a "financial contribution" on terms more favourable than those available to the recipient in the
market.
159.Canada has argued that the Panel erred in failing to take account of paragraph 1 of Annex IV as part of
the relevant context of the term "benefit". We fail to see the relevance of this provision to the interpretation
of "benefit" in Article 1.1(b) of the SCM Agreement. Annex IV provides a method for calculating the total
ad valorem subsidization of a product under the "serious prejudice" provisions of Article 6 of the SCM
Agreement, with a view to determining whether a subsidy is used in such a manner as to have "adverse
effects". Annex IV, therefore, has nothing to do with whether a "benefit" has been conferred, nor with
whether a measure constitutes a subsidy within the meaning of Article 1.1. We agree with the Panel that
Annex IV is not useful context for interpreting Article 1.1(b) of the SCM Agreement.
160.Canada insists that the concept of "cost to government" is relevant in the interpretation of "benefit".
We note that this interpretation of "benefit" would exclude from the scope of that term those situations
where a "benefit" is conferred by a private body under the direction of government. These situations cannot
be excluded from the definition of "benefit" in Article 1.1(b), given that they are specifically included in the
definition of "financial contribution" in Article 1.1(a)(iv). We are, therefore, not persuaded by this
argument of Canada.
161.In light of the foregoing, we find that the Panel has not erred in its interpretation of the word "benefit",
as used in Article 1.1(b) of the SCM Agreement.
(…)
23
Peace Clause
WTO Agreement on Agriculture Article 13
http://www.sice.oas.org/Trade/ur_round/UR13BE.asp
Article 13: Due Restraint
During the implementation period, notwithstanding the provisions of GATT 1994 and the
Agreement on Subsidies and Countervailing Measures (referred to in this Article as the "Subsidies
Agreement"):
(a) domestic support measures that conform fully to the provisions of Annex 2 to this
Agreement shall be:
(i) non-actionable subsidies for purposes of countervailing duties 4;
(ii) exempt from actions based on Article XVI of GATT 1994 and Part III of the
Subsidies Agreement; and
(iii) exempt from actions based on non-violation nullification or impairment of the
benefits of tariff concessions accruing to another Member under Article II of
GATT 1994, in the sense of paragraph 1(b) of Article XXIII of GATT 1994;
(b) domestic support measures that conform fully to the provisions of Article 6 of this
Agreement including direct payments that conform to the requirements of paragraph 5
thereof, as reflected in each Member's Schedule, as well as domestic support within de
minimis levels and in conformity with paragraph 2 of Article 6, shall be:
(i) exempt from the imposition of countervailing duties unless a determination of
injury or threat thereof is made in accordance with Article VI of GATT 1994 and
Part V of the Subsidies Agreement, and due restraint shall be shown in initiating
any countervailing duty investigations;
(ii) exempt from actions based on paragraph 1 of Article XVI of GATT 1994 or
Articles 5 and 6 of the Subsidies Agreement, provided that such measures do not
grant support to a specific commodity in excess of that decided during the 1992
marketing year; and
(iii) exempt from actions based on non-violation nullification or impairment of the
benefits of tariff concessions accruing to another Member under Article II of
GATT 1994, in the sense of paragraph 1(b) of Article XXIII of GATT 1994,
provided that such measures do not grant support to a specific commodity in excess
of that decided during the 1992 marketing year;
24
(c) export subsidies that conform fully to the provisions of Part V of this Agreement, as
reflected in each Member's Schedule, shall be:
(i) subject to countervailing duties only upon a determination of injury or threat
thereof based on volume, effect on prices, or consequent impact in accordance with
Article VI of GATT 1994 and Part V of the Subsidies Agreement, and due restraint
shall be shown in initiating any countervailing duty investigations; and
(ii) exempt from actions based on Article XVI of GATT 1994 or Articles 3, 5 and 6
of the Subsidies Agreement.
25
Subsidies Annual Report (2003)
http://www.wto.org/english/tratop_e/scm_e/scm_e.htm
WORLD TRADE
ORGANIZATION
G/L/655
4 November 2003
(03-5880)
(emphasis added)
REPORT (2003) OF THE COMMITTEE ON
SUBSIDIES AND COUNTERVAILING MEASURES
(…)
IV.NOTIFICATION OF SUBSIDIES
5.2003 new and full notifications. In accordance with Article 25.1 of the Agreement and Article XVI:1 of
GATT 1994, all Members of the Committee were required to submit a new and full notification of subsidies
to the Committee by 30 June 2003. As of 29 October 2003, 3410 WTO Members had notified subsidies
pursuant to Article 25 of the Agreement and Article XVI of GATT 1994. In addition, 11 Members had
notified that they maintain no subsidies notifiable pursuant to these provisions. These notifications may be
found in document series G/SCM/N/95/.... A table indicating the status of 2003 subsidy notifications is
reproduced in Annex A to this Report.
(…)
VI.NOTIFICATION AND EXAMINATION OF COUNTERVAILING DUTY LAWS
AND/OR REGULATIONS
11.As of 31 October 2003, pursuant to Article 32.6 and in accordance with a decision by the Committee, 96
Members11 had notified the Committee of their domestic countervailing duty legislation or made
communications in this respect to the Committee (G/SCM/N/1 and addenda). 35 Members had not, as yet,
made notifications under Article 32.6 of the Agreement. A table indicating the status of these notifications
is reproduced in Annex E to this Report.
(…)
VII.SEMI-ANNUAL REPORTS ON COUNTERVAILING ACTIONS
14.Notifications for 1 July-31 December 2002. As of 28 October 2003, 6 Members had notified
countervailing actions taken during the period 1 July-31 December 2002. 47 Members had notified the
Committee that they had not taken any countervailing duty action during this period. The remaining 76
Members had not submitted a notification. These semi-annual reports were circulated in document series
G/SCM/N/93. The status of semi-annual reports is set out in Annex F to this Report.
10 The European Communities is counted as one Member.
11 Ibid.
26
15.Notifications for 1 January-30 June 2003. As of 28 October 2003, 11 Members had notified
countervailing actions taken during the period 1 January-30 June 2003. 39 Members had notified the
Committee that they had not taken any countervailing action during this period. 81 Members had not
submitted a notification. These semi-annual reports were circulated in document series G/SCM/N/98. The
status of semi-annual reports is set out in Annex F to this Report.
(…)
VIII.REPORTS ON ALL PRELIMINARY OR FINAL COUNTERVAILING DUTY ACTIONS
17.Pursuant to Article 25.11 of the Agreement, Members are to report to the Committee without delay
all preliminary and final countervailing actions taken. Guidelines for the information to be contained in
these reports are set forth in G/SCM/3. As of 31 October 2003, reports of preliminary and final
countervailing actions had been received during the review period from the European Communities; South
Africa; and the United States (G/SCM/N/91, 94, 96-97 and 100-103). The Committee reviewed the
notifications of preliminary and final actions at its regular meetings in May and October 2003.
(…)
27
Agricultural Subsidies Found Illegal
1. U.S. Cotton Subsidy
Guardian Unlimited, WTO Rules American Cotton Subsidy Illegal, April 8, 2004,
http://www.guardian.co.uk/wto/article/0%2C2763%2C1204996%2C00.html
“Brazil has won a landmark victory at the World Trade Organisation that could spell the beginning
of the end of rich countries' subsidy payments to their farmers.”
“The WTO, based in Geneva, has ruled that $1.5bn (£830m) of annual subsidies given by the
United States government to its 25,000 cotton farmers are mostly illegal.”
(…)
“The ruling is the first time a developing country has won such a decision from the WTO when
arguing against one of the big trade powers.” (…)
2. EU Sugar Subsidy
CNN World Business, Brazil says WTO to rule against EU, August 4, 2004,
http://www.cnn.com/2004/BUSINESS/08/04/brazil.wto.ap/
“BRASILIA, Brazil (AP) -- The World Trade Organization found European Union subsidies for
sugar producers violate global trade rules, upholding a complaint filed by Brazil, Australia and
Thailand, a top Brazilian official said.”
(…)
“The sugar decision followed another big trade victory for Brazil in June, when it won a WTO case
claiming that U.S. cotton subsidies cause artificially low international prices, hurting Brazilian
farmers.”
(…)
28
1-3. THE DOHA AGENDA ON ANTIDUMPING AND SUBSIDIES
http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_e.htm
The Doha Ministerial Declaration (Nov. 20, 2001)
WORK PROGRAMME
(…)
WTO rules
28. In the light of experience and of the increasing application of these instruments by members, we agree
to negotiations aimed at clarifying and improving disciplines under the Agreements on Implementation of
Article VI of the GATT 1994 and on Subsidies and Countervailing Measures, while preserving the basic
concepts, principles and effectiveness of these Agreements and their instruments and objectives, and taking
into account the needs of developing and least-developed participants. In the initial phase of the
negotiations, participants will indicate the provisions, including disciplines on trade distorting practices,
that they seek to clarify and improve in the subsequent phase. In the context of these negotiations,
participants shall also aim to clarify and improve WTO disciplines on fisheries subsidies, taking into
account the importance of this sector to developing countries. We note that fisheries subsidies are also
referred to in paragraph 31.
29. We also agree to negotiations aimed at clarifying and improving disciplines and procedures under the
existing WTO provisions applying to regional trade agreements. The negotiations shall take into account
the developmental aspects of regional trade agreements.
29
2.
Mexican HFCS (2000)
http://www.wto.org/english/tratop_e/dispu_e/distab_e.htm
WORLD TRADE
ORGANIZATION
WT/DS132/R
28 January 2000
(00-0303)
Original: English
MEXICO – ANTI-DUMPING INVESTIGATION OF HIGH FRUCTOSE
CORN SYRUP (HFCS) FROM THE UNITED STATES
REPORT OF THE PANEL
The report of the Panel on Mexico – Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS)
from the United States is being circulated to all Members, pursuant to the DSU. The report is being
circulated as an unrestricted document from 28 January 2000 pursuant to the Procedures for the Circulation
and Derestriction of WTO Documents (WT/L/160/Rev.1). Members are reminded that in accordance with
the DSU only parties to the dispute may appeal a panel report. An appeal shall be limited to issues of law
covered in the Panel report and legal interpretations developed by the Panel. There shall be no ex parte
communications with the Panel or Appellate Body concerning matters under consideration by the Panel or
Appellate Body.
Note by the Secretariat: This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within 30 days after the date of
its circulation unless a party to the dispute decides to appeal or the DSB decides by consensus not to adopt the report. If the Panel
Report is appealed to the Appellate Body, it shall not be considered for adoption by the DSB until after the completion of the appeal.
Information on the current status of the Panel Report is available from the WTO Secretariat.
30
(…)
VII. FINDINGS
A. Introduction
7.1. This dispute involves the imposition of a definitive anti-dumping measure by the Mexican Ministry of
Trade and Industrial Development (SECOFI) on imports of high-fructose corn syrup (HFCS) from the
United States. The United States raises claims concerning the initiation of the investigation, the final
determination imposing the measure, the period of application of the provisional measure, and the
retroactive application of the final anti-dumping measure for the period during which the provisional
measure was in effect.
7.2. On 14 January 1997, Mexico's National Chamber of Sugar and Alcohol Industries (Sugar Chamber)
filed an application for an anti-dumping investigation with SECOFI alleging that imports of HFCS from the
United States were being exported to Mexico at dumped prices and threatened Mexico's sugar industry with
material injury. On 27 February 1997, SECOFI published a notice in Mexico's Diario Oficial announcing
the initiation of an anti-dumping investigation on imports of HFCS, grades 42 and 55, originating in the
United States.12 SECOFI established the period from 1 January 1996 to 31 December 1996 as the period
of investigation. Parties filed responses to investigation questionnaires and to requests for supplementary
information in April and May 1997, and also filed other submissions throughout the investigation.
7.3. On 25 June 1997, SECOFI published a notice announcing a preliminary determination imposing
provisional anti-dumping duties ranging from 66.57 to 125.30 U.S. dollars per metric ton in the case of
imports of HFCS grade 42, and 65.12 to 175.50 U.S. dollars per metric ton in the case of imports of HFCS
grade 55.13 The provisional measures remained in place until the final determination was published.
7.4. On 23 January 1998, SECOFI published a notice announcing the final determination that dumped
imports of HFCS from the United States threatened material injury to the Mexican sugar industry. The final
determination imposed definitive anti-dumping duties ranging from 63.75 to 100.60 U.S. dollars per metric
12 Resolución por la que se acepta la solicitud de parte interesada y se declara el inicio de la investigación
antidumping sobre las importaciones de jarabe de maíz de alta fructosa, mercancía clasificada en las
fracciones arancelarias 1702.40.01, 1702.40.99, 1702.60.01 y 1702.90.99 de la Tarifa de la Ley del
Impuesto General de Importación, originarias de los Estados Unidos de América, independientemente del
país de procedencia. (Decision to accept the request of the interested parties and to start the antidumping
investigation of high fructose corn syrup imports, merchandise classified in tariff classifications 1702.40.01,
1702.40.99, 1702.60.01 and 1702.90.99 of the Schedule to the General Import Duties Act, originating in the
United States of America, irrespective of the country of export). US-3, MEXICO-1 (Initiation Notice).
13 Resolución preliminar de la investigación antidumping sobre las importaciones de jarabe de maíz de
alta fructosa, mercancía clasificada en las fracciones arancelarias 1702.40.01, 1702.40.99, 1702.60.01 y
1702.90.99 de la Tarifa de la Ley del Impuesto General de Importación, originarias de los Estados Unidos
de América, independientemente del país de procedencia. (Preliminary determination in the antidumping
investigation of high fructose corn syrup imports, merchandise classified in tariff classifications 1702.40.01,
1702.40.99, 1702.60.01 and 1702.90.99 of the Schedule to the General Import Duties Act, originating in the
United States of America, irrespective of the country of export). US-2, MEXICO-2 (Preliminary
Determination).
31
ton in the case of imports of HFCS grade 42, and 55.37 to 175.50 U.S. dollars per metric ton in the case of
imports of HFCS grade 55.14
The notice provides that the Ministry of Finance and Public Credit was entrusted with collecting the
definitive anti-dumping duties, and the latter was directed to collect such duties retroactively to the date of
the imposition of the provisional measure.
(…)
C. Alleged violations regarding the initiation of the investigation
(…)
2. Alleged insufficiency of the information in the application
7.63. The United States notes that Article 5.2 of the AD Agreement provides that an application requesting
the initiation of an investigation "shall include evidence of ... injury within the meaning of Article VI of
GATT 1994 as interpreted by this Agreement and ... a causal link between the dumped imports and the
alleged injury". Relying on the Panel's decision in Guatemala-Cement15, the United States argues that
because the AD Agreement defines the term "injury" to include threat of material injury,16 evidence both
of threat of material injury and of a causal link between the allegedly dumped imports and the alleged threat
of material injury is required where, as here, an application alleges threat of material injury.
7.64. The United States asserts that, contrary to the requirements of Article 5.2 of the AD Agreement, the
application filed by the Sugar Chamber requesting the initiation of an anti-dumping investigation did not
contain sufficient evidence of threat of material injury, because it lacked sufficient information regarding
the likely impact of allegedly dumped imports of HFCS on the domestic industry, and the attendant relevant
economic factors and indices bearing on the likely state of the domestic industry. In addition, the
United States argues that, because the application did not contain sufficient evidence regarding the alleged
14 Resolución final de la investigación antidumping sobre las importaciones de jarabe de maíz de alta
fructosa, mercancía clasificada en las fracciones arancelarias 1702.40.99 y 1702.60.01 de la Tarifa de la
Ley del Impuesto General de Importación, originarias de los Estados Unidos de América,
independientemente del país de procedencia. (Final determination in the antidumping investigation of high
fructose corn syrup imports, merchandise classified in tariff classifications 1702.40.01, 1702.40.99,
1702.60.01 and 1702.90.99 of the Schedule to the General Import Duties Act, originating in the
United States of America, irrespective of the country of export). US-1, MEXICO-6 (Final Determination).
15 Guatemala-Cement, WT/DS60/R (Guatemala-Cement Panel Report), para. 7.76. The
United States recognizes that the Panel's decision on the merits in Guatemala-Cement has no legal status
and thus does not create "legitimate expectations" within the meaning of Japan-Alcohol. See Japan-Taxes
on Alcoholic Beverages (Japan-Alcohol), WTDS8/AB/R (Japan-Alcohol AB Report), adopted 1 November
1996, pages 14-15. However, the United States argues that we may take it into account if we consider its
reasoning persuasive on any point. See id. The Appellate Body reversed the Guatemala-Cement Panel's
ruling on its authority to consider the dispute in that case, finding that no "matter" had been presented to the
Panel. Consequently, the Appellate Body found that the Panel should never have considered the substance
of the dispute, and further stated that it could not, itself, rule on the substantive issues raised on appeal. It is
this decision that was adopted by the Dispute Settlement Body, together with the Panel's report "as reversed
by the Appellate Body report". WT/DS60/12. Thus, we are of the view that the Panel's ruling on the
substance of the dispute in Guatemala-Cement has no legal status, but that we may take the reasoning of the
Panel in that case into account in our decision, to the extent we consider it persuasive.
16 See AD Agreement, footnote 9.
32
threat of injury, it did not contain sufficient evidence of the causal link between the allegedly dumped
imports and the alleged threat of injury.
7.65. The United States notes that the Sugar Chamber alleged in the application that it represented all but
two domestic sugar mills, and, as stated in the initiation notice, its membership collectively accounted for
98 per cent of domestic sugar production.
Accordingly, the United States maintains that information regarding the likely impact on the domestic
industry and relevant economic factors was clearly and uniquely within the applicant’s control.
Nonetheless, the United States asserts, the Sugar Chamber did not even respond to the pertinent questions
in SECOFI’s application form requesting such information, responding "N/A" (not applicable) to the
relevant portions of the application form. The United States contends that, by answering "N/A", the Sugar
Chamber was stating to SECOFI its belief that the likely impact on the industry and the factors set forth in
Article 3.4 were not relevant to the initiation of an investigation on the basis of allegations of threat of
material injury. (…)
7.66. Mexico considers that the application submitted by the Sugar Chamber contained the information that
was reasonably available to it and that it included sufficient information concerning dumping, threat of
injury and a causal relationship between the two as well as evidence concerning the factors and indices
mentioned in Article 5.2(i) to (iv) of the AD Agreement. Mexico points out that Article 5.2(iv) of the
AD Agreement expressly stipulates that the application must contain information on "the consequent
impact of the imports on the domestic industry, as demonstrated by relevant factors and indices having a
bearing on the state of the domestic industry, such as those listed in paragraphs 2 and 4 of Article 3"
(emphasis added by Mexico). In Mexico's view, the ordinary meaning of the terms "relevant" and "such as"
in Article 5.2(iv) makes it clear that the requirement is not a strict one as regards the factors and indices.
The reference to Articles 3.2 and 3.4 of the AD Agreement is simply illustrative.
(…)
7.69. In Mexico's view, Article 5.2(iv) leaves the investigating authority with the authority to determine the
relevant indices and factors by which the consequent impact of the dumped imports can be evaluated.17
Thus, it is up to the investigating authority to decide whether the information submitted with the application
for the investigation deals with relevant factors and indices. Mexico asserts that SECOFI carried out a
comprehensive analysis of the information submitted, as is clear from paragraphs 24 to 99 of the notice of
initiation, in order to reach the conclusion that the application submitted by the Sugar Chamber met the
requirements of Article 5.2 of the AD Agreement. Mexico acknowledges that in parts of the questionnaire
the Sugar Chamber indicated that the question was not applicable ("N/A"). However, Mexico asserts that
this was not because the required information was irrelevant in supporting the alleged threat of injury, but
because the Sugar Chamber, following the order of the questionnaire, incorporated the information in other
sections.
7.70. In addressing this issue we must consider first, what information Article 5.2 requires to be in an
application, and second, whether SECOFI's conclusion that the Sugar Chamber's application contained the
information reasonably available to the Sugar Chamber on those elements was consistent with the
AD Agreement. The main issue in dispute between the parties is, in a case where threat of injury is alleged,
what is the information concerning the factors set forth in Article 3.4 of the AD Agreement, and what is the
17 The United States does not argue that information reasonably available to the applicant on all of the
Article 3.4 factors must be included in the application, but rather argues that the application did not contain
information on relevant factors which was reasonably available to the Sugar Chamber.
33
information regarding the existence of a causal link, that must be provided in the application, pursuant to
Article 5.2(iv).
7.71. We turn first to the text of Article 5.2, which provides in pertinent part:
"An application under paragraph 1 shall include evidence of (a) dumping, (b) injury within
the meaning of Article VI of GATT 1994 as interpreted by this Agreement and (c) a causal
link between the dumped imports and the alleged injury. Simple assertion, unsubstantiated
by relevant evidence, cannot be considered sufficient to meet the requirements of this
paragraph. The application shall contain such information as is reasonably available to the
applicant on the following: …
(iv)
information on the evolution of the volume of the allegedly dumped imports,
the effect of these imports on prices of the like product in the domestic
market and the consequent impact of the imports on the domestic industry,
as demonstrated by relevant factors and indices having a bearing on the state
of the domestic industry, such as those listed in paragraphs 2 and 4 of
Article 3".
7.72. It is clear from the text of the provision that an application must contain "information", in the sense of
evidence, regarding the consequent impact of the (allegedly dumped) imports on the domestic industry. It
is also clear from the text that this "information" must "demonstrate" the consequent impact of the imports
on the domestic industry. 18
7.73. However, the inclusion in Article 5.2(iv) of the word "relevant" and the phrase "such as" in the
reference to the factors and indices in Articles 3.2 and 3.4 in our view makes it clear that an application is
not required to contain information on all the factors and indices set forth in Articles 3.2 and 3.4. Rather,
Article 5.2(iv) requires that the application contain information on factors and indices relating to the impact
of imports on the domestic industry, and refers to Articles 3.2 and 3.4 as illustrative of factors which may be
relevant.19 Which factors and indices are relevant to demonstrate the consequent impact of imports on the
domestic industry will vary depending on the nature of the allegations made by the industry, and the nature
of the industry itself. If the industry provides information reasonably available to it concerning factors
which are relevant to the allegation of injury (or threat of injury) it makes in the application, and the
information concerning those factors demonstrates, that is, "shows evidence of", the consequent impact of
dumped imports on the domestic industry, we believe that Article 5.2(iv) is satisfied.20
7.74. Obviously, the quantity and quality of the information provided by the applicant need not be such as
would be required in order to make a preliminary or final determination of injury. Moreover, the applicant
need only provide such information as is "reasonably available" to it with respect to the relevant factors.
Since information regarding the factors and indices set out in Article 3.4 concerns the state of the domestic
industry and its operations, such information would generally be available to applicants. Nevertheless, we
18 We do not understand "demonstrate" in this context to mean "prove", but rather to mean "show evidence
of; describe or explain by help of specimens…". Concise Oxford Dictionary, 1976.
19 However, as discussed in section 0. below, the requirements of Article 3.4 are not merely illustrative in
the context of final determinations.
20 This does not mean that such an application is or would necessarily be sufficient for purposes of
initiation. That is a separate issue, which is addressed further below.
34
note that an application which is consistent with the requirements of Article 5.2 will not necessarily contain
sufficient evidence to justify initiation under Article 5.3.21
7.75. The application submitted by the Sugar Chamber on its face contains information on relevant
Article 3.4 factors, and that information shows evidence of the allegations of threat of injury and causal link
in the application. Some of this information is contained in confidential Annexes to the application. Some
of this information is requested in sections of the SECOFI application form to which the Sugar Chamber
responded "N/A".22
However, we do not consider that whether the Sugar Chamber filled out the application form provided by
SECOFI in the clearest and best manner is in any way dispositive of whether the application satisfied the
requirements of Article 5.2. Rather, we look to whether the necessary information was actually provided.
7.76. The Sugar Chamber alleged that dumped imports of HFCS threatened the domestic industry with
material injury. The application contained information showing increases in imports, and information
showing that market prices for sugar did not reach the maximum price level, while HFCS was priced below
sugar, HFCS substitutes for sugar, and producers in the United States could reduce their prices. The
application also contained information, inter alia, on the Mexican sugar producers' production, sales,
exports, imports, consumption, inventories and employment23; cash flow, financial situation, income,
production costs and financial ratios24; installed capacity25; and investment projects in the sugar
industry26. The United States argues that an application alleging only threat of material injury must
contain some "meaningful analysis" of the likely impact of allegedly dumped imports on the domestic
industry, and that the Sugar Chamber's application in this case did not. However, Article 5.2 does not
require an application to contain analysis, but rather to contain information, in the sense of evidence, in
support of allegations. While we recognize that some analysis linking the information and the allegations
would be helpful in assessing the merits of an application, we cannot read the text of Article 5.2 as requiring
such an analysis in the application itself.27
21 Guatemala-Cement Panel Report, para. 7.49–7.51. As the Panel noted in that case, the investigating
authority may, but is not required to, obtain additional information which, together with that provided in the
application, constitutes sufficient evidence to justify initiation under Article 5.3. Id. para. 7.53.
22 We note in this regard that SECOFI's application form instructs applicants, in para. 4.4 "It is important to
mention that an antidumping investigation cannot be initiated for injury and threat of injury simultaneously,
given that the two concepts are mutually exclusive". US-5(a) & (b). This instruction may be the reason the
Sugar Chamber responded "N/A" to section 4.2 of the application form, which sets out the information
SECOFI requires for applications alleging injury, but provided information in response to section 4.3 of the
application, which sets out the information SECOFI requires for applications alleging threat of injury.
Section 4.3 of the application form requests information on the Article 3.7 factors, and on expected return
on investments, but does not specifically mention information concerning consequent impact on the
domestic industry, or refer to the Article 3.2 and 3.4 factors. The Sugar Chamber's application includes
information on these latter as annexes to its response under section 4.3 of the application.
23 See Application, MEXICO-16 and Annex 6-A to Application, and the national balance for
sugar, MEXICO-17.
24 See Application, MEXICO-16 and Annexes 4.19, 4.20 and 4.21 to Application, MEXICO-33.
25 See Application, MEXICO-16 and Annex 4.22 to Application, MEXICO-30.
26 See Application, MEXICO-16 and Annex 4.24 to Application, MEXICO-32.
27 Of course, the investigating authority must examine the accuracy and adequacy of the information in the
application to determine whether there is sufficient evidence to justify initiation, pursuant to Article 5.3, a
question which is addressed further below. However, this obligation falls on the investigating authority,
35
7.77. This information, if read in the light of the allegations, provides evidence in support of the allegation
that dumped imports of HFCS from the United States threatened material injury to the Mexican sugar
industry. The United States has concentrated much of its argument on the proposition that the application
should have contained information concerning "potential negative effects" on various of the Article 3.4
factors. In this regard, we note that information, in the sense of evidence, concerning the future is at best a
calculated estimate based on past experience. While we agree that specific projections concerning a
domestic industry's sales, output, profits, market share, employment, etc., would certainly be relevant in an
application alleging threat of material injury, we cannot conclude that the absence of such projections
constitutes a fatal flaw which demands rejection of the application.
7.78. We therefore conclude that the Sugar Chamber's application was consistent with the requirements of
Article 5.2(iv) of the AD Agreement.
3. Alleged Insufficiency of the Notice of Initiation
7.79. The United States asserts that SECOFI’s initiation notice did not meet the requirements of
Articles 12.1 and 12.1.1 of the AD Agreement because it failed to set forth the actual basis of the definition
of the relevant domestic industry, since it did not state that SECOFI had excluded two companies from
consideration as the domestic industry.
The United States notes that a notice of initiation must contain "a summary of the factors on which the
allegation of injury is based". In the United States' view, the identity of the relevant domestic industry is an
essential factor on which any allegation of injury must be based. Therefore, the United States maintains,
when an investigating authority excludes companies producing the like product from the domestic industry
pursuant to Article 4.1(i) of the AD Agreement, the notice of initiation must include a statement of the
investigating authority's conclusions in this regard. This is particularly important in a case such as this one
where the applicant industry does not produce a product identical to the allegedly dumped imports, and
there is contradictory information in the application as to whether there is domestic production of the
identical product. The United States argues that the information in that notice both failed to summarize the
factors on which the allegation was based and failed to provide adequate information thereon.
(…)
7.84. Our decision regarding this issue requires us to consider Article 12.1, which governs the contents of
public notices of the initiation of anti-dumping investigations. It provides:
"When the authorities are satisfied that there is sufficient evidence to justify the initiation of
an anti-dumping investigation pursuant to Article 5, the Member or Members the products of
which are subject to such investigation and other interested parties known to the
investigating authorities to have an interest therein shall be notified and a public notice shall
be given.
12.1.1 A public notice of the initiation of an investigation shall contain, or
otherwise make available through a separate report23, adequate information on the
following:
I.
II.
III.
the name of the exporting country or countries and the product involved;
the date of initiation of the investigation;
the basis on which dumping is alleged in the application;
and does not imply a requirement for analysis resting on the applicant.
36
IV
V.
VI
a summary of the factors on which the allegation of injury is based;
the address to which representations by interested parties should be directed;
the time-limits allowed to interested parties for making their views known.
________________________
23
Where authorities provide information and explanations under the provisions of this
Article in a separate report, they shall ensure that such report is readily available to the
public".
(…)
7.86. In our view, the text of Article 12.1 and 12.1.1 is clear with respect to the first question.
Article 12.1 requires that a public notice of initiation shall be given "[w]hen the authorities are
satisfied that there is sufficient evidence to justify the initiation of an anti-dumping investigation
pursuant to Article 5". It then goes on to require, in Article 12.1.1, that the notice (or separate
report) contain "adequate information" on specific items, set forth in sub-parts (i)-(vi).
Article 12.1.1(iv), which is specifically relied upon by the United States, requires "a summary of
the factors on which the allegation of injury is based". We do not consider that the phrase "a
summary of the factors on which the allegation of injury is based" can reasonably be read to
encompass a requirement that the notice of initiation contain a summary of the allegations
pertaining to the specific issue of the definition of the relevant domestic industry.28 (…)
7.87. However, the United States' claim under Article 12.1 goes further, as the United States argues that the
notice of initiation must set forth the investigating authority's conclusion regarding the relevant domestic
industry, and the bases on which that conclusion was reached. We recall, however, that Article 12.1.1(iv)
merely requires that the notice of initiation contain "a summary of the factors on which the allegation of
injury is based" (emphasis added). It does not require a summary of the conclusion of the investigating
authority regarding the definition of the relevant domestic industry. Nor does it require a summary of the
factors and analysis on which the investigating authority based that conclusion. (…)
7.89. Thus, on the basis of the plain meaning of the text of Article 12.1, and its context, we conclude that the
notice of initiation need not contain a summary of the factors or analysis underlying, or a statement of the
investigating authority's conclusion regarding, the exclusion of some producers from consideration as the
relevant domestic industry by the investigating authority in satisfying itself that there is sufficient evidence
of injury to justify initiation.
7.90. The notice of initiation issued by SECOFI in this case contained adequate information concerning a
summary of the factors on which the allegation of threat of injury was based. The allegations concerning
threat of injury in the Sugar Chamber's application, and the supporting evidence for those allegations, are
summarized in the notice. While we believe that the interests of the parties and the public in transparency
of anti-dumping proceedings would be better served by a notice of initiation which included information
concerning such aspects of a decision to initiate as the investigating authority's conclusion concerning the
relevant domestic industry, we can find no requirement to do so in the Agreement. We therefore conclude
that the notice of initiation was consistent with the requirements of Articles 12.1 and 12.1.1 of the
AD Agreement.
28 In any event, we note that, in this case, the notice of initiation could in fact be viewed as containing a
summary of the factors on which the allegation of industry is based. It reflects the Sugar Chamber's
position that the Mexican sugar producers constitute the relevant domestic industry, as that is the industry
on behalf of which the application was submitted, and it reflects the allegations that there is no production
of HFCS in Mexico, and that sugar is a product with characteristics closely resembling those of HFCS.
37
4. Alleged Insufficiency of the Examination of the Accuracy and Adequacy of the Evidence
and Alleged Insufficiency of the Evidence to Justify Initiation
7.91. The United States argues that the application did not contain sufficient evidence regarding the impact
on the domestic industry of allegedly dumped HFCS imports and the causal link between the allegedly
dumped imports and the alleged threat of injury, and SECOFI did not independently gather sufficient
evidence to justify initiation of the investigation or request that the Sugar Chamber submit additional
information. Consequently, the United States asserts that SECOFI did not have sufficient evidence of
threat of material injury to the Mexican sugar industry or of a causal link between the allegedly dumped
imports of HFCS from the United States and the alleged threat of injury to justify initiation of the
investigation. Therefore, the United States argues that the initiation was inconsistent with Article 5.3 and
that the application should have been rejected under Article 5.8.
7.92. Mexico maintains that the application did contain relevant information which, together with
information obtained by SECOFI itself, was considered sufficient to justify initiation of the investigation.
Mexico asserts that SECOFI conducted an extensive analysis of the information in accordance with
Article 5.3 of the AD Agreement, which is set forth in paragraphs 61 to 98 of the notice of initiation.
Moreover, Mexico argues that the information concerning causal link is discussed throughout the notice of
initiation, and specifically and extensively in paragraphs 61 to 98 of that notice.
7.93. As discussed above, we have concluded that the application filed by the Sugar Chamber was
consistent with the requirements of Article 5.2. However, this does not dispose of the question whether the
initiation was consistent with the requirements of Article 5.3 of the AD Agreement, to which we now turn.
We begin our consideration of this issue by noting the text of Article 5.3 of the AD Agreement, which
provides:
"The authorities shall examine the accuracy and adequacy of the evidence provided in the
application to determine whether there is sufficient evidence to justify the initiation of an
investigation".
7.94. With respect to the question of whether the evidence may be deemed sufficient under the
AD Agreement for purposes of initiation, we note the findings of the Panel in Guatemala–Cement, which
took into account the reasoning of the Panel in United States-Softwood Lumber.29 We recognize that,
because the Appellate Body reversed the Guatemala-Cement Panel's conclusion on the issue of whether the
dispute was properly before it, that Panel's conclusions in this regard have no legal status.30 However, the
Panel's report sets out a standard that we consider instructive in this case:
"7.54 What constitutes "sufficient evidence" to justify the initiation of an anti-dumping
investigation is not defined in the ADP [sic] Agreement. In this case, of course, we are
bound by the requirements of Article 17.6(i) of the ADP Agreement as the standard of
review applicable to our examination of the Ministry's decision to initiate. Article 17.6(i)
provides:
"in its assessment of the facts of the matter, the panel shall determine
whether the authorities' establishment of the facts was proper and whether
their evaluation of those facts was unbiased and objective. If the
29 Guatemala-Cement Panel Report, United States-Measures affecting Import of Softwood Lumber from
Canada, SCM/162, BISD40S/358, adopted 27-28 October 1993.
30 See Japan-Alcohol AB Report, pages 14-15.
38
establishment of the facts was proper and the evaluation was unbiased and
objective, even though the panel might have reached a different conclusion,
the evaluation shall not be overturned".
7.55
The Panel in United States - Measures Affecting Imports of Softwood Lumber
From Canada considered much the same question as faces us here in a dispute challenging
the self-initiation of a countervailing duty investigation, on the basis, inter alia, of
allegedly insufficient evidence to warrant initiation.235 The Panel observed:
"In analyzing further what was meant by the term "sufficient evidence", the
Panel noted that the quantum and quality of evidence to be required of an
investigating authority prior to initiation of an investigation would
necessarily have to be less than that required of that authority at the time of
making a final determination. At the same time, it appeared to the Panel
that "sufficient evidence" clearly had to mean more than mere allegation or
conjecture, and could not be taken to mean just "any evidence". In
particular, there had to be a factual basis to the decision of the national
investigative authorities and this factual basis had to be susceptible to
review under the Agreement. Whereas the quantum and quality of evidence
required at the time of initiation was less than that required to establish,
pursuant to investigation, the required Agreement elements of subsidy,
subsidized imports, injury and causal link between subsidized imports and
injury, the Panel was of the view that the evidence required at the time of
initiation nonetheless had to be relevant to establishing these same
Agreement elements".236
(…)
7.57
We believe that the approach taken by the Panel in the Softwood Lumber dispute is
a sensible one and is consistent with the standard of review under Article 17.6(i). Thus, we
agree with the Panel in Softwood Lumber that our role is not to evaluate anew the evidence
and information before the Ministry at the time it decided to initiate. Rather, we are to
examine whether the evidence relied on by the Ministry238 was sufficient, that is, whether
an unbiased and objective investigating authority evaluating that evidence could properly
have determined that sufficient evidence of dumping, injury, and causal link existed to
justify initiating the investigation. Moreover, we agree with the view expressed by the
Panel in Softwood Lumber that the quantum and quality of evidence required at the time of
initiation is less than that required for a preliminary, or final, determination of dumping,
injury, and causation, made after investigation.239 That is, evidence which would be
insufficient, either in quantity or in quality, to justify a preliminary or final determination
of dumping, injury or causal link, may well be sufficient to justify initiation of the
investigation.
______________
235
SCM/162. While the Softwood Lumber report analyzed the sufficiency of evidence for the
initiation of a countervailing duty investigation, these aspects of the report are equally applicable to
anti-dumping investigations.
236
Id., para. 332.
237
Id., para. 335.
238 We note that we are not entirely persuaded that the information in the application was, in fact,
39
all that was reasonably available to the applicant, particularly with respect to the question of threat
of material injury. However, for the purposes of our analysis, we have assumed that this was the
case.
239 Softwood Lumber at para. 332".31
7.95. Our approach in this dispute will similarly be to examine whether the evidence before SECOFI at the
time it initiated the investigation was such that an unbiased and objective investigating authority evaluating
that evidence, could properly have determined that sufficient evidence of dumping, injury, and causal link
existed to justify initiation. We base our analysis principally on the notice of initiation, but also take into
account information that was before SECOFI at the time of its determination, to the extent that
consideration of it can be discerned from the notice.
7.96. SECOFI had before it information provided by the applicant, as well as information it obtained itself,
concerning increases in imports, price effects of imports, and the condition of the domestic sugar industry.
SECOFI, in the notice of initiation, observed that HFCS was used as a sweetener, substituting for sugar, had
almost entirely replaced sugar as a sweetener in soft-drinks in the United States over a ten year period, was
priced significantly below sugar, and that imports from the United States had increased significantly since
1994, and accounted for an increasing share of consumption in the industrial sector of the sugar market in
Mexico. SECOFI also noted that US producers had significant available capacity, and that Mexico was an
attractive market for US producers of HFCS. SECOFI observed that there was information concerning the
adverse effects the industry could suffer should the growing trend of low-priced HFCS imports continue.
The notice of initiation does not proceed to analyze or discuss the information concerning factors relevant
to assessing the consequent impact of imports on the domestic industry under Article 3.4. However, this
information is contained in the application, and is explicitly referred to in the notice at paragraph 23. We see
no basis to conclude that SECOFI ignored this information.
7.97. As the Panel in Guatemala-Cement stated, "There is clearly a different standard applicable to making
a preliminary or final determination of material injury, including threat of material injury, than to
determining whether there is sufficient evidence of material injury, including threat of material injury to
justify initiation of an investigation,…the subject-matter, or type of evidence needed to justify initiation is
the same as that needed to make a preliminary or final determination of threat of injury, although the quality
and quantity is less".32 (…)
7.98. (…) We therefore conclude that the initiation of the investigation was consistent with the
requirements of Article 5.3 of the AD Agreement.
7.99. Regarding the United States' claim of a violation of Article 5.8 of the AD Agreement, we note that
Article 5.8 provides that:
"[a]n application ... shall be rejected and an investigation shall be terminated promptly as
soon as the authorities concerned are satisfied that there is not sufficient evidence of either
dumping or of injury to justify proceeding with the case".
In our view, Article 5.8 does not impose additional substantive obligations beyond those in Article 5.3 on
the authority in connection with the initiation of an investigation. That is, if there is sufficient evidence to
justify initiation under Article 5.3, there is no violation of Article 5.8 in not rejecting the application.
31 Guatemala-Cement Panel Report, paras. 7.54–7.57 (footnotes in original).
32 Id. para. 7.77 (emphasis in original).
40
Having determined that the initiation of the investigation was not inconsistent with the requirements of
Article 5.3, we further conclude that there was no violation of Article 5.8 of the AD Agreement.
(…)
D. Alleged violations regarding the final determination
1. Consideration of Impact of Dumped Imports in a Threat of Injury Determination
(…)
7.118. Consideration of this issue requires us to interpret the provisions of Article 3 of the AD Agreement,
and establish what, if any, are the interrelationships between them.33 Article 3 is entitled "Determination
of Injury". Footnote 9 is appended to the title of Article 3, and provides "Under this Agreement the term
"injury" shall, unless otherwise specified, be taken to mean material injury to a domestic industry, threat of
material injury to a domestic industry or material retardation of the establishment of such an industry and
shall be interpreted in accordance with the provisions of this Article". Article 3.1 is a general provision, and
establishes that a determination of "injury"
"shall be based on positive evidence and involve an objective examination of both (a) the
volume of the dumped imports and the effect of the dumped imports on prices in the
domestic market for like products, and (b) the consequent impact of these imports on
domestic producers of such products".
7.119. The succeeding sections of Article 3 provide more specific guidance on the determination of injury.
Article 3.2 sets forth factors to be considered with regard to the volume and price effects of imports which
Article 3.1 requires be examined ("With regard to the volume of the dumped imports, the investigating
authorities shall consider… With regard to the effect of the dumped imports on prices, the investigating
authorities shall consider …"). Article 3.3 establishes the requirements for cumulative analysis. Article 3.4
sets forth factors to be considered in examining the impact of dumped imports on the domestic industry, as
required by Article 3.1 ("The examination of the impact of the dumped imports on the domestic industry
concerned shall include an evaluation of…").
Article 3.5 establishes requirements for the analysis of the causal link, and Article 3.6 allows for the
possibility of analysing a "product line" broader than the like product if information specific to the domestic
production of the like product is not obtainable. Article 3.7 establishes specific factors to be considered in
determining threat of injury ("In making a determination regarding the existence of a threat of material
injury, the authorities should consider, inter alia, such factors as…"). Article 3.8 specifies that special care
must be used in deciding cases of threat of material injury.
7.120. It is undisputed in this case that Mexico considered the factors set out in Article 3.7 in making its
final determination of threat of injury.34 The parties are also in general agreement that some consideration
of the impact of the dumped imports on the domestic industry is required in making a final determination of
threat of material injury. The difference between the parties centers on how this consideration is to be
conducted, and whether in fact SECOFI undertook such consideration.
33 We keep in mind, of course, the applicable standard of review, set forth in Article 17.6(ii) of the
AD Agreement.
34 As discussed further below in section, the United States claims that Mexico's consideration under
Article 3.7(i) was inconsistent with the requirements of that provision.
41
7.121. The United States argues that SECOFI was required to examine Article 3.4 factors in assessing the
likely impact of dumped imports on the domestic industry. Although the United States does not argue that
consideration of all the Article 3.4 factors is required, it does argue that SECOFI could not consider only
those Article 3.4 factors that supported an affirmative finding of threat of material injury, but was required
to consider such factors as profits, sales, output or capacity utilization, which the United States asserts are
essential to any understanding of the condition of the Mexican industry. In the absence of such an
understanding, the United States asserts that SECOFI's determination failed to articulate how future HFCS
imports would affect the condition of the domestic industry so as to cause material injury.
7.122. Mexico argues that the AD Agreement does not require, in a threat of injury analysis, consideration
of all the factors set forth in Article 3.4, or of any of them in particular. In Mexico's view, the investigating
authority has the discretion to examine the impact of the dumped imports on the condition of the domestic
industry by considering those of the factors enumerated in Article 3.2, Article 3.4 and Article 3.7 it deems
relevant based on the circumstances of the case, without explaining why some factors are not addressed, or
the basis on which some factors are deemed relevant and others not. In this case, Mexico asserts that
SECOFI examined domestic sales, the market share of imports, factors affecting domestic prices, return on
investments, and cash flow, as relevant factors, but that SECOFI gave greater weight to the Article 3.7
factors, as fundamental to the finding that dumped HFCS imports would increase in the immediate future,
creating a situation in which material injury would occur.
7.123. Thus, the dispute before us requires us to determine whether a specific analysis of the impact of the
dumped imports on the domestic industry is required in a threat of injury determination, and if so, what is
the nature of the analysis required.
7.124. In our view, the text of the AD Agreement is clear on the first point. Article 3.7 sets forth several
factors which must be considered, among others, in making a determination regarding the existence of
threat of injury. Article 3.7 then concludes: "No one of these factors by itself can necessarily give decisive
guidance but the totality of the factors considered must lead to the conclusion that further dumped exports
are imminent and that, unless protective action is taken, material injury would occur". This language, in our
view, recognizes that factors other than those set out in Article 3.7 itself will necessarily be relevant to the
determination.
7.125. Moreover, it is clear that in making a determination regarding the threat of material injury, the
investigating authority must conclude that "material injury would occur" (emphasis added) in the absence
of an anti-dumping duty or price undertaking. A determination that material injury would occur cannot, in
our view, be made solely on the basis of consideration of the Article 3.7 factors. Rather, it must include
consideration of the likely impact of further dumped imports on the domestic industry.
7.126. While an examination of the Article 3.7 factors is required in a threat of injury case, that analysis
alone is not a sufficient basis for a determination of threat of injury, because the Article 3.7 factors do not
relate to the consideration of the impact of the dumped imports on the domestic industry. The Article 3.7
factors relate specifically to the questions of the likelihood of increased imports (based on the rate of
increase of imports, the capacity of exporters to increase exports, and the availability of other export
markets), the effects of imports on future prices and likely future demand for imports, and inventories.
They are not, in themselves, relevant to a decision concerning what the "consequent impact" of continued
dumped imports on the domestic industry is likely to be. However, it is precisely this latter question –
whether the "consequent impact" of continued dumped imports is likely to be material injury to the
domestic industry - which must be answered in a threat of material injury analysis. Thus, we conclude that
an analysis of the consequent impact of imports is required in a threat of material injury determination.
42
7.127. Turning to the question of the nature of the analysis required, we note that Article 3.4 of the
AD Agreement sets forth factors to be evaluated in the examination of the impact of dumped imports on the
domestic industry. Nothing in the text or context of Article 3.4 limits consideration of the Article 3.4
factors to cases involving material injury. To the contrary, as noted above, Article 3.1 requires that a
determination of "injury", which includes threat of material injury, involve an examination of the impact of
imports, while Article 3.4 sets forth factors relevant to that examination. Article 3.7 requires that the
investigating authorities determine whether, in the absence of protective action, material injury would occur.
In our view, consideration of the Article 3.4 factors in examining the consequent impact of imports is
required in a case involving threat of injury in order to make a determination consistent with the
requirements of Articles 3.1 and 3.7.
7.128. The question which next must be answered is what is the nature of the consideration of the
Article 3.4 factors required in a threat of injury determination. The text of Article 3.4 is mandatory:
"The examination of the impact of the dumped imports on the domestic industry concerned
shall include an evaluation of all relevant economic factors and indices having a bearing
on the state of the industry, including…" (emphasis added).
In our view, this language makes it clear that the listed factors in Article 3.4 must be considered in all cases.
There may be other relevant economic factors in the circumstances of a particular case, consideration of
which would also be required. In a threat of injury case, for instance, the AD Agreement itself establishes that
consideration of the Article 3.7 factors is also required. But consideration of the Article 3.4 factors is required
in every case, even though such consideration may lead the investigating authority to conclude that a
particular factor is not probative in the circumstances of a particular industry or a particular case, and therefore
is not relevant to the actual determination. Moreover, the consideration of each of the Article 3.4 factors must
be apparent in the final determination of the investigating authority.35
(…)
7.131. In sum, we consider that Article 3.7 requires a determination whether material injury would occur,
Article 3.1 requires that a determination of injury, including threat of injury, involve an examination of the
impact of imports, and Article 3.4 sets out the factors that must be considered, among other relevant factors,
in the examination of the impact of imports on the domestic industry. Thus, in our view, the text of the
AD Agreement requires consideration of the Article 3.4 factors in a threat determination. Article 3.7 sets
out additional factors that must be considered in a threat case, but does not eliminate the obligation to
consider the impact of dumped imports on the domestic industry in accordance with the requirements of
Article 3.4.
35 In this regard, we note the text of Article 12.2.2, which provides:
"A public notice of conclusion or suspension of an investigation in the case of an affirmative
determination providing for the imposition of a definitive duty or the acceptance of a price
undertaking shall contain, or otherwise make available through a separate report, all relevant
information on the matters of fact and law and reasons which have led to the imposition of
final measures…".
43
7.132. In our view, this conclusion is mandated by the language of Article 3.7 of the AD Agreement itself.
Moreover, the entirety of Article 3, which serves as context for the interpretation of Article 3.7, supports
this conclusion. Article 3 as a whole deals with the determination of injury in anti-dumping investigations,
which is defined as material injury, threat of material injury, or material retardation of the establishment of
a domestic industry. With respect to the question of threat of material injury, we believe an investigating
authority cannot come to a reasoned conclusion, based on an unbiased and objective evaluation of the facts,
without taking into account the Article 3.4 factors relating to the impact of imports on the domestic industry.
These factors all relate to an evaluation of the general condition and operations of the domestic industry –
sales, profits, output, market share, productivity, return on investments, utilization of capacity, factors
affecting domestic prices, cash flow, inventories, employment, wages, growth, ability to raise capital.
Consideration of these factors is, in our view, necessary in order to establish a background against which
the investigating authority can evaluate whether imminent further dumped imports will affect the industry's
condition in such a manner that material injury would occur in the absence of protective action, as required
by Article 3.7.
7.133. Moreover, even if a consideration of all the Article 3.4 factors were not required in a threat of injury
determination by the text of the AD Agreement, in our view Article 3.7 would nonetheless require that the
investigating authorities consider relevant economic factors concerning the impact of imports on the
domestic industry, in order to reach a reasoned conclusion regarding threat of material injury. Such an
analysis would be necessary in order to explain the present, and anticipated future, condition of the
domestic industry sufficiently to support the conclusion that "material injury would occur", as provided in
Article 3.7, unless protective action is taken. Moreover, that analysis could not take into account only
factors which support an affirmative determination, but would have to account for all relevant factors,
including those which detract from an affirmative determination, and explain why the particular factors
considered were deemed relevant.
7.134. The question we turn to next is whether SECOFI's conclusion of threat of material injury,
specifically with respect to analysis of the impact of dumped imports on the domestic industry, as reflected
in its final determination, satisfies the requirements of Articles 3.7 and 3.4.36
(…)
7.140. The final determination reflects no meaningful analysis of a number of the Article 3.4 factors: the
Mexican sugar industry's profits, output, productivity, utilization of capacity, employment, wages, growth,
or ability to raise capital.37
Moreover, there is no analysis of the condition of the Mexican sugar industry during the period of
investigation, or projected for the near future. It is therefore not possible, by reading the final determination,
36 In this regard, we bear in mind the standard of review applicable to the investigating authorities'
assessment of the facts, as set forth in Article 17.6(i). We base our analysis of the consistency of SECOFI's
determination with Mexico's obligations under the AD Agreement on the Notice of Final
Determination, US-1, MEXICO-6. See Articles 12.2 and 17.5(ii) of the AD Agreement.
37 There is some information concerning some of these elements reflected in the determination. However,
the mere recitation of data does not constitute explanation, or findings and conclusions, sufficient to satisfy
the requirements of Article 12.2 of the AD Agreement. Mexico also pointed to certain working papers in
the administrative file which contain information on certain of the Article 3.4 factors. However, unless
consideration of a factor is reflected in the final determination, we do not take cognizance of underlying
evidence in the record. See Korea-Resins Panel Report, paras. 210, 212, Argentina-Footwear Safeguard
Panel Report, para. 8.126, Moreover, as discussed further below, SECOFI's references to this information
are limited to a discussion of that part of domestic production of sugar sold in the industrial market.
44
to understand the overall condition of the domestic industry with respect to the Article 3.4 factors. Yet
without an understanding of the condition of the industry, it is not possible, in our view, for SECOFI to have
come to a reasoned conclusion, based on an objective evaluation of the facts, concerning the likely impact
of dumped imports. (…)
7.141. Merely that dumped imports will increase, and will have adverse price effects, does not, ipso facto,
lead to the conclusion that the domestic industry will be injured – if the industry is in very good condition,
or if there are other factors at play, dumped imports may not threaten injury. Such a conclusion thus
requires the investigating authority to analyze, based on the information before it, the likely impact of
further dumped imports on the domestic industry. SECOFI concluded that imports were likely to increase,
based on the increases during the period of investigation, and the available capacity of the exporting
producers, but there is no meaningful analysis, based on facts, concerning the likely impact of further
dumped imports on the domestic industry in the final determination, e.g., whether such increased imports
are likely to account for an increased share of the growing Mexican market, have an effect on production or
sales of sugar, or affect the profits of the domestic producers, etc, in such a manner as to constitute material
injury. (…)
7.142. In sum, SECOFI's determination of threat of material injury fails to adequately address the factors set
forth in Article 3.4 concerning the impact of the dumped imports on the domestic industry. We therefore
conclude that SECOFI's determination of threat of material injury is inconsistent with Mexico's obligations
under Article 3.1, 3.4 and 3.7 of the AD Agreement.38
(…)
7.147. In considering this issue, we note that Article 4.1 defines the term "domestic industry" as "referring
to the domestic producers as a whole of the like products or to those of them whose collective output of
the products constitutes a major proportion of those products" (emphasis added).39 An anti-dumping duty
may only be applied if there is an affirmative determination of "injury", which as previously noted is
defined in footnote 9 as "material injury to a domestic industry, threat of material injury to a domestic
industry, or material retardation of the establishment of such an industry" (emphasis added). In our view,
the definition of the domestic industry in an anti-dumping investigation has unavoidable consequences for
the conduct of the investigation and the determination that must be made. These two provisions
inescapably require the conclusion that the domestic industry with respect to which injury is considered and
determined must be the domestic industry defined in accordance with Article 4.1, that is, the domestic
producers of the like product as a whole, or those of them whose collective output of the like product
constitutes a major proportion of the domestic production of the like product.
7.148. In the case before us, SECOFI defined the domestic industry as "manufacturers of cane sugar".40
Thus, SECOFI was required, by the explicit terms of the AD Agreement, to consider and determine the
question of threat of material injury with respect to that industry.41 The question before us is whether
SECOFI did so.
38 In light of our conclusion, we consider it unnecessary to address whether Mexico's determination is
inconsistent with Article VI:6(a) of GATT 1994 in this respect.
39 There are two situations set out in Article 4.1 in which the definition of domestic industry may be
modified: exclusion of related parties (Article 4.1(i)), and a case involving a regional industry
(Article 4.1(ii). It is undisputed that this case does not involve either of these situations.
40 Final Determination, para. 441.
41 There is no dispute that SECOFI had information enabling it to distinguish sugar sold in the industrial
market from that sold in the household market, and thus had information specific to sales in the industrial
45
(…)
7.154. It is important to differentiate the consideration of factors relevant to the injury analysis on a sectoral
basis, so as to gain a better understanding of the actual functioning of the domestic industry and its specific
markets and thus of the impact of imports on the industry, from the determination of injury or threat of
injury on the basis of information regarding only production sold in one specific market sector, to the
exclusion of the remainder of the domestic industry's production. There is certainly nothing in the
AD Agreement which precludes a sectoral analysis of the industry and/or market. Indeed, in many cases,
such an analysis can yield a better understanding of the effects of imports, and more thoroughly reasoned
analysis and conclusion. However, this does not mean that an analysis limited to that portion of the
domestic industry's production sold in one market sector is sufficient for establishing injury or threat of
injury to the domestic industry, consistently with the AD Agreement. It is undisputed in this case that
SECOFI defined the domestic industry as consisting of all sugar producers. What SECOFI failed to do,
however, was assess the question of injury to those producers on the basis of their production of the like
product, sugar. Instead, it assessed the question of threat of injury only with reference to that portion of
sugar producers' production that was sold in the industrial market, and took no account of the fact that
almost half of production was sold in the household market.42
7.155. We recognize that a conclusion that there is injury or threat of injury to a specific sector could be
indicative of injury or the threat of injury to the industry, as long as the sector in question were sufficiently
representative of the industry concerned as a whole. However, if this is the basis of the investigating
authority's determination, there must be an explanation of why the information and conclusions relating to
the specific market sector are considered by the investigating authority to be representative of the domestic
industry as a whole.43 There is nothing in the final determination to suggest that SECOFI considered that
market. Mexico insists on the reliability of the information concerning the industrial market. Even
assuming its reliability, however, merely that the information was reliable does not constitute a legal
justification for basing a determination of threat of injury to the sugar industry on information regarding
only part of that industry's production of the like product.
42 Mexico argues that sugar sold in the industrial market constitutes a "major proportion" of the domestic
production within the meaning of Article 4. However, we note that there is no explicit discussion of this in
the final determination. In any event, this aspect of the definition of domestic industry allows the
consideration of producers whose collective output of the like product constitutes a major proportion of
domestic production of that product as the domestic industry. It does not allow a finding of injury, or threat
of injury, on the basis of the effects of imports on a major proportion of the production of the like product
of all producers.
43 A similar conclusion has been reached in the context of the serious injury determination in safeguards
investigations in two recently circulated Panel reports, Korea-Dairy Safeguard Panel Report,
Argentina-Footwear Safeguard Panel Report. The issue addressed in each report is similar to that raised by
this case. In both instances, the investigating authorities considered separate sectors of domestic production
and the domestic market in conducting their analysis of whether there was serious injury to the domestic
industry. Article 4.1(c) of the Safeguards Agreement defines the domestic industry in terms almost
identical to those of the AD Agreement, as "the producers as a whole of the like or directly competitive
products …, or those whose collective output of the like or directly competitive products constitutes a major
proportion of the total domestic production of those products". Both Panels concluded that the failure of
the investigating authorities to either consider all sectors, or to relate their conclusions concerning specific
sectors to the industry as a whole, resulted in injury determinations that were not based on injury to the
industry "as a whole", inconsistent with the requirements of the Safeguards Agreement. Korea-Dairy
Safeguard Panel Report, para. 7.58, Argentina-Footwear Safeguard Panel Report, para. 8.137 & fn. 514.
46
the situation of the domestic industry with regard to the portion of its production sold in the industrial
market to the situation of the sugar industry represented the situation of the domestic industry with regard to
its production of the like product, sugar. There is no consideration of the impact of the household sector of
the market on the situation of the industry.
(…)
7.162. We therefore conclude that Mexico's determination of threat of injury is inconsistent with its
obligations under Article 3.1, 3.2, 3.4 and 3.7 of the AD Agreement.
(…)
VIII. Conclusion and Recommendation
8.1. In light of the findings above, we conclude that Mexico's initiation of the anti-dumping investigation on
imports of HFCS from the United States was consistent with the requirements of Articles 5.2, 5.3, 5.8, 12.1
and 12.1.1(iv) of the AD Agreement.
8.2. In light of the findings above, we conclude that Mexico's imposition of the definitive anti-dumping
measure on imports of HFCS from the United States is inconsistent with the requirements of the
AD Agreement in that:
Mexico's inadequate consideration of the impact of dumped imports on the domestic
industry, its determination of threat of material injury on the basis of only a part of
the domestic industry's production, that sold in the industrial sector, rather than on
the basis of the industry as a whole, (…) are not consistent with the provisions of
Articles 3.1, 3.2, 3.4, 3.7 and 3.7(i) of the AD Agreement, (…)
8.3. Under Article 3.8 of the DSU, in cases where there is infringement of the obligations assumed under a
covered agreement, the action is considered prima facie to constitute a case of nullification or impairment
of benefits under that agreement. Accordingly, we conclude that to the extent Mexico has acted
inconsistently with the provisions of the AD Agreement, it has nullified or impaired benefits accruing to the
United States under that Agreement.
8.4. We recommend that the Dispute Settlement Body request Mexico to bring its measure into conformity
with its obligations under the AD Agreement.
(…)
47
3.
Foreign Sales Corporations (FSC) (2000)
http://www.wto.org/english/tratop_e/dispu_e/distab_e.htm
WORLD TRADE
ORGANIZATION
WT/DS108/AB/R
24 February 2000
(00-0675)
Original: English
UNITED STATES – TAX TREATMENT FOR
“FOREIGN SALES CORPORATIONS”
AB-1999-9
Report of the Appellate Body
48
(...)
.I.Introduction
.1The United States and the European Communities appeal certain issues of law and legal interpretations in
the Panel Report, United States – Tax Treatment for “Foreign Sales Corporations” (the “Panel
Report”).44 The Panel was established to consider a complaint by the European Communities with respect
to “Sections 921-927 of the Internal Revenue Code and related measures establishing special tax treatment
for ‘Foreign Sales Corporations’ (‘FSCs’)”.45 Pertinent aspects of this “FSC measure”46 are described in
Section II below.47
.2In the Panel Report, circulated on 8 October 1999, the Panel concluded that, through the FSC measure:
(a)
the United States has, except as provided in the Agreement on Agriculture, acted inconsistently
with its obligations under Article 3.1(a) of the SCM Agreement by granting or maintaining export subsidies
prohibited by that provision;(...)
.3With respect to its conclusion regarding the Agreement on Subsidies and Countervailing Measures (the
“SCM Agreement”), the Panel recommended that the Dispute Settlement Body (the “DSB”) request the
United States “to withdraw the FSC subsidies without delay”.48 (…)
.II.Background
OVERVIEW OF RELEVANT UNITED STATES TAX LAWS
.6.For United States citizens and residents, the tax laws of the United States generally operate “on a
worldwide basis”.49 This means that, generally, the United States asserts the right to tax all income earned
“worldwide” by its citizens and residents. A corporation organized under the laws of one of the fifty
American states or the District of Columbia is a “domestic”, or United States, corporation, and is “resident”
in the United States for purposes of this “worldwide” taxation system.50 Under United States tax law,
“foreign” corporations are defined as all corporations that are not incorporated in one of the fifty states or
the District of Columbia.51
.7.The United States generally taxes any income earned by foreign corporations within the territory of the
United States. The United States generally does not tax income that is earned by foreign corporations
outside the United States.52 However, such “foreign-source” income of a foreign corporation generally
will be subject to United States taxation when such income is “effectively connected with the conduct of a
44WT/DS108/R, 8 October 1999.
45The Panel's terms of reference, WT/DS108/3, 11 November 1998, refer to the European Communities'
request for consultations, WT/DS108/1, 28 November 1997.
46In paragraph 7.34 and footnote 602 thereto of the Panel Report, the Panel identified sections 245(c), 921
through 927, and 951(e) of the United States Internal Revenue Code as the "primary" legal provisions
constituting the FSC measure. This finding has not been appealed.
47The Panel describes the FSC measure in paragraphs 2.1 to 2.8 of the Panel Report.
48Ibid., para. 8.3.
49United States' appellant's submission, para. 21.
50Section 7701(a)(4) IRC; United States' appellant's submission, para. 21.
51Section 7701(a)(5) and (9) IRC; United States' appellant's submission, para. 22.
52United States' appellant's submission, para. 22. Panel Report, paras. 4.1127 and 4.1128.
trade or business within the United States”.53 United States tax laws and regulations provide for the tax
authorities to conduct a factual inquiry to determine whether a foreign corporation’s income is “effectively
connected” income.
.8.Many foreign corporations are related to United States corporations. Generally, a United States parent
corporation is only subject to taxation on income earned by its foreign subsidiary when such income is
transferred to the United States parent in the form of a dividend.54 The period between the earning of such
income by the subsidiary and the transfer to the United States parent company of a dividend is called
“deferral” under the United States tax system, because the payment of tax on that income is deferred until
the income is repatriated to the United States.55
.9.The United States has also adopted a series of “anti-deferral” regimes that depart from the principle of
deferral and that, in general, respond to specific policy concerns about potential tax avoidance by United
States corporations through foreign affiliates. One of these regimes is Subpart F of the United States
Internal Revenue Code (the “IRC”), which limits the availability of deferral for certain types of income
earned by certain controlled foreign subsidiaries of United States corporations.56 Under Subpart F, certain
income earned by a foreign subsidiary can be imputed to its United States parent corporation even though it
has not yet been repatriated to the parent in the form of a dividend.57 The effect of Subpart F is that a
United States parent corporation is immediately subject to United States taxation on such imputed income
even while the income remains with the foreign subsidiary.
.10.These generally prevailing United States tax rules are altered for FSCs by the FSC measure.
THE FSC MEASURE
.11.FSCs are foreign corporations responsible for certain sales-related activities in connection with the sale
or lease of goods produced in the United States for export outside the United States. The FSC measure
essentially exempts a portion of an FSC’s export-related foreign-source income from United States income
tax.58 The relevant tax regime is comprised of three separate elements, which affect the tax liability under
United States law of an FSC as well as of the United States corporation that supplies goods for export. (...)
53Section 882(a) IRC. However, the foreign corporation may be eligible for a foreign tax credit with
respect to foreign income taxes that it has paid on such income.
54However, the United States parent may be eligible for an indirect foreign tax credit on some foreign
income taxes paid by the foreign subsidiary. See United States' appellant's submission, para. 23.
55United States' appellant's submission, para. 23.
56Section 951 IRC; United States' appellant's submission, para. 24.
57With respect to such deferred income, the United States parent may be eligible for an indirect foreign tax
credit on some foreign income taxes paid by the foreign subsidiary. See United States' appellant's
submission, para. 24.
58This characterization of the FSC measure is not disputed by the participants. See Panel Report,
para. 7.112.
50
.12.A corporation must satisfy several conditions to qualify as an FSC.59 To qualify, a corporation must be
a foreign corporation organized under the laws of a country that shares tax information with the
United States, or under the laws of a United States possession other than Puerto Rico.60 The corporation
must satisfy additional requirements relating to its foreign presence, to the keeping of records, and to its
shareholders and directors.61 The corporation must also elect to be an FSC for a given fiscal year.62
There is no statutory requirement that an FSC be affiliated with or controlled by a United States corporation.
The FSC measure is, however, such that the benefit to both FSCs and the United States corporations that
supply goods for export will, as a practical matter, often be greater if the United States supplier is related to
the FSC. As a result, many FSCs are controlled foreign subsidiaries of United States corporations.
.13.The foreign-source income of an FSC may be broadly divided into “foreign trade income” 63 and all
other foreign-source income. “Foreign trade income” is essentially the foreign-source income attributable
to an FSC from qualifying transactions involving the export of goods from the United States. An FSC’s
other foreign-source income may include inter alia “investment income”, such as interest, dividends and
royalties, and active business income not deriving from qualifying export transactions. This appeal raises a
number of issues with respect to the taxation of an FSC’s foreign trade income. Foreign trade income is in
turn divided into exempt foreign trade income and non-exempt foreign trade income.64 As explained
below, the United States tax treatment of an FSC’s exempt foreign trade income differs from the United
States tax treatment of an FSC’s non-exempt foreign trade income.
.14.An FSC’s foreign trade income is its “foreign trading gross receipts” generated in qualifying
transactions.65 Qualifying transactions involve the sale or lease of “export property” or the performance of
services “related and subsidiary” to such sale or lease. “Export property” is property manufactured or
produced in the United States by a person other than an FSC, sold or leased by or to an FSC for use,
consumption or disposition outside the United States, and of which no more than 50 per cent of its fair
market value is attributable to imports.66 In addition, for FSC income to be foreign trade income, certain
economic processes relating to qualifying transactions must take place outside the United States67, and the
FSC must be managed outside the United States.68
.15.Under the FSC measure, an FSC may, at its option, choose to apply one of three transfer pricing rules in
order to calculate its foreign trade income from qualifying transactions. These pricing rules serve two
59The description set forth here is intended to outline the main elements of the FSC measure which relate to
this appeal. A comprehensive explanation of all the rules applicable to FSCs should be obtained from the
text of the statutory provisions themselves or from specialized tax treatises, e.g., J. Isenbergh, International
Taxation, 2nd ed. (Aspen Publishers Inc., 1999). We note here that special rules apply inter alia in the case
of agricultural cooperatives, small FSCs, shared FSCs, FSCs owned by individual rather than corporate
shareholders, and transactions involving military property.
60Sections 922(a)(1) and 927(d)(3) IRC. Typically an FSC is organized in a non-United States jurisdiction
that does not tax, or applies a low tax rate to, corporate income.
61Section 922(a)(1) IRC.
62Section 922(a)(2) IRC.
63Section 923(b) IRC.
64Section 923(a) IRC.
65Section 924 IRC.
66Section 927(a) IRC; Panel Report, para. 2.1.
67Section 924(b)(1)(B) IRC.
68Sections 924(b)(1)(A) and 927(d)(3) IRC.
51
purposes. First, the transfer pricing rules allocate the income from transactions involving United States
export property as between an FSC and its United States supplier. The part of this income attributable to the
FSC is its foreign trade income (i.e. exempt and non-exempt foreign trade income). The second purpose of
the transfer pricing rules is to determine how much of the income from transactions involving United States
export property that is allocated to the FSC as foreign trade income is exempt foreign trade income, and
how much of it is non-exempt foreign trade income. The transfer pricing rule applied to determine the
amount of the FSC’s foreign trade income must also be applied to determine the division of that foreign
trade income into exempt and non-exempt foreign trade income.69
EXEMPTIONS PROVIDED BY THE FSC MEASURE
.16.The FSC measure establishes three main exemptions which affect the United States tax liability of the
FSC, of its United States supplier and, possibly United States shareholders. The first exemption relates to
the United States tax treatment of the foreign-source income of a foreign corporation.70 Under United
States law generally, the foreign-source income of a foreign corporation engaged in trade or business in the
United States is taxable only to the extent that it is “effectively connected with the conduct of a trade or
business within the United States”.71 This rule applies whether or not a foreign corporation is controlled
by a United States corporation. To determine whether the foreign-source income of a foreign corporation is
“effectively connected with the conduct of a trade or business within the United States”, a factual inquiry is
undertaken by the tax authorities.72 Under the FSC measure, however, the exempt portion of an FSC’s
foreign trade income is “treated as foreign source income which is not effectively connected with the
conduct of a trade or business within the United States”.73 In other words, the exempt portion of the FSC’s
foreign trade income is not subject to a factual inquiry to determine if it is “effectively connected with the
conduct of a trade or business within the United States”. Thus, under this first exemption, a portion of an
FSC’s foreign-source income is legislatively determined not to be “effectively connected” and, therefore,
is not taxable in the hands of the FSC – without regard to what conclusion an administrative factual inquiry
might come to in the absence of the FSC measure.
.17.The second exemption relates to the United States tax treatment of certain income earned by a foreign
corporation that is controlled by a United States corporation. Under United States law generally, a
69Under the first transfer pricing rule, the "arm's length" rule, the allocation of income is based on the
actual price paid by the FSC to its related United States supplier, subject to adjustment under Section 482
IRC. This rule may be used by any FSC. Provided that it meets certain additional requirements to
perform distribution activities in respect of qualifying transactions; and that it is related to its United States
supplier, an FSC may instead elect to use one of two other transfer pricing rules, known as the
"administrative pricing" rules. Each administrative pricing rule allows an FSC to determine its foreign
trade income by applying a formula which divides the combined total income derived from qualifying
transactions between the FSC and its related United States supplier. See Section 925 IRC and paras. 2.5 –
2.8 of the Panel Report.
70See Panel Report, para. 7.95.
71Section 882(a) IRC.
72Section 864 IRC sets out the rules for determining whether the income of a foreign corporation is
"effectively connected with the conduct of a trade or business within the United States". Under United
States tax law, the "effectively connected" concept is distinct from the "source-of-income" concept. The
income of a foreign corporation may be "foreign-source" income under the rules for determining source of
income (Sections 861-865 IRC), but may nevertheless be "effectively connected" with a trade or business
within the United States and, on this basis, subject to taxation (see J. Isenbergh, supra, footnote 24, Vol. I,
chapters 5 and 21).
73Section 921(a) IRC.
52
United States shareholder in a controlled foreign corporation must include in his gross income each year
a pro rata share of certain forms of income of the foreign controlled corporation which has not yet been
distributed to its United States parent.74 Such income is known as “Subpart F income”. The United States
shareholder corporation is immediately subject to United States tax on its Subpart F income, even though it
has not yet received the income from its foreign affiliate. Under the FSC measure, however, the foreign
trade income of an FSC is generally exempted from Subpart F.75 Thus, under this second exemption, the
parent of an FSC is not required to declare its pro rata share of the undistributed income of an FSC that is
derived from the foreign trade income of the FSC, and is not taxed on such income.
.18.The third exemption deals with the tax treatment of dividends received by United States corporations
from foreign corporations.76 Under United States law generally, dividends received by a United States
corporation which are derived from the foreign-source income of a foreign corporation are taxable, unless
such income has already been taxed under the Subpart F rules.77 Under the FSC measure, however, United
States corporate shareholders of an FSC generally may deduct 100 per cent of dividends received from
distributions made out of the foreign trade income of an FSC.78 Thus, under the third exemption, the
parent of an FSC is generally not taxed on dividends received that are derived from the foreign trade income
of the FSC.
.III. Arguments of the Participants
A. CLAIMS OF ERROR BY THE UNITED STATES – APPELLANT
.19.The United States urges the Appellate Body to take account of the historical background to this appeal.
According to the United States, the FSC measure and the issues raised in this appeal cannot be reviewed in
a vacuum, but can be understood only in the context of basic tax principles, the application of those
principles through the FSC measure, and the historical events that led to the creation of the FSC regime.
.20.The United States recalls that the origins of this dispute go back to the enactment by the United States of
the Domestic International Sales Corporations ("DISC") tax provisions in 1971. In 1972, the European
Communities requested dispute settlement consultations regarding the DISC measure, alleging that the
DISC measure constituted an export subsidy. The United States then requested consultations with France,
Belgium, and the Netherlands, contending that if the DISC measure were an export subsidy, then the tax
exemptions provided by those countries for foreign-source income also were export subsidies. The panel
reports in these four cases, the "Tax Legislation Cases", were issued in 1976, and the panels found that both
the DISC measure and the European tax systems had characteristics of an export subsidy prohibited under
74Section 951(a) IRC.
75Panel Report, para. 7.96; Section 951(e) IRC. If an FSC uses the administrative pricing rules, then this
second exemption applies with respect to both the exempt and the non-exempt portions of the FSC's
foreign trade income. However, if an FSC uses the Section 482 arm's length transfer pricing rules, then the
United States shareholder must declare a pro rata share of the non-exempt portion of its FSC's foreign
trade income and generally is subject to United States tax on that portion of the FSC's foreign trade income.
76See Panel Report, para. 7.97.
77Ibid.
78Section 245(c) IRC. If an FSC uses the administrative pricing rules, then this third exemption applies to
dividends derived from both the exempt and non-exempt portions of that FSC's foreign trade income.
However, if an FSC uses the Section 482 arm's length transfer pricing rules, then the United States
shareholder generally is subject to tax on dividends received from distributions derived from
the non-exempt portion of its FSC's foreign trade income, unless such income has already been taxed
under the Subpart F rules.
53
Article XVI:4 of the GATT 1947. Under the GATT 1947 dispute settlement system, panel reports were
only adopted by consensus of the contracting parties. Since the parties to the dispute would not, initially,
agree to the adoption of the panel reports in the Tax Legislation Cases, these reports remained unadopted
for several years.
.21.In 1979, a number of contracting parties, including the countries involved in the Tax Legislation Cases,
entered into the Agreement on Interpretation and Application of Articles VI, XVI, and XXIII of the General
Agreement on Tariffs and Trade (the "Tokyo Round Subsidies Code"), which included footnote 2 to the
Illustrative List of Export Subsidies. The United States points out that footnote 2 addressed key elements of
the Tax Legislation Cases. The footnote incorporated the panels' analysis in these reports with respect to
the issues of deferral and arm's length pricing, but departed from the panel's reasoning with respect to
double taxation. Footnote 2 expressly provided that countries may take steps to avoid the double taxation of
income.
.22.In 1981, the parties finally agreed to the adoption of the panel reports in the Tax Legislation Cases by
means of a GATT 1947 Council action which adopted the reports subject to an "understanding"79, and
which was accompanied by a statement from the Chairman of the Council. According to the United States,
that "understanding" effectively revised the panel reports by incorporating into them the principles of
footnote 2 to the Tokyo Round Subsidies Code's Illustrative List. In 1984, the United States replaced the
DISC provisions with the FSC provisions. According to the United States, the FSC provisions "were
intended to provide a limited territorial-type system of taxation"80 for United States exports that complied
with GATT subsidy rules, in particular those laid out in footnote 2 of the Tokyo Round Subsidies Code's
Illustrative List and the 1981 "understanding".
1. The SCM Agreement
.23.In the view of the United States, the Panel's finding that the FSC measure constitutes an export subsidy
was based on fundamental analytical errors. The Panel erred in failing to begin its analysis with footnote 59
to the Illustrative List of Export Subsidies (the "Illustrative List") in Annex I of the SCM Agreement, which
is the "controlling legal provision" in this case. Footnote 5 to Article 3.1(a) of the SCM Agreement makes
clear that a practice identified in the Illustrative List as not constituting an export subsidy is not prohibited
by Article 3.1(a) or any other provision of the SCM Agreement. Since, according to the United States, the
FSC tax exemption is permitted under footnote 59, no further analysis is needed.
.24.The United States does not, as a general proposition, disagree with the Panel's interpretation of the term
"otherwise due" in Article 1.1(a)(1)(ii) of the SCM Agreement as establishing a "but for" test. However,
this test must yield in situations where a specific standard exists for determining whether revenue is
"otherwise due". In this case, the context of Article 1.1(a)(1)(ii), in particular footnote 59 of
the SCM Agreement and the 1981 "understanding", demonstrates that such a specific standard exists –
taxation of foreign-source income is deemed not to be revenue that is "otherwise due".
.25.The United States considers that footnote 59 permits tax exemptions for foreign-source income even if
it is "specifically in relation to exports".81 Item (e) of the Illustrative List identifies certain tax practices as
79The participants in this appeal have generally referred to the 1981 Council action on the basis of which
the Council adopted the panel reports in the Tax Legislation Cases as the "1981 Understanding". Tax
Legislation, L/5271, 7-8 December 1981, BISD 28S/114. As explained infra at footnote 76, we prefer the
term "1981 Council action". In order faithfully to summarize the arguments of the participants, however,
we use the term 1981 "understanding" within this section of our Report.
80United States' appellant's submission, para. 45.
81United States' appellant's submission, para. 101.
54
export subsidies, and the text of footnote 59 qualifies this characterization of some of such practices. The
second sentence of footnote 59, in which Members "reaffirm" the principle of arm's length pricing, imposes
parameters on the prices that may be charged between related parties in export transactions. According to
the United States, the second sentence of footnote 59 assumes that foreign-source income may be
exempted from tax or taxed to a lesser extent than domestic-source income, and would have no meaning if
foreign-source income could not be exempted from tax.
.26.The United States submits that the FSC measure is also not an export subsidy by virtue of the fifth
sentence of footnote 59, which excludes from the scope of item (e) of the Illustrative List measures to
prevent foreign-source income from being subjected to double taxation. The Panel erred by failing to find
that, as a tax exemption measure to avoid the double taxation of foreign-source income, the FSC measure is
permitted by footnote 59. The Panel erroneously stated that the United States had not asserted that the fifth
sentence of footnote 59 applied to the FSC. In its first submission to the Panel, the United States asserted
that "the FSC is designed to prevent double taxation of export income earned outside the United
States ... ."82
.27.The United States argues that the Panel's interpretation of Article 1.1(a)(1)(ii), as well as of Article
3.1(a), also failed to take into account the 1981 "understanding". The "understanding" specifically states
that economic processes located outside the territory of the exporting country "should not be regarded as
export activities." The import of this language is to remove such processes from the ambit of Article 3.1(a)
and Annex 1 of the SCM Agreement, both of which deal exclusively with export subsidies. If foreign
economic processes do not constitute "export activities," then exempting the income from such processes
from taxation cannot be deemed to be an export subsidy.
.28.The United States contends that it is also clear that, in adopting the 1981 "understanding", the GATT
1947 Council intended to establish principles of general applicability. The opening sentence of the
"understanding" states that the "understanding" applies "in general". The background to the adoption of the
1981 "understanding" supports this interpretation. Footnote 2 of the Tokyo Round Subsidies Code's
Illustrative List recognized that countries could take steps to avoid double taxation of foreign-source
income, and that foreign-source income should be determined on the basis of the arm's length principle.
The impasse regarding the Tax Legislation Cases was resolved through the 1981 "understanding", which
accepted the principles codified in footnote 2 of the Tokyo Round Subsidies Code.83
.29.The United States further argues that the 1981 "understanding" satisfies all of the criteria to constitute a
"decision" under paragraph 1(b)(iv) of the language in Annex 1A incorporating the GATT 1994 into
the WTO Agreement. Accordingly, the 1981 "understanding" has the same legal force as any other
provision of the GATT 1994. In finding that the 1981 "understanding" is not an "other decision" within the
meaning of paragraph 1(b)(iv), the Panel wrongly imposed a requirement – that such decisions must be a
"legal instrument" – that is inconsistent with paragraph 1(b)(iv). Furthermore, the Panel misapplied this
standard by declaring the phrase "in general" in the 1981 "understanding" to be ambiguous, and then
misinterpreted the circumstances surrounding the adoption of the "understanding" to override the text itself.
The Panel failed to appreciate that the Council took two separate actions, with independent significance:
a decision to adopt the Tax Legislation Cases reports and an accompanying "understanding". Although
the Chairman stated that the decision does not affect the interpretation of the Tokyo Round Subsidies Code,
the Chairman did not make the same statement as regards the "understanding". To the contrary, the
United States alleges that the third sentence of the "understanding" shows that it would affect future
82Panel Report, para. 4.348.
83The United States refers to the statements of the Belgian, French, Dutch and Swiss representatives of
14 January 1981 (C/M/145).
55
interpretations of the Tokyo Round Subsidies Code, and that this guidance has been carried forward into the
WTO.
.30.Even if the 1981 "understanding" were not a part of the GATT 1994, the United States submits that it
would nevertheless be a "decision" within the meaning of Article XVI:1 of the WTO Agreement, by which
panels and the Appellate Body should be guided. The Panel erred in finding that the "understanding" was
not relevant to this dispute when, as the United States has demonstrated, the 1981 "understanding" and
footnote 59 are inextricably bound together. Even though the 1981 "understanding" involved an
interpretation of Article XVI of the GATT 1947, the text of the SCM Agreement, the jurisprudence of the
Appellate Body84, as well as the interconnected history of the SCM Agreement and Article XVI, all make
clear that the SCM Agreement and Article XVI are not to be construed in isolation from one another.
(…)
B. ARGUMENTS BY THE EUROPEAN COMMUNITIES – APPELLEE
1. The SCM Agreement
.44.The European Communities requests the Appellate Body to uphold the Panel's findings under the SCM
Agreement, and to reject the United States' appeal against the Panel's "finding that a failure to tax foreign
source income constitutes the foregoing of revenue that is 'otherwise due' within the meaning of Article
1.1(a)(1)(ii) of the SCM Agreement".85
.45.The European Communities objects that the United States' argument that the FSC measure can be
justified as a measure for the avoidance of double taxation within the meaning of the last sentence of
footnote 59 is inadmissible. The United States is relying on a new "affirmative defence" 86, which it did
not raise before the Panel. As a practical matter, the Appellate Body cannot deal with this issue as it would
require the examination of factual issues not examined by the Panel.
.46.The European Communities rejects the order in which the United States claims the Panel should have
addressed the issues in this appeal. In the view of the European Communities, the United States wants the
analysis to begin with footnote 59 and its "controlling legal principle" so as to avoid dealing with the clear
terms of Article 3.1(a) of the SCM Agreement. The European Communities agrees with the Panel that the
correct order to interpret the relevant provisions is to begin with the definition of a subsidy in Article 1,
examine contingency upon export performance under Article 3.1(a), and then consider whether the
prohibition is confirmed by item (e) and footnote 59 of the Illustrative List or whether this provision
contains an affirmative defence.
.47.It seems to the European Communities that the United States accepts the Panel's interpretation of
Article 1.1(a)(1)(ii) of the SCM Agreement and the "but for" test, but argues that an exception exists – that
taxation of foreign-source income is never "otherwise due". However, neither footnote 5, footnote 59, nor
the 1981 "understanding" relate to or can create such an exception. In this regard, the European
Communities considers that even if all measures in the Illustrative List were contingent upon export, this
does not mean that measures referred to as not constituting export subsidies are not subsidies. By its terms,
footnote 5 cannot exempt measures from the Article 1 definition of a subsidy. Furthermore, footnote 59 has
nothing to do with the general proposition that Members are not required to tax foreign-source income, and
84Appellate Body Report, Brazil – Measures Affecting Desiccated Coconut ("Brazil - Desiccated
Coconut"), WT/DS/22/AB/R, adopted 20 March 1997.
85European Communities' appellee's submission, para. 86.
86European Communities' appellee's submission, para. 13.
56
the 1981 "understanding" is irrelevant to the interpretation of revenue "otherwise due" under Article
1.1(a)(1)(ii) of the SCM Agreement. The European Communities notes in this regard that saying that
"foreign source income 'need not be subject to taxation by the exporting country'" is not tantamount to
saying that revenue is not "otherwise due" 87, and that the 1981 "understanding" relates to Article XVI of
the GATT 1947, which does not include a definition of subsidy.
.48.The European Communities observes that the United States does not deny that the FSC measure
provides subsidies that come within the general terms of Article 3.1(a) or within item (e) of the Illustrative
List. However, for the footnote 5 exception to Article 3.1(a) to apply, the FSC measures must be referred to
in Annex I as "not constituting export subsidies". Footnote 59 does not have such an effect. The second
sentence of footnote 59 simply points out that allowing enterprises to use non-arm's length pricing may give
rise to an export subsidy when this is done in connection with export-related measures. The fifth sentence is
not properly before the Appellate Body, and in any case, the European Communities adds, the FSC regime
is not intended "to avoid double taxation".
.49.The European Communities asks the Appellate Body to uphold the Panel's findings that the 1981
"understanding" is not an "other decision" within the meaning of paragraph (1)(b)(iv) of the introductory
language to GATT 1994. The European Communities rejects the United States' argument that
the decision to adopt the Tax Legislation Cases reports and the "understanding" are separate acts. As the
text of the 1981 "understanding" and the Chairman's statement clearly indicate, the Council adopted a
single decision – the "understanding" and the adoption of the panel reports were inextricably connected.
Even if the "understanding" were separate from the decision to adopt the Tax Legislation Cases reports,
the European Communities does not accept that it would constitute a "legal instrument" under
paragraph 1(b)(iv).
.50.The European Communities adds that the 1981 "understanding" cannot be relevant context for the
interpretation of the SCM Agreement because it is neither contemporaneous with, nor related to, that
Agreement. Since Article XVI:4 of the GATT 1947 has been substantially modified by the new WTO
system of rules, pre-1994 interpretations are doubly obsolete. Finally, the European Communities
emphasizes that the 1981 "understanding" states that foreign "economic processes" need not be subject to
tax, not that foreign "economic processes" may be exempted from tax on any condition a country wishes
to impose, including export contingency. Since FSC subsidies are not granted to "foreign economic
processes", the European Communities concludes that they cannot benefit from the 1981 "understanding".
(…)
.IV. Issues Raised in This Appeal
.76.This appeal raises the following issues:
(a)
whether the Panel erred in finding that the FSC measure constitutes a prohibited export subsidy
under Article 3.1(a) of the SCM Agreement, including whether the Panel erred in finding that the FSC
measure involves a “subsidy” under Article 1.1 of the SCM Agreement; (…)
.V. Article 3.1 of the SCM Agreement
.77.At the outset, the Panel stated that it would begin its examination of the dispute with the European
Communities’ claims under Article 3.1(a) of the SCM Agreement, rather than with the United States’
arguments under footnote 59 of that Agreement. Under Article 3.1(a), the Panel determined, first, whether
87European Communities' appellee's submission, para. 214, referring to the United States' appellant's
submission, para. 295.
57
the FSC measure involved a “subsidy” as that term is defined in Article 1.1 of the SCM Agreement. The
Panel examined, in particular, whether the FSC measure involved the foregoing of “government revenue
that is otherwise due” under Article 1.1(a)(1)(ii). (emphasis added) The Panel stated:
… we took the term “otherwise due” to refer to the situation that would prevail but for the measures in
question. It is thus a matter of determining whether, absent such measures, there would be a higher tax
liability. In our view, this means that a panel, in considering whether revenue foregone is “otherwise due”,
must examine the situation that would exist but for the measure in question. Under this approach, the
question presented in this dispute is whether, if the FSC scheme did not exist, revenue would be due which
is foregone by reason of that scheme.88 (underlining added)
.78.The Panel next considered whether this reading of the term “otherwise due” was altered by the
1981 Council action.89 The Panel concluded that that action was “not a legal instrument with binding legal
force on all contracting parties”90 and that it did not, therefore, form part of the GATT 1994 under
paragraph 1(b)(iv) of the language incorporating the GATT 1994 into the WTO Agreement.91
.79.The Panel went on to find that the 1981 Council action was a “decision” which “guided” the WTO
under Article XVI:1 of the WTO Agreement. However, the Panel took the view that the 1981 Council
action was not “relevant to this dispute” because the 1981 Council action was limited to Article XVI:4 of
the GATT 1947 and because Article XVI:4 of the GATT 1947 “differs dramatically from the export
subsidy disciplines in the SCM Agreement”.92 (emphasis added)
.80.The Panel also examined whether its reading of the term “otherwise due” was affected by footnote 59 of
the SCM Agreement. The Panel opined:
… even assuming for the sake of argument that footnote 59 is predicated on the assumption that income
arising from foreign economic processes is not as a general matter “otherwise due” within the meaning of
Article 1.1(a)(1)(ii), we could at most conclude that a decision by a Member not to tax any income arising
from foreign economic processes would not represent the foregoing of revenue “otherwise due”. There is in
our view however nothing in footnote 59 which would lead us to conclude that a Member that decides that
it will tax income arising from foreign economic processes does not forego revenue “otherwise due” if it
decides in a selective manner to exclude certain limited categories of such income from taxation.93
.81.The Panel, therefore, dismissed the United States argument that footnote 59 altered the interpretation of
the term “otherwise due”. Thereafter, the Panel examined whether the FSC measure involves the foregoing
of government revenue “otherwise due”. The Panel found:
Viewed as an integrated whole, the exemptions provided by the FSC scheme represent a systematic effort
by the United States to exempt certain types of income which would be taxable in the absence of the FSC
scheme. Thus, application of special source rules for FSCs serves to protect a certain proportion of the
foreign trade income of a FSC from direct taxation, whether or not that income would be taxable under the
source rules provided for in Section 864 of the US Internal Revenue Code. The exemption from the
anti-deferral rules of Subpart F of the US Internal Revenue Code ensure that the undistributed foreign trade
income of a FSC is not immediately taxable to the US parent of a FSC, even though such income might
88Panel Report, para. 7.45.
89Throughout our findings, we use the term "1981 Council action" to refer to the action taken by the GATT
1947 Council when adopting the panel reports in the Tax Legislation Cases, supra, footnotes 44 and 45.
90Panel Report, para. 7.74.
91Ibid., para. 7.85.
92Ibid., paras. 7.79 and 7.85.
93Panel Report, para. 7.92.
58
otherwise be subject to the anti-deferral rules. Finally, the 100 per cent dividends-received deduction
ensures that, even when the FSC distributes earnings attributable to foreign trade income to the US parent
company, the US parent will not be subject to US income taxes on that income. Taken together, it is clear
that the various exemptions under the FSC scheme result in a situation where certain types of income are
shielded from taxes that would be due in the absence of the FSC scheme.94
.82.The Panel, therefore, concluded that “the various exemptions under the FSC scheme, taken together,
result in the foregoing of revenue which is otherwise due and thus give rise to a financial contribution
within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.” 95 Having also found that the FSC
measure involves a “benefit” to the recipients of the FSC tax exemptions96, the Panel concluded that the
FSC tax exemptions “represent a subsidy within the meaning of Article 1 of the SCM Agreement.”97
.83.The Panel then considered whether the FSC subsidies are “contingent upon export performance” under
Article 3.1(a) of the SCM Agreement. The Panel examined the provisions of the IRC, notably those
relating to the “foreign trading gross receipts” of an FSC98 and the definition of “export property”.99 In
light of these provisions, the Panel concluded that the FSC tax exemptions are “contingent upon export
performance” under Article 3.1(a) of the SCM Agreement. The Panel then examined footnote 59 again and
reiterated that footnote 59 does not mean that “a Member is … entitled to … assert its taxing authority over
income derived from foreign economic activities generally and then create an exemption from such taxation
specifically for income derived from export activities.”100
.84.On the basis of this reasoning, the Panel concluded that the United States has “acted inconsistently with
its obligations under Article 3.1(a) of the SCM Agreement by granting or maintaining export subsidies
prohibited by that provision”.101
(…)
.88.We will examine the United States’ appeal on these various issues in the following order. First, we will
consider whether the Panel ought to have begun its analysis with footnote 59, rather than with Articles 1.1
and 3.1 of the SCM Agreement. Second, we will examine the Panel’s findings under Article 3.1(a) of the
SCM Agreement, including the Panel’s finding that the FSC measure involves a “subsidy” under Article 1.1
of the SCM Agreement and, in particular, the Panel’s interpretation of the term “otherwise due” in
Article 1.1. We will then address the Panel’s finding that the FSC subsidy is “contingent upon export
performance” and the United States’ arguments that footnote 59, as “confirmed” by the 1981 Council
action, means that the FSC measure is not an export subsidy.
.89.We start with the United States’ argument that the Panel erred by failing to begin its examination of the
European Communities’ claim under Article 3.1(a) of the SCM Agreement with footnote 59 of that
Agreement. Instead, the Panel began its examination with the general definition of a “subsidy” that is set
forth in Article 1.1 of the SCM Agreement.102 This definition applies throughout the SCM Agreement, to
94Ibid., para. 7.100.
95Ibid., para. 7.102.
96Ibid., para. 7.103.
97Panel Report, para. 7.104.
98Section 924 IRC.
99Section 927(a) IRC.
100Panel Report, para. 7.119.
101Ibid., para. 8.1.
102Panel Report, para. 7.39.
59
all the different types of “subsidy” covered by that Agreement. In our view, it was not a legal error for the
Panel to begin its examination of whether the FSC measure involves export subsidies by examining the
general definition of a “subsidy” that is applicable to export subsidies in Article 3.1(a).103 In any event,
whether the examination begins with the general definition of a “subsidy” in Article 1.1 or with footnote 59,
we believe that the outcome of the European Communities’ claim under Article 3.1(a) would be the
same.104 The appropriate meaning of both provisions can be established and can be given effect,
irrespective of whether the examination of the claim of the European Communities under Article 3.1(a)
begins with Article 1.1 or with footnote 59.105
(a)
Article 1.1 of the SCM Agreement
.90.We turn now to the definition of the term “subsidy” and, in particular, to Article 1.1(a)(1)(ii), which
provides that there is a “financial contribution” by a government, sufficient to fulfil that element in the
definition of a “subsidy”, where “government revenue that is otherwise due is foregone or not collected”.
(emphasis added) In our view, the “foregoing” of revenue “otherwise due” implies that less revenue has
been raised by the government than would have been raised in a different situation, or, that is, “otherwise”.
Moreover, the word “foregone” suggests that the government has given up an entitlement to raise revenue
that it could “otherwise” have raised. This cannot, however, be an entitlement in the abstract, because
governments, in theory, could tax all revenues. There must, therefore, be some defined, normative
benchmark against which a comparison can be made between the revenue actually raised and the revenue
that would have been raised “otherwise”. We, therefore, agree with the Panel that the term “otherwise due”
implies some kind of comparison between the revenues due under the contested measure and revenues that
would be due in some other situation. We also agree with the Panel that the basis of comparison must be the
tax rules applied by the Member in question. To accept the argument of the United States that the
comparator in determining what is “otherwise due” should be something other than the prevailing domestic
standard of the Member in question would be to imply that WTO obligations somehow compel Members to
choose a particular kind of tax system; this is not so. A Member, in principle, has the sovereign authority to
tax any particular categories of revenue it wishes. It is also free not to tax any particular categories of
revenues. But, in both instances, the Member must respect its WTO obligations.106 What is “otherwise
due”, therefore, depends on the rules of taxation that each Member, by its own choice, establishes for itself.
103We note that, in Brazil – Aircraft, we stated that in a dispute involving claims under Article 3.1(a)
brought against a developing country Member, it is incumbent on the complaining Member to demonstrate,
first, that the developing country Member in question is not in compliance with Article 27.4 of the
SCM Agreement. The reason for this is that, in the circumstances described in Article 27, Article 3.1(a)
does not apply to developing country Members. It is, therefore, necessary to establish, first, that Article
3.1(a) actually applies to the dispute (supra, footnote 52, para. 141). However, Article 27 does not apply to
this dispute, which does not involve a complaint against a developing country Member, and the
applicability of Article 3.1(a) is not, therefore, in issue.
104The United States agreed with this view in reply to questioning during the oral hearing.
105We note that the relationship between Article 1.1 and footnote 59 of the SCM Agreement is, therefore,
different in this way from the relationship between the chapeau of Article XX of the GATT 1994 and the
particular exceptions listed in sub-paragraphs (a) to (j) of that Article. In our Report in United States –
Import Prohibitions of Certain Shrimp and Shrimp Products ("United States – Shrimp"), we observed that
the application of the general standards of the chapeau of Article XX of the GATT 1994 is rendered very
difficult, if not impossible, if the treaty interpreter does not, first, identify and examine the specific
exception at issue (WT/DS58/AB/R, adopted 6 November 1998, para. 120).
106See Japan – Taxes on Alcoholic Beverages ("Japan – Alcoholic Beverages"), WT/DS8/AB/R,
WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, p. 16, and Chile – Taxes on Alcoholic
Beverages, WT/DS87/AB/R, WT/DS110/AB/R, adopted 12 January 2000, paras. 59 and 60.
60
.91.The Panel found that the term “otherwise due” establishes a “but for” test, in terms of which the
appropriate basis of comparison for determining whether revenues are “otherwise due” is “the situation that
would prevail but for the measures in question”.107 In the present case, this legal standard provides a
sound basis for comparison because it is not difficult to establish in what way the foreign-source income of
an FSC would be taxed “but for” the contested measure. However, we have certain abiding reservations
about applying any legal standard, such as this “but for” test, in the place of the actual treaty language.
Moreover, we would have particular misgivings about using a “but for” test if its application were limited to
situations where there actually existed an alternative measure, under which the revenues in question would
be taxed, absent the contested measure. It would, we believe, not be difficult to circumvent such a test by
designing a tax regime under which there would be no general rule that applied formally to the revenues in
question, absent the contested measures. We observe, therefore, that, although the Panel’s “but for” test
works in this case, it may not work in other cases. We note, however, that, in this dispute, the European
Communities does not contest either the Panel’s interpretation of the term “otherwise due” or the Panel’s
application of that term to the facts of this case.108 The United States also accepts the Panel’s
interpretation of that term as a general proposition.
.92.The United States does, however, argue that the Panel erred because the general interpretation of the
term “otherwise due” “must yield” 109 to the standard the United States perceives in footnote 59 of the
SCM Agreement, which the United States contends, is the “controlling legal provision”110 for
interpretation of the term “otherwise due” with respect to a measure of the kind at issue.111 In the view of
the United States, footnote 59 means that the FSC measure is not a “subsidy” under Article 1.1 of the
SCM Agreement. Thus, the United States does not read footnote 59 as providing context for the general
interpretation of the term “otherwise due”; rather, the United States views footnote 59 as a form of
exception to that general interpretation. The United States submits further that this reading of footnote 59 is
“confirmed” by the 1981 Council action, which, it will be recalled, the United States contends forms part of
the GATT 1994.
.93.Article 1.1 sets forth the general definition of the term “subsidy” which applies “for the purpose of this
Agreement”. This definition, therefore, applies wherever the word “subsidy” occurs throughout the
SCM Agreement and conditions the application of the provisions of that Agreement regarding prohibited
subsidies in Part II, actionable subsidies in Part III, non-actionable subsidies in Part IV and countervailing
measures in Part V. By contrast, footnote 59 relates to one item in the Illustrative List of Export Subsidies.
Even if footnote 59 means – as the United States also argues – that a measure, such as the FSC measure, is
not a prohibited export subsidy, footnote 59 does not purport to establish an exception to the general
definition of a “subsidy” otherwise applicable throughout the entire SCM Agreement. Under footnote 5 of
the SCM Agreement, where the Illustrative List indicates that a measure is not a prohibited export subsidy,
that measure is not deemed, for that reason alone, not to be a “subsidy”. Rather, the measure is simply not
prohibited under the Agreement. Other provisions of the SCM Agreement may, however, still apply to such
a “subsidy”. We note, moreover, that, under footnote 1 of the SCM Agreement, “the exemption of an
exported product from duties or taxes borne by the like product when destined for domestic consumption …
shall not be deemed to be a subsidy”. (emphasis added) The tax measures identified in footnote 1 as not
107Panel Report, para. 7.45.
108In the Panel proceedings, the European Communities advanced an interpretation of the term "otherwise
due" that differed from that retained by the Panel. The European Communities considered the Panel's
interpretation to be "formalistic". See Panel Report, paras. 4.591 and 7.46.
109United States' appellant's submission, para. 279.
110Ibid., para. 64.
111Ibid., para. 111.
61
constituting a “subsidy” involve the exemption of exported products from product-based consumption
taxes. The tax exemptions under the FSC measure relate to the taxation of corporations and not products.
Footnote 1, therefore, does not cover measures such as the FSC measure.
.94.In light of the above, we do not accept the United States’ argument that footnote 59 qualifies the general
interpretation of the term “otherwise due”. That being so, it is not necessary for us to examine, at this point,
the United States’ arguments on the interpretation of footnote 59 or the United States’ belief that its
interpretation of footnote 59 is “confirmed” by the 1981 Council action. These arguments will be
examined below when we consider Article 3.1(a) of the SCM Agreement and footnote 59 of that
Agreement, which is attached to item (e) of the Illustrative List.
.95.The United States’ appeal from the Panel’s findings under Article 1.1 of the SCM Agreement is limited
to its contention that the general interpretation of the term “otherwise due” is qualified by footnote 59. As
we do not accept that sole ground of appeal, we uphold the Panel’s finding that, under the FSC measure, the
government of the United States foregoes revenue that is “otherwise due” under Article 1.1(a)(1)(ii) of the
SCM Agreement. We note, in this respect, that the United States acknowledges that the FSC measure
represents a departure from the rules of taxation that would “otherwise” apply to FSCs. 112 We note also
that the United States does not contest that, absent the FSC measure, the tax liability of the FSCs would be
higher.
(b)
Article 3.1(a) of the SCM Agreement
.96.The United States’ appeal from the Panel’s findings under Article 3.1(a) is limited to its contention that
footnote 59, as “confirmed” by the 1981 Council action, means that the FSC measure is not an “export
subsidy”. Footnote 59 reads:
The Members recognize that deferral need not amount to an export subsidy where, for example, appropriate
interest charges are collected. The Members reaffirm the principle that prices for goods in transactions
between exporting enterprises and foreign buyers under their or under the same control should for tax
purposes be the prices which would be charged between independent enterprises acting at arm’s length.
Any Member may draw the attention of another Member to administrative or other practices which may
contravene this principle and which result in a significant saving of direct taxes in export transactions. In
such circumstances the Members shall normally attempt to resolve their differences using the facilities of
existing bilateral tax treaties or other specific international mechanisms, without prejudice to the rights and
obligations of Members under GATT 1994, including the right of consultation created in the preceding
sentence.
Paragraph (e) is not intended to limit a Member from taking measures to avoid the double taxation of
foreign-source income earned by its enterprises or the enterprises of another Member. (emphasis added)
.97.We need to examine footnote 59 sentence by sentence. The first sentence of footnote 59 is specifically
related to the statement in item (e) of the Illustrative List that the “full or partial exemption remission, or
deferral specifically related to exports, of direct taxes” is an export subsidy. The first sentence of footnote
59 qualifies this by stating that “deferral need not amount to an export subsidy where, for example,
appropriate interest charges are collected.” Since the FSC measure does not involve the deferral of direct
112In paragraphs 7.95, 7.96 and 7.97 of the Panel Report, the Panel described, in detail, the manner in
which the three tax exemptions provided under the FSC measure constitute a departure from the rules of
taxation that would "otherwise" apply. At the oral hearing, the United States confirmed the correctness of
the description given of the rules of taxation that would "otherwise" apply and of the three FSC exemptions
in paragraphs 7.95, 7.96 and 7.97 of the Panel Report. The FSC measure is also described, supra, in
paragraphs 11 to 18.
62
taxes, we do not believe that this sentence of footnote 59 bears upon the characterization of the FSC
measure as constituting, or not, an “export subsidy”.
.98.The second sentence of footnote 59 “reaffirms” that, in allocating export sales revenues, for tax
purposes, between exporting enterprises and controlled foreign buyers, the price for the goods shall be
determined according to the “arm’s length” principle to which that sentence of the footnote refers. Like the
Panel, we are willing to accept, for the sake of argument, the United States’ position that it is “implicit” in
the requirement to use the arm’s length principle that Members of the WTO are not obliged to tax
foreign-source income, and also that Members may tax such income less than they tax domestic-source
income.113 We would add that, even in the absence of footnote 59, Members of the WTO are not obliged,
by WTO rules, to tax any categories of income, whether foreign- or domestic-source income. The United
States argues that, since there is no requirement to tax export-related foreign-source income, a government
cannot be said to have “foregone” revenue if it elects not to tax that income. It seems to us that, taken to its
logical conclusion, this argument by the United States would mean that there could never be a foregoing of
revenue “otherwise due” because, in principle, under WTO law generally, no revenues are ever due and no
revenue would, in this view, ever be “foregone”. That cannot be the appropriate implication to draw from
the requirement to use the arm’s length principle.
.99.Furthermore, we do not believe that the requirement to use the arm’s length principle resolves the issue
that arises here. That issue is not, as the United States suggests, whether a Member is or is not obliged to
tax a particular category of foreign-source income. As we have said, a Member is not, in general, under any
such obligation. Rather, the issue in dispute is whether, having decided to tax a particular category of
foreign-source income, namely foreign-source income that is “effectively connected with a trade or
business within the United States”, the United States is permitted to carve out an export contingent
exemption from the category of foreign-source income that is taxed under its other rules of taxation. Unlike
the United States, we do not believe that the second sentence of footnote 59 addresses this question. It
plainly does not do so expressly; neither, as far as we can see, does it do so by necessary implication. As
the United States indicates, the arm’s length principle operates when a Member chooses not to tax, or to tax
less, certain categories of foreign-source income. However, the operation of the arm’s length principle is
unaffected by the choice a Member makes as to which categories of foreign-source income, if any, it will
not tax, or will tax less. Likewise, the operation of the arm’s length principle is unaffected by the choice a
Member might make to grant exemptions from the generally applicable rules of taxation of foreign-source
income that it has selected for itself. In short, the requirement to use the arm’s length principle does not
address the issue that arises here, nor does it authorize the type of export contingent tax exemption that we
have just described. Thus, this sentence of footnote 59 does not mean that the FSC subsidies are not export
subsidies within the meaning of Article 3.1(a) of the SCM Agreement.
.100.The third and fourth sentences of footnote 59 set forth rules that relate to remedies. In our view, these
rules have no bearing on the substantive obligations of Members under Articles 1.1 and 3.1 of the
SCM Agreement. So, we turn to the fifth and final sentence of footnote 59. That sentence provides:
Paragraph (e) is not intended to limit a Member from taking measures to avoid the double taxation of
foreign-source income earned by its enterprises or the enterprises of another Member.
.101.On appeal, the United States maintains that the FSC measure is a measure “to avoid double taxation of
foreign-source income” under footnote 59.114 As a consequence, the United States further contends that
the FSC measure is excluded from the prohibition against export subsidies in Article 3.1(a) of the
SCM Agreement. During the oral hearing, we asked the United States to identify where it had asserted
113United States' appellant's submission, para. 83.
114United States' appellant's submission, para. 268.
63
before the Panel that the FSC measure is a measure “to avoid double taxation of foreign-source income”
under footnote 59. That is, we asked the United States to tell us specifically where it had invoked the fifth
sentence of footnote 59 as a means of justifying the FSC measure. In reply, the United States pointed to its
first written submission to the Panel. In that submission, in describing the FSC measure and before setting
forth its legal arguments, the United States stated that “the FSC is designed to prevent double taxation of
export income earned outside the United States by exempting a portion of the FSC’s income from
taxation.”115 The United States pointed also to certain general arguments it made before the Panel
concerning the fifth sentence of footnote 59. However, the United States did not indicate that, in its
substantive arguments to the Panel, it had justified the FSC measure as a measure “to avoid double
taxation” under footnote 59. Nor do we find any indication in the Panel Record that the United States ever
invoked this justification. We, therefore, conclude that the United States did not assert, far less argue,
before the Panel that the FSC measure is a measure “to avoid double taxation of foreign-source income”
under footnote 59. Our conclusion is confirmed by the Panel’s statement, in footnote 682 of the Panel
Report, that the United States had not asserted that the fifth sentence of footnote 59 was “relevant to this
dispute”.116 It follows, therefore, that this issue was not properly litigated before the Panel and that the
Panel was not asked to examine whether the FSC measure is a measure “to avoid double taxation of
foreign-source income” under footnote 59.
.102.We said, in our Report in Canada – Aircraft, that “new arguments are not per se excluded from the
scope of appellate review, simply because they are new.”117 However, that statement should not be read
as allowing any new argument to be raised for the first time on appeal. Our ability to consider new
arguments is circumscribed by our mandate under Article 17 of the DSU. In Canada – Aircraft, for
example, we declined to examine a new argument that would have required us “to solicit, receive and
review new facts”, which we cannot do under Article 17.6 of the DSU.118
.103.Our mandate under Article 17.6 is to address “issues of law covered in the panel report and legal
interpretations developed by the panel”. The argument which the United States asks us to address under the
fifth sentence of footnote 59 involves two separate legal issues: first, that the FSC measure is a measure “to
avoid double taxation of foreign-source income” within the meaning of footnote 59; and second, that, in
consequence, the FSC measure is excluded from the prohibition in Article 3.1(a) of the SCM Agreement
against export subsidies. In our view, examination of the substantive issues raised by this particular
argument would be outside the scope of our mandate under Article 17.6 of the DSU, as this argument does
not involve either an “issue of law covered in the panel report” or “legal interpretations developed by the
panel”. The Panel was simply not asked to address the issues raised by the United States’ new argument.
Further, the new argument now made before us would require us to address legal issues quite different from
those which confronted the Panel and which may well require proof of new facts. The United States
appears in effect to be appealing from the failure of the Panel to make a ruling or legal interpretation
concerning the fifth sentence of footnote 59. That failure seems to us due to the failure of the respondent
Member properly to litigate the matter before the Panel. We, therefore, decline to examine the United
States’ argument that the FSC measure is a measure “to avoid double taxation” within the meaning of
footnote 59, and we reserve our opinion on this issue.
.104.We turn next to the 1981 Council action and to the United States’ argument that this action confirms its
reading of footnote 59 of the SCM Agreement. The United States contends that the 1981 Council action is
115United States' first submission to the Panel, para. 54, reproduced at para. 4.348 of the Panel Report.
116Panel Report, para. 7.118.
117Supra, footnote 58, para. 211.
118Ibid.
64
relevant to this dispute because, contrary to the Panel’s finding119, that action forms part of the
GATT 1994 and that, as such, it “confirms” the United States reading of footnote 59.120 For that reason,
the United States also appeals from the Panel’s finding that, although the 1981 Council action provides
“guidance” to the WTO as a “decision” under Article XVI:1 of the WTO Agreement, it has no relevance to
this dispute.121
.105.The 1981 Council action arose out of four disputes, known commonly and collectively as the Tax
Legislation Cases. These cases involved tax measures of, respectively, France, Belgium, the Netherlands
and the United States. 122 Each of the tax measures was alleged to involve export subsidies under
Article XVI:4 of the GATT 1947. The panels in these disputes, each of which had the same composition,
circulated their reports to the contracting parties of the GATT 1947 in November 1976. In each dispute, the
panels found that the tax measure at issue was inconsistent with Article XVI:4 of the GATT 1947. These
panel reports proved to be highly controversial with the contracting parties, and resulted in an impasse
among them which, for some time, prevented the adoption of any of these reports under the rules of
Article XXIII of the GATT 1947. After several years of deadlock, and, indeed, after some of the
contracting parties had signed the Tokyo Round Subsidies Code, in December 1981, the CONTRACTING
PARTIES adopted the four panel reports in the Tax Legislation Cases. These reports were adopted on the
basis of a particular action, which we have called the “1981 Council action”, which reads in full:
The Council adopts these reports on the understanding that with respect to these cases, and in general,
economic processes (including transactions involving exported goods) located outside the territorial limits
of the exporting country need not be subject to taxation by the exporting country and should not be regarded
as export activities in terms of Article XVI:4 of the General Agreement. It is further understood that
Article XVI:4 requires that arm’s-length pricing be observed, i.e., prices for goods in transactions between
exporting enterprises and foreign buyers under their or the same control should for tax purposes be the
prices which would be charged between independent enterprises acting at arm’s length. Furthermore,
Article XVI:4 does not prohibit the adoption of measures to avoid double taxation of foreign source
income.123 (emphasis added)
.106.The 1981 Council action was accompanied by a statement of the Chairman of the GATT 1947
Council:
Following the adoption of these reports the Chairman noted that the Council’s decision and understanding
does not mean that the parties adhering to Article XVI:4 are forbidden from taxing the profits on
transactions beyond their borders, it only means that they are not required to do so. He noted further that
the decision does not modify the existing GATT rules in Article XVI:4 as they relate to the taxation of
exported goods. He noted also that this decision does not affect and is not affected by the Agreement on the
Interpretation and Application of Articles VI, XVI and XXIII. Finally, he noted that the adoption of these
reports together with the understanding does not affect the rights and obligations of contracting parties
under the General Agreement.124 (emphasis added)
.107.The first issue relating to the 1981 Council action is whether it forms part of the GATT 1994 as an
“other decision” under paragraph 1(b)(iv) of the language incorporating the GATT 1947 into the WTO
Agreement. Paragraph 1(b) stipulates that the GATT 1994 includes certain “legal instruments … that
119Panel Report, para. 7.85.
120United States' appellant's submission, para. 133 and the heading on page 48.
121Panel Report, para. 7.79.
122Supra, footnote 44; Panel Report, paras. 7.52-7.54.
123Supra, footnote 45.
124Supra, footnote 45.
65
entered into force under the GATT 1947”, such as “other decisions of the CONTRACTING PARTIES to
the GATT 1947” under sub-paragraph (b)(iv). As the Panel said, in terms of Article II:2 of the WTO
Agreement, these various “legal instruments” are, in themselves, “integral parts” of the WTO Agreement
and are “binding on all Members”. The inclusion of these “legal instruments” in the GATT 1994
recognizes that the legal character of the rights and obligations of the contracting parties under the
GATT 1994 is not fully reflected by the text of the GATT 1994 because those rights and obligations are
conditioned by the “protocols”, “decisions” and other “legal instruments” to which paragraph 1(b) refers.
.108.In our Report in Japan – Alcoholic Beverages, we stated that not every decision of the
CONTRACTING PARTIES to the GATT 1947 is an “other decision” within the meaning of
paragraph 1(b)(iv) of the language incorporating the GATT 1994 into the WTO Agreement. In that respect,
we disagreed with the view that “adopted panel reports in themselves constitute ‘other decisions of the
CONTRACTING PARTIES to GATT 1947’ for the purposes of paragraph 1(b)(iv) of the language of
Annex 1A incorporating the GATT 1994 into the WTO Agreement.”125 (emphasis added) The reason for
this conclusion was that adopted panel reports “are not binding, except with respect to resolving the
particular dispute between the parties to that dispute”.126 (emphasis added) As we said there, the decision
to adopt a panel report was not intended by the GATT 1947 CONTRACTING PARTIES to “constitute a
definitive interpretation of the relevant provisions of GATT 1947.” 127 (emphasis added)
.109.The opening clause of the 1981 Council action states: “The Council adopts these reports on the
understanding that with respect to these cases, and in general…”. The 1981 Council action is, therefore,
somewhat equivocal in tenor. On the one hand, it is clear from the text that the 1981 Council action relates
specifically to the Tax Legislation Cases and is an integral part of the resolution of those disputes. This
would suggest that, consistently with our Report in Japan – Alcoholic Beverages, the Council action is
binding only on the parties to those disputes, and only for the purposes of those disputes.
.110.On the other hand, we note that the opening clause of the 1981 Council action also prefaces the
substance of the statement with the words “in general”. The United States argues that these words indicate
that the 1981 Council action was an “authoritative interpretation” of Article XVI:4 of the GATT 1947 that
has “general” application and that, therefore, bound all the contracting parties. The European Communities
counters that the 1981 Council action formed part of the resolution of the Tax Legislation Cases and that, in
adopting that decision, the GATT 1947 Council was acting in dispute settlement “mode”.128 The
European Communities contends further that disputes are resolved on the basis of the generally applicable
rules that are, first, interpreted “in general” and then applied to the facts of a specific dispute. It is in this
limited sense that the European Communities contends that the GATT 1947 Council meant the term “in
general”.129
.111.The remainder of the text of the 1981 Council action embodies the substantive statement of the GATT
1947 Council on Article XVI:4 of the GATT 1947 and does not, in our view, shed any additional light on
whether that statement bound all the contracting parties or only the parties to the Tax Legislation Cases.130
125Supra, footnote 100, p. 14.
126Ibid. In that Report, we noted that Article 59 of the Statute of the International Court of Justice makes
explicit provision to the same effect (p. 14).
127Ibid., p. 13.
128European Communities' appellee's submission, para. 154.
129Ibid., para. 158.
130We note, in that respect, that we do not share the Panel's misgivings regarding the use of the word
"should" in a "legal instrument" (Panel Report, para. 7.65). In our view, many binding legal texts employ
the word "should" and, depending on the context, the word may imply either an exhortation or express an
66
We, therefore, share the Panel’s view that the text of the 1981 Council action alone does not resolve the
ambiguity highlighted by the conflicting arguments of the United States and the European
Communities.131 Thus, we consider that the Panel was correct to examine the circumstances surrounding
the 1981 Council action.
.112.When the 1981 Council action was adopted, the Chairman of the GATT 1947 Council stated, inter
alia, that “the adoption of these reports together with the understanding does not affect the rights and
obligations of contracting parties under the General Agreement.” In our view, if the contracting parties had
intended to make an authoritative interpretation of Article XVI:4 of the GATT 1947, binding on all
contracting parties, they would have said so in reasonably recognizable terms. We think it most unlikely
that the Chairman would have stated that the action did “not affect the rights and obligations of contracting
parties”, if it represented an authoritative interpretation of Article XVI:4 of the GATT 1947.132 In our
view, an authoritative, and generally binding, interpretation of Article XVI:4 would, in all probability, have
been perceived by the contracting parties as affecting their rights and obligations and would not, therefore,
have been accompanied by such a statement. 133 Thus, we are of the view that the statement of the
GATT 1947 Council Chairman is consistent with a reading of the 1981 Council action which views that
action as an integral part of the resolution of the Tax Legislation Cases, binding only the parties to those
disputes.
.113.As the Panel observed134, it is also noteworthy that, in the report of the GATT 1947 Council to the
CONTRACTING PARTIES on its actions during that year, the 1981 Council action was addressed under
the heading “Recourse to Articles XXII and XXIII”. This tends to support the view that the 1981 Council
action was a part of the resolution of the Tax Legislation Cases and not an authoritative interpretation of
Article XVI:4 of the GATT 1947, binding on all the contracting parties.
.114.In light of these surrounding circumstances, we conclude that the Panel was correct to find, in
paragraph 7.85 of the Panel Report, that the 1981 Council action is not an “other decision” under
paragraph 1(b)(iv) of the language incorporating the GATT 1994 into the WTO Agreement, and does not
form part of the GATT 1994.
.115.We recognize that, as “decisions” within the meaning of Article XVI:1 of the WTO Agreement, the
adopted panel reports in the Tax Legislation Cases, together with the 1981 Council action, could provide
“guidance” to the WTO. The United States believes that the “guidance” to be drawn from the 1981 Council
action, through footnote 59, is that the FSC measure is not an “export subsidy”. The present dispute
involves the interpretation and application of Article 3.1(a) of the SCM Agreement and the question of
obligation (see, further, Canada – Aircraft, supra, footnote 58, para. 187).
131Panel Report, para. 7.65.
132This view is borne out by the statements made by a number of delegations, speaking either before or
after the adoption of the panel reports in the Tax Legislation Cases. These delegations also expressed the
view that the 1981 Council action did not affect or diminish their rights and obligations under the GATT
1947 (Panel Report, paras. 7.70 – 7-72).
133The distinction between an authoritative interpretation and an interpretation made in dispute settlement
proceedings is made clear in the WTO Agreement. Under the WTO Agreement, an authoritative
interpretation by the Members of the WTO, under Article IX:2 of that Agreement, is to be distinguished
from the rulings and recommendations of the DSB, made on the basis of panel and Appellate Body Reports.
In terms of Article 3.2 of the DSU, the rulings and recommendations of the DSB serve only "to clarify the
existing provisions of those agreements" and "cannot add to or diminish the rights and obligations provided
in the covered agreements."
134Panel Report, para. 7.67.
67
whether the FSC measure involves export subsidies under that provision. In contrast, the 1981 Council
action addresses the interpretation and application of Article XVI:4 of the GATT 1947. The “guidance”
that the 1981 Council action might provide, therefore, depends, in part, on the relationship between these
different provisions.
.116.Although we have not previously had an opportunity to examine the relationship between these two
particular provisions, we have in the past examined the relationship between the provisions of the
GATT 1994 and certain other Multilateral Agreements on Trade in Goods.135 In Brazil – Desiccated
Coconut, we observed that the “relationship between the GATT 1994 and the other goods agreements in
Annex 1A is complex and must be examined on a case-by-case basis.”136 In that case, we examined
aspects of the relationship between the GATT 1994 and the provisions of Part V of the SCM Agreement
relating to countervailing duties. The SCM Agreement has specific provisions that address the relationship
between the provisions of the GATT 1994 and the SCM Agreement on countervailing duties.137 Similarly,
in Korea – Dairy138 and Argentina – Safeguard Measures on Imports of Footwear139, we examined the
relationship between Article XIX of the GATT 1994 and the Agreement on Safeguards. There, too, the
“precise nature of the relationship between Article XIX of the GATT 1994 and the Agreement on
Safeguards” was explicitly addressed in the Agreement on Safeguards, in Articles 1 and 11.1(a).140
.117.In contrast, the provisions of the SCM Agreement do not provide explicit assistance as to the
relationship between the export subsidy provisions of the SCM Agreement and Article XVI:4 of the
GATT 1994.141 In the absence of any such specific textual guidance, we must determine the relationship
between Articles 1.1(a)(1) and 3.1(a) of the SCM Agreement and Article XVI:4 of the GATT 1994 on the
basis of the texts of the relevant provisions as a whole. It is clear from even a cursory examination of
Article XVI:4 of the GATT 1994 that it differs very substantially from the subsidy provisions of the
SCM Agreement, and, in particular, from the export subsidy provisions of both the SCM Agreement and the
Agreement on Agriculture. First of all, the SCM Agreement contains an express definition of the term
“subsidy” which is not contained in Article XVI:4. In fact, as we have observed previously,
the SCM Agreement contains a broad package of new export subsidy disciplines that “go well beyond
merely applying and interpreting Articles VI, XVI and XXIII of the GATT 1947”.142 Next, Article XVI:4
prohibits export subsidies only when they result in the export sale of a product at a price lower than the
135In particular, the Agreement on Safeguards and Part V of the SCM Agreement.
136Supra, footnote 50, p. 14.
137Articles 10 and 32.1 of the SCM Agreement. See Brazil – Desiccated Coconut, supra, footnote 50, p.
16.
138Supra, footnote 73.
139Appellate Body Report, WT/DS121/AB/R, adopted 12 January 2000.
140Ibid., para. 82.
141We note, however, that under Article 1.1(a)(2) of the SCM Agreement, a "subsidy" may exist if "there is
any form of income or price support in the sense of Article XVI of GATT 1994". This is a reference to
Article XVI:1 and not Article XVI:4 of the GATT 1994. Footnote 1 of the SCM Agreement, which is
attached to Article 1.1(a)(1)(ii) of that Agreement, also makes reference to Article XVI of the GATT 1994
in connection with "the exemption of an exported product from duties or taxes borne by like products
destined for domestic consumption …". This is a reference to the Interpretative Note Ad Article XVI of the
GATT and is not a specific reference to Article XVI:4 of the GATT 1994. This reference to the
Interpretative Note also has no relevance to this dispute. These references do not, therefore, provide us with
guidance in determining the relationship between the export subsidy provisions of the SCM Agreement and
Article XVI:4 of the GATT 1994.
142Brazil – Desiccated Coconut, supra, footnote 50, p. 17.
68
“comparable price charged for the like product to buyers in the domestic market.” In contrast,
the SCM Agreement establishes a much broader prohibition against any subsidy which is “contingent upon
export performance”. To say the least, the rule contained in Article 3.1(a) of the SCM Agreement that all
subsidies which are “contingent upon export performance” are prohibited is significantly different from a
rule that prohibits only those subsidies which result in a lower price for the exported product than the
comparable price for that product when sold in the domestic market. Thus, whether or not a measure is an
export subsidy under Article XVI:4 of the GATT 1947 provides no guidance in determining whether that
measure is a prohibited export subsidy under Article 3.1(a) of the SCM Agreement. Also, and significantly,
Article XVI:4 of the GATT 1994 does not apply to “primary products”, which include agricultural products.
Unquestionably, the explicit export subsidy disciplines, relating to agricultural products, contained in
Articles 3, 8, 9 and 10 of the Agreement on Agriculture must clearly take precedence over the exemption of
primary products from export subsidy disciplines in Article XVI:4 of the GATT 1994.
.118.Furthermore, as the Panel observed, the text of the 1981 Council action itself contains reference only
to Article XVI:4, and the Chairman of the GATT 1947 Council stated expressly that the 1981 Council
action did not affect the Tokyo Round Subsidies Code. We share the Panel’s view that, in these
circumstances, it would be incongruous to extend the scope of the action, beyond that intended, to the SCM
Agreement.143 If the 1981 Council action did not affect the Tokyo Round Subsidies Code, which existed
in 1981, it is difficult to see how that action could be seen to affect the SCM Agreement, which did not.
.119.Against this background, we agree with the Panel that the 1981 Council action does not dispose of the
issue before us, in particular, with respect to the determination of what constitutes an “export subsidy”
under Article 3.1(a) of the SCM Agreement. The 1981 Council action related to a different provision,
Article XVI:4 of the GATT 1947, and not to the export subsidy disciplines established by Articles 1.1
and 3.1(a) of the SCM Agreement.
.120.In any event, even if the United States had been correct that the 1981 Council action could be relevant
to Article 3.1(a) of the SCM Agreement, we do not believe that the 1981 Council action is of guidance in
resolving this dispute because, in our view, that action does not address the issues that arise in this dispute.
Through the 1981 Council action, the GATT 1947 Council made a statement about the conclusions of the
panel reports in the Tax Legislation Cases. The factual and legal issues that arose in those disputes were
quite different from the issue that arises here. That is, the GATT 1947 Council was not addressing the issue
of whether, having decided to tax a particular category of foreign-source income, namely foreign-source
income that is “effectively connected with a trade or business within the United States”, the United States
may provide an export contingent exemption from the category of foreign-source income that is taxed
under its other rules of taxation. We, therefore, believe that the 1981 Council action does not provide
useful interpretative “guidance” in resolving the legal issue relating to the FSC measure that is raised in this
appeal.
.121.In light of all the foregoing, we uphold the Panel’s conclusion, in paragraph 8.1 of the Panel Report,
that the FSC tax exemptions involve subsidies contingent upon export performance that are prohibited
under Article 3.1(a) of the SCM Agreement.
(…)
.XI. Findings and Conclusions
.177.For the reasons set out in this Report, the Appellate Body:
(a)
upholds the Panel’s finding, in paragraph 7.130 of the Panel Report, that the FSC measure
constitutes a prohibited export subsidy under Article 3.1(a) of the SCM Agreement; (…)
143Panel Report, para. 7.85.
69
.178.The Appellate Body recommends that the DSB request the United States to bring the FSC measure that
has been found, in this Report and in the Panel Report as modified by this Report, to be inconsistent with its
obligations under Articles 3.1(a) and 3.2 of the SCM Agreement (…) into conformity with its obligations
under those Agreements.
.179.We wish to emphasize that our ruling is on the FSC measure only. As always, our responsibility under
the DSU is to address the legal issues raised in an appeal in a dispute involving a particular measure.
Consequently, this ruling is in no way a judgement on the consistency or the inconsistency with WTO
obligations of any other tax measure applied by any Member. Also, this is not a ruling that a Member must
choose one kind of tax system over another so as to be consistent with that Member’s WTO obligations. In
particular, this is not a ruling on the relative merits of “worldwide” and “territorial” systems of taxation. A
Member of the WTO may choose any kind of tax system it wishes – so long as, in so choosing, that Member
applies that system in a way that is consistent with its WTO obligations. Whatever kind of tax system a
Member chooses, that Member will not be in compliance with its WTO obligations if it provides, through
its tax system, subsidies contingent upon export performance that are not permitted under the covered
agreements.
.180.By entering into the WTO Agreement, each Member of the WTO has imposed on itself an obligation to
comply with all the terms of that Agreement. This is a ruling that the FSC measure does not comply
with all those terms. The FSC measure creates a “subsidy” because it creates a “benefit” by means of a
“financial contribution”, in that government revenue is foregone that is “otherwise due”. This “subsidy” is
a “prohibited export subsidy” under the SCM Agreement because it is contingent upon export performance.
(…) Therefore, the FSC measure is not consistent with the WTO obligations of the United States. Beyond
this, we do not rule.
(...)
70
4.
Recent Developments
4-1. BOEING – AIRBUS DISPUTE (2005)
From ASIL Insight
http://www.asil.org/insights/2005/06/insights050607.html
The U.S. Opens Salvo at the WTO in the Airbus-Boeing Dispute
By Sungjoon Cho
July, 2005
Introduction
On May 30, 2005, the United States announced that it will file a request for the establishment of a panel
under the World Trade Organization (WTO) dispute settlement procedure to resolve a long-standing
dispute regarding the European Union’s (EU) various forms of subsidies for large civil aircraft (LCA)
manufactured by the Airbus company.[1] Since October 12, 2004, when the U.S. filed a request for
consultations before the WTO,[2] the U.S. and the EU have been negotiating on this issue for a possible
settlement, but to no avail. Because the EU had also filed its own request for consultations as to the U.S.’
alleged subsidies for LCA manufactured by the Boeing company,[3] the EU soon responded to the U.S.’
opening salvo by counter-filing its own request for the establishment of another WTO panel.[4]
What Is at Stake?
The Airbus-Boeing dispute involves a number of alleged “subsidies” in various forms. The U.S. argues that
the EU members have subsidized Airbus through financing at sub-market rates, assumption/forgiveness of
debts, equity infusion, and/or other grants.[5] The EU argues that U.S. state and federal governments have
subsidized Boeing through various research/development grants, tax credits, and/or government
contracts.[6] Each party claims that the other violates the WTO Agreement on Subsidies and
Countervailing Measures (SCM) on the ground that the other’s subsidies either constitute an “export
subsidy” (SCM Article 3) or cause adverse effects to its interests (SCM Articles 5 and 6).
The U.S.’s request for the establishment of WTO panel was triggered in part by the EU’s recent
commitment of $1.7 billon in “launch aid,” which finances the cost for design and development of the
newest LCA (A350) at low interest rates and with repayment contingent on its commercial success.[7]
Background
The history of this dispute corresponds with that of LCA. Thanks to LCA’s economic, political, and
military importance, both the U.S. and EU have long supported their LCA champions, i.e., Boeing and
Airbus, respectively. While LCAs manufactured by these two big players have shared the global sky, their
competition has been intensified and each has accused the other of illegal subsidies. Rounds of negotiations
finally culminated in the 1992 bilateral agreement which limits each government’s support for new LCA
development to 33% of the total development cost.[8]
However, the bilateral agreement has failed to end the dispute. Although the parties agreed in 2004 to
confer on a possible revision of the 1992 agreement, negotiations have reached a deadlock amid an
ever-increasing competition between Airbus and Boeing over their new ambitious projects, i.e., the Airbus
350 and Boeing 787 Dreamliner. Tedious negotiations and frustrations on both sides finally led to a rather
71
unusual spat between the outgoing U.S. Trade Representative Robert Zoellick and the new EU trade
commissioner Peter Mandelson, damaging the atmosphere for any settlement.
The timing of the U.S.’ request for the establishment of a WTO panel merits some attention because Airbus
plans to launch its new A350 at the Paris Air Show this month.[9]
Thorny Legal Issues
Under the new WTO dispute settlement mechanism, the establishment of a panel is nearly automatic once
requested. This case will soon be adjudicated by a panel (and the Appellate Body in case of appeal).
However, not only the panel/Appellate Body, but also WTO Members, will confront a daunting challenge
over various thorny legal issues.
First, the sheer magnitude of the case and its possible ripple effects tend to force rethinking the conventional
wisdom of using the WTO dispute settlement procedure. Considering its politically combustible nature, it
might be labeled a “wrong case,” a term the late Professor Robert Hudec once coined,[10] for its potential
damage to the integrity of the WTO dispute settlement system. A case of this weight might short-circuit the
whole system as was seen in the DISC case under the old GATT. Article 3.7 of the WTO Dispute
Settlement Understating (DSU) provides that “before bringing a case, a Member shall exercise its judgment
as to whether action under these procedures would be fruitful.” Yet it seems highly implausible that a panel
would refuse to review the case relying on this provision or any other “political question” doctrine.
Second, what would, and should, be the right remedies? A traditional form of WTO remedies is
“prospective,” not “retrospective,” which means that a losing party should, from that time forward,
withdraw its illegal subsidies such as export subsidies. Yet, a WTO panel ruled in 2000 that a remedy under
the SCM Agreement may include repayment of the prohibited subsidy.[11] Considering the long history of
subsidy practices by both parties, this repayment remedy, if sought, might complicate the panel process.
Third, the wing section of the Boeing’s ambitious 787 Dreamliner will be built by Japanese companies
which are subsidized by Japan.[12] It is unclear whether the Japanese subsidy should be separated from the
U.S.’ own subsidies for the Boeing 787 in calculating the level of injury. Or should it be deemed an
integrated part of the whole subsidy scheme? Should the EU proceed against Japan separately regarding the
latter’s own subsidy scheme?
Lastly, if a settlement is struck in the middle of the panel process, should the other WTO Members cease to
pay attention to this case? A mutually agreed solution may contain WTO-inconsistent components. Under
DSU Article 3.5, all solutions should be consistent with the WTO rules, and Article 3.6 opens a road for any
Member to question the legality of such a settlement. If that happens, the settlement might be the beginning
of a new dispute, not the end. According to an old adage, two wrongs do not make a right.[13]
Prospects
The two parties still have chances to settle and halt the panel process even after it begins. According to the
usual DSU calendar, a panel should issue its decision within 6 months. If appealed, the Appellate Body
should deliver its decision within 60-90 days. As for substantive legal issues, both parties and the panel are
likely to consult a previous subsidy case involving Canada and Brazil that has fact patterns similar to this
dispute.[14] Like the previous case, this dispute is very fact-intensive, including sophisticated issues of
adequate market rates and export contingency. As in the earlier case, one would anticipate a quite lengthy
panel report.
Finally, what impact would the dispute have on the Doha Round negotiations? Even though the U.S. and the
EU tried to downplay any negative effects of this litigation on the Doha negotiations,[15] the “hostility”
between these two trade superpowers, as the former head of the GATT Peter Sutherland observed, bodes ill
72
for future negotiations,[16] especially against the backdrop of an already apparent specter of protectionism
in these nations.
This case seems another litmus test to evaluate the extent to which the rule of law under the WTO serves its
own purpose, i.e., a “more viable and durable multilateral trading system.”[17]
About the author
Sungjoon Cho, an ASIL member, is an Assistant Professor of Law at Chicago-Kent College of Law, Illinois
Institute of Technology. During the period of 1994-96, he represented the government of South Korea in
negotiations under the World Trade Organization and the Organization for Economic Cooperation and
Development. He is the author of Free Markets and Social Regulation: A Reform Agenda of the Global
Trading System (Kluwer Law International 2003).
[1]United States Takes Next Step in Airbus WTO Litigation, USTR Press Release, May 30, 2005, available at
http://www.ustr.gov/Document_Library/Press_Releases/2005/
May/United_States_Takes_ Next_Step_in_Airbus_WTO_Litigation.html [hereinafter USTR Press Release].
[2] European Communities and Certain Member States – Measures Affecting Large Civil Aircraft, Request for
Consultations by the United States, WT/DS316/1, Oct. 12, 2004 [hereinafter U.S. Request for Consultations].
[3] United States – Measures Affecting Trade in Large Civil Aircraft, Request for Consultations by the European
Communities, WT/DS317/1, Oct. 12, 2004 [hereinafter EU Request for Consultations].
[4] EU resumes WTO case against Boeing, EUROPA, May 31, 2005, available at
http://europa.eu.int/comm/trade/issues/respectrules/dispute/
pr310505_en.htm
[5] U.S. Request for Consultations, supra note 2.
[6] EU Request for Consultations, supra note 3.
[7] U.S. Request for Consultations, supra note 2.
[8] USTR Press Release, supra note 1.
[9] David Greising, Cross-Accusations of Improper Subsidies for Airbus and Boeing, Chicago Tribune, June 1, 2005,
Sec. 3, at 1, 4.
[10] See Robert E. Hudec, GATT Dispute Settlement after the Tokyo Round: An Unfinished Business, 13 Cornell Int'l
L.J. 145, 159 (1980).
[11] Australia – Subsidies to Producers and Exporters of Automotive Leather, WT/DS126/RW, para. 6.39 (adopted on
Feb. 11, 2000). The Panel held that:
“Based on the ordinary meaning of the term "withdraw the subsidy", read in context, and in light of its object and
purpose, and in order to give it effective meaning, we conclude that the recommendation to "withdraw the subsidy"
provided for in Article 4.7 of the SCM Agreement is not limited to prospective action only but may encompass
repayment of the prohibited subsidy” (emphasis in the original).
[12] Greising, supra note 9.
[13] See Joel P. Trachtman, Decisions of the Appellate Body of the WTO: Canada-Measures Affecting the Export of
Civilian Aircraft, available at http://www.ejil.org/journal/curdevs/sr3.html.
[14] Canada—Measures Affecting the Export of Civilian Aircraft, AB-1999-2, WT/DS70/AB/R (99-3221), adopted
by Dispute Settlement Body, 20 August 1999; Brazil-Export Financing Programme for Aircraft, AB-1999-1,
WT/DS46/AB/R (99-3216), adopted by Dispute Settlement Body, 20 August 1999.
[15] See Edward Alden & Raphael Minder, U.S. Calls in WTO to End Airbus Subsidies, Financial Times, May 31,
2005, at 1.
[16] See Alan Beattie & Raphael Minder, Aerospace Subsidy Battle with Brussels Sparks Fears over Global Trade
System, Financial Times, June 1, 2005, at 1.
[17] Marrakesh Agreement Establishing the World Trade Organization, preamble.
73
4-2. U.S. – COTTON SUBSIDIES (2005)
From ASIL Insight
http://www.asil.org/insights/2005/03/insights050323.html
The WTO Decision on U.S. Cotton Subsidies
By Eliza Patterson
March 2005
On March 3, 2005, the WTO Appellate Body (AB) issued a landmark decision[1] interpreting key WTO
provisions on agricultural subsidies and upholding a prior panel ruling finding various US cotton subsidies
to be WTO illegal. In September 2004 the panel, in a challenge by Brazil, had ruled that various US
agricultural programs constituted illegal subsidies under the WTO Agreement on Subsidies and
Countervailing Measures, the Agreement on Agriculture and Article XVI of the GATT 1994.[2]
The importance of the AB ruling goes far beyond its impact on US cotton farmers.[3]
The AB demonstrated a notable consistency in broadly interpreting the coverage of WTO provisions
disciplining subsidies and narrowly interpreting provisions exempting government programs from those
disciplines. The interpretations given by the AB to various WTO rules increase the likelihood of successful
challenges to a vast array of government measures. The likely result will be to deter the granting of future
support to agriculture and add pressure on all nations to reduce their current support as part of the ongoing
Doha Round negotiations.
On a preliminary issue, the AB ruled that WTO Members may challenge the laws of other Members even if
those laws have expired, provided only that the law continues to have an adverse effect on the complaining
country. This allowed Brazil to challenge two cotton support programs that had expired in 2002. The typical
remedy in WTO cases -- that the offending measure be brought into conformity -- is clearly not available
when dealing with an expired law. However, in the case of a subsidy an alternative remedy is available:
removal of any adverse effects of that subsidy. Thus, the effect of the AB ruling is that nations may be
called upon to take remedial actions for subsidy laws even after the laws have expired. This provides a
significant deterrent to the granting of subsidies, particularly given the risk that future panels and ABs will
follow this AB’s lead and interpret the rules so as to tighten the disciplines applicable to pre-existi ng
subsidies.
In one of the more far reaching portions of its report, the AB narrowly defined the two categories of
domestic agriculture support programs that are exempt from challenge under Article 13 of the Agreement
on Agriculture, entitled “Due Restraint” and often referred to as the “peace clause.” It provides in relevant
part that from 1995 to 2004, domestic support programs that meet the requirements of Annex 2 of the
Agreement shall be exempt from challenge.
The first category of programs eligible for peace clause treatment concerns so-called “green box”
subsidies.[4] These include “decoupled income support” programs in which the amount of payment is not
based on the type or volume of production and therefore have minimal effects, at most, on production.[5]
The AB ruled that domestic programs that condition support payments on a producer’s not producing
certain crops do not qualify as green box “decoupled income support” falling under the peace clause. The
US programs at issue were the production flexibility contract program and its successor, the direct
payments program. Under these programs producers had considerable flexibility on what they could
produce and still receive payments, including the right not to produce at all. However, payment would be
74
denied if certain specified crops were produced. In the AB view, this ban effectively “coupled” payment
with production because it had the effect of channeling production toward crops that remain eligible for
payments.[6]
Although the peace clause has expired, the “green box”-- or permissible subsidies program -- remains in
effect. This ruling, narrowly defining its coverage, will place considerable constraints on the US’ and other
governments’ agricultural support policies.
The second (and less important) category concerns programs in which the support granted “to a specific
commodity” does not exceed the support provided in base year 1992. Here again the AB limited the
coverage of the peace clause. The AB broadly defined the category of support measure qualifying as
directly supporting a particular commodity and as such included in the calculation of current payments.
Specifically, the AB included in its calculation of current support all payments that actually went to the
production of cotton despite the facts that the decision to plant cotton was beyond the control of the
government (the program did not require that cotton be produced) and payments would have been made
even if a different crop had been produced. The effect of this determination was to increase the assessed
value of current payments and thereby limit the number of programs saved from challenge by the peace
clause. Even though the p eace clause has expired, the concept of “support to a specific commodity”
remains relevant in the Doha round of agriculture talks.
Having determined that various US cotton subsidization programs were subject to challenge, the AB
proceeded to evaluate the validity of Brazil’s specific challenges. With only minor exceptions the AB
supported Brazil’s complaints and did so through an analysis with significant implications:
The Agreement on Subsidies and Countervailing Measures (The SCM Agreement) bans subsidies that
cause significant price suppression in the market and thereby seriously prejudice the interests of another
Member.[7] The AB’s interpretation of this provision significantly broadened its scope. The AB ruled that
the selection of the market in which the existence of price suppression was to be determined was up to the
complainant and could be any market in which the complainant’s and the respondent’s products compete,
including the world market. Further, in cases in which the world market was selected, the price to be
examined could be either the price on world markets of the complainant’s product or the general “world
price,” again leaving the selection to the complainant. Thirdly, the time period in which the price effect of
the subsidy is determined may, at complainant&rsquo ;s request, include years beyond the year in which it
is paid. Providing the complaining country wide latitude in selecting the market, the prices and the time
period to be examined seriously tips the scales against the subsidy-providing country.
The SCM Agreement[8] provides that the prohibition on certain specified domestic subsidies[9] applies
“except as provided in the Agreement on Agriculture.” The AB narrowly interpreted this carve-out,
subjecting a wide range of agriculture subsides to challenge under the SCM Agreement even though they
are in full compliance with the Agreement on Agriculture. In the view of the AB, only agriculture subsidies
that are specifically authorized by the Agreement on Agriculture are exempt from an SCM challenge, and
compliance with the provisions of the Agreement on Agriculture does not constitute specific authorization.
As part of the Agreement on Agriculture [10] Member governments undertook to develop disciplines on the
provision of export credit guarantees and, thereafter, to comply with those disciplines. Although no
disciplines have been agreed to under this provision, the AB ruled that export credit guarantees were subject
to disciplines under other provisions of the Agreement. In its view, an undertaking to develop disciplines
and a commitment to comply after such development does not mean applicable disciplines do not already
exist.[11] Consequently the AB ruled that US export credit guarantees are subject to the existing disciplines
on export subsidies in the Agreement on Agriculture and in the SCM Agreement and fail to comply with
both. Again the AB broadened the coverage of the WTO rules, adding another deterrent to the provision of
an entire category of agricultural sup port programs.
75
This case represents an important victory for the developing world and all those seeking to limit farm
subsidies. In it, the AB interpreted WTO provisions to significantly expand the restriction on agricultural
support programs generally. Moreover, if future panels continue to read disciplines broadly and exemptions
narrowly, agricultural support programs may be headed for zero tolerance regardless of the outcome of the
Doha Round negotiations.
About the author:
Eliza Patterson is a Harvard Law School graduate. She currently teaches international trade law at
Washington and Lee School of Law. She can be contacted at [email protected]
[1] WT/DS267/AB/R, United States -- Subsidies on Upland Cotton.
[2] The ruling by the WTO Dispute Settlement Panel (WT/DS267/R) dealt with the following US
agricultural programs: marketing loan program payments, user marketing payments, production flexibility
contract payments, market loss assistance payments, direct payments, counter-cyclical payments, crop
insurance payments, cottonseed payments, and export credit guarantees.
[3] To comply with the ruling, the US would have to cut over $3 billion a year in payments to its 25,000 cotton farmers
and eliminate its export credit program.
[4] Green box subsidies are exempt from the domestic support reduction obligations of the Agreement on
Agriculture
[5] Annex 2, para. 6 of the Agreement on Agriculture.
[6] The AB dismissed the US argument that paragraph 6(b) did not cover “negative” prohibitions on the production of
certain crops, but only requirements that specified crops be produced. The AB also rejected the US claim that the
program was saved by the fact that the producer had the right not to produce at all and still receive payments.
[7] SCM Agreement, Articles 5, 6.3(c).
[8] SCM Agreement, Article 3.1.
[9] These are subsidies contingent on the use of domestic over imported goods.
[10] Agreement on Agriculture, Article 10.2.
[11] In an unusual development, one member of the AB dissented from this portion of the report, concluding that
export guarantee programs are not subject to the disciplines of either the Agreement on Agriculture or the SCM
Agreement. His reasoning was that an agreement to develop disciplines and comply with them thereafter implied that
current disciplines applicable to these measures do not exist.
76
4-3. EU – SUGAR SUBSIDIES (2005)
From Bridges Weekly Trade News Digest, vol. 9, No. 15, May 4, 2005
http://www.ictsd.org/weekly/05-05-04/story5.htm
EU SUGAR DISPUTE: WTO APPELLATE BODY CONFIRMS BRAZIL'S
WIN
On 28 April, the WTO Appellate Body released to the public its report on an appeal brought by Brazil,
Thailand and Australia with regard to their challenge against the EU's sugar regime. Following closely on
the heels of Brazil's recent win in the "cotton appeal" (see BRIDGES Weekly, 9 March 2005), the Appellate
Body upheld all of the dispute settlement panel's findings. Furthermore, it disagreed with the panel's
decision not to rule on Brazil's claim under the WTO Agreement on Subsidies and Countervailing Measures
(SCM Agreement).
The panel had found that the EU subsidises sugar exports beyond the level formally notified to the WTO -its so-called 'commitment schedule' -- and was thus in violation of the WTO Agreement on Agriculture
(AoA, see BRIDGES Weekly, 15 September 2004). The Appellate Body upheld this major finding.
The panel had also found that sugar exports in excess of the EU's commitment level equalled the amount of
sugar imported under preferential arrangements from the African, Caribbean and Pacific (ACP) countries
and India, as well as that of sugar produced in excess of EU sugar quotas. The EU had argued that a footnote
in its commitment schedule excluded 1.6 million tonnes of sugar -- equivalent to the quantity that it
imported from the ACP and India -- from the scope of its subsidies reduction requirements. The panel
dismissed this argument, holding that the footnote had no legal effect and could not enlarge or modify the
EU's specified commitment levels.
The Appellate Body agreed with the panel on these points, which were also of significance to ACP
countries (some of which were third parties in this dispute and filed submissions in the appeal). Nonetheless
it ruled that contrary to the panel's reasoning, the footnote did indeed have legal effect -- but not "the legal
effect of enlarging or otherwise modifying the [EU's] commitment levels as specified in its Schedule."
Panel erred in applying "judicial economy" on SCM claim
On 25 January 2005, Brazil, Australia and Thailand filed counter-appeals regarding the panel's decision not
to rule on their claims that the EU's subsidies for sugar exports violated of the SCM Agreement. The panel
had declined to rule on the matter because it found that its decisions under the Agreement on Agriculture
(AoA) rendered such a ruling unnecessary and because the parties had not sufficiently substantiated their
subsidiary claims relating to the SCM Agreement (see BRIDGES Weekly, 20 October 2004). The
co-complainants had wanted to take advantage of the remedies provided for under this agreement, since
they would have shortened the time frame granted to the EU to comply with the ruling.
The Appellate Body held that the panel was wrong in exercising "judicial economy," and had failed to
discharge its obligation under dispute settlement rules. However, it declined to "complete the legal analysis
and to examine the Complaining Parties' claims under the SCM Agreement left unaddressed by the Panel,"
saying that it had not been presented with enough information to allow it to determine the appropriate
period of time for withdrawing any subsidies that would have been found to be "prohibited" under the SCM
Agreement.
77
(…)
78
4-4. U.S. – ZEROING (2006)
The WTO Appellate Body Strikes Down the U.S. Zeroing Methodology Used in Antidumping Investigations,
ASIL INSIGHTS (May 4, 2006), http://www.asil.org/insights/2006/05/insights060504.html.
By Sungjoon Cho
Introduction
On April 18, 2006, the WTO Appellate Body (AB) released its decision on the “zeroing” antidumping case
which the EU brought against the U.S. i In the decision, the AB upheld the panel’s finding that the U.S.’
zeroing methodology employed in initial antidumping investigations was inconsistent with the fair
comparison requirement under Article 2.4.2 of the WTO Antidumping Agreement (AD Agreement). In
addition, the AB, reversing the panel’s original finding, held that certain applications of the same
methodology in the administrative review process were inconsistent with Article 9.3 of the AD Agreement.
Background: What is “Zeroing”?
Dumping is a type of price discrimination under which a foreign producer exports products at prices lower
than their domestic prices (normal value) or at prices below the cost of production plus normal profits.
Although such price discrimination is widely regarded as a legitimate business strategy to maximize profits
in the absence of anticompetitive (predatory) intent under the U.S. legal system, international trade law
(GATT/WTO) provides importing countries with remedies (antidumping duties) to countervail this
allegedly unfair practice when such dumping materially injures domestic industries. ii However, many
economists as well as policy-makers criticize the antidumping mechanism as a protectionist scheme. iii
The amount of antidumping duties corresponds to the magnitude of dumping (“dumping margin”) which is
a difference between export price and domestic price (or normal value). Dumping margins are calculated in
two different stages. First, in the “original investigation,” an antidumping authority, such as the Department
of Commerce (DOC) in the U.S., determines a general dumping margin over a particular product in
question by summing up each individual dumping margin (normal value minus export price) computed in a
group (an “averaging group”) of identical products. In doing so, the DOC disregards any “negative”
dumping margin (any excess of export price over normal value) in the group by simply “zeroing” it.
Consequently, a general dumping margin, which is a total sum of these individual dumping margins, tends
to be inflated because the zeroing methodology precludes any offsetting effect of negative individual
dumping margins. The DOC employs the same methodology when it finally assesses a company-specific
dumping margin to impose actual antidumping duties in the annual “administrative review” process.
The zeroing methodology has been contested several times under the GATT/WTO. An unadopted panel
report under the GATT (Committee on Antidumping Practices) once upheld the EU’s zeroing
methodology. iv However, the WTO Appellate Body (AB) struck down certain applications of such
methodology both by the EU v and the U.S. vi A recent NAFTA Chapter 19 panel (NAFTA Softwood
Lumber) vii condemned this practice, invoking the celebrated Charming Betsy doctrine (a U.S. Supreme
Court decision holding that U.S. statutes should be interpreted, if possible, in such a way as to avoid placing
the United States in violation of international law), and expressing the view that the U.S. should follow the
AB decision against it in WTO Softwood Lumber V. It may be no coincidence that the EU challenged the
U.S. zeroing methodology after the EU’s own applications of the same methodology were invalidated by
the WTO.
The AB Report
79
The panel had originally struck down “as such” the U.S.’ zeroing methodology embodied in the “Standard
Zeroing Procedures” in the original investigation under Article 5 of the AD Agreement. The panel held that
the methodology ignored negative margins and thus violated the “fair comparison” requirement under
Article 2.4.2 of AD Agreement. viii The AB upheld the panel’s finding. ix The U.S., in its appeal, had
challenged the panel’s aforementioned finding under Article 11 of Dispute Settlement Understanding
(DSU). x The U.S. contended that the zeroing methodology itself could not be challenged “as such” because
it did not “mandate” a WTO violation or “preclude” a WTO-consistent action. xi Thus, the U.S. argued that
the panel failed to make an objective assessment required under DSU Article 11. xii However, the AB
rejected this argument and upheld the panel’s ruling as it refused to make any “general”
mandatory/discretionary distinction in deciding the admissibility of a measure as such. xiii
In addition, the AB reversed the panel’s original finding on the EU’s “as applied” claims as to the DOC’s
applications of the zeroing methodology in the administrative review. The panel had ruled in favor of the
U.S. that the zeroing applications in the administrative review were not inconsistent with the AD
Agreement. xiv The U.S. argued that a dumping margin can be computed on a “transaction-specific” basis so
that a certain comparison in a certain averaging group might produce a zeroed margin. xv In other words, for
the purpose of calculating dumping margins the DOC might rely selectively on a comparison between an
averaged normal value (average domestic price) and a particular export price (which is less than the normal
value), not an averaged export price. Suppose that there are two shipments (transactions) of a widget whose
normal value (an average domestic price) is one dollar. Also suppose that an export price is fifty cents in the
first shipment, and one dollar and fifty cents in the second shipment. According the U.S., it can simply pick
the first transaction to compare the normal value to the export price, thereby producing a 50% dumping
margin. However, the AB sternly rejected the U.S. argument. It highlighted its previous position under EC
– Bed Linen and US – Softwood Lumber V which ruled that multiple comparisons to establish a dumping
margin should include the results of all of those comparisons. xvi Therefore, in the aforementioned example
the dumping margin should be 0% (50%-50%), instead of 50%.
In light of this reasoning, the zeroing methodology itself caused the anti-dumping duty to exceed the margin
of the dumping, in violation Article 9.3 of the AD Agreement xvii since it inevitably led to higher dumping
margins and hence higher antidumping duties than otherwise. xviii The AB focused on the violative structure
of the zeroing methodology itself. The AB held that:
Because results of this type were systematically disregarded, the methodology applied by the
USDOC in the administrative reviews at issue resulted in amounts of assessed anti-dumping duties
that exceeded the foreign producers' or exporters' margins of dumping with which the anti-dumping
duties had to be compared under Article 9.3 of the Anti-Dumping Agreement and Article VI:2 of the
GATT 1994. (Emphasis added.) xix
This uncompromising ruling leaves the DOC nearly no option but to repeal the zeroing methodology on the
whole in the administrative review as well, even though the EU’s claim here was “as applied” to the facts of
the particular case.
Prospects
The U.S. Court of Appeals for the Federal Circuit has recently ruled that the zeroing methodology is a
reasonable interpretation by the DOC. xx However, under the aforementioned Charming Betsy doctrine, the
DOC may now have to abandon the entire zeroing methodology when it examines dumping margins in the
initial antidumping investigation. The U.S. would also find it hard to justify such methodology in other
80
stages of an antidumping proceeding, such as the administrative review, considering the AB’s emphasis on
the systematic flaws embedded in this methodology.
This decision appears to benefit the hitherto main targets of antidumping investigations, in particular
developing countries, as well as consumers and consuming industries which have been forced to pay higher
prices for imported products due to antidumping duties generated by the zeroing methodology. xxi
At the same time, however, one might argue that this case is an exercise of judicial activism that goes
beyond the limited standard of review under Article 17.6 of AD Agreement. xxii The AB in this case foresaw
such potential criticism when it noted that its interpretation was still consistent with Article 17.6 (ii)
because the U.S. zeroing methodology clearly violated the text of Article 9.3 of AD Agreement. xxiii Yet, to
those who regard the nature of the WTO as a contract among its Members, the AB’s ruling might, at least to
certain Members including the U.S., threaten to undermine their original terms of bargain under the
Uruguay Round. They would argue that the bargain included Article 17.6, which unsurprisingly resembles
the Chevron doctrine – a doctrine of U.S. law that gives considerable deference to decisions by
administrative agencies. xxiv In this regard, they might argue that such judicial activism could precipitate
political backlashes from some (developed) Members and might deter them from making further
concessions in future trade talks. xxv
It remains to be seen how far this decision can influence future negotiations as well as panel or AB
decisions in the areas of antidumping and related subjects.
81
Optional Reading
US – STEEL (2001)
WORLD TRADE
WT/DS184/AB/R
24 July 2001
ORGANIZATION
(01-3642)
Original:
http://www.wto.org/english/tratop_e/dispu_e/distabase_wto_members3_e.htm
UNITED STATES – ANTI-DUMPING MEASURES ON CERTAIN
HOT-ROLLED STEEL PRODUCTS FROM JAPAN
Report of the Appellate Body
(…)
United States – Anti-Dumping Measures on
Certain Hot-Rolled Steel Products from
Japan
AB-2001-2
United States, Appellant/Appellee
Japan, Appellant/Appellee
Taniguchi, Presiding Member
Feliciano, Member
Lacarte-Muró, Member
Brazil, Third Participant
Canada, Third Participant
Chile, Third Participant
European Communities, Third Participant
Korea, Third Participant
Present:
I.Introduction
(…)
2On 15 October 1998, the United States Department of Commerce ("USDOC") initiated an anti-dumping
investigation into imports of hot-rolled steel from, among others, Japan. 144 USDOC determined that it
was not practicable to examine all known Japanese producers and exporters and, therefore, conducted its
investigation on the basis of a sample of Japanese producers. USDOC selected Kawasaki Steel Corporation
144Panel Report, para. 2.3. The United States International Trade Commission had already instituted an
injury investigation. (Panel Report, para. 2.2)
82
("KSC"), Nippon Steel Corporation ("NSC"), and NKK Corporation ("NKK") for individual
investigation. 145 USDOC calculated an individual dumping margin for each of these companies.
USDOC also established a single rate of anti-dumping duty applicable to all those Japanese producers and
exporters not individually investigated (the "all others" rate). The "all others" rate was calculated as the
weighted average of the individual dumping margins calculated for KSC, NSC and NKK. 146 On 6 May
1999, USDOC published its final affirmative dumping determination. 147 On 23 June 1999, the United
States International Trade Commission (the "USITC") published its final affirmative determination of
injury to the United States' hot-rolled steel industry. 148 On 29 June 1999, USDOC published an
anti-dumping duty order imposing anti-dumping duties on imports of hot-rolled steel from Japan. 149 (…)
4In its Report, circulated to Members of the World Trade Organization (the "WTO") on 28 February 2001,
the Panel concluded:
(a)
that the United States acted inconsistently with Articles 6.8 and
Annex II of the AD Agreement in its application of "facts
available" to Kawasaki Steel Corporation (KSC), Nippon Steel
Corporation (NSC) and NKK Corporation;
(b)
that section 735(c)(5)(A) of the Tariff Act of 1930, as amended,
which mandates that USDOC exclude only margins based entirely
on facts available in determining an all others rate, is inconsistent
with Article 9.4 of the AD Agreement, and that therefore the
United States has acted inconsistently with its obligations under
Article 18.4 of the AD Agreement and Article XVI:4 of the
Marrakesh Agreement by failing to bring that provision into
conformity with its obligations under the AD Agreement; and
(…)
V.Article 6.8 of the Anti-Dumping Agreement: the Use of "Facts Available"
A.Application of "Facts Available" to NSC and NKK
63Before the Panel, Japan claimed that USDOC's application of "facts available" in the calculation of the
dumping margins for Nippon Steel Corporation ("NSC") and NKK Corporation ("NKK") was inconsistent
with the United States' obligations under Article 6.8 of the Anti-Dumping Agreement. Japan argued that,
under that provision, USDOC was not entitled to reject certain information – namely "weight conversion
factors", supplied by NSC and NKK to USDOC – for the sole reason that this information was provided
after the deadlines for responses to USDOC's questionnaires, and to use instead facts available in respect of
the transactions concerned. (…)
145These three companies accounted for more than 90 per cent of all known exports of hot-rolled steel
from Japan during the period of investigation. (Panel Report, para. 2.3)
146Panel Report, para. 2.6.
147USDOC established the following margins of dumping: 67.14% for KSC; 19.65% for NSC; and
17.86% for NKK. The "all others" rate was 29.30%. (Panel Report, para. 2.7; Notice of Final
Determination of Sales at Less Than Fair Value: Hot-Rolled Flat-Rolled Carbon-Quality Steel Products
From Japan ("USDOC Final Determination"), United States Federal Register, 6 May 1999 (Volume 64,
Number 87), Exhibit JP-12 submitted by Japan to the Panel, p. 24329 at 24370)
148Panel Report, para. 2.8.
149Ibid., para. 2.9.
83
67In its preliminary dumping determination, issued on 19 February 1999, USDOC applied "facts available"
to the small number of NSC and NKK transactions made on a theoretical weight basis because the actual
weight conversion factor had not been submitted. As USDOC chose "adverse" facts available, this led to
larger dumping margins for NSC and NKK than would have been the case if the weight conversion factors
subsequently submitted by those companies had been used. 150
68NSC submitted a weight conversion factor on 23 February 1999, 14 days before verification. (…) On the
same day, and nine days before verification, NKK also submitted a weight conversion factor. (…)
69(…)On 12 April and 15 April 1999, respectively, USDOC wrote to NSC and NKK informing them that
the weight conversion factors submitted had been rejected as untimely. USDOC returned one copy of their
respective weight conversion factor submissions to each of NSC and NKK, informed NSC and NKK that
all other copies of that information would be expunged from the record, and requested NSC and NKK to
revise and resubmit all submissions that referred to the weight conversion factors that had been
submitted. 151
70The Panel examined Article 6.8 and Annex II of the Anti-Dumping Agreement and, on the basis of that
examination, found that, with respect to the weight conversion factors submitted by both NSC and NKK,
and given the evidence before USDOC, "an unbiased and objective investigating authority evaluating that
evidence could not have reached the conclusion that [NSC and NKK] had failed to provide necessary
information within a reasonable period." 152 The Panel, therefore, found that the application of facts
available by USDOC in determining NSC's and NKK's dumping margins was inconsistent with United
States' obligations under Article 6.8 of the Anti-Dumping Agreement. 153
71The United States appeals these findings and argues that USDOC was entitled to reject NSC's and
NKK's weight conversion factors because they were submitted after the deadlines for questionnaire
responses. The United States interprets Article 6.8 as permitting investigating authorities to rely upon
reasonable, pre-established deadlines for the submission of data. (…)
72We begin with Article 6.1.1, which provides:
Exporters or foreign producers receiving questionnaires used in an
anti-dumping investigation shall be given at least 30 days for reply. Due
consideration should be given to any request for an extension of the 30-day
period and, upon cause shown, such an extension should be granted
whenever practicable.
150The term "adverse" does not appear in the Anti-Dumping Agreement in connection with the use of facts
available. Rather, the term appears in the provision of the United States Code that applies to the use of facts
available. Pursuant to 19 U.S.C. § 1677e(b), if the investigating authorities find that "an interested party
has failed to cooperate by not acting to the best of its ability to comply with a request for information", then
they may, in reaching their determination, "use an inference that is adverse to the interests of that party in
selecting from among the facts otherwise available". (emphasis added) The United States explained to us at
the oral hearing that, in practice, an "adverse inference" is used because it is assumed that the information
that a non-cooperative party did not provide would have been adverse to its interests. In this appeal, we
do not address the issue of whether, or to what extent, it is permissible, under the Anti-Dumping
Agreement, for investigating authorities consciously to choose facts available that are adverse to the
interests of the party concerned. Rather, we use the term "adverse" facts available simply to denote that the
facts available used by USDOC, in this case, with respect to NSC and NKK's sales on a theoretical weight
basis, and KSC's sales to CSI, increased the respective dumping margins of these companies, that is, they
had an "adverse" impact on those margins from the point of view of the companies concerned.
151Exhibits JP-29(f) and JP-45(i) submitted by Japan to the Panel.
152Panel Report, paras. 7.57 and 7.59.
153Ibid.
84
(…)
74While the United States stresses the significance of the first sentence of Article 6.1.1, we believe that
importance must also be attached to the second sentence of that provision. According to the express
wording of the second sentence of Article 6.1.1, investigating authorities must extend the time-limit for
responses to questionnaires "upon cause shown ", where granting such an extension is "practicable ".
(emphasis added) This second sentence, therefore, indicates that the time-limits imposed by investigating
authorities for responses to questionnaires are not necessarily absolute and immutable.
75In sum, Article 6.1.1 establishes that investigating authorities may impose time-limits for questionnaire
responses, and that in appropriate circumstances these time-limits must be extended. However, Article
6.1.1 does not, on its own, resolve the issue of when investigating authorities are entitled
to reject information submitted, and instead resort to facts available, as USDOC did in this case. We
consider that this issue is to be resolved by reading Article 6.1.1 together with Article 6.8 of
the Anti-Dumping Agreement, and Annex II of that Agreement, which is incorporated by reference into
Article 6.8.
76Article 6.8 of the Anti-Dumping Agreement provides:
In cases in which any interested party refuses access to, or otherwise does not provide, necessary
information within a reasonable period or significantly impedes the investigation, preliminary and
final determinations, affirmative or negative, may be made on the basis of the facts available. The
provisions of Annex II shall be observed in the application of this paragraph.
(…)
78Article 6.8 requires that the provisions of Annex II of the Anti-Dumping Agreement be observed in the
use of facts available. Paragraph 1 of Annex II provides, in relevant part, that:
The authorities should also ensure that the party is aware that if information
is not supplied within a reasonable time, the authorities will be free to
make determinations on the basis of the facts available … (emphasis
added)
(…)
80Neither Article 6.8 nor paragraph 1 of Annex II expressly addresses the question of when the
investigating authorities are entitled to reject information submitted by interested parties, as USDOC did
in this case. In our view, paragraph 3 of Annex II of the Anti-Dumping Agreement bears on this issue.
Paragraph 3 of Annex II states, in relevant part:
All information which is verifiable, which is appropriately submitted so
that it can be used in the investigation without undue difficulties, which is
supplied in a timely fashion, and, where applicable, which is supplied in a
medium or computer language requested by the authorities, should be
taken into account when determinations are made. (emphasis added)
(…)
83That being so, we consider that, under paragraph 3 of Annex II, investigating authorities should not be
entitled to reject information as untimely if the information is submitted within a reasonable period of time.
In other words, we see, "in a timely fashion", in paragraph 3 of Annex II as a reference to a "reasonable
period" or a "reasonable time". This reading of "timely" contributes to, and becomes part of, the coherent
framework for fact-finding by investigating authorities. Investigating authorities may reject information
under paragraph 3 of Annex II only in the same circumstances in which they are entitled to overcome the
lack of this information through recourse to facts available, under Article 6.8 and paragraph 1 of Annex II
85
of the Anti-Dumping Agreement. The coherence of this framework is also secured through the second
sentence of Article 6.1.1, which requires investigating authorities to extend deadlines "upon cause shown",
if "practicable". In short, if the investigating authorities determine that information was submitted within a
reasonable period of time, Article 6.1.1 calls for the extension of the time-limits for the submission of
information.
(…)
85In sum, a "reasonable period" must be interpreted consistently with the notions of flexibility and balance
that are inherent in the concept of "reasonableness", and in a manner that allows for account to be taken of
the particular circumstances of each case. In considering whether information is submitted within a
reasonable period of time, investigating authorities should consider, in the context of a particular case,
factors such as: (i) the nature and quantity of the information submitted; (ii) the difficulties encountered by
an investigated exporter in obtaining the information; (iii) the verifiability of the information and the ease
with which it can be used by the investigating authorities in making their determination; (iv) whether other
interested parties are likely to be prejudiced if the information is used; (v) whether acceptance of the
information would compromise the ability of the investigating authorities to conduct the investigation
expeditiously; and (vi) the numbers of days by which the investigated exporter missed the applicable
time-limit.
(…)
87In this case, the Panel found that USDOC had rejected the weight conversion factors submitted by NSC
and NKK for the sole reason that they were submitted after the deadline for submission of the
questionnaire responses. According to the Panel, USDOC made no effort to determine whether,
notwithstanding the fact that the weight conversion factors were received after the applicable deadlines,
they were nevertheless submitted "within a reasonable period". 154 Instead, USDOC relied exclusively on
the fact that the deadline had expired, even though NSC and NKK had requested that USDOC accept the
information as a correction to the information submitted in the questionnaire. USDOC did not consider
any other facts and circumstances – even though several were raised 155 – which indicated that the
information might have been submitted within a reasonable period of time. Moreover, in the case of NKK,
USDOC in fact verified the information, before subsequently rejecting it as out of time.
88The approach taken by the United States in this case excludes the very possibility, recognized by
Articles 6.1.1 and 6.8 and Annex II of the Anti-Dumping Agreement, that USDOC might be required, by
these provisions, to extend the time-limits and accept the information submitted, as requested by NSC and
NKK.
89We are, therefore, of the view that USDOC acted inconsistently with Article 6.8 of the Anti-Dumping
Agreement through its failure to consider whether, in the light of all the facts and circumstances, the weight
conversion factors submitted by NSC and NKK were submitted within a reasonable period of time. In
reaching this conclusion, we are not finding that USDOC could not, consistently with the Anti-Dumping
Agreement, have rejected the weight conversion factors submitted by NSC and NKK. Rather, we conclude
simply that, under Article 6.8, USDOC was not entitled to reject this information for the sole reason that it
was submitted beyond the deadlines for responses to the questionnaires. Accordingly, we find that
USDOC's action does not rest upon a permissible interpretation of Article 6.8 of the Anti-Dumping
Agreement.
154Panel Report, para. 7.55.
155NSC and NKK argued, for example, that they were unable to provide the information at an earlier date,
and that the weight conversion factors were verifiable (and, in the case of NKK, actually verified) and
usable. See, supra, paras. 68 and 69.
86
90For all of the above reasons, we, therefore, uphold, albeit for different reasons, the Panel's findings that
the United States acted inconsistently with Article 6.8 of the Anti-Dumping Agreement in applying facts
available to the theoretical weight transactions made by NSC and NKK. 156
B.Application of "Adverse" Facts Available to KSC
91During the period of investigation, KSC made a significant proportion of its export sales to the United
States to California Steel Industries Inc. ("CSI"), a joint venture company which is owned 50 percent by
KSC and 50 percent by a Brazilian company, Companhia Vale de Rio Doce ("CVRD"). In the proceedings
before USDOC, CSI participated as one of the group of petitioners for the United States' hot-rolled steel
industry.
92In order to construct an export price for KSC's United States export sales, USDOC requested KSC to
provide information concerning the prices at which CSI resold products it had purchased from KSC, as well
as information concerning CSI's further manufacturing costs. (…)
98We begin our examination of this issue with the last sentence of paragraph 7 of Annex II of that
Agreement, which provides:
It is clear, however, that if an interested party does not cooperate and thus
relevant information is being withheld from the authorities, this situation
could lead to a result which is less favourable to the party than if the party
did cooperate. (emphasis added)
(…)
100Paragraph 7 of Annex II does not indicate what degree of "cooperation" investigating authorities are
entitled to expect from an interested party in order to preclude the possibility of such a "less favourable"
outcome. To resolve this question we scrutinize the context found in Annex II. In this regard, we consider
it relevant that paragraph 5 of Annex II prohibits investigating authorities from discarding information that
is "not ideal in all respects" if the interested party that supplied the information has, nevertheless, acted "to
the best of its ability". (emphasis added) This provision suggests to us that the level of cooperation
required of interested parties is a high one – interested parties must act to the "best" of their abilities.
101We note, however, that paragraph 2 of Annex II authorizes investigating authorities to request
responses to questionnaires in a particular medium (for example, computer tape) but, at the same time,
states that such a request should not be "maintained" if complying with that request would impose an
"unreasonable extra burden " on the interested party, that is, would "entail unreasonable additional cost
and trouble ". (emphasis added) This provision requires investigating authorities to strike a balance
between the effort that they can expect interested parties to make in responding to questionnaires, and the
practical ability of those interested parties to comply fully with all demands made of them by the
investigating authorities. We see this provision as another detailed expression of the principle of good faith,
which is, at once, a general principle of law and a principle of general international law, that informs the
provisions of the Anti-Dumping Agreement, as well as the other covered agreements. 157 This organic
principle of good faith, in this particular context, restrains investigating authorities from imposing on
exporters burdens which, in the circumstances, are not reasonable. 158
(…)
156Panel Report, paras. 7.57 and 7.59.
157Appellate Body Report, United States – Import Prohibition of Certain Shrimp Products,
WT/DS58/AB/R, adopted 6 November 1998, para. 158; Appellate Body Report, United States – Tax
Treatment for "Foreign Sales Corporations", WT/DS108/AB/R, adopted 20 March 2000, para. 166.
158See, infra, para. 193 and footnotes 141 and 142 thereto.
87
105Bearing in mind our interpretation of the requirements of "cooperation", we recall the approach taken
by USDOC and made of record in this case. It is uncontested that the information requested by USDOC:
was not known to, nor in the possession of, KSC; related to the prices and costs of CSI; resulted from CSI's
own operations and not KSC's; and was known only to, and in the possession only of, CSI. We observe,
also, that, as set forth above, KSC made several attempts to obtain the requested information from CSI. 159
Indeed, USDOC itself acknowledged that KSC "has provided a great deal of information and has
substantially cooperated with respect to other issues" and that, with respect to the missing information, KSC
"[has made] some effort to obtain the data and […] CSI's management rebuffed these efforts". 160
106KSC also repeatedly reported to USDOC its difficulties in obtaining information from CSI. 161
However, USDOC took no steps to assist KSC to overcome these difficulties, or to make allowances for the
resulting deficiencies in the information supplied. USDOC declined to allow KSC to attend a meeting with
petitioners' counsel to discuss the issue. Although USDOC met with KSC to discuss the issue, it appears
that USDOC did not provide any specific guidance or assistance to KSC – USDOC simply repeated that
KSC should obtain the requested information from CSI. 162 USDOC did not take any steps to secure the
necessary information by requesting it directly from CSI. 163 We find nothing in the Anti-Dumping
Agreement which would have prevented USDOC from asking CSI directly for the information. To the
contrary, Articles 6.1 and 6.11 of the Agreement contemplate precisely such an approach. 164
(…)
109Against this background, the Panel found that the interpretation of "cooperate" applied by USDOC
"went far beyond any reasonable understanding of any obligation to cooperate implied by paragraph 7 of
Annex II." 165 The Panel stated that, in "the absence of a justified conclusion that there was a lack of
cooperation", there was no basis, pursuant to that provision, for a result "less favourable" than would have
been the case had KSC cooperated. 166 In effect, the Panel held that USDOC's conclusion that KSC failed
to "cooperate" in the investigation did not rest on a permissible interpretation of that word. In the light of
our own interpretation of the word "cooperate", and taking account of the circumstances of this case, we
agree with the Panel's finding on this issue.
110We, therefore, uphold the Panel's finding, in paragraph 8.1(a) of its Report, that the United States acted
inconsistently with Article 6.8 and Annex II of the Anti-Dumping Agreement in applying "adverse" facts
available to KSC's sales to CSI.
VI.Article 9.4 of the Anti-Dumping Agreement: Calculation of the "All Others" Rate
11Before the Panel, Japan claimed that the United States' statutory method for calculating a rate of
anti-dumping duty for those exporters and producers who were not individually investigated, as well as
159See, supra, para. 92.
160USDOC Final Determination, supra, footnote 5 at 24368.
161Exhibit JP-42 submitted by Japan to the Panel details all of the efforts made by KSC to obtain the data
and to inform USDOC of the problems it encountered, as well as the reactions from CSI and from USDOC.
162Letter of 18 December 1998 from KSC to USDOC. (Exhibit JP-42 submitted by Japan to the Panel)
163Exhibit JP-42(n) submitted by Japan to the Panel.
164We recall that, in their investigation, investigating authorities deal with all interested parties, which
are defined under Article 6.11 of the Anti-Dumping Agreement, to include, inter alia, exporters, domestic
producers of the like product, and trade associations representing such domestic producers. Moreover, we
observe that Article 6.1 requires investigating authorities to give notice to "[a]ll interested parties" of the
information required from them.
165Panel Report, para. 7.73.
166Ibid.
88
USDOC's application of that method in this case, were inconsistent with Article 9.4 of the Anti-Dumping
Agreement.
112The Panel concluded that section 735(c)(5)(A) of the United States Tariff Act of 1930, as amended,
is, on its face, inconsistent with Article 9.4 of the Anti-Dumping Agreement "insofar as it requires the
consideration of margins based in part on facts available in the calculation of the all others rate"; and that,
in maintaining section 735(c)(5)(A) following the entry into force of the Anti-Dumping Agreement, the
United States acted inconsistently with Article 18.4 of that Agreement as well as with Article XVI:4 of
the WTO Agreement. 167 The Panel also concluded that the application by the United States of
section 735(c)(5)(A) of the Tariff Act of 1930, as amended, in this case was inconsistent with United States'
obligations under Article 9.4 of the Anti-Dumping Agreement. 168
(…)
114Article 9.4 of the Anti-Dumping Agreement provides, in pertinent part:
When the authorities have limited their examination [to a sample of
exporters or producers], any anti-dumping duty applied to imports from
exporters or producers not included in the examination shall not exceed:
(i)
the weighted average margin of dumping established with respect
to the selected exporters or producers
…
provided that the authorities shall disregard for the purpose of this
paragraph any zero and de minimis margins and margins established
under the circumstances referred to in paragraph 8 of Article 6. (emphasis
added)
115We observe, first, that Article 9.4 applies only in cases where investigating authorities have used
"sampling", that is, where investigating authorities have, in accordance with Article 6.10 of the
Anti-Dumping Agreement, limited their investigation to a select group of exporters or producers. In such
cases, the investigating authorities may determine an anti-dumping duty rate to be applied to those
exporters and producers who were not included in the investigated sample. The rate so established is
referred to as the "all others" rate.
116Article 9.4 does not prescribe any method that WTO Members must use to establish the "all others" rate
that is actually applied to exporters or producers that are not investigated. Rather, Article 9.4 simply
identifies a maximum limit, or ceiling, which investigating authorities "shall not exceed " in establishing an
"all others" rate. Sub-paragraph (i) of Article 9.4 states the general rule that the relevant ceiling is to be
established by calculating a "weighted average margin of dumping established" with respect to those
167Panel Report, para. 7.90. Article 18.4 of the Anti-Dumping Agreement provides:
Each Member shall take all necessary steps, of a general or particular
character, to ensure, not later than the date of entry into force of the WTO
Agreement for it, the conformity of its laws, regulations and administrative
procedures with the provisions of this Agreement as they may apply for the
Member in question.
Article XVI:4 of the WTO Agreement provides:
Each Member shall ensure the conformity of its laws, regulations and
administrative procedures with its obligations as provided in the annexed
Agreements.
168Panel Report, para. 7.90.
89
exporters or producers who were investigated. However, the clause beginning with "provided that", which
follows this sub-paragraph, qualifies this general rule. This qualifying language mandates that, "for the
purpose of this paragraph", investigating authorities "shall disregard ", first, zero and de minimis margins
and, second, "margins established under the circumstances referred to in paragraph 8 of Article 6." Thus, in
determining the amount of the ceiling for the "all others" rate, Article 9.4 establishes two prohibitions. The
first prevents investigating authorities from calculating the "all others" ceiling using zero or de
minimis margins; while the second precludes investigating authorities from calculating that ceiling using
"margins established under the circumstances referred to" in Article 6.8.
117The United States' appeal on this point concerns only the second type of "margins" that are to be
disregarded in the calculation of the maximum "all others" rate, namely "margins established under the
circumstances referred to in paragraph 8 of Article 6." The United States' appeal is founded on the
contention that this phrase should be interpreted to cover only those margins which are calculated
entirely on the basis of the facts available, that is, where both components of the calculation of a dumping
margin – normal value and export price – are determined exclusively using facts available. By contrast,
the Panel found that the phrase in Article 9.4 excludes, from the calculation of the ceiling for the "all others"
rate, any margins which are calculated, even in part, using facts available.
(…)
122(…) Article 6.8 applies even in situations where only limited use is made of facts available. To read
Article 9.4 in the way the United States does is to overlook the many situations where Article 6.8 allows a
margin to be calculated, in part, using facts available. Yet, the text of Article 9.4 simply refers, in an
open-ended fashion, to "margins established under the circumstances" in Article 6.8. Accordingly, we see
no basis for limiting the scope of this prohibition in Article 9.4, by reading into it the word "entirely" as
suggested by the United States. In our view, a margin does not cease to be "established under the
circumstances referred to" in Article 6.8 simply because not every aspect of the calculation involved the use
of "facts available".
123Our reading of Article 9.4 is consistent with the purpose of the provision. Article 6.8 authorizes
investigating authorities to make determinations by remedying gaps in the record which are created, in
essence, as a result of deficiencies in, or a lack of, information supplied by the investigated exporters.
Indeed, in some circumstances, as set forth in paragraph 7 of Annex II of the Anti-Dumping Agreement, "if
an interested party does not cooperate and thus relevant information is being withheld from the authorities,
this situation could lead to a result which is less favourable to the party than if the party did cooperate."
(emphasis added) Article 9.4 seeks to prevent the exporters, who were not asked to cooperate in the
investigation, from being prejudiced by gaps or shortcomings in the information supplied by the
investigated exporters. This objective would be compromised if the ceiling for the rate applied to "all
others" were, as the United States suggests, calculated – due to the failure of investigated parties to supply
certain information – using margins "established" even in part on the basis of the facts available.
(…)
127The method used by the United States to calculate an "all others" rate is set forth in section 735(c)(5) of
the United States Tariff Act of 1930, as amended, which provides:
(A)
General rule
For purposes of this subsection and section 1673b(d) of this title,
the estimated all-others rate shall be an amount equal to the weighted
average of the estimated weighted average dumping margins established
for exporters and producers individually investigated, excluding any zero
and de minimis margins, and any margins determined entirely under
section 1677e of this title. (emphasis added)
90
(B)
Exception
If the estimated weighted average dumping margins established for
all exporters and producers individually investigated are zero or de
minimis margins, or are determined entirely under section 1677e of this
title, the administering authority may use any reasonable method to
establish the estimated all-others rate for exporters and producers not
individually investigated, including averaging the estimated weighted
average dumping margins determined for the exporters and producers
individually investigated. 169 (emphasis added)
128Section 735(c)(5)(A) of the United States Tariff Act of 1930, as amended, sets forth a mandatory
method for calculating the actual "all others" rate. This provision requires that the "all others" rate be
equal to a weighted average of margins, unless those margins are zero, de minimis, or are determined
"entirely " on the basis of the facts available. Thus, this provision requires the inclusion of all margins
calculated using facts available, unless the margin is calculated entirely on the basis of the facts available.
Accordingly, in calculating the "all others" rate, section 735(c)(5)(A) requires the inclusion of margins
calculated in part using facts available. However, as we have said, Article 9.4 of the Anti-Dumping
Agreement requires the exclusion of all such margins from the calculation of the maximum "all others"
rate. In consequence, in cases where margins established in part on the basis of facts available are used to
calculate the "all others" rate, the "all others" rate calculated pursuant to section 735(c)(5)(A) may well
exceed the maximum allowable "all others" rate under Article 9.4 of the Anti-Dumping Agreement.
129As section 735(c)(5)(A) of the United States Tariff Act of 1930, as amended, requires the inclusion of
margins established, in part, on the basis of facts available, in the calculation of the "all others" rate, and to
the extent that this results in an "all others" rate in excess of the maximum allowable rate under Article 9.4,
we uphold the Panel's finding that section 735(c)(5)(A) of the United States Tariff Act of 1930, as amended,
is inconsistent with Article 9.4 of the Anti-Dumping Agreement. We also uphold the Panel's consequent
findings that the United States acted inconsistently with Article 18.4 of that Agreement and with Article
XVI:4 of the WTO Agreement. 170 We further uphold the Panel's finding that the United
States' application of the method set forth in section 735(c)(5)(A) of the Tariff Act of 1930, as amended,
to determine the "all others" rate in this case was inconsistent with United States' obligations under
the Anti-Dumping Agreement because it was based on a method that included, in the calculation of the "all
others" rate, margins established, in part, using facts available. 171
(…)
169Section 735(c)(5)(B) of the United States Tariff Act of 1930, as amended, is contained in Title 19 of the
United States Code at 19 U.S.C. § 1673d(c)(5). We note that section 1673b(d) refers to the establishment
of an "all others" rate in preliminary determinations, while section 1677e refers to determinations on the
basis of facts available.
170Panel Report, para. 7.90.
171We recall that the United States calculated the "all others" rate in this case based on a weighted average
of the individual margins it determined for NSC, NKK, and KSC, even though all of those margins were
calculated, in part, based on facts available. Since, for each company, the use of facts available increased,
in one case significantly, the respective dumping margins, the use of those dumping margins to calculate the
"all others" rate inevitably increased that rate.
91
FSC II (2002)
WORLD TRADE
WT/DS108/AB/RW
14 January 2002
ORGANIZATION
(02-0152)
Original:
http://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm
UNITED STATES – TAX TREATMENT FOR "FOREIGN SALES CORPORATIONS"
RECOURSE TO ARTICLE 21.5 OF THE DSU BY THE EUROPEAN COMMUNITIES
Report of the Appellate Body
United States – Tax Treatment For "Foreign
Sales Corporations"
AB-2001-8
Recourse To Article 21.5 of the DSU by the
European Communities
Present:
United States, Appellant/Appellee
European Communities, Appellant/Appellee
Feliciano, Presiding Member
Ganesan, Member
Taniguchi, Member
Australia, Third Participant
Canada, Third Participant
India, Third Participant
Japan, Third Participant
I.Introduction
1The United States appeals certain issues of law and legal interpretations in the Panel Report, United States
– Tax Treatment for "Foreign Sales Corporations" – Recourse to Article 21.5. of the DSU by the European
Communities (the "Panel Report").172 The Panel was established to consider a complaint by the European
Communities concerning the consistency of the United States FSC Replacement and Extraterritorial
Income Exclusion Act (the "ETI Act") 173 with the Agreement on Subsidies and Countervailing Measures
(the "SCM Agreement"), the Agreement on Agriculture, and the General Agreement on Tariffs and Trade
172WT/DS108/RW, 20 August 2001.
173United States Public Law 106-519, 114 Stat. 2423 (2000).
92
1994 (the "GATT 1994"). The ETI Act is a measure taken by the United States with a view to complying
with the recommendations and rulings of the Dispute Settlement Body (the "DSB") in United States – Tax
Treatment for "Foreign Sales Corporations" ("US – FSC ").174 Pertinent aspects of the ETI Act are
described in Section II below, as well as in paragraphs 2.1-2.8 of the Panel Report.
2In US – FSC, the original panel concluded that the "FSC measure", consisting of Sections 921-927 of the
United States Internal Revenue Code (the "IRC") and related measures establishing special tax treatment
for foreign sales corporations, was inconsistent with the United States' obligations under the SCM
Agreement and under the Agreement on Agriculture.175 The Appellate Body upheld the original panel's
finding that the FSC measure was inconsistent with United States' obligations under the SCM
Agreement and modified the Panel's findings under the Agreement on Agriculture.
3On 20 March 2000, the DSB adopted the reports of the original panel and the Appellate Body. The DSB
recommended that the United States bring the FSC measure into conformity with its obligations under the
covered agreements and that the FSC subsidies found to be prohibited export subsidies within the meaning
of the SCM Agreement be withdrawn without delay, namely, "at the latest with effect from
1 October 2000."176 At its meeting on 12 October 2000, the DSB acceded to a request made by the United
States to modify the time-period for complying with the DSB's recommendations and rulings in this dispute
so as to expire on 1 November 2000.177 On 15 November 2000, with a view to such compliance, the
United States promulgated the ETI Act.178 The background of this dispute is set out in further detail in the
Panel Report.179
4The European Communities considered that the ETI Act did not comply with the recommendations and
rulings of the DSB and that it was not consistent with the United States' obligations under the SCM
Agreement, the Agreement on Agriculture, and the GATT 1994. The European Communities therefore
requested that the matter be referred to the original panel pursuant to Article 21.5 of the Understanding on
Rules and Procedures Governing the Settlement of Disputes (the "DSU").180 On 20 December 2000, in
accordance with Article 21.5 of the DSU, the DSB referred the matter to the original panel.181 The Panel
Report was circulated to the Members of the World Trade Organization (the "WTO") on 20 August 2001.
5The Panel concluded that:
(a)the [ETI] Act is inconsistent with Article 3.1(a) of the SCM Agreement as it involves subsidies
"contingent… upon export performance" within the meaning of Article 3.1(a) of the
SCM Agreement by reason of the requirement of "use outside the United States" and fails to fall
within the scope of the fifth sentence of footnote 59 of the SCM Agreement because it is not a
measure to avoid the double taxation of foreign-source income within the meaning of footnote 59
of the SCM Agreement;
174The recommendations and rulings of the DSB resulted from the adoption, by the DSB, of the
Appellate Body Report in US – FSC, WT/DS108/AB/R, adopted 20 March 2000 (the "original Appellate
Body Report"). In this Report, we refer to the panel that considered the original complaint brought by the
European Communities as the "original panel" and to its report as the "original panel report".
175Original Panel Report, US – FSC, WT/DS108/R, adopted 20 March 2000, as modified by the Appellate
Body Report, WT/DS108/AB/R, para. 8.1.
176Ibid., para. 8.8.
177WT/DSB/M/90, paras. 6-7. See also Panel Report, para. 1.3.
178Panel Report, para. 1.5.
179Ibid., paras. 1.1-1.13.
180WT/DS108/16, 8 December 2000.
181WT/DS108/19, 5 January 2001.
93
(b)the United States has acted inconsistently with its obligation under Article 3.2 of the SCM
Agreement not to maintain subsidies referred to in paragraph 1 of Article 3 of the SCM
Agreement;(…)
(e)the United States has not fully withdrawn the FSC subsidies found to be prohibited export
subsidies inconsistent with Article 3.1(a) of the SCM Agreement and has therefore failed to
implement the recommendations and rulings of the DSB made pursuant to Article 4.7 SCM
Agreement.182
(…)
V.Article 1.1 of the SCM Agreement: "Foregoing Revenue" that is "Otherwise Due"
81The Panel found that the ETI measure "results in the foregoing of revenue which is 'otherwise due' and
thus gives rise to a financial contribution within the meaning of Article 1.1(a)(1)(ii) of the SCM
Agreement." 183
(…)
105In our view, the definitive exclusion from tax of QFTI, compared with the taxation of other
foreign-source income, and coupled with the right of election for taxpayers to use the rules of taxation most
favourable to them, means that, under the contested measure, the United States foregoes revenue on QFTI
which is otherwise due.
106For these reasons, we uphold the Panel's finding, in paragraphs 8.30 and 8.43 of the Panel Report, that
through the measure at issue, the United States government foregoes revenue that is otherwise due within
the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement, and that the ETI measure, therefore, gives rise
to a financial contribution under Article 1.1(a)(1) of that Agreement. (…)
VI.Article 3.1(a) of the SCM Agreement: Export Contingency
(…)
108.The Panel found that "the Act involves subsidies 'contingent … upon export performance' by reason of
the requirement of 'use outside the United States' and is therefore inconsistent with Article 3.1(a) of
the SCM Agreement." 184 (…).
118(…)The subsidy granted with respect to the property produced within the United States, and exported
from there, is export contingent within the meaning of Article 3.1(a) of the SCM Agreement, irrespective of
whether the subsidy given in respect of property produced outside the United States is also export
contingent.
119For these reasons, we uphold the Panel's finding, in paragraphs 8.75 and 9.1(a) of the Panel Report –
which is limited to property "manufactured, produced, grown, or extracted" within the United States – that
the measure at issue grants subsidies contingent in law upon export performance within the meaning of
Article 3.1(a) of the SCM Agreement.185 We do not opine upon the alleged export contingency of the
subsidy in relation to property "manufactured, produced, grown, or extracted" outside the United States.186
182Panel Report, para. 9.1.
183Panel Report, para. 8.43. (footnote omitted)
184Panel Report, para. 8.75.
185Supra, paras. 0-Error! Reference source not found..
186We note that the European Communities makes a conditional appeal concerning the Panel's exercise of
judicial economy in relation to this issue. See infra, paras. Error! Reference source not found.-Error!
Reference source not found..
94
VII.Footnote 59 to the SCM Agreement: Avoiding Double Taxation of Foreign-Source Income
(…)
184Certainly, if the ETI measure were confined to those aspects which grant a tax exemption for
"foreign-source income", it would fall within footnote 59. However, the ETI measure is not so confined.
Rather, in several important respects, two of the three basic allocation rules of the ETI measure, the (1.2 and
15 percent rules) provide an exemption for domestic-source income.187 We have said that avoiding
double taxation is not an exact science and we recognize that Members must have a degree of flexibility in
tackling double taxation. However, in our view, the flexibility under footnote 59 to
the SCM Agreement does not properly extend to allowing Members to adopt allocation rules that
systematically result in a tax exemption for income that has no link with a "foreign" State and that would
not be regarded as foreign-source under any of the widely accepted principles of taxation we have
reviewed.
185(…) Accordingly, we uphold the Panel's finding in paragraphs 8.107 and 9.1(a) of the Panel Report.
(…)
X.Article 4.7 of the SCM Agreement: Withdrawal of FSC Subsidies
(…)
227Under the ETI Act, no corporation may elect to be treated as an FSC after 30 September 2000.188
However, for FSCs in existence as of that date, the repeal of the original FSC measure "shall not apply" to
any transaction which occurs before 1 January 2002.189 Moreover, even after that date, existing FSCs can
continue to use the original FSC measure for transactions pursuant to a binding contract between the FSC
and any unrelated person that was in effect on and after 30 September 2000.190 Thus, by the United States'
own acknowledgement, the original FSC measure continues to apply, unmodified, to existing FSCs in
respect of a defined set of transactions.191 The success of the United States' appeal depends on the success
of its argument that prohibited FSC subsidies can continue to be granted to protect the contractual interests
of private parties and to ensure an orderly transition to the regime of the new measure. In short, on the basis
of these arguments, the United States seeks to have the time-period for the full withdrawal of the prohibited
FSC subsidies extended, in some circumstances, indefinitely.
(…)
229Thus, as we indicated in that appeal, a Member's obligation under Article 4.7 of the SCM Agreement to
withdraw prohibited subsidies "without delay" is unaffected by contractual obligations that the Member
itself may have assumed under municipal law. Likewise, a Member's obligation to withdraw prohibited
export subsidies, under Article 4.7 of the SCM Agreement, cannot be affected by contractual obligations
which private parties may have assumed inter se in reliance on laws conferring prohibited export subsidies.
Accordingly, we see no legal basis for extending the time-period for the United States to withdraw fully the
prohibited FSC subsidies.
230Accordingly, we uphold the Panel's finding, in paragraphs 8.170 and 9.1(e) of its Report, that the United
States has not fully withdrawn the FSC subsidies found to be prohibited export subsidies under Article 3.1(a)
187In addition, under the third formula for FSLI, there are circumstances where the ETI measure could
grant a tax exemption for lease or rental income which includes domestic-source income. See supra, para.
Error! Reference source not found..
188Section 5(b)(1) of the ETI Act.
189Section 5(c)(1)(A) of the ETI Act.
190See Section 5(c)(1)(B)(ii) of the ETI Act.
191Panel Report, para. 8.169.
95
of the SCM Agreement and has therefore failed to implement the recommendations and rulings of the DSB
made pursuant to Article 4.7 of the SCM Agreement.
(…)
96
US - URAA SECTION 129 (2002)
WORLD TRADE
WT/DS221/R
15 July 2002
ORGANIZATION
(02-3841)
Original:
UNITED STATES – SECTION 129(c)(1) OF THE
URUGUAY ROUND AGREEMENTS ACT
Report of the Panel
http://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm>
(…)
II.Factual Aspects
(…)
A.SECTION 129 OF THE URAA
(…)
2.3.Section 129 of the URAA is entitled "Administrative Action Following WTO Panel Reports". It has
five subsections, viz., subsections (a) through (e). Subsections (a) through (d) are reproduced below in
relevant part.192
(a)
ACTION BY UNITED STATES INTERNATIONAL TRADE
COMMISSION.—
(1)
ADVISORY REPORT.— If a dispute settlement panel
finds in an interim report under Article 15 of the Dispute Settlement
Understanding, or the Appellate Body finds in a report under Article 17 of
that Understanding, that an action by the International Trade Commission
in connection with a particular proceeding is not in conformity with the
obligations of the United States under the Antidumping Agreement, the
192 Subsection (e) amends section 516A of the Tariff Act of 1930 to provide for judicial review by US
courts and NAFTA binational panels of new Title VII determinations made by the US Department of
Commerce or the International Trade Commission under section 129 that are implemented.
97
Safeguards Agreement, or the Agreement on Subsidies and
Countervailing Measures, the Trade Representative may request the
Commission to issue an advisory report on whether title VII of the Tariff
Act of 1930 or title II of the Trade Act of 1974, as the case may be, permits
the Commission to take steps in connection with the particular proceeding
that would render its action not inconsistent with the findings of the panel
or the Appellate Body concerning those obligations. The Trade
Representative shall notify the congressional committees of such request.
[…]
(4)
COMMISSION
DETERMINATION.—
Notwithstanding any provision of the Tariff Act of 1930 or title II of the Trade
Act of 1974, if a majority of the Commissioners issues an affirmative
report under paragraph (1), the Commission, upon the written request of
the Trade Representative, shall issue a determination in connection with
the particular proceeding that would render the Commission's action
described in paragraph (1) not inconsistent with the findings of the panel
or Appellate Body. The Commission shall issue its determination not later
than 120 days after the request from the Trade Representative is made.
(5)
CONSULTATIONS ON IMPLEMENTATION OF
COMMISSION DETERMINATION.— The Trade Representative shall
consult with the congressional committees before the Commission's
determination under paragraph (4) is implemented.
(6)
REVOCATION OF ORDER.— If, by virtue of the
Commission's determination under paragraph (4), an antidumping or
countervailing duty order with respect to some or all of the imports that are
subject to the action of the Commission described in paragraph (1) is no
longer supported by an affirmative Commission determination under title
VII of the Tariff Act of 1930 or this subsection, the Trade Representative
may, after consulting with the congressional committees under paragraph
(5), direct the administering authority to revoke the antidumping or
countervailing duty order in whole or in part.
[…]
(b)
ACTION BY ADMINISTERING AUTHORITY.—
(1)
CONSULTATIONS
WITH
ADMINISTERING
AUTHORITY AND CONGRESSIONAL COMMITTEES.— Promptly
after a report by a dispute settlement panel or the Appellate Body is issued
that contains findings that an action by the administering authority in a
proceeding under title VII of the Tariff Act of 1930 is not in conformity
with the obligations of the United States under the Antidumping
Agreement or the Agreement on Subsidies and Countervailing Measures,
the Trade Representative shall consult with the administering authority
and the congressional committees on the matter.
(2)
DETERMINATION
BY
ADMINISTERING
AUTHORITY.— Notwithstanding any provision of the Tariff Act of 1930,
98
the administering authority shall, within 180 days after receipt of a written
request from the Trade Representative, issue a determination in
connection with the particular proceeding that would render the
administering authority's action described in paragraph (1) not
inconsistent with the findings of the panel or the Appellate Body.
(3)
CONSULTATIONS
BEFORE
IMPLE-MENTATION.— Before the administering authority implements
any determination under paragraph (2), the Trade Representative shall
consult with the administering authority and the congressional committees
with respect to such determination.
(4)
IMPLEMENTATION OF DETERMINATION.— The
Trade Representative may, after consulting with the administering
authority and the congressional committees under paragraph (3), direct the
administering authority to implement, in whole or in part, the
determination made under paragraph (2).
(c)
EFFECTS OF DETERMINATIONS; NOTICE OF
IMPLE-MENTATION.—
(1)
EFFECTS OF DETERMINATIONS.— Determinations
concerning title VII of the Tariff Act of 1930 that are implemented under
this section shall apply with respect to unliquidated entries of the subject
merchandise (as defined in section 771 of that Act) that are entered, or
withdrawn from warehouse, for consumption on or after—
(A) in the case of a determination by the Commission
under subsection (a)(4), the date on which the Trade
Representative directs the administering authority under
subsection (a)(6) to revoke an order pursuant to that determination,
and
(B) in the case of a determination by the administering
authority under subsection (b)(2), the date on which the Trade
Representative directs the administering authority under
subsection (b)(4) to implement that determination.
(2)
NOTICE OF IMPLEMENTATION.—
(A) The administering authority shall publish in the
Federal Register notice of the implementation of any
determination made under this section with respect to title VII of
the Tariff Act of 1930.
(B) The Trade Representative shall publish in the Federal
Register notice of the implementation of any determination made
under this section with respect to title II of the Trade Act of 1974.
(d)
OPPORTUNITY FOR COMMENT BY INTERESTED
PARTIES.— Prior to issuing a determination under this section, the
administering authority or the Commission, as the case may be, shall
provide interested parties with an opportunity to submit written comments
99
and, in appropriate cases, may hold a hearing, with respect to the
determination.193
2.4.Under Section 129, the United States Trade Representative (hereafter the "USTR") may request the US
International Trade Commission (hereafter the "ITC") or the US Department of Commerce (hereafter the
"Department of Commerce") to take action "not inconsistent" with a panel report only if such action is in
accord with US antidumping or countervailing duty law.194 Section 129 does not apply in cases where
implementation of an adverse DSB ruling requires a change in US antidumping or countervailing duty
statutes.
B.THE RETROSPECTIVE DUTY ASSESSMENT SYSTEM OF THE UNITED STATES
2.5.In a US antidumping or countervailing duty investigation, the Department of Commerce determines
whether the imports under investigation are being dumped or subsidized and the ITC determines whether
the dumped or subsidized imports cause or threaten to cause material injury. If the final determinations of
the Department of Commerce and the ITC establish that the imports under investigation are being dumped
or subsidized and are causing (or threatening to cause) injury, the Department of Commerce issues an
antidumping or countervailing duty order instructing the US Customs Service to (i) assess antidumping or
countervailing duties on completion of a future administrative review and (ii) require the payment of a cash
deposit of estimated duties on all future entries of the relevant product.195
2.6.The United States employs a "retrospective" duty assessment system under which definitive liability for
antidumping or countervailing duties is determined after merchandise subject to an antidumping or
countervailing duty measure enters the United States. The determination of definitive duty liability is made
at the end of "administrative reviews" which are initiated by the Department of Commerce each year on
request by an interested party (such as the foreign exporter or the US importer of the imports), beginning
one year from the date of the order. In addition to calculating an assessment rate in respect of the entries
under review, administrative reviews also determine the cash deposit rates for estimated antidumping or
countervailing duties that will be required as a security on future entries, until subsequent administrative
reviews are conducted with respect to those entries.
2.7.An administrative review entails a substantive legal and factual analysis of whether imports of the
product during the period of review were dumped or subsidized and, if so, to what extent.196 The facts
pertaining to entries during the period under review are investigated for the first time during an
administrative review. The law applied in an administrative review is the law as interpreted by the
Department of Commerce at the time that it makes its administrative review decision. The Department of
Commerce's interpretation of the underlying antidumping or countervailing duty laws or regulations may
be different from the interpretation it applied in the original investigation or in previous administrative
reviews.
2.8.At the conclusion of the administrative review, the Department of Commerce instructs the US Customs
Service to assess definitive antidumping and countervailing duties in accordance with the determination of
193 Uruguay Round Agreements Act, Pub. L. No. 103-465, section 129(a)-(d), 108 Stat. 4836-4838.
194 See section B.1.(c), third paragraph, of the Statement of Administrative Action, supra, p. 1023.
195 See section 351.211 of the Antidumping and Countervailing Duties Regulations, 19 C.F.R. Part 351
(exhibit CDA-5). Normally, if an administrative review is not requested, the Department of Commerce will
instruct the US Customs Service to assess antidumping or countervailing duties at rates equal to the cash
deposit of estimated antidumping or countervailing duties required on the relevant entries.
196 In administrative reviews, imports covered by the period under review are imports that entered the
United States during the 12 to 18 months prior to the initiation of the review. The Department of
Commerce does not issue its final determination in the administrative review until 12 to 18 months after the
end of the review period.
100
the Department of Commerce. To the extent that the definitive duties owed are less than the level of the
cash deposits paid as security, any excess plus interest is returned to the importer. To the extent that the
definitive liability is greater than the cash deposits, the importer must pay that additional amount.
(…)
VI.Findings
A.MEASURE AT ISSUE
(…)
6.4.We note that, in the course of these proceedings, Canada made numerous references to the provisions of
title VII of the United States Tariff Act of 1930, as amended.197 However, Canada has not argued that title
VII of the Tariff Act of 1930 or any of its sections was itself a measure within this Panel's terms of reference.
As a result, we need not examine whether the relationship between title VII of the Tariff Act of 1930 and
section 129(c)(1) is such that title VII, or any of its individual sections, could be considered to be "included"
in our terms of reference.198
6.5.In the light of the above, we conclude that the only measure that is within this Panel's terms of reference
is section 129(c)(1). Accordingly, we will examine whether section 129(c)(1), taken alone, is inconsistent
with the WTO provisions invoked by Canada.
B.CLAIMS AND ARGUMENTS OF THE PARTIES AND ANALYTICAL APPROACH OF THE
PANEL
1.Arguments of the parties
6.6.According to Canada, section 129(c)(1) provides that a new antidumping or countervailing duty
determination made by the Department of Commerce or the ITC to bring a previous antidumping,
countervailing duty or injury determination into conformity with an adverse WTO panel or Appellate Body
report applies only to imports that enter the United States on or after the date that the USTR directs
implementation of the new determination. In Canada's view, section 129(c)(1) implies that imports that
entered the United States prior to that date, and that are subject to an order imposing potential liability for
the payment of antidumping or countervailing duties, remain subject to future administrative review
determinations and definitive duty assessment without regard to the new determination made by the
Department of Commerce or the ITC and any consequent revocation or amendment of the original order.
6.7.Canada refers to the latter type of imports as "prior unliquidated entries", since those imports entered
the United States prior to the date on which the USTR directs implementation of a new determination
pursuant to section 129(a)(6) and section 129(b)(4) and remain unliquidated (that is, the definitive duty, if
any, to be levied on the imports remains undetermined) on that date. For the purposes of this dispute,
Canada is assuming that the USTR directs the Department of Commerce or the ITC to implement an
adverse DSB ruling at the end of the reasonable period of time accorded to a Member pursuant to
Article 21.3 of the DSU. Canada refers to that date as the "implementation date".
197 Title VII of the Tariff Act of 1930, codified at 19 U.S.C. §§ 1671 et seq.
198 We note that there may be circumstances in which a measure that is not specifically identified in a
panel request may nevertheless be considered to be "included" in a measure that is specifically identified, if
such a measure is "subsidiary or closely related" to the measure that is referenced in the panel request. See
Panel Report, Japan – Measures Affecting Consumer Photographic Film and Paper ("Japan – Film "),
WT/DS44/R, adopted 22 April 1998, DSR 1998:IV, 1179, para. 10.8. However, as already pointed out,
Canada did not assert before us that title VII of the Tariff Act of 1930 or any of its sections should be
considered to be "included" in Canada's references, in its panel request and elsewhere, to section 129(c)(1).
101
6.8.Canada considers that where an order imposing duty liability on imports has been revoked or amended
under section 129(c)(1) in response to an adverse WTO ruling, there is no legal basis in the AD Agreement,
the SCM Agreement or the GATT 1994 for the United States to conduct administrative reviews and to
assess definitive antidumping or countervailing duties with respect to "prior unliquidated entries" without
regard to the new determination made by the ITC or the Department of Commerce pursuant to section 129
and the revocation or amendment of the original order. Canada further argues that there is no legal basis in
the AD Agreement, the SCM Agreement or the GATT 1994 for the United States to retain cash deposits
collected in respect of "prior unliquidated entries" pending the determination of definitive duty liability for
those entries, to the extent that these cash deposits were made pursuant to the original order, which has been
revoked or amended only with respect to entries that entered the United States on or after the
implementation date.
6.9.Canada asserts that section 129(c)(1) requires the Department of Commerce, in determining whether to
retain cash deposits previously collected on "prior unliquidated entries" and whether to conduct
administrative reviews and assess duties with respect to such entries, to disregard (i) the new determination
made by the ITC or the Department of Commerce pursuant to paragraphs (a)(6) and (b)(4) of section 129,
and (ii) any revocation or amendment of the original order. Canada submits that where a new determination
results in a negative finding of injury, a negative finding of dumping or subsidization, or a reduction in the
dumping or subsidization margin, and the Department of Commerce, as a result of section 129(c)(1),
subsequently retains cash deposits previously collected in respect of "prior unliquidated entries", conducts
an administrative review of "prior unliquidated entries" or assesses definitive antidumping or
countervailing duties with respect to such entries without taking into account the new determination and the
adverse DSB ruling, the Department of Commerce is acting inconsistently with the obligations of the
United States under the AD Agreement, the SCM Agreement or the GATT 1994.
(…)
6.14.The United States considers that any discussion of whether section 129(c)(1) is inconsistent with the
WTO obligations of the United States must start with an understanding of the obligations that the DSU
imposes with respect to implementing adverse WTO reports. The United States submits, in this regard, that
the DSU creates an obligation on the part of a Member whose measure has been found to be
WTO-inconsistent to bring that measure into conformity in a prospective manner. In the view of the United
States, prospective implementation in a case involving an antidumping or countervailing duty measure
requires a Member to ensure that a new, WTO-consistent antidumping or countervailing duty determination
applies to all merchandise that enters for consumption on or after the date of implementation.
6.15.The United States asserts that there is no requirement to apply a new, WTO-consistent antidumping or
countervailing duty determination to "prior unliquidated entries". The United States submits that, pursuant
to Article 21 of the DSU, there is no obligation to cease or otherwise suspend a WTO-inconsistent measure
with respect to its impact on entries that take place during the reasonable period of time. In the view of the
United States, neither the AD Agreement, nor the SCM Agreement or the GATT 1994 addresses the timing
of the implementation of adverse WTO reports. The United States adds that, to the extent that those
agreements refer to effective dates for any purpose, those effective dates are based on the date of entry. The
United States submits that using the date of entry as the basis for implementation is, therefore, consistent
with the basic manner in which the AD Agreement and the SCM Agreement operate.
(…)
6.18.The United States further argues that, in any event, Canada must establish that section 129(c)(1)
mandates action that is inconsistent with the WTO obligations of the United States or that it precludes
action that is consistent with those obligations. The United States submits that if section 129(c)(1) does not
mandate or preclude any of the actions identified by Canada, then Canada's claims must fail, regardless of
what it means to implement a new antidumping or countervailing duty determination in a WTO-consistent
manner.
102
6.19.According to the United States, section 129(c)(1) only addresses the application of a new,
WTO-consistent determination to entries made on or after the date of implementation. In the view of the
United States, section 129(c)(1) does not mandate that the Department of Commerce take, or preclude
Commerce from taking, any particular action with respect to "prior unliquidated entries" in a separate
segment of an antidumping or countervailing duty proceeding, such as in a separate administrative review.
The United States submits that Canada has, therefore, failed to demonstrate that section 129(c)(1) mandates
WTO-inconsistent action or precludes WTO-consistent action and that, as a consequence, Canada's claims
must fail.
2.Evaluation by the Panel
(…)
6.22.As concerns Canada's principal claims, we note that Canada in this case is challenging
section 129(c)(1) "as such", that is to say independently of a particular application of section 129(c)(1). It is
clear to us that a Member may challenge, and a WTO panel rule against, a statutory provision of another
Member "as such" (for example, section 129(c)(1)), provided the statutory provision "mandates" the
Member either to take action which is inconsistent with its WTO obligations199 or not take action which is
required by its WTO obligations200. In accordance with the normal WTO rules on the allocation of the
burden of proof, it is up to the complaining Member to demonstrate that a challenged measure mandates
another Member to take WTO-inconsistent action or not to take action which is required by its WTO
obligations.201
6.23.In the light of the foregoing, it will be clear that Canada's principal claims will be sustained only if
Canada succeeds in establishing that section 129(c)(1) mandates the United States to take action which is
inconsistent with the WTO provisions which form the basis for those claims or mandates the United States
not to take action which is required by those WTO provisions. In other words, for Canada to discharge its
burden with respect to its principal claims, it must demonstrate both of two elements: first, that
section 129(c)(1) mandates that the United States take or not take the action identified by Canada, and
second that this mandated behaviour is inconsistent with the WTO provisions that it has invoked.
6.24.We consider that the issue of whether section 129(c)(1) mandates the United States to take certain
action or not to take certain action is distinct from the issue of whether such behaviour would be
inconsistent with the WTO provisions relied on by Canada. As a result, those two issues appear to us to be
capable of independent examination.
6.25.We think that we need not address both of the aforementioned issues if we find that Canada has failed
to meet its burden with respect to either one of them. As for the sequence in which we will address those
199 Appellate Body Report, United States – Anti-Dumping Act of 1916 ("US – 1916 Act "),
WT/DS136/AB/R, WT/DS162/AB/R, adopted 26 September 2000, paras. 88-89. We note that both parties
agree that the issue of whether section 129(c)(1) is a mandatory or discretionary provision is relevant to this
dispute.
200 Both parties agree that a statutory provision may be challenged "as such" not only if it mandates
WTO-inconsistent action, but also if it "precludes" action that is required by WTO rules. Canada's Second
Oral Statement, para. 17; US Second Submission, para. 7. We understand the parties to this dispute to use
the term "preclude" in the sense of "mandate not to". Whereas we are aware that another panel spoke of
statutory provisions "precluding WTO-consistency" which could, as such, violate WTO provisions (see
Panel Report, United States – Sections 301-310 of the Trade Act of 1974 ("US – Section 301 Trade Act "),
WT/DS152/R, adopted 27 January 2000, footnote 675), we will, in the interests of clarity, use the expression
"mandate not to" rather than "preclude".
201 Appellate Body Report, US – 1916 Act, supra, paras. 96-97; Panel Report, Brazil – Export Financing
Programme for Aircraft – Second Recourse by Canada to Article 21.5 of the DSU ("Brazil – Aircraft
(Article 21.5 – Canada II) "), WT/DS46/RW/2, adopted 23 August 2001, para. 5.50.
103
issues, we find it appropriate, in the circumstances of this case, to analyse first whether section 129(c)(1)
mandates the United States to take specified action or not to take specified action.202 (…)
C.CANADA'S PRINCIPAL CLAIMS
(…)
3.Whether section 129(c)(1) requires and/or precludes any of the actions identified by Canada
6.54.The Panel will now proceed to assess whether section 129(c)(1), as understood by the Panel, supports
Canada's assertions that, with respect to "prior unliquidated entries", section 129(c)(1) "requires" the
United States to take the actions listed in para. 6.31 and that it "precludes" the United States from taking the
actions listed in para. 6.32.
6.55.We recall, in this regard, that section 129(c)(1), on its face, does not address entries that took place
before the implementation date, i.e., "prior unliquidated entries". Section 129(c)(1) only speaks to entries
that take place on or after the implementation date. It is clear to us, therefore, that section 129(c)(1) does
not, by its express terms, require or preclude any particular action with respect to "prior unliquidated
entries". We consider that the above-quoted paragraph of the SAA -- i.e., the first paragraph of section
B.1.c.(3) -- supports our view.203
6.56.Therefore, we conclude that Canada has not succeeded in establishing that, with respect to "prior
unliquidated entries", the express terms of section 129(c)(1), read in the light of the SAA, require the
Department of Commerce to take any of the actions listed in para. 6.31 above or preclude the Department of
Commerce from taking any of the actions listed in para. 6.32 above.
4.Whether section 129(c)(1) has the effect of requiring and/or precluding any of the actions identified
by Canada
(…)
6.57.The Panel next turns to consider Canada's additional assertions that section 129(c)(1) has the effect of
requiring the Department of Commerce to take specified actions with respect to "prior unliquidated entries"
and that section 129(c)(1) has the effect of precluding the Department of Commerce from taking specified
actions with respect to such entries.204 (…)
6.67.We first consider the operation of section 129(c)(1) in methodology cases. Methodology cases are
cases in which the section 129 determination does not result in the revocation of the original antidumping or
202 We note that the Panel in United States - Measures Treating Exports Restraints as Subsidies first
considered whether certain action was in conformity with WTO requirements and only then addressed
whether the measure at issue mandated such action. See Panel Report, United States – Measures Treating
Export Restraints as Subsidies ("US – Export Restraints"), WT/DS194/R and Corr.2, adopted
23 August 2001, para. 8.14. In the circumstances of the case at hand, where there is a major factual dispute
regarding whether section 129(c)(1) requires and/or precludes certain action, we think that a panel is of
most assistance to the DSB if it examines the factual issues first. Moreover, we do not see how addressing
first whether certain actions identified by Canada would contravene particular WTO provisions would
facilitate our assessment of whether section 129(c)(1) mandates the United States to take certain action or
not to take certain action. Finally, we have taken into account the fact that, in the present case, our ultimate
conclusions with respect to Canada's claims would not differ depending on the order of analysis we decided
to follow.
203 The SAA paragraph in question is reproduced at para. 6.40 above. Since we will provide a detailed
analysis of the first paragraph of section B.1.c.(3) of the SAA in Subsection C.4.(b) below, we do not offer
any discussion of the relevant SAA paragraph at this point. We further note that the evidence before us
relating to the application of section 129(c)(1) to date does not support Canada's view that section 129(c)(1)
requires and/or precludes any of the actions which it has identified. See, infra, Subsection C.4.(c).
204 For a description of the actions specified by Canada see, supra, paras. 6.31 and 6.32.
104
countervailing duty order, but instead results in a new margin of dumping or a new countervailable subsidy
rate. Such an outcome may be due, for instance, to the application of a new, WTO-consistent methodology
or a new, WTO-consistent interpretation of US antidumping or countervailing duty laws.205 If the USTR
directs implementation of a section 129 determination of the aforementioned type, that determination
would be applied, pursuant to section 129(c)(1), to all entries that take place on or after the implementation
date.206 As a practical matter, the section 129 determination would be applied by setting a new cash
deposit rate for such entries.207
6.68.Turning now to Canada's assertions regarding the "effect" of section 129(c)(1) vis-à-vis "prior
unliquidated entries", we begin our analysis by considering what would be the impact on "prior
unliquidated entries" of a section 129 determination which establishes a new dumping margin or a new
countervailable subsidy rate. As we understand it, since a section 129 determination of this type would not
be applicable to "prior unliquidated entries", that determination, as such, would not have an impact on such
entries. In other words, we think it can be inferred from the fact that a section 129 determination which
establishes a new dumping margin or a new countervailable subsidy rate is inapplicable to "prior
unliquidated entries" that the Department of Commerce would not be required, because of section 129(c)(1),
to refund excessive cash deposits previously collected on "prior unliquidated entries" or to make
determinations regarding dumping or subsidization and assess definitive antidumping or countervailing
duties with respect to such entries on the basis of the new, WTO-consistent methodology.
6.69.Conversely, we think it can not be inferred from the mere fact that a section 129 determination which
establishes a new dumping margin or a new countervailable subsidy rate is inapplicable to "prior
unliquidated entries" that the Department of Commerce would be required to retain excessive cash deposits
collected on such entries or would be precluded from refunding such cash deposits. Nor does it follow from
the fact that a section 129 determination does not apply to "prior unliquidated entries" that the Department
of Commerce would be required to make administrative review determinations regarding dumping or
subsidization and assess definitive antidumping or countervailing duties with respect to "prior unliquidated
entries" on the basis of the previous, WTO-inconsistent methodology, or would be precluded from making
such determinations and assessing definitive duties with respect to such entries on the basis of the new,
WTO-consistent methodology.208
(…)
6.81.Accordingly, we provisionally find that Canada has failed to demonstrate that section 129(c)(1), by
itself, has the effect, in methodology cases, of requiring the Department of Commerce to retain excessive
205 In their argumentation, the parties have primarily discussed cases in which a section 129 determination
is based on a new methodology rather than on a revised statutory interpretation. Accordingly, our analysis
similarly focuses on methodology cases.
206 We recall that we have found at para. 6.53, supra, that, pursuant to section 129(c)(1), section 129
determinations do not apply to "prior unliquidated entries".
207 US Second Submission, para. 17.
208 It might of course be the case that, because section 129(c)(1) limits the application of section 129
determinations to entries that take place on or after the implementation date, "prior unliquidated entries"
would remain subject to other provisions of US antidumping or countervailing duty laws which might, for
instance, require the Department of Commerce to assess definitive antidumping or countervailing duties
with respect to "prior unliquidated entries" on the basis of the old, WTO-inconsistent methodology or might
preclude the Department of Commerce from assessing such duties with respect to such entries on the basis
of the new, WTO-consistent methodology. However, in such instances, it would not be because of
section 129(c)(1) that the Department of Commerce would be required to take, or be precluded from taking,
such action with respect to "prior unliquidated entries", but because of those other provisions of US law.
Since the only measure before us is section 129(c)(1), we are not called on to make findings regarding
whether any other provisions of US law would require the United States to take any of the actions which
Canada has identified and considers contrary to WTO law.
105
cash deposits collected on "prior unliquidated entries" or of precluding the Department of Commerce from
returning such cash deposits, or of requiring the Department of Commerce to conduct administrative
reviews for "prior unliquidated entries" on the basis of a methodology found by the DSB to be
WTO-inconsistent.
(…)
7.Overall conclusion with respect to Canada's principal claims
6.129.In the light of all its findings and conclusions in Section C, the Panel concludes that Canada has
failed to establish that section 129(c)(1) is inconsistent with Articles VI:2, VI:3 and VI:6(a) of the GATT
1994; Articles 1, 9.3, 11.1 and 18.1 of the AD Agreement; or Articles 10, 19.4, 21.1 and 32.1 of the SCM
Agreement.
(…)
106
CANADA – DIARY PRODUCTS (2002)
WORLD TRADE
WT/DS103/AB/RW2
WT/DS113/AB/RW2
20 December 2002
ORGANIZATION
(02-7032)
Original: English
Canada – Measures Affecting the Importation of Milk
and the Exportation of Dairy Products
Second Recourse to Article 21.5 of the DSU
by New Zealand and the United States
AB-2002-6
Report of the Appellate Body
107
(…)
WORLD TRADE ORGANIZATION
APPELLATE BODY
Canada – Measures Affecting the Importation of
Milk and the Exportation of Dairy Products
AB-2002-6
Second Recourse to Article 21.5 of the DSU
by New Zealand and the United States
Present:
Canada, Appellant
New Zealand, Appellee
United States, Appellee
Argentina, Third Participant
Australia, Third Participant
European Communities, Third Participant
Baptista, Presiding Member
Sacerdoti, Member
Taniguchi, Member
(…)
II.Background
12.The original panel found, inter alia, and the Appellate Body upheld, that Canada provided,
through Special Milk Classes 5(d) and 5(e), "export subsidies" within the meaning of Article 9.1(c) of
the Agreement on Agriculture. It was also found that these subsidies were being provided for
quantities of exports that exceeded the quantity commitment level specified in Canada's Schedule.
The original panel concluded, and the Appellate Body upheld, that Canada, therefore, had acted
inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture. 209
13.By way of implementation, Canada abolished Special Milk Class 5(e) and restricted export
subsidies under Special Milk Class 5(d) to its commitment levels. 210 At the same time, Canada
established a new class of milk, Class 4(m), under which over-quota milk can be sold as domestic
animal feed. Canada otherwise left unchanged its domestic milk supply management system,
under which domestic milk supply is controlled through the allocation of quota to individual milk
producers by government agencies. 211 Generally, a producer can sell milk domestically only
209Panel Report, Canada – Dairy, para. 8.1(a); Appellate Body Report, Canada – Dairy, para.
144(b).
210Canada's quantity commitment levels, as contained in Part IV, Section II, of its Schedule, are:
3,500 tonnes for butter; 44,953 tonnes for skim milk powder; 9,076 tonnes for cheese; and 30,282
tonnes for other milk products.
211In response to questioning at the oral hearing, Canada stated that, when the milk supply
management system was created, quota was allocated among existing farmers. Canada also
indicated that quota is a transferable right and that an active market for quota has developed. The
price of quota on this market is currently in the range of C$15,000-C$30,000/kg of butterfat per
day.
108
within the limits of its quota. The only exception is that a producer can sell over-quota milk in the
new Class 4(m) as domestic animal feed, but for a much lower price. 212 Moreover, the price of
domestic milk is fixed by government agencies. Government agencies also market domestic milk,
collect the sales proceeds and distribute these proceeds among producers. 213
14.Canada also introduced a new category of milk for export processing, known as "commercial
export milk" ("CEM"). Sales of CEM are made by Canadian producers to Canadian processors, for
processing of that milk into various dairy products for export. These sales are made pursuant to
"pre-commitment" contracts, that is, contracts concluded in advance of milk production. 214
Canadian producers may sell any quantity of CEM to processors on terms and conditions freely
negotiated between the producer and the processor. Sales of CEM do not require a quota or any
other form of permit from the Canadian government or its agencies. Revenues derived from sales
of CEM are collected directly by producers, without government involvement. However, if a dairy
product derived from CEM is sold on the domestic market, the processor is liable to financial
penalties for diverting the dairy product into the domestic market. The factual aspects of the new
scheme are set out in greater detail in the Panel Report. 215
(…)
VI.Article 9.1(c) of the Agreement on Agriculture—"Payments Financed by Virtue of
Governmental Action"
78.The second issue appealed by Canada is whether the Panel erred in its interpretation and
application of Article 9.1(c) of the Agreement on Agriculture. This issue raises two separate
questions: (a) whether the Panel erred in finding that CEM involves "payments" under Article
9.1(c); and (b) having found that CEM involves "payments", whether the Panel erred in finding
that these "payments" are "financed by virtue of governmental action". We will examine these
questions in turn.
79.Before turning to the question of "payments", we note that Canada does not appeal, and we will
not address, the Panel's finding that the alleged CEM payments are made "on the export " of
agricultural products, as required by Article 9.1(c) of the Agreement on Agriculture. 216
A."Payments"
212The administered price for Class 4(m) milk is C$10 per hectolitre ("hl"), as opposed to
C$49.48/hl and C$56.06/hl, which is the price range for domestic industrial milk. Canada does not
dispute these figures. (Panel Report, footnote 410 to para. 5.116)
213For a more detailed description of the pre-existing milk supply management system see
Appellate Body Report, Canada – Dairy, paras. 6-16; and Panel Report, Canada – Dairy,
paras. 2.1-2.66.
214At the oral hearing, Canada informed the Appellate Body that, generally, producers pre-commit
to sell CEM at least 30 days in advance of the sale.
215Panel Report, paras. 2.2-2.4. See also Panel Report, Canada – Dairy (Article 21.5 – New
Zealand
and US), paras. 3.1-3.9. The average CEM price is approximately C$29/hl. (Panel Report, para.
5.60)
216See ibid., para. 5.23.
109
80.The Panel began its reasoning by recalling that "payments" under Article 9.1(c) of the
Agreement on Agriculture include "payments-in-kind" made through the supply of goods or
services. 217 The Panel noted that we held, in the first Article 21.5 proceedings, that the existence
of payments-in-kind, for purposes of CEM, should be determined by comparing CEM prices with
"some objective standard … reflect[ing] the proper value" of milk to the producer. 218 The Panel
also observed that we held that "the average total cost of production represents the appropriate
standard" in these proceedings. 219
81.Before the Panel, the parties disagreed as to how the average total cost of production standard
(the "COP standard") should be determined. The Panel "doubted" that Canada was correct to argue
that the standard should be each individual producer's costs of production, rather than a single
industry-wide average figure, as proposed by the complaining Members. 220 The Panel also
found that Canada did not demonstrate why imputed costs for family labour and management, and
for owner's equity, as well as quota, transport, marketing, and administrative costs, should not be
included in calculating the COP standard, as suggested by the complaining Members. 221
82.Despite these doubts regarding Canada's position, the Panel made two distinct findings on the
existence of "payments"; one based on Canada's interpretation of the COP standard and the other
based on the complaining Members' interpretation. The Panel ruled that, even assuming Canada's
interpretation of the standard were correct, the evidence submitted by Canada did not support
Canada's position that payments were not made. 222 The Panel also considered that the
complaining Members' evidence was sufficient to establish a prima facie case that payments were
made, on the basis of their interpretation of the COP standard. 223
83.As the Panel came to an identical conclusion under both interpretations of the COP standard, it
concluded that it was "unnecessary [for it] to decide in this case which of these two interpretations
is the correct one." 224 Therefore, the Panel did not express any definitive views on the proper
application of the COP standard.
84.In its appeal, Canada makes four primary arguments on the question of "payments". Canada
contends: first, that the Panel erred in considering that the COP standard should be applied on an
217Ibid., para. 5.26, referring to Appellate Body Report, Canada – Dairy, para. 112; and to
Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US), paras. 71 and 76.
218Ibid., para. 5.27, referring to Appellate Body Report, Canada – Dairy (Article 21.5 – New
Zealand
and US), paras. 74-75, 96, and 104.
219Ibid., para. 5.28, referring to Appellate Body Report, Canada – Dairy (Article 21.5 – New
Zealand
and US), para. 87. (emphasis added) See also Appellate Body Report, Canada – Dairy (Article
21.5 – New Zealand and US), para. 96.
220Panel Report, paras. 5.50-5.51.
221Ibid., para. 5.85.
222Ibid., paras. 5.65 and 5.87.
223Ibid., paras. 5.34 and 5.86.
224Ibid., para. 5.90. (original italics; underlining added) We note, however, that the Panel also
stated, in paragraph 5.126 of the Panel Report, that "imputed costs of family labour, return to
management, return to equity, and production quota, as well as transport, marketing and
administrative costs … are properly to be included in a calculation of the average total cost of
production."
110
industry-wide basis; second, that the Panel erred in finding that the COP standard includes
"non-monetary costs", such as the costs of family labour and management, and of owner's equity,
that do not represent actual cash costs incurred by the producer; third, that the Panel erred in
finding that the COP standard extends to costs associated with selling milk, such as quota, transport,
marketing, and administrative costs, whereas Canada submits that it covers only the on-farm costs
of producing milk; and fourth, that the Panel erred in its assessment of the evidence by placing a
burden on Canada that it "cannot possibly be expected to meet". 225 Before examining these four
arguments, we provide general observations relating to Article 9.1(c).
1.General Remarks on Article 9.1(c) of the Agreement on Agriculture
85.The word "payment", in Article 9.1(c) of the Agreement on Agriculture, denotes a "transfer of
economic resources". 226 Although a monetary payment certainly involves such a transfer, the
same is equally true where goods or services are transferred for less than full value. Recognizing
this, we upheld the original panel's finding that the ordinary meaning of the word "payment", in
Article 9.1(c) of the Agreement on Agriculture, "encompasses 'payments' made in forms other
than money". 227
86.In these second Article 21.5 proceedings, New Zealand and the United States assert that
non-monetary "payments" are effected through the supply of goods—CEM. The issue is, therefore,
whether supplies of CEM, by Canadian producers, involve a transfer of economic resources to
processors.
87.In examining this question in the first Article 21.5 proceedings, we took into account that
Article 9.1(c) of the Agreement on Agriculture describes an unusual form of subsidy in that
"payments" can be made by private parties, and need not be made by government. 228 Moreover,
"payments" need not be funded from government resources, provided they are "financed by virtue
of governmental action". 229 Article 9.1(c), therefore, contemplates that "payments" may be made
and funded by private parties, without the type of governmental involvement ordinarily associated
with a subsidy. Furthermore, the notion of payments encompasses a diverse range of practices
involving monetary transfers, or transfers-in-kind. We, therefore, determined that, in identifying
whether "payments" are made, it is necessary to consider the particular features of the alleged
"payments", by whom they are made, and in what circumstances. Thus, we found that the standard
for determining the existence of "payments" under Article 9.1(c) must be identified after careful
scrutiny of the factual and regulatory setting of the measure. 230
88.In the case of CEM, we took into account the fact that the alleged "payments" are made by
private parties through the supply of milk. Moreover, subject to the requirement to pre-commit
sales of CEM, the private parties are entirely free to produce milk for sale as CEM, and it is for
them to agree the price, volume, and timing of the sale with the buyers. 231 In these particular
225Canada's appellant's submission, para. 47.
226Appellate Body Report, Canada – Dairy, para. 107.
227Ibid., para. 112.
228Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US), paras. 113 and
115.
229Ibid., para. 114.
230Ibid., para. 76.
231In response to questioning at the oral hearing, Canada affirmed us that pre-commitment of
111
circumstances, we considered that the determination of whether "payments" are made depends on a
comparison between the price of CEM and an "objective standard or benchmark which reflects the
proper value of the [milk] to [its] provider". 232 We found that, in the circumstances of this dispute,
the standard for determining the proper value of CEM is the average total cost of production of the
milk (the COP standard), as this standard represents the economic resources the producer invests in
the milk. If CEM is sold at less than its proper value, "payments" are made, because there is a
transfer of the portion of economic resources not reflected in the selling price.
89.We also provided certain guidance on the determination of the COP standard:
The average total cost of production would be determined by
dividing the fixed and variable costs of producing all milk,
whether destined for domestic or export markets, by the total
number of units of milk produced for both these markets. 233
(original italics)
90.With these general observations in mind, we turn to Canada's four primary arguments on
"payments".
2.Individual Producer's Costs of Production or Industry-wide Average
(…) 94.For purposes of resolving this question, it is relevant to consider the nature of the
obligations imposed under the Agreement on Agriculture. That Agreement, which is annexed to
the Marrakesh Agreement Establishing the World Trade Organization, is an international
agreement to which Canada is a party, as a sovereign State. Pursuant to this Agreement, Canada
has undertaken a number of different obligations. Among these are the obligations in Articles 3.3
and 8 of the Agreement on Agriculture not to provide export subsidies otherwise than in
conformity with this Agreement and with the commitments as specified in that Member's Schedule.
Accordingly, under Article 3.3, Canada has undertaken not to provide the export subsidies listed in
Article 9.1 "in excess of … [its] quantity commitment levels".
95.However, under Article 9.1(c) of the Agreement on Agriculture, it is not solely the conduct of
WTO Members that is relevant. We have noted that Article 9.1(c) describes an unusual form of
export subsidy in that "payments" can be made and funded by private parties, and not just by
government. 234 The conduct of private parties, therefore, may play an important role in applying
Article 9.1(c). Yet, irrespective of the role of private parties under Article 9.1(c), the obligations
imposed in relation to Article 9.1(c) remain obligations imposed on Canada. It is Canada, and not
private parties, which is responsible for ensuring that it respects its export subsidy commitments
under the covered agreements. Thus, under the Agreement on Agriculture, any "export subsidies"
provided through private party action in Canada are deemed to be provided by Canada, and count
towards Canada's export subsidy commitment levels.
96.We believe that the standard for determining the existence of "payments", under Article 9.1(c),
should reflect the fact that the obligation at issue is an international obligation imposed on Canada.
The question is not whether one or more individual milk producers, efficient or not, are selling
CEM sales must be made at least 30 days in advance of the sale date.
232Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US), para. 74.
233Ibid., para. 96.
234Supra, para. 0.
112
CEM at a price above or below their individual costs of production. The issue is whether Canada,
on a national basis, has respected its WTO obligations and, in particular, its commitment levels. It,
therefore, seems to us that the benchmark should be a single, industry-wide cost of production
figure, rather than an indefinite number of cost of production figures for each individual producer.
The industry-wide figure enables cost of production data for producers, as a whole, to be
aggregated into a single, national standard that can be used to assess Canada's compliance with its
international obligations. (…)
3.Imputed Costs
(…) 101.In examining this issue, we recall that the notion of "payment", in Article 9.1(c), covers
transfers of economic resources, irrespective of the means by which the resources are transferred.
Thus, the transfer may be effected in monetary form or equally by a transfer of goods or services for
less than full value. 235
102.In these proceedings, the purpose of the COP standard is precisely to determine whether
supplies of CEM involve payments-in-kind that are made in a form other than money. If the COP
standard were confined solely to cash costs, as Canada argues, this would overlook the possibility
of "payments" being made in the form of non-cash resources invested in the production of milk.
Thus, the COP standard must cover all of the economic resources invested in the production of
milk and which may be transferred, irrespective of whether the resources involve an actual cash
cost.
103.We are satisfied that any labour or management services provided by the farmer's family to the
dairy enterprise are relevant economic resources invested in the production of milk and must be
included in the COP standard. (…) We observe that both the United States and New Zealand
submitted evidence to the Panel in support of the view that, from the perspective of economic
theory, any labour and management services provided to an enterprise involve such an economic
"opportunity" cost. 236 (…)
104.The same is also true of any equity the owner invests in the dairy enterprise. The allocation of
such capital is, clearly, an investment of economic resources and carries an economic opportunity
cost to the owner because the capital cannot simultaneously be invested elsewhere. 237 Again, the
profits of the dairy enterprise are the proceeds after all costs, including the cost of equity, have been
accounted for. (…)
106.Accordingly, we find that any failure to include in the COP standard the costs of family labour
and management, or of owner's equity, would understate the costs of milk production, and may lead
to a non-monetary "payment" going undetected. (…)
4.Selling Costs
235Appellate Body Report, Canada – Dairy, paras. 107-112.
236Exhibit NZ-23 submitted by New Zealand to the Panel; Exhibit US-35 submitted by the United
States to the Panel.
237The documentary evidence submitted by New Zealand and the United States is equally
supportive of the view that, in economic theory, investment of equity involves an economic
opportunity cost. (Ibid.)
113
(…) 113.We recall that the COP standard represents the producer's investment of economic
resources in milk and, hence, in these proceedings, the proper value of the milk to the producer. 238
In our view, costs incurred by the producer in selling milk are as much a part of the economic
resources the producer invests in the milk as are farm-based production costs. Indeed, the costs
incurred to make sales are a vital part of the process by which the producer earns revenues through
producing milk. If the producer sells milk at a price sufficient to cover only the farm-based
production costs, it transfers to the processor any resources invested in selling the milk, such as the
value of transport, marketing, and administration. There would, in such circumstances, be a
"payment" of the value of these additional selling costs. Accordingly, these costs must be included
in the COP standard in the comparison with the sales price of CEM. (…)
6.Conclusion on "Payments" under Article 9.1(c)
121.For all these reasons, we uphold the Panel's finding, in paragraph 5.89 of the Panel Report, that
the supply of CEM, by producers to processors, involves "payments" within the meaning of Article
9.1(c) of the Agreement on Agriculture.
B."Financed by Virtue of Governmental Action"
(…) 123.The Panel recalled that that there must be a "demonstrable link" between governmental
action and the financing of "payments". 239 The Panel proceeded to examine several actions of the
Canadian government in regulating the supply of domestic milk and CEM. It concluded that
New Zealand and the United States had made out a prima facie case that a demonstrable link
exists between these Canadian governmental actions and the financing of CEM payments. Further,
the Panel found that Canada had failed to establish, pursuant to Article 10.3 of the Agreement on
Agriculture, that these governmental actions were not demonstrably linked to the financing of the
payments. 240
124.On appeal, Canada argues that the Panel erred under Article 9.1(c) of the Agreement on
Agriculture, in particular by finding that a "demonstrable link" exists between Canadian
governmental action and the financing of CEM payments. Canada claims that it has removed
government action from "every stage of the export transaction" and that producers and processors
"freely choose to enter into export transactions". 241 Therefore, Canada argues that no
demonstrable link exists between governmental action and financing of CEM payments.
125.Article 9.1(c) of the Agreement on Agriculture provides:
Export Subsidy Commitments
1.
The following export subsidies are subject to reduction
commitments under this Agreement:
…
(c)
payments on the export of an agricultural product that are
financed by virtue of governmental action, whether or not a
238Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US), para. 96.
239Panel Report, para 5.106, referring to Appellate Body Report, Canada – Dairy, para. 113.
240Ibid., paras. 5.133-5.135.
241Canada's appellant's submission, paras. 74 and 101.
114
charge on the public account is involved, including payments that
are financed from the proceeds of a levy imposed on the
agricultural product concerned or on an agricultural product from
which the exported product is derived; (emphasis added)
(…)
128.We observe that Article 9.1(c) does not require that payments be financed by virtue of
government "mandate", or other "direction". Although the word "action" certainly covers
situations where government mandates or directs that payments be made, it also covers other
situations where no such compulsion is involved. 242
129.Although the term "governmental action", when read in isolation, is somewhat open-ended,
perhaps even abstract, the words "by virtue of " clarify further the meaning of this term. In the first
Article 21.5 proceedings, we opined:
The words "by virtue of " indicate that there must be a
demonstrable link between the governmental action at issue and
the financing of the payments, whereby the payments are, in some
way, financed as a result of, or as a consequence of, the
governmental action. 243 (original italics)
(…)
131.Thus, although Article 9.1(c) extends, in principle, to any "governmental action", not every
governmental action will have the requisite nexus to the financing of payments. In the first
Article 21.5 proceedings, we observed that "[g]overnments are constantly engaged in regulation of
different kinds in pursuit of a variety of objectives." 244 Yet, we went on to say that regulation that
merely enables payments to occur will not suffice for those payments to be regarded as "financed
by virtue of governmental action". We stated:
[Where regulation merely enables payments to occur], the link
between the governmental action and the financing of the
payments is too tenuous for the "payments" to be regarded as
"financed by virtue of governmental action" … within the
meaning of Article 9.1(c). Rather, there must be a tighter nexus
between the mechanism or process by which the payments
are financed … 245 (original italics)
132.This brings us to the meaning of the word "financing". The word refers generally to the
mechanism or process by which financial resources are provided to enable "payments" to be made.
242Article 9.1(c) of the Agreement on Agriculture may be contrasted with Article 9.1(e) of the
Agreement on Agriculture, as well as with Article 1.1(a)(1)(iv) of the SCM Agreement, and items
(c), (d), (j), and (k) of the Illustrative List of Export Subsidies (the "Illustrative List") of the SCM
Agreement. In these provisions, some kind of government mandate, direction, or control is an
element of a subsidy provided through a third party.
243Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US), para. 113.
244Ibid., para. 115.
245Ibid.
115
The word could, therefore, be read to mean that government itself must provide the resources for
producers to make payments. However, Article 9.1(c) expressly precludes such a reading, as it
states that "payments" need not involve "a charge on the public account". This is borne out by the
fact that the text indicates that "financing" need only be "by virtue of governmental action", rather
than "by government" itself. Article 9.1(c), therefore, contemplates that "payments may be
financed by virtue of governmental action even though significant aspects of the financing might
not involve government." 246 Indeed, as we have said, payments may be made, and funded, by
private parties. 247
133.The word "financing" must, nonetheless, be given meaning. Accordingly, even if government
does not fund the payments itself, it must play a sufficiently important part in the process by which
a private party funds "payments", such that the requisite nexus exists between "governmental
action" and "financing". (…)
136.We have also upheld the Panel's finding that producers make "payments", under Article 9.1(c)
of the Agreement on Agriculture, to processors through sales of CEM at prices that are below the
COP standard. As a result, producers' sales revenues do not recoup all of the costs associated with
producing and selling CEM. As this short-fall in revenues must be "financed" from some other
source, sales of CEM necessarily involve the "financing" of "payments". The crucial question is
the source of that financing and, in particular, whether the financing occurs "by virtue of
governmental action".
137.The Panel considered that "a significant percentage" of Canadian milk producers are able to
cover the entirety of fixed and variable costs of production through in-quota sales of domestic milk.
As a result, the Panel opined, these producers can afford to make export sales at marginal cost. 248
The Panel found that governmental action regulating the domestic milk market "cross-subsidizes
many sales that otherwise would not be made or would at least constitute sales at a loss." 249
138.We note that CEM is produced almost exclusively by the same producers who supply milk to
the domestic market. 250 It is not contested that these producers use the same production facilities
to produce domestic and export milk—that is, the same land, cattle, buildings, machinery, milking
facilities, and so on. Indeed, in some provinces, even after production, both regulatory classes of
milk have common storage and transportation facilities. 251 There is, in other words, a single line
of production for all milk, whatever its destination market.
246Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US), para. 114.
247Supra, para. 0.
248Ibid., para. 5.128.
249Ibid., para. 5.127.
250According to Canada, approximately 100 milk producers produce CEM without, at the same
time, holding a domestic quota. (Canada's response to Question 2(c) posed by the Panel during the
Panel proceedings, confirmed by Canada's response to questioning at the oral hearing) These 100
producers represent approximately 0.5% of all 19,000 Canadian milk producers and 1.25% of all
8000 CEM producers. (Panel Report, paras. 3.70 and 5.55) Moreover, the export market represents
only 3.62 percent, by volume, of the total Canadian milk production. (Canada's response to
questioning at the oral hearing)
251See, for instance, the Agreement on Commercial Milk Export between the British Columbia
Milk Producers Association, the Mainland Dairymen's Association, and the British Columbia
Dairy Council, p. 2, Exhibit US-21 submitted by the United States to the Panel.
116
139.Where fungible goods, such as milk, are produced using a single line of production, but sold in
two different markets, the fixed costs of production are, in principle, shared between sales revenues
from both markets. However, in the event that one of the two markets offers much higher revenues,
a disproportionately large part, possibly even all, of the shared fixed costs may be borne by sales
made in the more remunerative market.
140.Where sales in the more remunerative market bear more than their relative proportion of shared
fixed costs, sales in the other market do not need to cover their relative proportion of the shared
fixed costs in order to be profitable. 252 Rather, these sales can be made profitably below the
average total cost of production. If the more remunerative sales cover all fixed costs, sales in the
other market can be made profitably at any price above marginal cost. In these situations, the
higher revenue sales effectively "finance" a part of the lower revenue sales by funding the portion
of the shared fixed costs attributable to the lower priced products.
141.In Canada, the domestic price of milk is fixed by a government agency—the CDC—on the
basis of an annual survey of producers' costs of production. The CDC has a statutory mandate to
ensure that, through the administered price, a "fair return" is secured for "efficient producers". The
CDC sets this administered price on the basis of data covering 70 percent of producers, such that
these 70 percent of producers can, on average, cover all of their costs of production, including all
fixed costs, through domestic sales of milk. 253 Moreover, for other producers, domestic sales
will cover a significant part, if not all, of the fixed costs. This suggests, to us, that a large proportion
of producers can finance the sale of CEM at a price that is below the COP standard as a result of
participation in the domestic market. 254 In that respect, we note also that the domestic milk
market represents 96.4 percent, by volume, of total Canadian milk production, with export
production representing only 3.6 percent, by volume. 255
(…) 144.It falls now to consider the role of the Canadian government in financing payments made
on the sale of CEM. We have agreed with the Panel that a significant percentage of producers are
likely to finance sales of CEM at below the costs of production as a result of participation in the
domestic market. Canadian "governmental action" controls virtually every aspect of domestic milk
supply and management. 256 In particular, government agencies fix the price of domestic milk
252Even if sales in the more remunerative market do not cover all of the shared fixed costs, they
may bear a higher relative proportion of those costs, such that sales in the less remunerative market
can be made at a price below the average total cost of production, because these sales do not need to
cover their entire relative proportion of shared fixed costs.
253Panel Report, para. 5.128.
254In addition to the CDC Handbook, the Panel also referred to newspaper articles submitted by
New Zealand to support its view that a significant proportion of producers covers their fixed costs
through domestic sales. (Panel Report, para. 5.128; Exhibit NZ-7 submitted by New Zealand to the
Panel) In the two newspaper articles, the President of Dairy Farmers Canada and the Chairman of
Dairy Farmers Ontario asserted, respectively, that only 25 percent and 39 percent of producers
would cover all their costs at the price fixed by the CDC. At the oral hearing, Canada cautioned
that such newspaper opinions should be treated "carefully". In any event, we note that even these
figures tend to indicate that a large proportion of producers covers most, if not all, of their fixed
costs through in-quota domestic sales.
255Canada's response to questioning at the oral hearing.
256We recall that certain aspects of the supply and management of milk in Canada were examined
in the original proceedings in this dispute. In those proceedings, we found that the agencies
117
that renders it highly remunerative to producers. Government action also controls the supply of
domestic milk through quota, thereby protecting the administered price. The imposition by
government of financial penalties on processors that divert CEM into the domestic market is
another element of governmental control over the supply of milk. Further, the degree of
government control over the domestic market is emphasized by the fact that government pools,
allocates, and distributes revenues to producers from all domestic sales. Finally, governmental
action also protects the domestic market from import competition through tariffs. 257
(…) 146.Accordingly, we agree with the Panel that "governmental action" in the domestic market
plays a critical part in the "financing" of payments made by a significant percentage of producers
on the sale of CEM. As such, we agree with the Panel that payments made through the supply of
CEM at below the COP standard are financed by virtue of this governmental action. 258 We also
agree with the Panel that Canada failed to establish the contrary, pursuant to Article 10.3 of
the Agreement on Agriculture. (…)
C.Conclusion on Article 9.1(c) of the Agreement on Agriculture
155.We have upheld the Panel's finding that the supply of CEM involves "payments" on the export
of dairy products and also its finding that these payments are "financed by virtue of governmental
action". Accordingly, we uphold the Panel's finding, in paragraph 5.136 of the Panel Report, that
the supply of CEM involves export subsidies under Article 9.1(c) of the Agreement on Agriculture.
156.In consequence, we also uphold the Panel's conclusion, in paragraph 6.1 of the Panel Report,
that, through the combination of the supply of CEM and the operation of Special Milk Class 5(d),
Canada has acted inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on
Agriculture. (…)
managing the supply of milk were "government" agencies. (Appellate Body Report,
Canada – Dairy, para. 118)
257For instance, in its Schedule, Canada has established a tariff quota of 64,500 tonnes for fluid
milk (tariff headings 0401.10.10 and 0401.20.10) for cross-border purchases imported by Canadian
consumers, with an in-quota tariff rate of 7.5 percent since 2001; outside this tariff quota, since
2001, Canada's bound tariff is 241.3 percent, but not less than C$34.5/hl. For yogurt (tariff heading
0403.10), the tariff quota is 332 tonnes and is limited to yogurt in retail-sized containers only;
outside this quota, since 2001, the applicable bound tariff rate is 237.5 percent, but not less than
46.6¢/kg. "Fresh (unripened or uncured) cheese" (tariff heading 0406.10) falls under a tariff quota
of 20,411,866 tonnes; outside this quota, since 2001, the applicable bound tariff rate is 245.6
percent, but not less than 451.1¢/kg.
258Panel Report, paras. 5.133-5.135.
118
EU – ZEROING (2001)
WORLD TRADE
WT/DS141/AB/R
1 March 2001
ORGANIZATION
(01-0973)
Original: English
http://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm
EUROPEAN COMMUNITIES – ANTI-DUMPING DUTIES ON IMPORTS
OF COTTON-TYPE BED LINEN FROM INDIA
AB-2000-13
Report of the Appellate Body
(…)
119
WORLD TRADE ORGANIZATION
APPELLATE BODY
European Communities – Anti-Dumping Duties
on Imports of Cotton-Type Bed Linen from
India
AB-2000-13
European Communities, Appellant/Appellee
India, Appellant/Appellee
Bacchus, Presiding Member
Abi-Saab, Member
Feliciano, Member
Present:
Egypt, Third Participant
Japan, Third Participant
United States, Third Participant
I.Introduction
1.The European Communities and India appeal certain issues of law and legal interpretations in the
Panel Report, European Communities – Anti-Dumping Duties on Imports of Cotton-Type Bed
Linen from India (the "Panel Report").259 The Panel was established to consider a complaint by
India with respect to definitive anti-dumping duties imposed by the European Communities on
imports of cotton-type bed linen.
2.On 13 September 1996, the European Communities initiated an anti-dumping investigation into
certain imports of cotton-type bed linen from, inter alia, India.260 The European Communities
made its preliminary affirmative determination of dumping, injury and causal link on 12 June 1997,
and imposed provisional anti-dumping duties with effect from 14 June 1997.261 The European
Communities made its final affirmative determination of dumping, injury and causal link on
259WT/DS141/R, 30 October 2000.
260Panel Report, para. 2.3.
261Commission Regulation (EC) No 1069/97 of 12 June 1997 imposing a provisional
anti-dumping duty on imports of cotton-type bed linen originating in Egypt, India and Pakistan,
Official Journal, No L 156, 13 June 1997, p. 11.
120
28 November 1997, and imposed definitive anti-dumping duties with effect from 5 December
1997.262 The factual aspects of this dispute are set out in greater detail in the Panel Report.263
3.The Panel considered claims by India that, in imposing the anti-dumping duties on imports of
cotton-type bed linen, the European Communities acted inconsistently with Articles 2.2, 2.2.2,
2.4.2, 3.1, 3.4, 3.5, 5.3, 5.4, 12.2.2, and 15 of the Agreement on Implementation of Article VI of the
General Agreement on Tariffs and Trade 1994 (the "Anti-Dumping Agreement").264
4.In its Report, circulated to Members of the World Trade Organization (the "WTO") on
30 October 2000, the Panel concluded that:
(…)
… the European Communities acted inconsistently with its
obligations under Articles 2.4.2, 3.4, and 15 of the AD Agreement
in:
(g)
determining the existence of margins of dumping on the
basis of a methodology incorporating the practice of
zeroing (India's claim 7), (…)
III.Issues Raised in this Appeal
45.This appeal raises the following issues:
(a)
Whether the Panel erred in finding that the practice of "zeroing" when
establishing "the existence of margins of dumping", as applied by the European
Communities in the anti-dumping investigation at issue in this dispute, is
inconsistent with Article 2.4.2 of the Anti-Dumping Agreement; (…)
IV.Article 2.4.2 of the Anti-Dumping Agreement
(…)
262Council Regulation (EC) No 2398/97 of 28 November 1997 imposing a definitive
anti-dumping duty on imports of cotton-type bed linen originating in Egypt, India and Pakistan,
Official Journal, No L 332, 4 December 1997, p. 1.
263Panel Report, paras. 2.1-2.11.
264The Panel did not examine the claims withdrawn by India in the course of the Panel
proceedings and declined to consider certain claims falling outside the scope of its terms of
reference. Furthermore, the Panel did not deem it necessary nor appropriate to make findings on a
121
47.The practice of "zeroing", as applied in this dispute, can briefly be described as follows265:
first, the European Communities identified with respect to the product under investigation –
cotton-type bed linen – a certain number of different "models" or "types" of that product. Next, the
European Communities calculated, for each of these models, a weighted average normal value and
a weighted average export price. Then, the European Communities compared the weighted
average normal value with the weighted average export price for each model. For some models,
normal value was higher than export price; by subtracting export price from normal value for
these models, the European Communities established a "positive dumping margin" for each model.
For other models, normal value was lower than export price; by subtracting export price from
normal value for these other models, the European Communities established a "negative dumping
margin" for each model.266 Thus, there is a "positive dumping margin" where there is dumping,
and a "negative dumping margin" where there is not. The "positives" and "negatives" of the
amounts in this calculation are an indication of precisely how much the export price is above or
below the normal value. Having made this calculation, the European Communities then added up
the amounts it had calculated as "dumping margins" for each model of the product in order to
determine an overall dumping margin for the product as a whole. However, in doing so, the
European Communities treated any "negative dumping margin" as zero – hence the use of the word
"zeroing". Then, finally, having added up the "positive dumping margins" and the zeroes, the
European Communities divided this sum by the cumulative total value of all the export transactions
involving all types and models of that product. In this way, the European Communities obtained an
overall margin of dumping for the product under investigation.
48.With respect to this first issue appealed, the Panel found that:
… the European Communities acted inconsistently with
Article 2.4.2 of the AD Agreement in establishing the existence of
margins of dumping on the basis of a methodology which included
zeroing negative price differences calculated for some models of
bed linen.267
number of other claims in light of considerations of judicial economy. See Panel Report, para. 7.3.
265For a more detailed description, see Panel Report, para. 6.102.
266For these latter models, in other words, dumping had not occurred, as the export price
exceeded the normal value.
267Panel Report, para. 6.119.
122
49.The European Communities appeals this finding. In defending its practice of "zeroing", the
European Communities principally argues that the Panel was mistaken about the ordinary meaning
of Article 2.4.2. According to the European Communities, Article 2.4.2 requires a comparison
with a "weighted average of prices of all comparable export transactions" (emphasis added),
which, in the view of the European Communities, as we understand it, is not the same as requiring
a comparison with a weighted average of all export transactions. Emphasizing the presence in
Article 2.4.2 of the word "comparable", the European Communities maintains that, where the
product under investigation consists of various "non-comparable" types or models, the
investigating authorities should first calculate "margins of dumping" for each of the
"non-comparable" types or models, and, then, at a subsequent stage, combine those "margins" in
order to calculate an overall margin of dumping for the product under investigation. Thus, the
European Communities sees two stages in calculating margins of dumping in such an anti-dumping
investigation, and contends that Article 2.4.2 provides no guidance as to how the "margins of
dumping" for each of the types or models should be combined in the second stage in order to
calculate an overall margin of dumping for the product under investigation. (…)
50.As always, we turn first to the text of the provision at issue on appeal. Article 2.4.2 of
the Anti-Dumping Agreement states:
Subject to the provisions governing fair comparison in paragraph 4,
the existence of margins of dumping during the investigation phase
shall normally be established on the basis of a comparison of a
weighted average normal value with a weighted average of prices of
all comparable export transactions or by a comparison of normal
value and export prices on a transaction-to-transaction basis. A
normal value established on a weighted average basis may be
compared to prices of individual export transactions if the
authorities find a pattern of export prices which differ significantly
among different purchasers, regions or time periods, and if an
explanation is provided as to why such differences cannot be taken
into account appropriately by the use of a weighted
average-to-weighted average or transaction-to-transaction
comparison. (emphasis added)
51.Article 2.4.2 of the Anti-Dumping Agreement explains how domestic investigating authorities
must proceed in establishing "the existence of margins of dumping", that is, it explains how they
must proceed in establishing that there is dumping. Toward this end, Article 2.1 states:
123
For the purpose of this Agreement, a product is to be considered as
being dumped, i.e. introduced into the commerce of another country
at less than its normal value, if the export price of the product
exported from one country to another is less than the comparable
price, in the ordinary course of trade, for the like product when
destined for consumption in the exporting country. (emphasis
added)
From the wording of this provision, it is clear to us that the Anti-Dumping Agreement concerns the
dumping of a product, and that, therefore, the margins of dumping to which Article 2.4.2 refers are
the margins of dumping for a product.
52.We observe that, in this case, the European Communities defined the product at issue in its
anti-dumping investigation as follows:
The proceeding covers bed linen of cotton–type fibres, pure or
mixed with man-made fibres or flax, bleached, dyed or printed.
Bed linen includes bed sheets, duvet covers and pillow cases,
packaged for sale either separately or in sets.
…
Notwithstanding the different possible product types due to
different weaving construction, finish of the fabric, presentation
and size, packing, etc., all of them constitute a single product for
the purpose of this proceeding because they have the same physical
characteristics and essentially the same use.268 (emphasis added)
53.Thus, of its own accord, the European Communities clearly identified cotton-type bed linen as
the product under investigation in this case. This is undisputed in this appeal. Having defined
the product as it did, the European Communities was bound to treat that product consistently
thereafter in accordance with that definition. Thus, it follows that, with respect to Article 2.4.2, the
European Communities had to establish "the existence of margins of dumping" for the product –
cotton-type bed linen – and not for the various types or models of that product. We see nothing in
Article 2.4.2 or in any other provision of the Anti-Dumping Agreement that provides for the
establishment of "the existence of margins of dumping" for types or models of the product under
investigation; to the contrary, all references to the establishment of "the existence of margins of
dumping" are references to the product that is subject of the investigation. Likewise, we see
268Commission Regulation (EC) No 1069/97, supra, footnote 3, para. 10. See also Council
Regulation (EC) No 2398/97, supra, footnote 4, para. 9.
124
nothing in Article 2.4.2 to support the notion that, in an anti-dumping investigation, two different
stages are envisaged or distinguished in any way by this provision of the Anti-Dumping Agreement,
nor to justify the distinctions the European Communities contends can be made among types or
models of the same product on the basis of these "two stages". Whatever the method used to
calculate the margins of dumping, in our view, these margins must be, and can only be, established
for the product under investigation as a whole. We are unable to agree with the European
Communities that Article 2.4.2 provides no guidance as to how to calculate an overall margin of
dumping for the product under investigation.
54.With this in mind, we recall that Article 2.4.2, first sentence, provides that "the existence of
margins of dumping" for the product under investigation shall normally be established according to
one of two methods. At issue in this case is the first method set out in that provision, under which
"the existence of margins of dumping" must be established:
… on the basis of a comparison of a weighted average normal value
with a weighted average of prices of all comparable export
transactions …
55.Under this method, the investigating authorities are required to compare the weighted average
normal value with the weighted average of prices of all comparable export transactions. Here, we
emphasize that Article 2.4.2 speaks of "all" comparable export transactions. As explained above,
when "zeroing", the European Communities counted as zero the "dumping margins" for those models
where the "dumping margin" was "negative". As the Panel correctly noted, for those models, the
European Communities counted "the weighted average export price to be equal to the weighted
average normal value … despite the fact that it was, in reality, higher than the weighted average
normal value."269 By "zeroing" the "negative dumping margins", the European Communities,
therefore, did not take fully into account the entirety of the prices of some export transactions,
namely, those export transactions involving models of cotton-type bed linen where "negative
dumping margins" were found. Instead, the European Communities treated those export prices as if
they were less than what they were. This, in turn, inflated the result from the calculation of the
margin of dumping. Thus, the European Communities did not establish "the existence of margins of
dumping" for cotton-type bed linen on the basis of a comparison of the weighted average normal
value with the weighted average of prices of all comparable export transactions – that is, for all
269Panel Report, para. 6.115.
125
transactions involving all models or types of the product under investigation. Furthermore, we are
also of the view that a comparison between export price and normal value that does not take fully
into account the prices of all comparable export transactions – such as the practice of "zeroing" at
issue in this dispute – is not a "fair comparison" between export price and normal value, as required
by Article 2.4 and by Article 2.4.2.
(…)
57.(…) The European Communities argues before us that export transactions involving different
types or models of cotton-type bed linen are not "comparable" because different types or models of
cotton-type bed linen have very different physical characteristics. Specifically, the European
Communities suggests that the differences between the various models or types of bed linen
involved in the relevant export transactions are "so substantial that they cannot be eliminated by
making adjustments for differences in physical characteristics".270 However, as we have already
noted, at the very outset of its anti-dumping investigation, the European Communities identified, of
its own accord, cotton-type bed linen as the product under investigation. Moreover, in defining
cotton-type bed linen as the product at issue, the European Communities stated that "the different
possible product types … constitute a single product for the purpose of this proceeding because
they have the same physical characteristics and essentially the same use".271 (emphasis added)
(…)
61.In support of its appeal of the Panel's interpretation of Article 2.4.2, the European Communities
argues, additionally, that this interpretation would not allow Members to counter dumping
"targeted" to certain types of the product under investigation.272 With respect to the notion of
"targeted" dumping, we note that Article 2.4.2, second sentence, states:
A normal value established on a weighted average basis may be
compared to prices of individual export transactions if the
authorities find a pattern of export prices which differ significantly
among different purchasers, regions or time periods, and if an
explanation is provided as to why such differences cannot be taken
into account appropriately by the use of a weighted
270European Communities' appellant's submission, para. 39. See also para. 40 and footnote 34 of
the European Communities' appellant's submission.
271Commission Regulation (EC) No 1069/97, supra, footnote 3, para. 10.
272European Communities' appellant's submission, paras. 46-49.
126
average-to-weighted average
comparison. (emphasis added)
or
transaction-to-transaction
62.This provision allows Members, in structuring their anti-dumping investigations, to address
three kinds of "targeted" dumping, namely dumping that is targeted to certain purchasers, targeted
to certain regions, or targeted to certain time periods. However, neither Article 2.4.2, second
sentence, nor any other provision of the Anti-Dumping Agreement refers to dumping "targeted" to
certain "models" or "types" of the same product under investigation. It seems to us that, had the
drafters of the Anti-Dumping Agreement intended to authorize Members to respond to such kind of
"targeted" dumping, they would have done so explicitly in Article 2.4.2, second sentence. The
European Communities has not demonstrated that any provision of the Agreement implies that
targeted dumping may be examined in relation to specific types or models of the product under
investigation. Furthermore, we are bound to add that, if the European Communities wanted to
address, in particular, dumping of certain types or models of bed linen, it could have defined, or
redefined, the product under investigation in a narrower way.273
(…)
VI.Findings and Conclusions
86.For the reasons set out in this Report, the Appellate Body:
(1)
upholds the finding of the Panel in paragraph 6.119 of the Panel Report that the
practice of "zeroing" when establishing "the existence of margins of dumping", as
applied by the European Communities in the anti-dumping investigation at issue in
this dispute, is inconsistent with Article 2.4.2 of the Anti-Dumping Agreement;
(…)
273The European Communities also argues in its appellant's submission, paras. 42-45, that the
Panel's interpretation of Article 2.4.2 would disadvantage those importing Members which collect
anti-dumping duties on a "prospective" basis when compared to those importing Members which
collect anti-dumping duties on a "retrospective" basis. We note, though, that Article 2.4.2 is not
concerned with the collection of anti-dumping duties, but rather with the determination of "the
existence of margins of dumping". Rules relating to the "prospective" and "retrospective"
collection of anti-dumping duties are set forth in Article 9 of the Anti-Dumping Agreement. The
European Communities has not shown how and to what extent these rules on the "prospective" and
"retrospective" collection of anti-dumping duties bear on the issue of the establishment of "the
existence of dumping margins" under Article 2.4.2.
127
87.The Appellate Body recommends that the DSB request that the European Communities bring its
measure found in this Report, and in the Panel Report as modified by this Report, to be inconsistent
with the Anti-Dumping Agreement into conformity with its obligations under that Agreement.
(…)
128
REFERENCES
Raj Bhala, Rethinking Antidumping Law, Geo. Wash. J. Int’l L. & Econ. (1995).
William D. Hunt, WTO Dispute Settlement in Antidumping and Countervailing Duty Cases,
863 PLI/Corp 547 (1994)
i
United States – Laws, Regulations, and Methodology for Calculating Dumping Margins (“Zeroing”),
WT/DS294/AB/R, Apr. 18, 2006, http://www.wto.org/english/tratop_e/dispu_e/294abr_e.pdf
[hereinafter the AB Report].
ii
General Agreement on Tariffs and Trade, October 30, 1947, T.I.A.S. No. 1700, 55 U.N.T.S. 187, art. VI;
Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994, Annex 1 A,
Marrakech Agreement Establishing the World Trade Organization, April 15, 1994, Final Act Embodying the
Results of the Uruguay Round of Multilateral Trade Negotiations, LEGAL INSTRUMENTS–RESULTS OF THE
URUGUAY ROUND, 6, 6-18; 33 I.L.M. 1140, 1144-1153 (1994).
iii
Alan Greenspan once observed that antidumping remedies are “just simple guises for inhibiting
competition” imposed in the name of “fair trade.” Richard J. Pierce, Jr., Antidumping Law as a Means of
Facilitating Cartelization, 67 ANTITRUST L.J. 725, 725 (2000) (quoting the former Federal Reserve Board
Chairman Alan Greenspan, Remarks Before the Dallas Ambassadors Forum, Dallas, Texas (Apr. 16, 1999)).
iv
EC – Anti-Dumping Duties on Audio Tapes in Cassettes Originating in Japan, ADP/136, Apr. 28, 1995
(unadopted). Unlike the WTO, under the old GATT system any party, including a losing party, could “veto”
the adoption of a panel report so that the report would not be legally “binding.” However, even such an
unadopted report is still regarded as a useful legal guidance. See Japan - Taxes on Alcoholic Beverages,
WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, at 13, Appellate Body and Panel Report, as modified,
adopted on November 1 1996.
v
European Communities – Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India, the
Appellate Body Report circulated on Mar. 1, 2001, WT/DS141/AB/R, paras. 54-55.
vi
United States – Anti-Dumping Measures on Stainless Steel Plate in Coils and Stainless Steel Sheet and
Strip from Korea, Panel Report circulated on Dec. 22, 2000, WT/DS179/R, para. 6.105; U.S. – Final
Dumping Determination on Soft Lumber from Canada, WT/DS264/AB/R, circulated on Aug. 11, 2004, para.
183 (a)
vii
Softwood Lumber Products from Canada, No. USA-CDA-2002-1904-2, Jun. 9, 2005, at 43-44.
viii
United States – Laws, Regulations, and Methodology for Calculating Dumping Margins (“Zeroing”),
WT/DS294/R, Panel Report circulated on Oct. 31, 2005, paras. 7.105-106.
ix
The AB Report, supra note 1, para. 222.
x
“[A] panel should make an objective assessment of the matter before it, including an objective assessment
of the facts of the case and the applicability of and conformity with the relevant covered agreements, (…)”
xi
United States’ Other Appellant's Submission, para. 44.
xii
The AB Report, supra note 1, paras. 207-08.
xiii
Id., para. 211.
xiv
The AB Report, supra note 1, para. 3.
xv
United States' Appellee's Submission, paras. 171-178.
xvi
The AB Report, supra note 1, para. 126.
xvii
“The amount of the anti-dumping duty shall not exceed the margin of dumping as established under
Article 2.”
xviii
The AB Report, supra note 1, para. 133.
xix
Id.
xx
Corus Staal B.A. v. United States, 395 F.3d 1343 (Fed. Cir. 2005); Timken Co. v. United States, 354 F.3d
1334, 1343-44 (Fed. Cir. 2004).
129
xxi
See PRNewswire, CITAC Calls on Commerce Department to Stop 'Zeroing' Practice Following WTO
Ruling, Apr. 18, 2006,
http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=109&STORY=/www/story/04-18-2006/0004
342396&EDATE.
xxii
17.6 In examining the matter referred to in paragraph 5:
(i)
in its assessment of the facts of the matter, the panel shall determine whether the authorities'
establishment of the facts was proper and whether their evaluation of those facts was
unbiased and objective. If the establishment of the facts was proper and the evaluation was
unbiased and objective, even though the panel might have reached a different conclusion, the
evaluation shall not be overturned;
(ii)
the panel shall interpret the relevant provisions of the Agreement in accordance with
customary rules of interpretation of public international law. Where the panel finds that a
relevant provision of the Agreement admits of more than one permissible interpretation, the
panel shall find the authorities' measure to be in conformity with the Agreement if it rests
upon one of those permissible interpretations.
xxiii
The AB Report, supra note 1, para. 134.
xxiv
Despite the textual similarity, the interpretation of Article 17.6 is subject to public international law
principles stipulated in the Vienna Convention of the Law of Treaties, not to the U.S. domestic law. See
notably Steven P. Croley & John H. Jackson, WTO Dispute Procedures, Standard of Review, and Deference
to National Governments, 90 AM. J. INT’L L. 193 (1996).
xxv
See Daniel K. Tarullo, Paved with Good Intentions: The Dynamic Effects of WTO Review of
Anti-Dumping Action, 2 WORLD TRADE REV. 373, 374 (2003).
130