submission of the united states

submission of the united states

1. Applicability of the SCM Agreement to subsidies provided prior to the entry into force of the WTO Agreement

   1. 
      The United States argues that, contrary to Canada’s argument (para. 4.74), the SCM Agreement does apply to subsidies provided prior to the entry into force of the WTO Agreement. In the view of the United States, Canada’s arguments are wrong for two reasons. First, putting aside the question of a different intention in the SCM Agreement or the WTO Agreement, Article 28 of the Vienna Convention states that a treaty does not apply to “’any situation which ceased to exist‘” before the entry into force of a treaty. In this case, the United States notes, the “’situation‘” complained about by Brazil is subsidization. The United States argues that depending on the nature of the alleged subsidies provided under DIPP and SDI, it may be the case that subsidization did not cease as of 1 January 1995, the date on which the WTO Agreement entered into force with respect to Canada.
      
   2. 
      More specifically, the United States argues that it is well-accepted that the benefits of certain types of subsidies can last for a period of years, noting that this concept is recognized in Annex IV of the SCM Agreement, paragraph 7 of which provides as follows: “’Subsidies granted prior to the date of entry into force of the WTO Agreement, the benefits of which are allocated to future production, shall be included in the overall rate of subsidization‘”. (emphasis added by the United States).⁴⁸⁷ The Tokyo Round Subsidies Code Committee also recognized the concept when it adopted Guidelines on Amortization and Depreciation that called for the allocation of certain subsidies over time.⁴⁸⁸ Moreover, to the best of the US’ knowledge, all major users of the countervailing duty remedy, including Canada, allocate certain subsidies over time, although the mechanics of allocation methodology may vary from country to country. Finally, for the United States, common sense dictates that, for example, the provision of a $100 million grant to a firm does not constitute a subsidy only with respect to merchandise produced by the firm on the day the grant is received. Instead, the grant benefits merchandise produced over a period of time.
      
   3. 
      The United States maintains that because certain subsidies bestowed in the past can be deemed to benefit current or future production, it follows that a situation of subsidization can exist long after a subsidy is initially bestowed. Where this is the case, in the United States’s view, the fact that the action creating the situation of subsidization may have been taken prior to 1 January 1995 does not mean that the situation of subsidization is exempt from the obligations and remedies of the SCM Agreement if that situation persists after 1 January 1995.
      
   4. 
      For the United States, the second reason why Canada is wrong is that the SCM Agreement does, in fact, demonstrate that it applies to subsidies provided prior to 1 January 1995, recalling paragraph 7 of Annex IV, which expressly provides that pre-WTO subsidies must be included for purposes of Article 6.1(a). Thus, the United States maintains, Canada is clearly wrong when it states that the SCM Agreement “’does not . . . apply to events that took place prior to 1 January 1995.’”
      
   5. 
      The United States submits that under Article 28 of the Vienna Convention, the DIPP and SDI subsidies could be subject to the SCM Agreement.⁴⁸⁹ Therefore, in the view of the United States, this preliminary objection of Canada’s is unfounded.
      
   6. 
      In response to a Panel question whether the distinction between the SCM Agreement’s parts II and III is relevant to the question of temporal application of the part II prohibition (in light of the US argument based on the serious prejudice provisions including paragraph 7 of Annex IV), the United States replies that this distinction is not relevant. Here, the United States recalls the reference in paragraph 7 of Annex IV to subsidies “’the benefits of which are allocated to future production‘” (emphasis added by the United States), and argues that the wording of paragraph 7 makes clear that insofar as the allocation of subsidies is concerned, the drafters did not intend paragraph 7 to be a special rule applicable exclusively to serious prejudice cases involving Article 6.1(a) of the SCM Agreement. Instead, the drafters took as a given the notion that the benefits of certain types of subsidies should be allocated to future production (i.e., should be allocated over time), and added paragraph 7 in order to clarify how these types of subsidies figured into the calculation of the ad valorem subsidy rate for purposes of Article 6.1(a). For the United States, the phrase “’the benefits of which are allocated‘” connotes a proposition that is universally applicable, regardless of the context, and had the drafters intended otherwise, they would have used different language, such as the following:
      

1. 
   Moreover, the United States maintains, even if the drafters had intended that paragraph 7 function as an acknowledgement of the propriety of allocating subsidies over time for purposes of Article 6.1(a), the fact that paragraph 7 expressly recognizes, for purposes of Article 6.1(a) of the SCM Agreement, that the benefits of subsidies can last for a period of years does not mean that in other contexts the benefits of subsidies cannot last for a period of years. Put differently, the fact that the drafters expressly recognized in one portion of the SCM Agreement the concept of allocating subsidy benefits over time does not mean that the drafters intended to preclude the application of this concept in other portions of the Agreement.
   
2. 
   The United States also notes that it did not cite only paragraph 7 of Annex IV in its third party submission, but also referred to experience under the Tokyo Round Subsidies Code, the countervailing duty practice of Members (including Canada), and common sense, the latter probably being the most important factor of all.
   
3. 
   Finally, the United States notes that it also cited paragraph 7 of Annex IV for purposes of responding to Canada’s across-the-board assertion that the SCM Agreement does not apply to subsidies provided prior to 1 January 1995. If nothing else, the United States argues, the existence of paragraph 7 effectively rebuts such a sweeping assertion.
   

1. Canada’s interpretation of “export subsidy”

   1. 
      The United States does not take a position on whether the measures at issue are, in fact, export subsidies. The United States agrees with Canada that the first Brazilian submission is somewhat cryptic on the question of what constitutes an export subsidy, and notes that not understanding Brazil’s legal theory, it is difficult to comment on Brazil’s arguments.
      
   2. 
      The United States strongly disagrees with Canada’s interpretation of the term “export subsidy”. In the view of the United States, Canada’s interpretation is not supported by the relevant rules of treaty interpretation,⁴⁹⁰ and, if accepted, would eviscerate the stronger disciplines against the use of export subsidies that were one of the principal achievements of the Uruguay Round subsidy negotiations.
      
   3. 
      The United States notes Canada’s interpretation that: “’Article 3.1 prohibits subsidies that are, in law or in fact, contingent upon or tied to export performance. A subsidy is so contingent or tied when it is available only on condition that exports take place.‘” The United States recalls the following factors identified by Canada as “’useful in determining whether subsidies are in fact contingent upon export performance:
      

(b) whether there are penalties -- in the sense of reduction or withdrawal of payments -- if exports do not take place; or

1. 
   For the United States, these conclusions are premised on a flawed interpretative analysis. First, Canada places great reliance on the presence of the word “performance” in Article 3.1(a), concluding that “’on its plain meaning, Article 3.1(a) applies only to subsidies that are conditional on exports being executed or accomplished.‘”⁴⁹¹ However, the United States argues, Article 3.1(a) does not, as Canada suggests, state that exports must actually be executed or accomplished. Instead, Canada is impermissibly trying to read words into Article 3.1(a) that are not there.⁴⁹²
   
2. 
   Second, the United States maintains that throughout its discussion of export subsidy, Canada ignores one key word: “anticipated”. Footnote 4 to Article 3.1(a) provides that a de facto export subsidy exists “’when the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings.‘” (emphasis added by the United States). For the United States, the ordinary meaning of “’anticipate‘” is to “’look forward to; colloq. expect.‘”⁴⁹³ Thus, under Article 3.1(a), a de facto export subsidy can exist where the granting of a subsidy is tied to expected exportation or export earnings, according to the United States, and there is no requirement that exportation or export earnings actually have occurred or that penalties be imposed if expectations are not fulfilled. Therefore, the United States submits, the text of Article 3.1(a) contradicts Canada’s assertion that the intent or objective of a subsidy is irrelevant.
   
3. 
   Finally, the United States argues, Canada’s discussion of the negotiating history behind Article 3.1(a) is inaccurate and incomplete. In the view of the United States, it is inaccurate because Canada concludes that the evolution of the text somehow demonstrates that intent became irrelevant (paras. 5.75- 5.76), but the word “’anticipated‘” connotes a test based on intent. For the United States, all that the various draft versions of Article 3.1(a) show is that the manner in which the drafters express the intent factor changed over time.
   
4. 
   The United States asserts that Canada’s discussion of the negotiating history is incomplete, because it ignores the reason why footnote 4 was added in the first place. According to the United States, footnote 4 originated with a proposal by the European Communities, which the European Communities explained as follows:
   

• 
  The prohibition of export subsidies in Article 9 of the Subsidies Code should be reformulated in order to define clearly its scope.
  
• 
  This prohibition must apply to all export subsidies, that is, all government interventions which confer, through a charge on the public account (in the form of direct financial outlays or revenue foregone, such as tax relief and debt forgiveness), a benefit on a firm or an industry contingent upon export performance.
  
• 
  In addition, since experience has shown that government practices may be easily manipulated or modified in order to avoid this prohibition, it is apparent that a prohibition only of those subsidies which are de jure (that is, expressly) made contingent upon export performance is open to circumvention.
  
• 
  The prohibition, in the present discipline also applies to subsidies de facto contingent upon export. This, however, makes it necessary to provide for clearer guidance in identifying de facto export subsidies . . . de facto export subsidies are those where facts which were known -- or should clearly have been known -- to the government when granting the subsidy demonstrate that the subsidy, without having been made expressly contingent upon export performance, was indeed intended to increase exports.⁴⁹⁴
  

1. 
   The United States submits that while the final text of footnote 4 does not contain a “’knowledge‘” test as originally articulated by the European Communities,⁴⁹⁵ the word “’anticipated‘” is consistent with a test that takes into account the intent of the subsidizing government.
   
2. 
   For the United States, Canada’s discussion of the negotiating history also is incomplete because it fails to identify another change that was made in order to expand the scope of the export subsidy category. Specifically, instead of requiring that export performance be the “’only‘” or the “’most important‘” element, Article 3.1(a) provides that export performance may be either the sole contingency for the subsidy or merely “’one of several other conditions.‘” Thus, the United States argues, Canada’s constricted interpretation of export subsidy is at odds with this textual evidence of an intent to craft a more liberal test for identifying an export subsidy.
   
3. 
   The United States submits that the flaws in Canada’s reasoning can best be demonstrated with an example where a government establishes a subsidy programme that provides large grants for the construction of production facilities. The only eligibility criterion for a grant is that a firm must submit a plan explaining how the construction of such facilities will increase the firm’s exports or export earnings. If a firm does not submit such a plan, it cannot receive a grant. Once the grant is bestowed, however, the government does not impose penalties if the export plan is not fulfilled.
   
4. 
   In the view of the United States, according to Canada such a programme would not constitute an export subsidy, because grants would not be contingent on the condition that exports actually take place. In the view of the United States, such a programme clearly would be an export subsidy under Article 3.1(a) because the grants would be tied to anticipated exportation or export earnings.
   
5. 
   The United States submits that in this dispute the Panel should not apply Canada’s erroneous standard for identifying an export subsidy. If adopted, this standard would enable governments to engage in the very sorts of manipulation and modifications of subsidy programmes that the drafters of the SCM Agreement sought to curtail.
   

1. The relevance of item (k) of the Illustrative List to export financing activities of the EDC

   1. 
      The United States notes that in its discussion of the export financing activities of the Export Development Corporation (“EDC”), Canada appears to distinguish between the activity of the EDC under its corporate account and activities under the Canada Account, appearing to argue that activities under the Canada Account are governed by item (k) of the Illustrative List of Export Subsidies contained in Annex I to the SCM Agreement, but that activities under the corporate account are governed by some other standard.
      
   2. 
      In the view of the United States, both activities (the corporate account and the Canada Account) are governed by item (k). Thus, the United States submits, if financing provided under either account is inconsistent with the standard set forth in the first paragraph of item (k), the financing is potentially an export subsidy. Conversely, if financing provided under either account is consistent with the standard set forth in the first paragraph, it is not an export subsidy in the US view, because item (k) establishes the exclusive standard for determining whether the practices described therein constitute export subsidies. In addition, the United States argues, even if financing provided under either account should run afoul of the first paragraph of item (k), it still would not be deemed an export subsidy if the financing conformed to the provisions of the OECD Consensus referred to in the second paragraph of item (k).
      
   3. 
      In response to a Panel question regarding the United States’ understanding of the term “interest rate provisions” of the relevant undertaking in item (k) of the Illustrative List of Export Subsidies, the United States responds that the “’interest rate provisions‘” of the undertaking (i.e., the OECD Arrangement) provide rules for the provision by governments of fixed interest rate financing (either through direct lending or interest rate support mechanisms) or pure cover (provision of guarantees or insurance to banks providing either fixed or floating rate financing). The “’interest rate provisions‘” do not provide rules for the provision by governments of floating interest rate financing (e.g., through direct lending). Thus, the United States states, if the EDC were to provide export subsidies in the form of a direct loan at a floating rate of interest, the second paragraph of item (k) would not apply to such financings.
      
   4. 
      In its comments on the draft descriptive part of this report, the United States requested permission from the Panel to withdraw its submissions in this dispute, and asked the Panel to modify the descriptive part of the reports so as not to reflect those submissions. The United States further asked that, if the Panel declined the United States' request to withdraw its submissions, the descriptive part of the report reflect that this request had been made."⁴⁹⁶
      
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