before the appellate body of the world trade...

Before the Appellate Body

of the World Trade Organisation

United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint)

(AB-2011-3 / DS353)

Appellant Submission of the European Union

Contains no BCI or HSBI

Geneva 21 April 2011

US – Measures Affecting Trade in Large Civil Aircraft Appellant Submission (AB-2011-3 / DS353) European Union

Contains no BCI or HSBI ___________________________________________________________________________________________________________

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TABLE OF CONTENTS

I. INTRODUCTION .......................................................................................................................................... 1

II. AN SCM AGREEMENT ANNEX V PROCEDURE IS INITIATED BY ACTION BY NEGATIVE CONSENSUS NOT BY DECISION BY CONSENSUS.............................................................................. 4

A. INTRODUCTION AND EXECUTIVE SUMMARY................................................................................................. 4 B. SUMMARY OF THE RELEVANT FACTS............................................................................................................ 4 C. SUMMARY OF THE CLAIMS AND ARGUMENTS BEFORE THE PANEL ............................................................... 5 D. SUMMARY OF THE PANEL REPORT................................................................................................................ 7 E. AN SCM AGREEMENT ANNEX V PROCEDURE IS INITIATED BY ACTION BY NEGATIVE CONSENSUS NOT BY

DECISION BY CONSENSUS ............................................................................................................................. 8 F. LEGAL ERRORS IN THE PANEL REPORT AND REQUEST FOR REVERSAL ....................................................... 18 G. REQUEST FOR COMPLETION OF THE ANALYSIS AND OTHER CONSEQUENCES................................................ 19 H. JURISDICTIONAL CONSIDERATIONS............................................................................................................. 20

III. SUBSIDIES ................................................................................................................................................... 23

A. INTRODUCTION AND EXECUTIVE SUMMARY............................................................................................... 23 B. IN ITS ANALYSIS OF NASA AND DOD PATENT WAIVERS/TRANSFERS, THE PANEL ADOPTED AN

ERRONEOUS INTERPRETATION AND APPLICATION OF “GRANTING AUTHORITY” IN ARTICLE 2.1 OF THE SCM AGREEMENT ...................................................................................................................................... 24

1. Summary of the Facts and the Parties’ Arguments............................................................................... 24 2. Summary of the Panel’s Findings ......................................................................................................... 25 3. The Panel Erred in its Interpretation and Application of Article 2.1 of the SCM Agreement in its

Analysis of NASA and DOD Patent Waivers/Transfers ........................................................................ 27 a. The Proper Interpretation of Article 2.1 of the SCM Agreement .......................................................................27 b. Application of the Proper Interpretation of Article 2.1 of the SCM Agreement to the Facts .............................31

i. NASA...........................................................................................................................................................31 ii. DOD .............................................................................................................................................................33

c. Conclusion .........................................................................................................................................................35 C. THE PANEL ERRED BY EXCLUDING ALL TRANSACTIONS PROPERLY CHARACTERISED AS PURCHASES OF

SERVICES FROM THE SCOPE OF THE SCM AGREEMENT .............................................................................. 35 1. Summary of the Facts and the Parties’ Arguments............................................................................... 36 2. Summary of the Panel’s Findings ......................................................................................................... 37 3. The Panel Erred in its Narrow Interpretation of the Scope of Article 1.1(a)(1) of the SCM Agreement

............................................................................................................................................................... 39

IV. SUBSIDIES CONTINGENT/CONDITIONAL IN FACT UPON EXPORT.......................................... 48

A. INTRODUCTION AND EXECUTIVE SUMMARY............................................................................................... 48 B. THREE LEGAL ISSUES: THE MEANING OF CONTINGENT/CONDITIONAL; THE MEANING OF ACTUAL OR

ANTICIPATED; AND THE REQUIREMENT OF FAVOURING OR DIFFERENTIATION ........................................... 51 C. HB 2294 AS A WHOLE AND INSTANCES OF APPLICATION ........................................................................... 52

1. Summary of the facts ............................................................................................................................. 52 2. Summary of the Claims and Arguments Before the Panel .................................................................... 53 3. Summary of the Panel Report ............................................................................................................... 55 4. HB 2294 as a Whole and Instances of Application are Subsidies Contingent/Conditional in Fact Upon

Export.................................................................................................................................................... 57 5. Legal Errors in the Panel Report and Request for Reversals ............................................................... 58 6. Completion of the Analysis.................................................................................................................... 59

D. HB 2294 B&O TAX RATE REDUCTIONS AND INSTANCES OF APPLICATION................................................ 59 1. Summary of the Facts............................................................................................................................ 59 2. Summary of the Claims and Arguments Before the Panel .................................................................... 61 3. Summary of the Panel Report ............................................................................................................... 62 4. HB 2294 B&O Tax Rate Reductions and Instances of Application are Subsidies

Contingent/Conditional in Fact Upon Export....................................................................................... 62 5. Legal Errors in the Panel Report and Request for Reversals ............................................................... 64 6. Completion of the Analysis.................................................................................................................... 65



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V. ADVERSE EFFECTS .................................................................................................................................. 65

A. INTRODUCTION AND EXECUTIVE SUMMARY............................................................................................... 65 B. THE PANEL ERRED IN NOT AGGREGATING THE EFFECTS FROM THE B&O TAX SUBSIDIES AND THE

AERONAUTICS R&D SUBSIDIES BENEFITING THE 787 ................................................................................ 68 1. Summary of the Facts and the Parties’ Arguments............................................................................... 68 2. Summary of the Panel’s Findings ......................................................................................................... 69 3. The Panel Erred in its Interpretation and Application of Articles 5 and 6.3 of the SCM Agreement... 71

C. THE PANEL ERRED IN NOT AGGREGATING THE EFFECTS OF THE TAX SUBSIDIES WITH THE EFFECTS OF THE REMAINING SUBSIDIES ............................................................................................................................... 79

1. Summary of the Facts and the Parties’ Arguments............................................................................... 79 2. Summary of the Panel’s Findings ......................................................................................................... 80 3. The Panel Erred in its Interpretation and Application of Articles 5 and 6.3 of the SCM Agreement... 81

D. THE PANEL FAILED TO SATISFY THE DUE PROCESS RIGHTS REQUIRED BY ARTICLE 11 OF THE DSU WHEN IT EXCLUDED CERTAIN DOD RDT&E SUBSIDIES FROM ITS ADVERSE EFFECTS ANALYSIS BASED ON A SURPRISE STANDARD, AND WITHOUT ALLOWING FOR NECESSARY FACTUAL DEVELOPMENT................... 84

1. Summary of the Facts and the Parties’ Arguments............................................................................... 85 2. Summary of the Panel’s Findings ......................................................................................................... 86 3. The Panel Failed to Make the Objective Assessment Required by Article 11, Due to Deficiencies in its

Provision of Due Process...................................................................................................................... 88

VI. CONCLUSION ............................................................................................................................................. 95



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TABLE OF CASES Short Title Full Case Title and Citation

Australia – Automotive Leather II

Panel Report, Australia – Subsidies Provided to Producers and Exporters of Automotive Leather, WT/DS126/R, adopted 16 June 1999, DSR 1999:III, 951

Brazil – Aircraft Panel Report, Brazil – Export Financing Programme for Aircraft, WT/DS46/R, adopted 20 August 1999, as modified by Appellate Body Report WT/DS46/AB/R, DSR 1999:III, 1221

Brazil – Aircraft (Article 21.5 – Canada II)

Panel Report, Brazil – Export Financing Programme for Aircraft – Second Recourse by Canada to Article 21.5 of the DSU, WT/DS46/RW/2, adopted 23 August 2001, DSR 2001:X, 5481

Canada – Aircraft Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377

Canada – Autos Appellate Body Report, Canada – Certain Measures Affecting the Automotive Industry, WT/DS139/AB/R, WT/DS142/AB/R, adopted 19 June 2000, DSR 2000:VI, 2985

Canada – Continued Suspension

Appellate Body Report, Canada – Continued Suspension of Obligations in the EC – Hormones Dispute, WT/DS321/AB/R, adopted 14 November 2008

Chile – Price Band System Appellate Body Report, Chile – Price Band System and Safeguard Measures Relating to Certain Agricultural Products, WT/DS207/AB/R, adopted 23 October 2002, DSR 2002:VIII, 3045 (Corr.1, DSR 2006:XII, 5473)

China – Publications and Audiovisual Products

Appellate Body Report, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/AB/R, adopted 19 January 2010

EC and Certain Member States – Large Civil Aircraft

Panel Report, European Communities and Certain Member States – Measures Affecting Trade in Large Civil Aircraft, WT/DS316/R, circulated to WTO Members 30 June 2010

EC – Bananas III Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997, DSR 1997:II, 591

EC – Countervailing Measures on DRAM Chips

Panel Report, European Communities – Countervailing Measures on Dynamic Random Access Memory Chips from Korea, WT/DS299/R, adopted 3 August 2005, DSR 2005:XVIII, 8671

India – Patents (EC) Panel Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, Complaint by the European Communities and their member States, WT/DS79/R, adopted 22 September 1998, DSR 1998:VI, 2661

India – Patents (US) Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R, adopted 16 January 1998, DSR 1998:I, 9

Japan – DRAMs (Korea) Panel Report, Japan – Countervailing Duties on Dynamic Random Access Memories from Korea, WT/DS336/R, adopted 17 December 2007, as modified by Appellate Body Report WT/DS336/AB/R, DSR 2007:VII, 2805

Mexico – Corn Syrup (Article 21.5 – US)

Appellate Body Report, Mexico – Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the DSU by the United States, WT/DS132/AB/RW, adopted 21 November 2001, DSR 2001:XIII, 6675



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Short Title Full Case Title and Citation

Mexico – Taxes on Soft Drinks

Appellate Body Report, Mexico – Tax Measures on Soft Drinks and Other Beverages, WT/DS308/AB/R, adopted 24 March 2006, DSR 2006:I, 3

US – Anti-Dumping and Countervailing Duties (China)

Appellate Body Report, United States - Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, WT/DS379/AB/R, adopted 25 March 2011

US – Continued Zeroing Appellate Body Report, United States – Continued Existence and Application of Zeroing Methodology, WT/DS350/AB/R, adopted 19 February 2009

US – Countervailing Measures on Certain EC Products

Appellate Body Report, United States – Countervailing Measures Concerning Certain Products from the European Communities, WT/DS212/AB/R, adopted 8 January 2003, DSR 2003:I, 5

US – Gambling Appellate Body Report, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/AB/R, adopted 20 April 2005, DSR 2005:XII, 5663 (Corr.1, DSR 2006:XII, 5475)

US – Carbon Steel Appellate Body Report, United States – Countervailing Duties on Certain Corrosion-Resistant Carbon Steel Flat Products from Germany, WT/DS213/AB/R and Corr.1, adopted 19 December 2002, DSR 2002:IX, 3779

US – Softwood Lumber IV Appellate Body Report, United States – Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada, WT/DS257/AB/R, adopted 17 February 2004, DSR 2004:II, 571

US – Upland Cotton Appellate Body Report, United States – Subsidies on Upland Cotton, WT/DS267/AB/R, adopted 21 March 2005, DSR 2005:I, 3

US – Upland Cotton Panel Report, United States – Subsidies on Upland Cotton, WT/DS267/R, Corr.1, and Add.1 to Add.3, adopted 21 March 2005, as modified by Appellate Body Report WT/DS267/AB/R, DSR 2005:II, 299

US – Upland Cotton (Article 21.5 – Brazil)

Appellate Body Report, United States – Subsidies on Upland Cotton – Recourse to Article 21.5 of the DSU by Brazil, WT/DS267/AB/RW, adopted 20 June 2008, DSR 2008:III, 809

US – Continued Suspension Appellate Body Report, United States – Continued Suspension of Obligations in the EC – Hormones Dispute, WT/DS320/AB/R, adopted 14 November 2008, DSR 2008:X, 3507



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TABLE OF ABBREVIATIONS AD Agreement Agreement on Implementation of Article VI of the General Agreement

on Tariffs and Trade 1994 B&O Business and occupation DOD United States Department of Defense DUS&T Dual Use Science & Technology DSB Dispute Settlement Body DSU Understanding on Rules and Procedures Governing the Settlement of

Disputes EU European Union FSC/ETI Foreign Sales Corporation/Extraterritorial Income FWS First Written Submission GATT General Agreement on Tariffs and Trade GATS General Agreement on Trade in Services HB House Bill LCA Large Civil Aircraft ManTech Manufacturing Technology NASA National Aeronautics and Space Administration PEs Project elements R&D Research and development RDT&E Research, Development, Test and Evaluation SCM Agreement Agreement on Subsidies and Countervailing Measures Space Act National Aeronautics and Space Act of 1958 SWS Second Written Submission US United States USDOC United States Department of Commerce Vienna Convention Vienna Convention on the Law of Treaties, adopted on 22 May 1969



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I. INTRODUCTION

1. The European Union appeals discrete errors of law and legal interpretation

developed in the panel report in United States – Measures Affecting Trade in

Large Civil Aircraft (Second Complaint) (DS353) (“Panel Report”). Having

prevailed on significant parts of its claims before the Panel, the European Union

nevertheless files its appeal first. It does so with the objective of avoiding any

further unwarranted delay in these proceedings.

2. As a preliminary matter, the European Union appeals the Panel’s findings

concerning the absence of the procedure provided for under Annex V of the

Agreement on Subsidies and Countervailing Measures (“SCM Agreement”)

notwithstanding the fact that it was requested by the European Union.1 The

European Union considers that an Annex V procedure is initiated by negative

consensus and not, as the United States would have it, by consensus. Because the

United States failed to co-operate both by stating that it did not consent and by

refusing to respond to the questions put to it, the European Union was entitled to

base its case on the available information, and the Panel was required to complete

the record relying on best information otherwise available and, where appropriate,

to draw adverse inferences.

3. The European Union next appeals two of the Panel’s findings related to the

existence of specific subsidies, within the meaning Articles 1 and 2 of the SCM

Agreement. Each of these findings results from erroneous legal interpretations or

applications of key terms in those provisions. First, the European Union appeals

the Panel’s finding that any subsidy deriving from the allocation of patent rights

under National Aeronautics and Space Administration (“NASA”) and Department

of Defense (“DOD”) research and development (“R&D”) contracts and

agreements with Boeing are not “specific”.2 The European Union demonstrates

that the Panel’s conclusion, which was the only basis for its ultimate rejection of

the EU’s claims against these measures, stems from an erroneous interpretation

1 Panel Report, paras. 7.19-7.22. 2 Panel Report, para. 7.1276-7.1294.



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and application of the phrase “granting authority” in Article 2.1 of the SCM

Agreement.

4. Second, the European Union appeals the Panel’s finding that Article 1.1(a)(1)

excludes from its scope (and therefore the scope of the SCM Agreement)

transactions properly characterised as a “purchase of services” by a government –

even if those transactions include “direct transfers of funds”, “provisions of

goods”, or other activities specifically covered by Article 1.1(a)(1).3 This legal

error would open up a considerable loophole in the SCM Agreement. This

erroneous interpretation was the basis for the Panel’s decision that much of the

challenged funding and support provided by the DOD Research, Development,

Test and Evaluation (“RDT&E”) Programme to Boeing do not constitute

subsidies.

5. Next, the European Union appeals the Panel’s finding that the tax subsidies under

Washington State’s House Bill (“HB”) 2294 are not contingent/conditional in fact

upon export performance, under Article 3.1(a) and footnote 4 of the SCM

Agreement.4 Both HB 2294 and the business and occupation (“B&O”) tax rate

reductions that form part of it are obviously subsidies that are

contingent/conditional, the first on building a facility that can produce 36 787s per

year and the second on sales. Thus, unlike in some other cases, the issue is not

contingency/conditionality (or the lack of it). Rather, the issues were whether or

not the contingent/conditional event could reasonably be considered a proxy in

fact for exports, and whether or not there was any favouring or differentiation of

exports. The European Union considers this to be the case, because it is inherently

implausible that 787s will not be exported, and because by their own terms the

measures exclude a range of products that will not be exported.

6. Finally, the European Union appeals three findings in the Panel’s adverse effects

analysis, with the first two related to errors in the substance of the Panel’s

causation analysis, and the third related to deficiencies in the due process rights

provided to the European Union. First, the Panel erred in its interpretation and

3 Panel Report, paras. 7.953-7.970. 4 Panel Report, paras. 7.1513-7.1590 and 8.2(b).



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application of Articles 5 and 6.3 of the SCM Agreement, by considering it “not

appropriate”,5 due to their “entirely distinct causal mechanisms”,6 to cumulatively

assess (i) the effects of the B&O tax subsidies on 787 sales, prices and market

share and (ii) the effects of the US aeronautics R&D subsidies on 787 sales, prices

and market share on Airbus large civil aircraft (“LCA”) in the 200-300 seat LCA

market. Instead, the Panel merely isolated the B&O tax subsidies and examined

whether, “on their own”,7 they caused price suppression in the 200-300 seat

market. The Panel erred by failing to assess additionally the combined market

effects of the two sets of subsidies.

7. Second, the Panel erred in its interpretation and application of Articles 5 and 6.3 of

the SCM Agreement, by declining to aggregate with the Foreign Sales Corporation

and Extraterritorial Income (“FSC/ETI”) and B&O tax subsidies another group of

specific subsidies to Boeing, involving $550 million, and to assess their effects in

the aggregate.8 Both groups of subsidies benefited Boeing LCA and enabled price

effects on competing Airbus LCA in the three LCA markets. The Panel, therefore,

should have performed an aggregated assessment of both sets of subsidies, given

that they have a “sufficient nexus” to the subsidised product and the effects-related

variable.9

8. Third, the Panel acted inconsistently with the principle of due process required by

Article 11 of the DSU when it excluded from its adverse effects assessment the

effects of assistance instruments funded through the RDT&E programmes, other

than those funded pursuant to the Manufacturing Technology (“ManTech”) and

the Dual Use Science & Technology (“DUS&T”) programmes.10

5 Panel Report, para. 7.1824. 6 Panel Report, para. 7.1824. 7 Panel Report, para. 7.1824. 8 Panel Report, paras. 7.1825-7.1828. 9 Panel Report, US – Upland Cotton, para. 7.1191. 10 Panel Report, para. 7.1701.



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II. AN SCM AGREEMENT ANNEX V PROCEDURE IS INITIATED BY ACTION BY NEGATIVE CONSENSUS NOT BY DECISION BY CONSENSUS

A. Introduction and Executive Summary

9. The legal issue in dispute before the Panel and in dispute before the Appellate

Body in this appeal is a pure question of legal interpretation: is an SCM Agreement

Annex V procedure initiated, upon request, by DSB action by negative

consensus11 (as the European Union submits); or DSB decision by consensus (as

the United States submits). The European Union considers that the correct answer

to this question is obtained through a classic interpretative process, in which the

relevant terms of the treaty are contextualised, in light of the object and purpose.12

The precise order of the analysis is not determinative: what matters is that all the

relevant elements are taken into consideration and accorded appropriate and

reasonable weight.

10. In summary, the terms of Annex V, paragraph 2, first sentence of the SCM

Agreement do not state expressly whether initiation occurs by action by negative

consensus or decision by consensus. However, the negative consensus rule cross-

referenced in Article 7.4 of the SCM Agreement coupled with other elements of the

text, context and object and purpose, strongly support the conclusion that the rule

governing initiation is action by negative consensus and not decision by

consensus.

B. Summary of the Relevant Facts

11. The relevant facts are uncontroversial and not in dispute.

12. The EU Request for Panel Establishment and Initiation of an Annex V Procedure

in this dispute13 was considered for the second time14 at the DSB meeting on 17

11 That is, in effect and/or alternatively, automatically. 12 Vienna Convention on the Law of Treaties (“Vienna Convention”), Article 31(1): “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” 13 Panel Report, Annex B (WT/DS353/2/Corr.1).



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February 2006.15 The minutes of that meeting record a statement by the United

States that it did not agree to the initiation of an Annex V procedure.16 The

minutes further record that the DSB established the Panel and took note of the

statements made regarding the Annex V procedure.17 With respect to the Annex V

procedure, substantially the same events occurred at the DSB meetings of 14

March 2006,18 17 March 2006,19 21 April 200620 and 17 May 2006.21 The

European Union submitted fact-finding questions also to the United States by

letters dated 23 May 200622 and 2 August 2007,23 to which the United States

refused to respond. The European Union was thus obliged to proceed with the

case in the absence of co-operation by the United States with the fact-finding

procedure provided for in Annex V of the SCM Agreement.24

C. Summary of the Claims and Arguments before the Panel

13. The European Union raised as a preliminary matter before the Panel the existence

of a procedural defect in these proceedings, that is, the absence of any Annex V

procedure.25 The European Union explained that this flowed from a disagreement

between the European Union and the United States on a question of legal

interpretation. The European Union argued that an Annex V procedure is initiated

by action by negative consensus. In contrast, the United States argued that an

14 Article 6.1 of the DSU provides that: “If the complaining party so requests, a panel shall be established at the latest at the DSB meeting following that at which the request first appears as an item on the DSB’s agenda, unless at that meeting the DSB decides by consensus not to establish a panel.” 15 WT/DSB/M/205, 31 March 2006, paras. 68-76. 16 WT/DSB/M/205, 31 March 2006, para. 71. 17 WT/DSB/M/205, 31 March 2006, paras. 73-75. 18 WT/DSB/M/206, 4 April 2006, paras. 11-26. 19 WT/DSB/M/207, 26 April 2006, paras. 92-101. 20 WT/DSB/M/210, 30 May 2006, paras. 99-104. 21 WT/DSB/212, 20 June 2006, paras. 64-73. 22 Exhibit EC-1 to the EU Request for Preliminary Rulings. 23 Letter dated 2 August 2007 from the EU to the Panel, copied to the United States and the Secretariat. 24 EU FWS, paras. 51-59. 25 EU Request for Preliminary Rulings, paras. 7-44.



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Annex V procedure is initiated by decision by consensus.26 The European Union

explained to the Panel that pursuant inter alia to paragraphs 1 and 6 to 9 of Annex

V of the SCM Agreement, the United States had an obligation to co-operate in the

development of the evidence; that the EU request for an Annex V procedure could

not lawfully be delayed or denied through the actions of the United States or

otherwise; and that as a matter of law the Annex V procedure was initiated and/or

should be deemed to have been initiated and/or should have been initiated.27 The

European Union further asked the Panel to take the necessary steps to ensure that

the information gathering process provided for in Annex V of the SCM Agreement

would in fact take place.28 Alternatively, the European Union asked the Panel to

exercise its powers under Article 13 of the DSU to seek the necessary information

from the United States.29

14. In response, the United States argued that the Panel did not have the authority to

consider the matter raised by the European Union.30 It argued that all actions or

decisions by the DSB, or the absence thereof, are matters with respect to which

neither panels nor the Appellate Body have any authority to rule.31 The United

States also considered the matter outside the Panel's terms of reference.32 In any

event, the United States argued that initiation was by decision by consensus.33

According to the United States, the European Union was inventing a distinction

between decisions and actions of the DSB, and no such distinction exists.34 The

United States considered that Article 2.4 of the DSU establishes a general rule of

26 EU Request for Preliminary Rulings, particularly paras. 7-29. 27 EU Request for Preliminary Rulings, particularly paras. 7-43 and para. 44, first indent. See also EU FWS, paras. 60-68; EU Responses to Panel Questions 1 to 5 and EU Comments on US Reponses to Panel Questions 1 and 6 to 9 (“Issues relating to information gathering and the amount of the alleged subsidies”); EU SWS, paras. 19-23; EU Responses to Panel Questions 106, 107 and 109 and EU Comments on US Reponses to Panel Questions 108 and 109 (“Best information available and adverse inferences”); EU Responses to Panel Questions 316 and 317 (“Best information available”). 28 EU Request for Preliminary Rulings, particularly para. 44, second to third indents. 29 EU Request for Preliminary Rulings, particularly para. 58, fifth and sixth indents. 30 US Response to EU Request for Preliminary Rulings, paras. 21-25. 31 US Response to EU Request for Preliminary Rulings, para. 23, first sentence. 32 US Response to EU Request for Preliminary Rulings, para. 24. 33 US Response to EU Request for Preliminary Rulings, paras. 26-33. 34 US Response to EU Request for Preliminary Rulings, paras. 28 and 33.



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decision by consensus, and Annex V, paragraph 2, first sentence of the SCM

Agreement is not an exception from such general rule.35 The United States

asserted that in past cases the European Union and other Members had considered

that initiation is by decision by consensus.36 Finally, the United States argued that

there had been an Annex V procedure in DS317.37

15. Brazil agreed with the European Union that initiation is by negative consensus38

and encouraged the Panel to draw adverse inferences from the United States’

refusal to co-operate in the information gathering process.39 Canada agreed with

the European Union on the substance of the matter, that is, that initiation is by

negative consensus.40 However, Canada considered that the Panel had no

jurisdiction to rule on the matter.41

D. Summary of the Panel Report42

16. On the substance of the matter, the Panel, agreeing with the European Union,

twice stated that it may well be that the initiation of an Annex V procedure is not a

decision that is subject to consensus.43 However, the Panel also stated that it was

unable to rule that an Annex V procedure was initiated in this dispute. The Panel

observed that the European Union had requested such procedure; that the United

States had refused to consent; and that the DSB merely “took note” of those

statements without taking any action to initiate. For these reasons, the Panel

35 US Response to EU Request for Preliminary Rulings, para. 26. 36 US Response to EU Request for Preliminary Rulings, paras. 34-36. 37 US Response to EU Request for Preliminary Rulings, paras. 37-39. 38 Brazil’s Observations on the EU Request for Preliminary Rulings, para. 2. 39 Brazil’s Third Party Written Submission, paras. 1-8. 40 Canada’s Observations on the EU Request for Preliminary Rulings, third paragraph. 41 Canada’s Observations on the EU Request for Preliminary Rulings, first paragraph. 42 Footnote 1026 of the Panel Report recalls that the decision reproduced in paras. 7.19-7.24 of the Panel Report was originally transmitted to the Parties on 30 July 2007. 43 Panel Report, para. 7.21, second and final sentences.



8

rejected the EU request (as framed by the Panel) and what it characterised as the

EU's dependent additional requests.44

17. The European Union sought clarification of the Preliminary Ruling from the Panel,

but the Panel responded that it considered it “unnecessary to rule in the abstract on

the issue” and rejected the EU's request for clarification.45

E. An SCM Agreement Annex V Procedure is Initiated by Action by Negative Consensus Not by Decision by Consensus

18. In addressing this matter, we begin with the relevant treaty terms. Article 7.4 of

the SCM Agreement provides:

If consultations do not result in a mutually agreed solution within 60 days20, any Member party to such consultations may refer the matter to the DSB for the establishment of a panel, unless the DSB decides by consensus not to establish a panel. The composition of the panel and its terms of reference shall be established within 15 days from the date when it is established.

20 Any time periods mentioned in this Article may be extended by mutual agreement.

(emphasis added)

19. Annex V, paragraph 1, first sentence of the SCM Agreement provides:

Every Member shall cooperate in the development of evidence to be examined by a panel in procedures under paragraphs 4 through 6 of Article 7. …

(emphasis added)

20. Annex V, paragraph 2, first sentence, of the SCM Agreement provides :

In cases where matters are referred to the DSB under paragraph 4 of Article 7, the DSB shall, upon request, initiate the procedure to obtain such information from the government of the subsidizing Member as necessary to establish the existence and amount of subsidization, the value of total sales of the subsidized firms, as well as information necessary to analyze the adverse effects caused by the subsidized product.66

44 Panel Report, paras. 7.20-7.22. 45 Communication from the Panel dated 30 August 2007, second paragraph.



9

66 In cases where the existence of serious prejudice has to be demonstrated.

(emphasis added)

21. Thus, the terms of Annex V, paragraph 2, first sentence of the SCM Agreement do

not state expressly whether initiation occurs by action by negative consensus or

decision by consensus. However, there is a direct cross-reference from Annex V,

paragraph 2 to Article 7.4 of the SCM Agreement where the negative consensus

rule is expressly provided for. This provides a strong textual basis to support the

conclusion that a Member cannot block an Annex V procedure by withholding its

consent. Furthermore, the text, context and object and purpose of the other relevant

provisions discussed below strongly support the conclusion that Annex V initiation

is by action by negative consensus and not decision by consensus.

22. Since the legal issue in dispute also touches upon the procedures to be followed in

the DSB the European Union considers that it is appropriate to set out and have

regard to the overall framework of legal rules that govern those procedures. In this

respect, the European Union recalls that, when the General Council convenes as

the DSB, it must follow the rules of procedure for the General Council, except as

provided otherwise in the DSU.46 The General Council takes decisions in

accordance with Article IX of the WTO Agreement.47

23. The DSB is “established” by Article 2.1 of the DSU. According to this provision,

the DSB “administer{s} these rules and procedures” (that is, those referred to in

the DSU). It has the authority to “establish” panels, “adopt” panel and Appellate

Body reports (any “recommendations or rulings” becoming DSB recommendations

or rulings), “maintain” surveillance and “authorize” suspension of concessions. It

also “informs” the relevant WTO Councils and Committees about disputes.48

46 Rules of Procedure for Meetings of the Dispute Settlement Body (WT/DSB/9) (“DSB Procedures”), paragraph 1: “When the General Council convenes as the Dispute Settlement Body (DSB), it shall follow the rules of procedure for meetings of the General Council, except as provided otherwise in the Dispute Settlement Understanding (DSU) or below.” 47 Rules of Procedure for Sessions of the Ministerial Conference and Meetings of the General Council (“GC/DSB Procedures”), Rule 33: “The General Council shall take decisions in accordance with the decision-making provisions of the WTO Agreement, in particular Article IX thereof entitled “Decision-Making”. 48 DSU, Article 2 and Article 21.



10

Significantly, Article 2.1 of the DSU, final sentence expressly provides that, where

the DSB “administers” dispute settlement rules, it proceeds by way of “decisions

or actions”.

24. Article 2.4 of the DSU provides:

Where the rules and procedures of this Understanding provide for the DSB to take a decision, it shall do so by consensus.1

1 The DSB shall be deemed to have decided by consensus on a matter submitted for its consideration, if no Member, present at the meeting of the DSB when the decision is taken, formally objects to the proposed decision.

25. Thus, certain DSU rules and procedures provide for the taking of decisions by

consensus. At the same time the DSU also provides for the taking of DSB actions,

and as a brief review of the relevant provisions confirms, DSB actions relating to

dispute settlement must occur unless the DSB decides by consensus not to act

(often referred to as “negative consensus”).

26. The first relevant provision is Article 6.1 of the DSU, which provides:

If the complaining party so requests, a panel shall be established at the latest at the DSB meeting following that at which the request first appears as an item on the DSB’s agenda, unless at that meeting the DSB decides by consensus not to establish a panel.5

5 If the complaining party so requests, a meeting of the DSB shall be convened for this purpose within 15 days of the request, provided that at least 10 days’ advance notice of the meeting is given.

27. It follows from the preceding analysis that, when a panel is established at a DSB

meeting, it is not established by way of a DSB decision by consensus, but by way

of a DSB action by negative consensus. It cannot be a decision by consensus

pursuant to Article 2.4 of the DSU because it is not taken by consensus, but by

negative consensus. Thus, by definition and of necessity, what Article 6.1 of the

DSU refers to is something else – namely an action by negative consensus in

accordance with Article 6 of the DSU. That is why a WTO document is



11

subsequently distributed recording the establishment of the panel "in accordance

with Article 6 of the DSU".49

28. A DSB action establishing a panel by negative consensus is subject to only one

condition: a “request” by the complaining party.

29. The analysis is the same for Articles 16.450 and 17.1451 of the DSU (“adoption” by

DSB action by negative consensus of panel and Appellate Body Reports); as well

as Articles 22.6, first sentence52 and 22.7, final sentence53 of the DSU

(“authorization” by DSB action by negative consensus to suspend concessions).

30. The second sentence of Article 22.6 of the DSU,54 which concerns referral to an

arbitration panel, also provides for action by the DSB following a request. Under

the logic of the US argument, because the second sentence of Article 22.6 of the

DSU does not expressly refer to negative consensus, the matter could only be

referred to an arbitration panel by consensus. This cannot be correct. A

complaining Member could not unilaterally block an arbitration panel as a means

of obtaining the retaliation requested without judicial review; nor could a

defending Member unilaterally block a retaliation request by indefinitely

49 See, for example, in the present case, WT/DS353/6 of 4 December 2006: “At its meeting on 17 February 2006, the Dispute Settlement Body (DSB) established a Panel pursuant to the request of the European Communities in document WT/DS353/2, in accordance with Article 6 of the DSU.” 50 “Within 60 days after the date of circulation of a panel report to the Members, the report shall be adopted at a DSB meeting unless a party to the dispute formally notifies the DSB of its decision to appeal or the DSB decides by consensus not to adopt the report. …”. See, for example, most recently, WT/DS402/5, of 1 March 2011, US – Use of Zeroing in Anti-dumping Measures Involving Products from Korea, “Action by the Dispute Settlement Body.” 51 “An Appellate Body report shall be adopted by the DSB and unconditionally accepted by the parties to the dispute unless the DSB decides by consensus not to adopt the Appellate Body report within 30 days following its circulation to the Members. …”. See, for example, most recently, WT/DS367/17, of 5 January 2011, Australia – Measures Affecting the Importation of Apples From New Zealand, “Action by the Dispute Settlement Body.” 52 “When the situation described in paragraph 2 occurs, the DSB, upon request, shall grant authorization to suspend concessions or other obligations within 30 days of the expiry of the reasonable period of time unless the DSB decides by consensus to reject the request. …”. 53 “… The DSB shall be informed promptly of the decision of the arbitrators and shall upon request grant authorization to suspend concessions or other obligations where the request is consistent with the decision of the arbitrator, unless the DSB decides by consensus to reject the request.” 54 “… However, if the Member concerned objects to the level of suspension proposed, or claims that the principles and procedures set forth in paragraph 3 have not been followed where a complaining party has requested authorization to suspend concessions or other obligations pursuant to paragraph 3(b) or (c), the matter shall be referred to arbitration. …”



12

obstructing an arbitration panel. It is the context of the first sentence, together

with the text contained in the first sentence, and the object and purpose, that

compels this interpretation.

31. With the above observations in mind, the European Union now turns to further

analyze Annex V of the SCM Agreement.

32. First, Annex V, paragraph 2 expressly cross-refers to the first sentence of Article

7.4 of the SCM Agreement. The existence of an express cross-reference means

that, in the case of paragraph 2 of Annex V, and compared to Article 22.6 of the

DSU discussed above, even greater weight has to be given to the express reference

to the negative consensus procedure in Article 7.4 of the SCM Agreement.

33. Second, the term “the DSB shall” indicates that the provision creates an obligation

on the DSB to proceed according to the terms of the treaty. This is highly

significant. Each of the provisions of the DSU analysed above55 relating to actions

by negative consensus contains the same mandatory language. By contrast, there

is no provision of the DSU that imposes an obligation on the DSB with respect to

any decision by consensus relating to the procedural conduct of a dispute. The

logic of this is self-evident. The Members would not oblige the DSB to act, and yet

at the same time provide the defending Member in a dispute with the means to

frustrate such action. That would create an internal incoherence within the treaty

that would render the treaty provision obliging the DSB to act wholly ineffective.

A treaty may not be interpreted so as to render entire provisions without effect. In

short, there is a clear pattern in the DSU: such mandatory language with respect to

the DSB and disputes is consistently associated with action by negative consensus

and dissociated from decision by consensus. Accordingly, the presence of such

mandatory language in Annex V, paragraph 2, first sentence of the SCM

Agreement strongly supports the conclusion that initiation is by action by negative

consensus.

34. Third, the word “request”, used in paragraph 2 of Annex V, is also used in Articles

6.1, 22.6 first sentence and 22.7 final sentence of the DSU. This supports the view

55 DSU, Articles 6.1, 16.4, 17.14, 22.6 first sentence, 22.7 final sentence and 22.6 second sentence.



13

that the provision refers to a DSB action by negative consensus, conditional only

on a “request” being made by the interested Member.

35. Fourth, we have also had regard to the use of the term “under” in Annex V,

paragraph 2. We note that the dictionary meanings of the term “under” include :

Covered by, enveloped in; within, on the inside of … In an inferior or subordinate position or capacity to; below in rank or standing … Subject to the authority, control, direction or guidance of … Controlled, restrained or bound by …56

36. Thus, the ordinary meaning of this term supports the view that the “cases” or

“matters” referred to in Annex V, paragraph 2, will be subject to the procedures

provided for in Article 7.4 of the SCM Agreement, namely negative consensus.

The terms “cases” and “matters” in paragraph 2 of Annex V suggest the same

conclusion. A procedure under Annex V, paragraph 2 of the SCM Agreement does

not constitute a separate case or matter, distinct from the case or matter which is

the subject of the request for the establishment of the panel.

37. Fifth, the term “procedure” is used in Annex V, paragraph 2 of the SCM

Agreement. Article 2(1) of the DSU expressly refers to the DSB “administering”

the relevant “rules and procedures”, and most particularly the dispute settlement

provisions of the covered agreements, expressly stated by Appendix 2 of the DSU

to include Annex V of the SCM Agreement. The use of the term “procedure”

under Annex V of the SCM Agreement thus clearly falls within the scope of a DSB

action by negative consensus administering the rules and procedures referred to in

the DSU.

38. Sixth, the first sentence of paragraph 1 of Annex V of the SCM Agreement

establishes an overarching obligation that informs the remainder of Annex V. The

first sentence provides that every Member shall cooperate in the development of

evidence to be examined by a panel in procedures under paragraphs 4 through 6 of

Article 7. This is entirely consistent with the proposition that the correct

procedure is negative consensus. It is difficult to understand how a defending

Member could lawfully prevent the initiation of an Annex V procedure whilst

56 Shorter Oxford English Dictionary (5th ed. 2002).



14

acting in a manner consistent with this basic obligation to cooperate. In other

words, the proposition that there is an obligation to cooperate, but a right to do

nothing appears to us to constitute a conflict that cannot be resolved. This is

inconsistent with the “principle” that the rules and procedures in the DSU should

be used to the extent necessary to “avoid conflict.”57 This view is further

confirmed by the terms of the second sentence of paragraph 1 of Annex V, which

refers, in mandatory terms, to “the procedures to be used to comply with requests

for information.” Once again, this language does not suggest that compliance is

optional. On the contrary, it suggests that compliance is mandatory.

39. Seventh, paragraph 5 of Annex V provides that the information gathering process

shall be completed within 60 days of the date on which the matter has been

referred to the DSB under paragraph 4 of Article 7. This is a mandatory 60 day

period that must be complied with. Significantly, it begins to run from the date on

which the matter is referred to the DSB under paragraph 4 of Article 7. It is not

expressed to run from the date on which the Annex V procedure is initiated. The

reason for this is self-evident. The provision assumes that, perhaps absent

exceptional steps taken by a complaining Member, initiation of an Annex V

procedure will generally be contemporaneous with the establishment of a panel.

Furthermore, use of the terms “the matter” again supports the view that there is a

close link between the panel request and the Annex V procedure. In other words,

the two are closely bound together and follow the same procedure: negative

consensus.

40. Eighth, paragraphs 6 to 9 of Annex V provide for specific consequences in the

event that the defending Member fails to cooperate, and specifically also condition

the panel’s subsequent behaviour. Once again, these provisions are inconsistent

with the proposition that the defending Member has a right to do nothing (that is,

to block the procedure and/or refuse to cooperate). If that would be the case, there

would be no reason for the SCM Agreement to provide for what are in effect

penalties for non-cooperation.

57 DSU, Article 1.2, final sentence: “… the principle that … the rules and procedures set out in this Understanding should be used to the extent necessary to avoid conflict.”



15

41. Ninth, the provisions of Article 12.7 of the SCM Agreement provide, in the context

of countervailing investigations, that if interested Members or parties do not

cooperate in providing information, determinations may be made on the basis of

facts available. The drafters thus recognised the information gathering issue in the

context of countervailing investigations and effectively mandated cooperation with

the sanction of using facts available. This being so, we fail to see why, in the

context of serious prejudice cases, in which the panel makes the initial

determination, the drafters would have accepted that the defending Member should

be free to refuse to cooperate with impunity. That is precisely why they foresaw

the initiation of an Annex V procedure, in conjunction with a panel request, by

negative consensus.

42. Tenth, the Appellate Body has confirmed the general principle that Members have

an obligation to co-operate in the information gathering procedures of the DSU,

failing which it may be appropriate to draw adverse inferences.58 The reasoning of

the Appellate Body draws expressly on the terms of the SCM Agreement.

43. Taking all these aspects of the text and context into consideration, the European

Union submits that it is evident that the initiation of a procedure within the

meaning of Annex V, paragraph 2 of the SCM Agreement is not a DSB decision to

be adopted by consensus, but a DSB action by negative consensus.59

44. In addition to the above arguments, also from an object and purpose point of view

it is apparent that the initiation of the Annex V procedure is and must be by action

by negative consensus. The Annex V process is a necessary corollary and integral

part of the establishment of a panel in a dispute settlement proceeding, which,

through the establishment of a panel, is launched by negative consensus. Any

attempt to make this fact-finding procedure specifically designed for serious

58 Appellate Body Report, Canada – Aircraft, para. 202: “… the authority to draw adverse inferences from a Member's refusal to provide information … seems to us an ordinary aspect of the task of all panels to determine the relevant facts of any dispute involving any covered agreement: a view supported by the general practice and usage of international tribunals.” 59 We leave open the question of whether the action is also or alternatively to be characterised as a decision by negative consensus, since that is not relevant to our analysis. In fact, whether the event in question is characterised by the US or anyone else as an action, a decision, an action and a decision, or something else, or as automatic, the EU considers that the negative consensus rule applies to Annex V procedures, for the reasons set out in this submission.



16

prejudice cases subject to a veto of the defending party would severely limit the

ability of a complaining party to successfully bring a serious prejudice case. The

overall balance and effectiveness of the SCM Agreement would be severely

hampered with far-reaching systemic implications. The complainants must have a

tool to prepare their serious prejudice case by obtaining the necessary information

before their submissions have to be made to a panel.

45. The European Union considers that the above interpretation is confirmed by a

consideration of the preparatory work and/or the circumstances of conclusion (or

alternatively that such consideration resolves any ambiguity or obscurity in the

meaning in favour of the European Union and/or disproves the manifestly absurd

and unreasonable interpretation advanced by the United States).60 The substantive

provisions of Annex V of the SCM Agreement were not contained in the first two

draft texts circulated by the Chairman of the Negotiating Group on Subsidies and

Countervailing Measures,61 but first appeared in the third draft text.62 It remains

clear from this and subsequent drafts that the Annex V procedure was tied-to the

panel request, in the sense that the same procedures would apply, which explains

why, when the reference to negative consensus was subsequently added to Article

7.4 of the SCM Agreement it was well understood that the linked Annex V

procedure would follow the same procedure.

46. It is particularly instructive to note that the Annex V procedure was added

following a proposal by the United States,63 the essential elements of which were

agreed to by all the Members by consensus. The United States eloquently

explained the object and purpose of its proposal in the following terms (bold

underline emphasis added):

60 Vienna Convention, Article 32 (Supplementary means of interpretation): “Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable.” 61 MTN.GNG/NG10/W/38 of 18 July 1990 and MTN.GNG/NG10/W/38/Rev. 1 of 4 September 1990. 62 MTN.GNG/NG10/W/38/Rev. 2 of 2 November 1990. 63 MTN.GNG/NG10/W/40, of 5 October 1990, p. 2 and 3.



17

Both the current Code and the Chairman's Note tie subsequent countermeasures to a demonstration of adverse effects but provide no credible, explicit means for determining the degree and nature of these effects. Unlike a multilateral review of a countervailing measure, where there is already a determination by an investigating authority of the existence of a subsidy and material injury, and a record of detailed evidence on which to conduct a review, a Panel or Committee proceeding with respect to serious prejudice is de novo.

With no effective, multilaterally-sanctioned guidelines for conducting the necessary serious prejudice enquiry, a party's ability to prepare an adequate case is limited. The party must rely on whatever information it can gather without any particular confidence regarding the factors essential to establish serious prejudice. Further, and perhaps as important, the complaining party may not get full or prompt co-operation from the subsidizing country or a third country in its efforts. In addition, it would be difficult for a multilateral body to discharge its responsibilities with due regard to all information relevant to the case on a timely basis.

The problem of developing a proper case is especially acute where third-countries are involved because the information necessary to show adverse effects caused by subsidized products is not necessarily within the reach of the complaining party. Moreover, unlike the situation where there are effects in the home market of the subsidizing country, such information is also beyond the reach of the subsidizing country. In some cases, the third country would have an incentive not to co-operate in producing the necessary evidence because the effects which are adverse to companies in the complaining country may actually be beneficial to the consumers in the third country. Thus, while the complaining country might be able to present a determination of subsidization and adverse effects with respect to the third country, it might be denied critical information regarding the relation between the imports and adverse effects in the third market.

To strengthen the ability to establish the effects in the home market of the subsidizing country and in third countries, this proposal envisions an information-gathering process supported by a commitment to co-operate. With this information, the parties can make their arguments on adverse effects based on a record of information developed. If a country determines, on the basis of its examination of this information, to seek full multilateral review, the multilateral body can make an informed and timely determination on the basis of that record. An obligation to co-operate in the gathering of information, as well as, where necessary, reliance on best information available, should especially enhance the ability of countries with the most limited national resources in preparing cases to bring to multilateral dispute settlement.

Therefore, in order to improve the multilateral rules and procedures for demonstrating adverse effects required to show serious prejudice, and for enhancing the credibility of remedies in this area, the following mechanism is suggested.

47. In this instance, of course, the United States and all WTO Members got exactly

what they wished for: an information gathering procedure hand-in-hand with a

panel procedure that is mandatory (that is, by negative consensus) backed up with

a threat of adverse inferences in case of failure to co-operate.



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F. Legal Errors in the Panel Report and Request for Reversal

48. Obviously, the Panel has, in effect, simply avoided ruling on the legal question at

the root of the dispute between the Parties, even though on the substance of the

matter the Panel appears to agree with the European Union.

49. The Panel has not done this by ruling that the matter is outside its jurisdiction, as

the United States and Canada argued. Rather, the Panel appears to have accepted,

at least by implication, that it had an implied or inherent power, and in fact an

obligation, to rule on the matter.

50. However, what the Panel appears to have done is to erroneously re-state part of the

EU complaint as a request for a ruling on a narrow factual proposition: that the

DSB has initiated an Annex V procedure by action by negative consensus. The

Panel then states that it cannot agree with that factual proposition (of the Panel's

own invention) and rejects the remainder of the EU request, characterising it as

“dependent”. Obviously, this reasoning is circular and unreasonable. It is exactly

the absence of an Annex V procedure about which the European Union was

complaining; and yet for the Panel that absence becomes the very justification for

rejecting the EU request. Equally obviously the EU request constituted far more

than such a narrow factual proposition, as the United States itself well-understood

in its response64 and as Brazil and Canada well-understood in their observations on

the matter.

51. In light of the above explanations, the European Union submits that this constitutes

a failure to make an objective assessment of the matter within the meaning of

Article 11 of the DSU, including a failure to make an objective assessment of the

facts; and/or a false exercise of judicial economy; and/or an error in the

interpretation and application of Article 7.4 and Annex V, paragraph 2, first

sentence of the SCM Agreement. For these reasons, we request reversal of the

statements at paragraph 7.22 of the Panel Report, first and final sentences, denying

the EU requests.

64 US Response to EU Request for Preliminary Rulings, particularly paras. 26-33.



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G. Request for completion of the analysis and other consequences

52. The most substantial part of the relief that the European Union was seeking from

the Panel in its request for Preliminary Rulings was that the Panel take the

necessary steps to ensure that in fact the information gathering process provided

for in Annex V of the SCM Agreement should actually take place. That did not

occur. The United States' failure to co-operate in the information-gathering

process, which began with its repeated DSB statements referenced above and

continued throughout the Panel proceedings, forced the European Union to present

its serious prejudice case on the basis of the evidence available to it. In these

circumstances, the European Union requests the Appellate Body to complete the

analysis by making the following findings:65

• the initiation of an SCM Agreement Annex V procedure is by action by

negative consensus, not by decision by consensus, or in any event is by

negative consensus or automatic;

• as a matter of law, with the EU request at the DSB meeting of 17 February

2006, re-iterated at the subsequent DSB meetings of 14 March 2006, 17

March 2006, 21 April 2006 and 17 May 2006, all the conditions for the

initiation of an Annex V procedure were fulfilled, and such procedure was

initiated and/or is deemed to have been initiated and/or should have been

initiated;

• that in refusing to co-operate in the information-gathering process,

beginning with its repeated DSB statements referenced above and

continuing throughout the Panel proceedings with its refusal to answer the

questions set out in the European Union’s letters dated 23 May 2006 and 2

August 2007, the United States failed to comply with its obligations under

Annex V, paragraph 1, first sentence, of the SCM Agreement; and

• that, pursuant to paragraphs 6 to 9 of Annex V of the SCM Agreement, and

in light of the US failure to co-operate described in this submission and

65 Each finding is requested as a separate and independent matter. No one finding is requested as dependent upon any other finding or findings.



20

particularly in the preceding bullet point, the European Union was entitled

to present its serious prejudice case based on the evidence available to it,

the Panel was entitled to complete the record as necessary relying on best

information otherwise available, and that, in making its determinations, the

Panel was entitled to draw adverse inferences.66

53. Independently from its request for reversal and completion of the analysis, the

European Union requests the Appellate Body to constantly bear in mind the

circumstances of this case. The US refusal to co-operate in the Annex V

procedure colours the entire dispute.67 This means that, with respect to any matter

that the United States might appeal, either pursuant to Article 11 of the DSU or

with respect to the Panel's legal characterisation of the facts, the Appellate Body

should constantly bear in mind that the United States has chosen to withhold

information from the European Union and the Panel. Consequently, the United

States cannot now reasonably criticise the Panel for its assessment of the facts or

for the reasonable drawing of factual inferences where the United States itself is

responsible for depriving the Panel of information. Conversely, in considering the

substantive aspects of the EU appeal, or any request by the European Union to

complete the analysis, the Appellate Body should constantly bear in mind the

above circumstances. In case of doubt or evidentiary conflict or equipoise, the

Appellate Body should rule in favour of the European Union.

H. Jurisdictional Considerations

54. Since the Panel did not deny the EU request based on the jurisdictional argument

advanced by the United States and Canada we do not address that matter in full

detail in this submission. Rather, for the time being we summarise our position as

follows.

66 See, in particular, EU FWS, paras. 60-68. 67 For example, EU FWS, paras. 60-68; EU Responses to Panel Questions 1 to 5 and EU Comments on US Reponses to Panel Questions 1 and 6 to 9 (“Issues relating to information gathering and the amount of the alleged subsidies”); EU SWS, paras. 19-23; EU Responses to Panel Questions 106, 107 and 109 and EU Comments on US Reponses to Panel Questions 108 and 109 (“Best information available and adverse inferences”); EU Responses to Panel Questions 316 and 317 (“Best information available”).



21

55. The Panel had the implied or inherent power, and indeed the obligation, to

consider the matter raised by the European Union. The DSU, including the special

or additional rules listed in Appendix 2, which expressly references Annex V of

the SCM Agreement, is a covered agreement.68 The DSU itself applies to disputes

regarding the interpretation of the DSU.69 The dispute settlement system serves to

preserve the rights and obligations of Members under the covered agreements,

including the DSU, and to clarify the existing provisions of those agreements in

accordance with customary rules of interpretation of public international law.70

When Members seek redress of a violation of their DSU rights they must have

recourse to, and abide by, the rules and procedures of the DSU;71 and the DSU

affords them that right.72 Thus, disputes regarding the correct interpretation of the

DSU are themselves to be resolved through the application of the DSU and the

dispute settlement system, by a panel and eventually by the Appellate Body,

applying the negative consensus rule.

56. The absence of the matter from the Panel Request is not determinative, since the

matter post-dates the Panel Request. Article 11 of the DSU expressly provides that

a panel must 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, and "make such other findings

as will assist the DSB in making the recommendations or in giving the rulings

provided for in the covered agreements". Thus, disputes about the correct

interpretation of the DSU are not issues that necessarily require the complaining

Member to instigate new panel proceedings. Rather, they are issues that fall to be

assessed, at least in the first place, within the panel proceedings in which the issue

arises. This is confirmed by the principle that the prompt settlement of disputes is

essential to the effective functioning of the WTO and the maintenance of a proper

balance between the rights and obligations of Members.73 It is perfectly illustrated

68 DSU, Article 1.1, first sentence, and Appendix 1(B), fifth item. 69 DSU, Article 1.1, second sentence. 70 DSU, Article 3.2, second sentence. 71 DSU, Article 23.1; Appellate Body Report, Mexico – Taxes on Soft Drinks, para. 52. 72 DSU, Article 3.3; Appellate Body Report, Mexico – Taxes on Soft Drinks, para. 52. 73 DSU, Article 3.3.



22

by the numerous panel and Appellate Body reports addressing issues under Article

4.2 and 6.2 of the DSU that have arisen in the same DSU proceedings. There are

numerous procedural defects that might arise in the operation of the DSU during

dispute settlement proceedings and that could disrupt the balance of rights and

obligations set out in the DSU, and thus by extension any and all of the covered

agreements. By definition they must all be subject to resolution through the DSU

itself. Panels and the Appellate Body have repeatedly confirmed this analysis.74

57. We reserve the right to return to this issue should the United States appeal this

aspect of the Panel Report.

58. With respect to the different question of the Appellate Body's jurisdiction to

consider the matters raised in this submission, we consider it self-evident that,

pursuant to Article 17.6 of the DSU, the Appellate Body has the authority to

consider issues of law covered in the Panel Report and legal interpretations

developed by the Panel.

59. Finally, with respect to the Appellate Body's jurisdiction in the context of

completing the analysis, we consider that this follows the Panel's jurisdiction,

since the Appellate Body would be stepping into the shoes of the Panel.

Accordingly, as indicated above, until such time as this matter may be raised by

the United States, we do not comment in full detail at this time, but reserve our

right to do so in response to any submissions from the United States on this issue.

74 Appellate Body Report, Mexico – Corn Syrup (Article 21.5 - US), para. 36; Appellate Body Report, India – Patents (US), para. 92; Appellate Body Report, Mexico – Taxes on Soft Drinks, para. 42; Appellate Body Report, US-Continued Suspension, para. 433; Appellate Body Report, Canada – Continued Suspension, para. 433; Panel Report, India – Patents (EC), paras. 7.9 to 7.24 (ruling on the propriety of its own establishment); Panel Report, Australia – Automotive Leather II, paras. 9.13 to 9.15 (assessing the substance of Australia’s claim that, on a proper interpretation of the DSU, the panel was established – also through the actions of the DSB – inconsistently with the DSU).



23

III. SUBSIDIES


60. The European Union appeals two of the Panel’s findings related to the existence of

specific subsidies, within the meaning Articles 1 and 2 of the SCM Agreement.

Each of these findings results from an erroneous legal interpretation or application

of key terms in those provisions.

61. First, the European Union appeals the Panel’s finding that any subsidy deriving

from the allocation of patent rights under NASA and DOD R&D contracts and

agreements with Boeing are not “specific”.75 The European Union demonstrates

that the Panel’s conclusion stems from an erroneous interpretation and application

of the phrase “granting authority” in Article 2.1 of the SCM Agreement. Having

adopted an erroneous interpretation of “granting authority” that focuses on the

policy of the Member (i.e., the United States Government, as a whole) rather than

the actions of the actual government entity providing the subsidy, the Panel

proceeded to find that the NASA and DOD patent waivers/transfers are not

specific. If the Panel had adopted the correct legal interpretation, it would have

readily reached the conclusion that these NASA and DOD patent waivers/transfers

are indeed “specific”, within the meaning of Article 2.1(a).

62. Second, the European Union appeals the Panel’s finding that Article 1.1(a)(1)

excludes from its scope (and therefore the scope of the SCM Agreement)

transactions properly characterised as a “purchase of services” by a government –

even if those transactions included “direct transfers of funds”, “provisions of

goods”, or other activities specifically covered by Article 1.1(a)(1).76 In finding,

for example, that the ordinary meaning of “direct transfer of funds” in its context

excludes a significant class of direct transfers of funds (i.e., those that occur

pursuant to transactions properly characterised as a purchase of services), the

Panel failed to perform a holistic interpretation of the provision in light of its

75 Panel Report, para. 7.1294. 76 Panel Report, paras. 7.953-7.970.



24

context, and the object and purpose of the SCM Agreement. Indeed, the Panel’s

interpretation opens up an enormous loophole in the SCM Agreement. It was this

interpretation that provided the basis for the Panel’s decision that much of the

challenged funding and support provided by the DOD RDT&E Programme to

Boeing does not constitute subsidies. And, if upheld, the Panel’s interpretation

will provide the basis in the future for Members to modify the form (but not the

substance) of their measures in a manner that allows them to escape from all of the

disciplines of the SCM Agreement.

B. In Its Analysis of NASA and DOD Patent Waivers/Transfers, the Panel Adopted an Erroneous Interpretation and Application of “Granting Authority” in Article 2.1 of the SCM Agreement

1. Summary of the Facts and the Parties’ Arguments

63. Beginning with its first written submission, the European Union detailed the way

in which NASA and DOD transferred valuable patent rights to Boeing, including

patents related to Boeing’s development of LCA.77 It explained why such transfers

of patent rights should be found to constitute “financial contributions” that confer

“benefits” to Boeing, pursuant to Article 1 of the SCM Agreement, and that such

subsidies were “specific” within the meaning of Article 2.1.78

64. The United States did not dispute much of the EU’s factual description of the US

law and practice through which NASA and DOD allocate property rights

developed pursuant to NASA and DOD R&D contracts.79 Instead, the United

States disagreed with each aspect of the European Union’s legal characterisation of

these NASA and DOD patent waivers and transfers, including the evaluation of

whether they constitute a “financial contribution”, provide a “benefit”, and are

“specific”.

77 Panel Report, para. 7.1266. 78 Panel Report, para. 7.1266. 79 Panel Report, paras. 7.1272-7.1275.



25

65. The legislative authority for NASA’s R&D programmes, including the authority to

waive patents, derives from the National Aeronautics and Space Act of 1958

(“Space Act”), and its implementing regulations. Accordingly, the European

Union reasoned that NASA patent waivers are specific to the enterprises that

participate in aeronautics and space-related R&D (just like the NASA R&D

funding and support).80 As for DOD patent waivers and transfers, the European

Union explained that these are granted pursuant to the overall provision of R&D

funding and support provided by DOD, and that they are therefore specific to the

group of defence-related industries capable of conducting the specialised activities

required by DOD.81

66. By contrast, the United States argued that NASA and DOD patent waivers and

transfers are not specific because NASA and DOD “look to the policy established

in the Presidential Memorandum of 18 February 1983 and Executive Order

12591”.82 Further, the United States argued that the “granting authority” in the

case of these patent waivers is the “President of the United States”.83 In response,

the European Union repeatedly pointed out that the “‘granting authorities’ at issue

with respect to the provision/waiver of intellectual property rights are NASA and

DOD”.84

2. Summary of the Panel’s Findings

67. In the name of “simplicity and efficiency”, the Panel opted to begin and end its

analysis by evaluating the Parties’ arguments on specificity pursuant to Article 2 of

the SCM Agreement,85 concluding that the allocation of patent rights under NASA

and DOD R&D contracts and agreements with Boeing are not “specific”, within

80 Panel Report, para. 7.1270, citing EU FWS, para. 853. 81 Panel Report, para. 7.1270, citing EU FWS, para. 853. 82 Panel Report, para. 7.1275, citing US FWS, paras. 338-339. 83 See, e.g., US Response to Panel Question 144(k) and Exhibit US-1268. 84 EU SWS, para. 570; see also EU FNCOS, para. 86; EU Comments on US Response to Panel Question 144, para. 138. 85 Panel Report, para. 7.1276 and note 2933.



26

the meaning of Article 2 of the SCM Agreement.86 Rejecting the European

Union’s arguments that NASA and DOD should be considered the relevant

“granting authorit{ies}” for purposes of the Article 2.1 analysis, the Panel instead

focused on the broader US Government-wide policies and legislation related to the

allocation of intellectual property under government contracts.87

68. In particular, the Panel found that “allocation of patent rights is uniform under all

U.S. government R&D contracts, agreements, and grants, in respect of all U.S.

government departments and agencies, for all enterprises in all sectors”.88 The

Panel considered the “U.S. Government” policy, as implemented through a number

of different legal instruments.89 Although the Panel acknowledged the existence of

“NASA-specific regulations”,90 it found that these regulations “cannot, for

purposes of Article 2 of the SCM Agreement, be analysed in isolation from the

broader policy and legal framework that they implement”.91 It reached this

conclusion despite the Panel’s earlier finding that NASA R&D funding and

support provided pursuant to the Space Act were specific under Article 2.1(a),

based in part on the undisputed fact that the Space Act “explicitly limits the scope

of NASA’s R&D activities (i.e. to aeronautics and space)”.92

69. With respect to DOD, the Panel found lack of specificity because DOD generally

allocates patent rights in accordance with certain federal laws and policies (which

are not specific to DOD), such as the Bayh-Dole Act (i.e., providing government

contractors with an option to retain patent rights, subject to certain exclusions) and

the 1983 Executive Memorandum (i.e., expanding the Bayh-Dole Act such that it

applies to large businesses that serve as government contractors).93 It reached this

conclusion despite its earlier finding that, to the extent it was necessary to evaluate

86 Panel Report, para. 7.1294. It did so assuming arguendo that the allocation of the patent rights was a “subsidy”, as it did not evaluate the EU’s claims under Article 1 of the SCM Agreement. 87 Panel Report, para. 7.1276. 88 Panel Report, para. 7.1266 (emphases added). 89 Panel Report, para. 7.1278. 90 Panel Report, paras. 7.1278, 7.1287, 7.1293. 91 Panel Report, para. 7.1293. 92 Panel Report, para. 7.1045. 93 Panel Report, paras. 7.1291-7.1292.



27

specificity of the RDT&E Program “as a whole,” “RDT&E funding goes

‘predominantly’ to firms in the defense industry, and this is enough to establish de

facto specificity under Article 2.1(c)”.94

3. The Panel Erred in its Interpretation and Application of Article 2.1 of the SCM Agreement in its Analysis of NASA and DOD Patent Waivers/Transfers

a. The Proper Interpretation of Article 2.1 of the SCM Agreement

70. The Panel erred in its interpretation and application of Article 2.1 of the SCM

Agreement when it found that the US Government, as a whole, was the “granting

authority” for the NASA and DOD patent waivers/transfers. The Panel did this in

view of its finding that the US Government, as a whole, had an overall “policy”

related to intellectual property rights in government contracts.95 In addition to

adopting an interpretation of “granting authority” contrary to its ordinary meaning

in its context, the interpretation of “granting authority” implicit in the Panel

Report, if upheld by the Appellate Body, would establish a road map for obscuring

the specificity of measures that would otherwise be considered specific subsidies.

Under the Panel’s interpretation, a government entity within a Member that

provides massive subsidies to “certain enterprises” could avoid a finding that those

subsidies are specific under Article 2.1 by simply referring to a series of

government-wide policy statements and the intent of those policies to support all

industries throughout the entire economy.

71. The Panel did not set out a systematic interpretation, under the Vienna Convention,

of the phrase “granting authority”. Nevertheless, the content of the Panel’s

analysis reveals that it was a flawed interpretation of that phrase which led to the

ultimate finding of no specificity. Specifically, in evaluating specificity of the

NASA and DOD patent waivers/transfers, the Panel implicitly interpreted

“granting authority” as encompassing not the authority that actually granted the

94 Panel Report, para. 7.1197. 95 Panel Report, para. 7.1277.



28

subsidies at issue, but rather the highest authority of the US Government that could

somehow be linked to the granting of the subsidy.

72. Beginning with the ordinary meaning of “granting authority”, as the Panel should

have done, the adjective “granting” is defined as something “{t}hat grants, in

senses of the {verb}”.96 To grant is to “agree to, promise, undertake”; to “allow or

concede as an indulgence; to permit or suffer (a person) to have (something); to

bestow or confer as a favour, or in answer to a request”; and, with particular

respect to “a sovereign or supreme authority” “{t}o bestow or confer (a possession,

right, etc.) by a formal act”.97 An “authority” is “the body or persons exercising

power or command”.98 Thus, the “granting authority”, in the context of Article

2.1, is the “body or persons exercising power” that “bestow{s} or confer{s}” a

subsidy “as a favour, or in answer to a request”.

73. Considering the context of the SCM Agreement, it is evident that the drafters used

a number of different terms to reference the actor at issue in particular provisions.

For example, while the drafters used the term “granting authority” in Article 2.1,

they chose instead to use the term “Member” in Articles 5 and 6. If the drafters of

the SCM Agreement had intended for the Article 2.1(a) analysis to focus on the

activities of the US Government, as a whole, and without regard to the entity

within the government that actually provided the subsidy, then they would have

used the term “Member” in that provision, as well. They did not.

74. The use of these terms in the SCM Agreement and other WTO agreements

confirms a distinction between a “Member”, on the one hand, and “authorities”

comprising a Member’s internal governmental structures, on the other. The SCM

Agreement repeatedly references “the authorities of a Member” and “the

authorities of the importing Member”99, and both the SCM Agreement and the

Agreement on Implementation of Article VI of the General Agreement on Tariffs

96 Oxford English Dictionary (2nd ed. 1989); online version November 2010, http://www.oed.com:80/Entry/80776 (accessed 4 March 2011). 97 Id. 98 Oxford English Dictionary (2nd ed. 1989); online version November 2010, http://www.oed.com:80/Entry/13349 (accessed 4 March 2011). 99 SCM Agreement Articles 12.12, 13.3, 18.2, 18.3, 18.5, 18.6, and 19.2.

http://www.oed.com/Entry/80776

http://www.oed.com/Entry/13349



29

and Trade 1994 (“AD Agreement”) frequently and consistently use “authority” or

“authorities” as signifying an investigating entity of a Member.100 Moreover,

language used in both agreements clearly contemplates the existence of multiple

“authorities” for any single Member.101 Other WTO agreements similarly

distinguish between an “authority”/“authorities” and a “Member” (or “contracting

party”),102 utilising the term “authority”/“authorities” in reference to internal

(central, regional, local) governmental entities.103

75. Thus, and as further detailed below, the Panel erred by effectively reading

“granting authority” as equivalent to “Member”, pursuant to its analysis of the

NASA and DOD patent waivers/transfers.

76. Moreover, an interpretation of Article 2.1 that looks to government-wide policies

of a Member, rather than the actions and legislation of the authority that actually

provides the subsidy, could frustrate the object and purpose of the SCM

Agreement, i.e., to “impose multilateral disciplines on subsidies which distort

international trade” in goods.104 Under the Panel’s interpretation, a Member could

simply issue a series of government-wide “policy statements” on its intent to

100 See, e.g., SCM Agreement Articles 12.3, 14; see generally AD Agreement Articles 2-12, 16-17. 101 See, e.g., SCM Agreement Article 25.12 (“Each Member shall notify the Committee (a) which of its authorities are competent to initiate and conduct investigations referred to in Article 11...”); id. at Article 23 (For the purpose of judicial review of CVD measures, “{e}ach Member whose national legislation contains provisions on countervailing duty measures shall maintain” tribunals or procedures providing for such review and which are “independent of the authorities responsible for the determination or review in question...”) (emphasis added); Agreement on the Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (“Anti-dumping Agreement”) Article 2.2.1, n. 3 (“When in this Agreement the term ‘authorities’ is used, it shall be interpreted as meaning authorities at an appropriate senior level”); id. at Article 6.1.3 (“...the authorities shall provide the full text of the written application received under paragraph 1 of Article 5 to the known exporters{} and to the authorities of the exporting Member...”); id. at Article 8.5 (“Price undertakings may be suggested by the authorities of the importing Member...”); id. at Article 14.1 (“An application for anti-dumping action on behalf of a third country shall be made by the authorities of the third country requesting action”). 102 See, e.g., General Agreement on Trade in Services (“GATS”) Article VI:3 (“the competent authorities of a Member shall, within a reasonable period of time after the submission of an application considered complete under domestic laws and regulations, inform the applicant of the decision concerning the application”) (emphasis added). 103 See, e.g., GATS Annex on Financial Services Article 5(c) (“‘Public entity’ means: {} a government, a central bank or a monetary authority, of a Member, or an entity owned or controlled by a Member...”); General Agreement on Tariffs and Trade Article XXIV:12 (“Each contracting party shall take such reasonable measures ... to ensure observance of the provisions of this Agreement by the regional and local governments and authorities within its territories”). 104 Panel Report, Brazil – Aircraft, para. 7.26; Panel Report, Brazil – Aircraft (Article 21.5 – Canada II), para. 4.4.



30

support all industries throughout the entire economy in a variety of ways, and this

could potentially be enough to avoid a finding of specificity when the authorities

providing the subsidy reference those “policy statements”. That is because the

focus would be on the “Member’s” general policy statements, rather than the

activities and limitations of the entity granting the subsidy.

77. According to Article 2.1(a), the source of the requisite “explicit{} limitat{ion of}

access to a subsidy to certain enterprises” can be either “the granting authority” or

“the legislation pursuant to which the granting authority operate{d}”. Thus,

specificity can be analysed from either of these two perspectives – from the point

of view of the “granting authority” or the “legislation”. Although the Panel does

not specifically address Article 2.1(b) of the SCM Agreement, it appears that non-

specificity under that paragraph may likewise be evaluated from the perspective of

either the “granting authority” or “legislation pursuant to which the granting

authority operates”. Yet, the United States did not properly present a developed

defence under the terms of Article 2.1(b). Further, the Panel did not evaluate the

United States’ arguments according to the terms of Article 2.1(b), nor did it make

any findings that the United States had met the factual requisites of that provision

(i.e., “objective criteria or conditions governing the eligibility for, and the amount

of, a subsidy”, “eligibility is automatic”, “such criteria and conditions are strictly

adhered to”). If it had properly considered Article 2.1(b), then the Parties’

arguments may have ultimately turned to Article 2.1(c), pursuant to which the

European Union had also presented argument and evidence.105

78. It is unclear whether the Panel evaluated specificity of NASA or DOD patent

waivers/transfers from the perspective of a “granting authority”, “legislation

pursuant to which the granting authority operate{d}”, or perhaps a combination of

both frameworks.106 What is clear, however, is that the Panel adopted a flawed

interpretation of “granting authority”, which failed to identify the “body or persons

exercising power” that “bestow{s} or confer{s}” a subsidy “as a favour, or in

answer to a request”. At the same time, the Panel failed to interpret Article 2.1 in a

105 See, e.g., EU FWS, paras. 854-856; EU SWS, paras. 578-582. 106 Panel Report, paras. 7.1276-7.1294.



31

holistic manner, but instead appears to have focused its analysis exclusively on

Article 2.1(a) of the SCM Agreement.

b. Application of the Proper Interpretation of Article 2.1 of the SCM Agreement to the Facts

i. NASA

79. Having adopted an erroneous interpretation of “granting authority” that focuses on

the Member (i.e., the United States Government, as a whole) rather than the actual

government entity providing the subsidy, the Panel also erred in its application of

Article 2.1, by finding that the NASA patent waivers are not specific. If the Panel

had adopted the correct legal interpretation, it would have reached the conclusion

that these NASA patent waivers are indeed “specific”, within the meaning of

Article 2.1(a), as detailed below.

80. First, it is undisputed, and the Panel specifically found, that NASA has its own

specific legislation and regulations related to patent waivers.107 The Space Act,

which provides NASA’s statutory basis for performing aeronautical research,

specifically provides that any invention made pursuant to a NASA contract “shall

be the exclusive property of the United States, and if such invention is patentable a

patent therefore shall be issued to the United States” unless waived by NASA.108

As the Panel also correctly noted, NASA generally waives patent rights to

contractors at their request, pursuant to NASA-specific regulations.109

81. Consequently, the Space Act and its implementing regulations constitute “the

legislation pursuant to which the granting authority operates”, within the meaning

of Article 2.1(a) of the SCM Agreement, and this legislation determines whether

107 Panel Report, paras. 7.1287-7.1289. NASA’s statutory authority is not superseded by the more generalized US patent law, with respect to large businesses like Boeing. See EU SWS, para. 572, citing 35 U.S.C. § 210(a)(7) (Exhibit EC-558). 108 Panel Report, para. 7.1287, quoting Space Act, 42 U.S.C. §2457(a) (Exhibit EC-571). 109 Panel Report, para. 7.1287, citing 14 C.F.R. §§ 1254.100 et seq (Exhibit EC-572). Notably, these regulations do not require that the contractor compensate NASA for granting the waiver, although they do provide that the government receives a nonexclusive, nontransferable, irrevocable paid-up license to practice the invention for its own benefit. 14 C.F.R. §§ 1254.107 (Exhibit EC-572).



32

NASA will grant the requested patent waiver. Moreover, as the Panel stated in the

context of its analysis of the NASA R&D programmes, “it is not in dispute that the

Space Act explicitly limits the scope of NASA’s aeronautics R&D activities (i.e.,

to aeronautics and space)”.110

82. Second, it is also undisputed that the patent waivers at issue are those granted as a

feature of the R&D contracts entered into between NASA and Boeing. Stated

differently, if NASA did not grant the R&D contracts to Boeing, then Boeing

would not be eligible to have NASA waive the resulting patent rights. In a

different context, the United States makes this point on several occasions, arguing

that “{t}he allocation of intellectual property rights under U.S. Government

contracts cannot be analyzed independently of the contracts that generate those

rights”.111 Just as it is not the US Government as a whole that provides the R&D

funding and support for NASA R&D, it is also not the US Government as a whole

that waives the patent rights resulting from those same contracts.

83. Third, as the Panel points out, when NASA waives patent rights, it does so in

response to a request either in advance of the invention, or after the contractor

reports back to NASA on the invention after-the-fact.112 The instrument that

executes this waiver provides, for example, that “the {NASA} administrator waives

the property rights of the United States Government ... and hereby conveys to the

waiver recipient the entire right, title, and interest in and to each invention which

may be conceived or first actually reduced to practice in the performance of work

under the above-mentioned contract”.113

84. Thus, it is particularly clear from this process of requesting and granting patent

waivers that the “granting authority” – i.e., the “body ... exercising power” that

“bestow{s} or confer{s}” a subsidy “as a favour, or in answer to a request” – is

110 Panel Report, para. 7.1042. 111 US SWS, p. 40, heading VI(A); see also US Response to Panel Question 18(c), para. 41 (“{S}ince the intellectual property arises out of the performance of the services required under the contract, it is impossible to consider the provisions assigning rights in the intellectual property independently from the contract”) (emphasis added). 112 Panel Report, para. 7.1287, citing 14 C.F.R. §§ 1245.104, 1245.105 (Exhibit EC-572). 113 Panel Report, para. 7.1288, quoting NASA, Instrument of Waiver (Domestic and Foreign Rights), Structures and Materials Technology for Aerospace Vehicles (Exhibit EC-1227) (emphases added).



33

NASA, and not the entirety of the US Government. The “request” made to the

granting authority is the request to waive the patent right, and the body that

“bestow{s} or confer{s}” the patent waiver is NASA.

85. Consequently, the European Union submits that, in view of the ordinary meaning

of “granting authority” in its context, and the factors discussed above, the Panel

erred in failing to consider that NASA is the “granting authority” of the patent

waivers/transfers provided pursuant to NASA R&D contracts. Alternatively, and

also in view of the ordinary meaning of “legislation pursuant to which the granting

authority operates”, the Panel erred in failing to consider that the NASA Space Act

qualifies as the relevant “legislation”.

86. Instead, the Panel focused on the activities of authorities other than the actual

granting authority, including those of other US Government agencies.114 The

activities of these other authorities are not relevant to the analysis under Article

2.1(a), which requires a focus on the “granting authority”.

ii. DOD

87. As with NASA, having adopted an erroneous interpretation of “granting authority”

that focuses on the Member (i.e., United States Government, as a whole) rather

than the actual government entity providing the subsidy, the Panel erred in

proceeding to find that the DOD patent transfers are not specific. If the Panel had

adopted the correct legal interpretation, it would have reached the conclusion that

these DOD patent transfers are indeed “specific”, within the meaning of Article

2.1(a), as detailed herein.

88. First, it is uncontested that, as the entity that grants the R&D contracts, DOD need

not waive or grant rights in favour of a contractor to inventions arising from DOD-

funded contracts.115 For example, as the Panel explains, DOD can remove a

contractor’s ability to retain patent rights “when it is determined by the agency that

restriction or elimination of the right to retain title to any subject invention will

114 Panel Report, para. 7.1276. 115 Panel Report, para. 7.1291.



34

better promote the policy and objectives of” the provisions of US Patent Law on

“Patent Rights Made with Federal Assistance”.116

89. As with NASA, DOD is in the position of the “granting authority”, as it is the

“body ... exercising power” that “bestow{s} or confer{s}” a subsidy “as a favour”.

DOD is the body that includes in its R&D contract the clauses providing that

contractors are generally entitled to the rights from the inventions developed

pursuant to the R&D contracts, and it is the body that chooses not to exercise its

authority to remove this possibility. As the United States explained to the Panel, it

is DOD that “committed those {patent} rights at the time they signed the {R&D}

contract”.117

90. Second, as with NASA, the DOD patent waivers/transfers at issue are those

provided as a feature of the R&D contracts and agreements issued pursuant to the

DOD RDT&E Program. Stated differently, if DOD did not grant the R&D

contracts to Boeing, then Boeing would not be eligible to have DOD

waive/transfer the resulting patent rights. In a different context, the United States

makes this point on several occasions, arguing that “{t}he allocation of intellectual

property rights under U.S. Government contracts cannot be analyzed

independently of the contracts that generate those rights”.118 Just as it is not the

US Government as a whole that provides the R&D funding and support pursuant to

DOD RDT&E Program, it is also not the US Government as a whole that

waives/transfers the patent rights deriving from those same contracts.

91. Third, it is important to recall that the Panel found, as an alternative basis for

specificity of the DOD RDT&E Program as a whole, that “RDT&E funding goes

‘predominantly’ to firms in the defense industry, and this is enough to establish de

facto specificity under Article 2.1(c)”.119 In turn, the transfers/waivers of patent

116 Panel Report, para. 7.1291, quoting 35 U.S.C. §§200-212, Patent Rights in Inventions Made with Federal Assistance, § 202(a) (Exhibit EC-558) (emphasis added). 117 US FWS, para. 331. 118 US SWS, p. 40, heading VI(A); see also US Response to Panel Question 18(c), para. 41 (“{S}ince the intellectual property arises out of the performance of the services required under the contract, it is impossible to consider the provisions assigning rights in the intellectual property independently from the contract”) (emphasis added). 119 Panel Report, para. 7.1197.



35

rights deriving from this funding likewise go “predominantly to firms in the

defense industry”. Although the United States certainly challenged the legal

relevance of the facts relied upon by the EU’s Article 2.1(c) analysis for the DOD

RDT&E Programme, it did not dispute the key underlying facts themselves, such

as the average share of RDT&E funding distributed to Boeing (12.6%), and to five

aerospace companies (45.2%).120 These un-rebutted facts provide a strong basis

for a finding of specificity, under Article 2.1 of the SCM Agreement, as long as the

actual “granting authority” is chosen.

c. Conclusion

92. In sum, the European Union submits that, in view of the proper interpretation of

“granting authority” in Article 2.1 and the factors discussed above, the Panel erred

in failing to consider NASA and DOD, respectively, as the “granting authority” of

the patent waivers/transfers at issue. The Panel’s erroneous focus on the United

States as the granting authority necessarily reflects an erroneous legal

interpretation of the treaty term “granting authority”. Consequently, the Panel’s

findings must be reversed.

C. The Panel Erred by Excluding All Transactions Properly Characterised as Purchases of Services from the Scope of the SCM Agreement

93. The Panel erred by adopting an interpretation of Article 1.1(a)(1) that excluded

from its scope (and therefore the scope of the SCM Agreement) transactions

properly characterised as a “purchase of services” by a government – even if

those transactions included “direct transfers of funds”, “provisions of goods”, or

other activities specifically covered by Article 1.1(a)(1).121 In particular, the

Panel failed to properly apply the customary rules of treaty interpretation

codified, at least in part, in Articles 31 to 33 of the Vienna Convention, and in

doing so created a loophole in the coverage of the SCM Agreement that will

frustrate its object and purpose. As a direct consequence of this error of law, the

120 US FWS, para. 338. 121 Panel Report, paras. 7.953-7.970.



36

Panel came to the erroneous conclusion that much of the provision of funding

and other support to Boeing pursuant to the DOD RDT&E Program is excluded

from the scope of the SCM Agreement.122


94. Before the Panel, the European Union explained that NASA and DOD provide

R&D funding and support that benefits Boeing’s LCA division. In particular, the

European Union presented evidence and argument to demonstrate that NASA

provided billions of dollars in R&D funding and support to Boeing’s LCA

division, through a series of specific R&D programmes.123 As for DOD, the

European Union explained that DOD has provided billions of dollars in R&D

contracts and agreements, through the DOD RDT&E Program, which have directly

benefited Boeing LCA without any requirement that Boeing repay any portion of

the commercial benefits.124

95. The European Union argued that the cash flows accruing to Boeing from the

NASA and DOD aeronautics R&D programmes were “direct transfer{s} of funds”

within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement, and therefore

“financial contribution{s}”.125 The European Union advanced a Vienna

Convention analysis of Article 1.1(a)(1) to demonstrate that there is neither an

explicit nor implicit exclusion for alleged purchases of services that otherwise fit

into any of the other categories of financial contributions listed in Article 1.1(a)(1),

and that the US interpretation would create an enormous loophole in the SCM

Agreement that would allow Members to frustrate its object and purpose.126

122 Panel Report, paras. 7.1136-7.1171. 123 Panel Report, para. 7.940. 124 Panel Report, paras. 7.1111-7.1123. 125 Panel Report, para. 7.971, citing EU FWS, paras. 455, 524, 548, 572, 588, 603, 618, 631, and 650 (NASA); DS353 Panel Report, para. 7.1125, citing EU FWS, para. 762 (DOD). The European Union also explained that NASA and DOD provide Boeing access to facilities, equipment, and employees pursuant to the challenged programmes, and therefore provide goods and services to Boeing within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement. DS353 Panel Report, para. 7.972, citing EU FWS, paras. 524, 548, 572, 588, 603, 618, 631, 650, and 890-901(NASA); DS353 Panel Report, para. 7.1126, citing EU FWS, para. 762 (DOD). 126 Panel Report, para. 7.949, citing EU SWS, paras. 349-364.



37

96. With particular respect to the object and purpose, the European Union argued as

follows:

It could not have been the intention of the drafters of the SCM Agreement that the acquisition of services by the government from a goods producer, at whatever price and conditions, should escape all discipline under the Agreement. The implication of this would be that a producer of goods could obtain potentially unlimited amounts of non-market benefits by receiving excessive payments from the government in return for providing “services”. The nature of this benefit is exactly the same as that conferred by a direct transfer of funds – i.e., a payment from the government.127

97. The United States responded that the funding and support to Boeing pursuant to

the NASA and DOD contracts, under the challenged aeronautics R&D

programmes, constitute part of a “purchase of services”.128 Further, the United

States argued that purchases of services are a category of transactions that do not

qualify as “financial contributions” pursuant to Article 1.1(a)(1), regardless of

whether they take a form that would otherwise fall within the scope of Article

1.1(a)(1).129 While the United States did not point to any language explicitly

excluding purchases of services from the coverage of Article 1.1(a)(1) for

transactions that would otherwise qualify – for example, as a “transfer of funds” –

it argued that the context of Article 1.1(a)(1)(i), and the negotiating history of the

SCM Agreement, require such a finding.130


98. Before proceeding to evaluate any of the specific NASA or DOD measures at issue

in the dispute, the Panel began its analysis of the aeronautics R&D subsidies by

considering the pure legal question raised by the United States on the scope of

Article 1.1(a)(1). Specifically, the question presented was whether “transactions

properly characterised as ‘purchases of services’ are excluded from the scope of

127 EU Response to Panel Question 119(b), para. 60. 128 Panel Report, paras. 7.975, 7.1130-7.1133. 129 Panel Report, paras. 7.950, 7.1130. 130 Panel Report, para. 7.950, citing US FWS, paras. 48, 218, and US Responses (and/or Comments on the EU Responses) to Panel Questions 15, 17, and 113-120.



38

Article 1.1(a)(1) of the SCM Agreement”. The Panel agreed with the United

States, finding that such transactions are indeed excluded.131

99. Beginning with the ordinary meaning of the phrase “a government practice

involves a direct transfer of funds” in isolation, the Panel agreed with the European

Union that these words “might be broad enough to cover purchases of services”.132

It then proceeded to evaluate the “context” of Article 1.1(a)(1)(i), with a special

focus on Articles 1.1(a)(1)(iii) and 14(d) of the SCM Agreement.133 The Panel

noted that both reference the provision of “goods or services” and the purchase of

“goods”, but do not mention the purchase of services.134 From this omission, the

Panel concluded that the parties intended to exclude purchases of services from the

scope of Article 1.1(a)(1).135 The Panel also found that an interpretation of the

other provisions of Article 1.1(a)(1) in a manner that would encompass purchases

of services would render inutile the term “purchase of goods” in Article

1.1(a)(1)(iii).136

100. With respect to the object and purpose of the SCM Agreement, the Panel rejected

the argument by the European Union, Brazil and Australia that an exclusion of

purchase of services would open up a loophole in the subsidy disciplines,

reasoning that “WTO panels and national investigating authorities will be able to

detect transactions that are not properly characterized as purchases of services”.137

Further, the Panel found confirmation for its view in the preparatory work, and in

the evolution of the drafts of what would ultimately become Article 1.1(a)(1) of the

SCM Agreement.138

131 Panel Report, paras. 7.953-7.970. 132 Panel Report, para. 7.954. 133 Panel Report, para. 7.955-56. 134 Panel Report, para. 7.955-56. 135 Panel Report, para. 7.955. 136 Panel Report, para. 7.956. 137 Panel Report, para. 7.960. 138 Panel Report, para. 7.962.



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101. The Panel then proceeded to evaluate whether the NASA and DOD aeronautics

R&D contracts at issue could properly be characterised as “purchases of

services”.139

3. The Panel Erred in its Narrow Interpretation of the Scope of Article 1.1(a)(1) of the SCM Agreement

102. The Panel erred in adopting an interpretation of Article 1.1(a)(1) that excluded

from its scope (and therefore the scope of the SCM Agreement) transactions

properly characterised as a “purchase of services” by a government – even if those

transactions included “direct transfers of funds”, “provisions of goods”, or other

activities specifically covered by Article 1.1(a)(1). In doing so, the Panel failed to

properly apply the customary rules of treaty interpretation codified, at least in part,

in Articles 31 to 33 of the Vienna Convention, Article 31(1) of which provides that

“a treaty shall be interpreted in good faith in accordance with the ordinary meaning

to be given to the terms of the treaty in their context and in the light of its object

and purpose”.

103. In particular, the Panel failed to consider in a holistic manner the “ordinary

meaning” of the terms of Article 1.1(a)(1), in their context, and in light of the

“object and purpose”. As a result, the interpretation formulated by the Panel, if

upheld by the Appellate Body, will established a road map for entirely avoiding

the disciplines of the SCM Agreement. Under the Panel’s interpretation, the SCM

Agreement would allow Members to massively distort international trade in goods,

by transferring enormous amounts of funding to specific industries and companies

on non-market terms, as long as those “transfers of funds” are pursuant to

transactions properly characterised as purchases of services. This exemption will

shield the Member against findings not just of providing actionable subsidies

causing adverse effects, but also of granting prohibited subsidies.

104. The Panel began by considering the ordinary meaning of the phrase “a government

practice involves a direct transfer of funds” in Article 1.1(a)(1)(i), and correctly

139 Panel Report, paras. 7.977-7.1027 (NASA), 7.1136-7.1171 (DOD).



40

found that this phrase (at least considered in isolation) was broad enough to cover

fund transfers that occur as part of a purchase of services.140

105. A “transfer of funds” refers to the conveyance of financial resources from one

person to another. This follows from the definition of “transfer”, which is “a

conveyance from one person to another”,141 and the definition of “fund,” which is

“a stock or sum of money, esp. one set apart for a particular purpose” or “financial

resources”.142 There is nothing in the ordinary meaning of “a government practice

{that} involves a direct transfer of funds” that indicates it could not encompass the

direct transfer of funds that takes place as part of a purchase of services. Neither

the Panel nor the United States appears to have disagreed with this understanding

of the “ordinary meaning”, at least in isolation.

106. The Panel’s error arose when it proceeded to evaluate the surrounding “context”

and “object and purpose”, and in doing so failed to apply the interpretative rule set

out in Article 31 of the Vienna Convention in a holistic way.

107. As described in the previous subsection, the Panel relied on two particular aspects

of “context” to yield its interpretation, both of which rely on the content of a

different subsection of Article 1.1(a)(1), namely, sub-paragraph (iii). In particular,

sub-paragraph (iii) lists the following as one of the types of “financial

contributions” covered by Article 1.1(a)(1): “a government provides goods or

services other than general infrastructure, or purchases goods”.143 The Panel also

pointed out that those three types of transactions – i.e., provision of goods,

provision of services, and purchase of goods – are also listed in Article 14(d),

which provides guidelines on calculation of benefit for Part V of the SCM

Agreement.144

108. The Panel noted that these provisions both reference the provision of “goods or

services” and the purchase of “goods”, but do not mention the purchase of

140 Panel Report, para. 7.954. 141 The New Shorter Oxford English Dictionary 3367 (4th ed. 1993). 142 The New Shorter Oxford English Dictionary 1042 (4th ed. 1993). 143 Emphases added. 144 Panel Report, para. 7.955.



41

services.145 From this omission, the Panel came to two conclusions, both of which

are erroneous.

109. First, the Panel found that the drafters intended to exclude purchases of services

from the definition of financial contribution in Article 1.1(a)(1), even if those

services are purchased in a manner that would be covered by other elements of the

“financial contribution” definition.146

110. Second, the Panel found that an interpretation of the other provisions of Article

1.1(a)(1), such as Article 1.1(a)(1)(i), that would encompass purchases of services,

would render inutile the term “purchase of goods” in Article 1.1(a)(1)(iii). The

Panel reasoned that this would be the case because other aspects of a “purchase of

goods” would be covered by the other paragraphs of Article 1.1(a)(1).147

111. In assessing the Panel’s use of “context” in its interpretation of Article 1.1(a)(1) of

the SCM Agreement, it is important to recall the Appellate Body’s guidance from

US – Continued Zeroing:

The principles of interpretation that are set out in Articles 31 and 32 are to be followed in a holistic fashion. The interpretative exercise is engaged so as to yield an interpretation that is harmonious and coherent and fits comfortably in the treaty as a whole so as to render the treaty provision legally effective. A word or term may have more than one meaning or shade of meaning, but the identification of such meanings in isolation only commences the process of interpretation, it does not conclude it. ... {A} treaty interpreter is required to have recourse to context and object and purpose to elucidate the relevant meaning of the word or term. This logical progression provides a framework for proper interpretative analysis. At the same time, it should be kept in mind that treaty interpretation is an integrated operation, where interpretative rules or principles must be understood and applied as connected and mutually reinforcing components of a holistic exercise.148

145 Panel Report, para. 7.955-56. 146 Panel Report, para. 7.955. 147 Panel Report, para. 7.956. 148 Appellate Body Report, US – Continued Zeroing, para. 268.



42

112. An interpretation that excessively narrows the meaning of a term in a manner that

frustrates the object and purpose of the treaty, can not constitute a “holistic”

interpretation.

113. In China – Publications and Audiovisual Products, emphasising the holistic nature

of treaty interpretation, the Appellate Body explained that “the purposes of the

interpretative exercise is to narrow the range of possible meanings of the treaty

term to be interpreted, not to generate multiple meanings or confirm the ambiguity

and inconclusiveness of treaty obligations. Rather, a treaty interpreter is required

to have recourse to context and object and purpose to elucidate the relevant

meaning of the word or term”.149

114. By contrast, in finding that the ordinary meaning of “direct transfer of funds” in its

context excludes a significant class of direct transfers of funds (i.e., those that

occur pursuant to transactions properly characterised as a purchase of services),

the Panel did not, in the words of the Appellate Body, “narrow the range of

possible meanings of the treaty term” by having “recourse to context and object

and purpose to elucidate the relevant meaning of the ... term”. As such, the Panel

did not properly “ascertain the common intention of the parties to” the treaty,

which, according to the Appellate Body in US – Anti-Dumping and Countervailing

Duties (China), is the goal of treaty interpretation under Article 31 of the Vienna

Convention.150 Instead, it came to this conclusion while putting aside the concerns

over object and purpose, finding that there is “every reason to believe” that future

panels will somehow be able to effectively deal with the enormous loophole

potentially created by the interpretation.151

115. Moreover, the Panel’s understanding of the context provided by Article

1.1(a)(1)(iii) fails on its own terms. Specifically, the Panel erred in its

understanding that the EU’s interpretation could render the “purchase of goods”

phrase inutile.152 It failed to appreciate, as pointed out by the panel in Japan –

149 Appellate Body Report, China – Publications and Audiovisual Products, para. 399. 150 Appellate Body, US – Anti-Dumping and Countervailing Duties (China), para. 312. 151 Panel Report, para. 7.960. 152 Panel Report, para. 7.956.



43

DRAMs, that “certain … transactions might be covered simultaneously by different

sub-paragraphs of Article 1.1(a)(1)”,153 and that such overlap is not unexpected.

Consequently, an interpretation that would allow purchases of goods to be covered

by two different paragraphs of Article 1.1(a)(1) (e.g., the first as a direct transfer of

funds, and the second as a purchase of goods) is neither unexpected nor somehow

discouraged, and there is no need to attempt to interpret the ordinary meaning in

order to avoid that result.

116. One example of a transaction that may fall under more than one sub-paragraph is

an equity infusion.154 It is explicitly mentioned in Article 1.1(a)(1)(i), but can also

be considered as a “purchase of goods”, within the meaning of Article

1.1(a)(1)(iii), given that ownership rights can be considered “goods”, according to

the jurisprudence of the Appellate Body.155 Accordingly, the text of the SCM

Agreement itself acknowledges on its face that overlaps between categories of

financial contributions are an integral feature of Article 1.1(a)(1), and therefore do

not indicate “inutility” of certain sub-paragraphs of that provision. Following the

Panel’s reasoning, however, “purchase of goods” would need to be interpreted in a

manner that excludes “equity infusions”, or else the reference to “equity infusion”

would be rendered inutile. Such strained interpretations are both unnecessary and

incorrect.

117. Furthermore, the Panel erred when it condemned the EU’s interpretation on the

basis that “the scope and coverage of Article 1.1(a)(1) of the SCM Agreement

would be precisely the same if those words {i.e., ‘purchases goods’} had not been

added to Article 1.1(a)(1)(iii)”.156 For example, a government may purchase

goods from a company, where the “consideration” for the purchase is or includes

153 Panel Report, Japan – DRAMs (Korea), para. 7.439. See also Panel Report, EC – Countervailing Measures on DRAM Chips, para. 7.92 (finding that the purchase of corporate bonds constitutes a direct transfer of funds). 154 While the Panel alludes to the fact that the “equity infusion” is both a direct transfer of funds and the purchase of something, it did not appear to accord significance to this fact in its review of the context. Panel Report, para. 7.954 (“{O}ne of the examples of a ‘direct transfer of funds’ given in Article 1.1(a)(1)(i) is that of ‘equity infusion,’ which refers to a situation in which a government ‘purchases’ something (i.e. shares in a company)”) 155 Appellate Body Report, US – Softwood Lumber IV, paras. 46-76. 156 Panel Report, para. 7.956



44

the promise to exercise government discretion in enforcing regulations in a certain

way, or to provide preferential treatment in competitions for future government

contracts. Such a purchase of goods on preferential terms would be covered only

by Article 1.1(a)(1)(iii), and not by any of the other types of financial

contributions listed in Article 1.1(a)(1). In this example, therefore, Article

1.1(a)(1)(iii) serves an important purpose, even under the EU’s interpretation of

Article 1.1(a)(1).

118. Turning to the object and purpose, as a Multilateral Agreement on Trade in Goods

in Annex 1A of the WTO Agreement, the overall object and purpose of the SCM

Agreement is to “impose multilateral disciplines on subsidies which distort

international trade” in goods.157 By contrast, Article XV of the General

Agreement on Trade in Services addresses subsidies that distort trade in services.

As the Appellate Body has held, “measures that involve a service relating to a

particular good” properly fall within the scope of the Multilateral Agreements on

Trade in Goods in Annex 1A of the WTO Agreement.158 Thus, transactions

properly characterised as purchases of services that nonetheless relate to a

particular good should not fall outside the scope of the SCM Agreement.

119. A failure to discipline subsidies that distort international trade in goods, because

they can be characterised as purchases of services, would create a considerable gap

in the coverage of the SCM Agreement. This gap would, for example, allow a

Member to entirely avoid the SCM Agreement simply by asking for some type of

service from a goods producer (whether a shoe shine, a musical performance, a

drive around the block, etc.) in exchange for something that would otherwise be

considered an actionable or prohibited subsidy under Parts II and III of the SCM

Agreement (whether a transfer of funds, foregoing of government revenue

otherwise due, or provision of goods or services).

157 Panel Report, Brazil – Aircraft, para. 7.26; Panel Report, Brazil – Aircraft (Article 21.5 – Canada II), para. 4.4. 158 Specifically, the Appellate Body held that there is a “category of measures that could be found to fall within the scope of both the GATT 1994 and the GATS. These are measures that involve a service relating to a particular good or a service supplied in conjunction with a particular good”. Appellate Body Report, EC – Bananas III, para. 221.



45

120. The Appellate Body considered an analogous situation in Canada – Autos, where

ordinary meaning and object and purpose led to one interpretation, while context

could have led to a very different interpretation. In that case, the relevant context

was the omission of a term in one provision (“in fact”) that appeared in the

preceding provision, where the two provisions together constituted the exclusive

list of the types of prohibited subsidies. In particular, Article 3.1(a) of the SCM

Agreement specifically indicates that “subsidies contingent, in law or in fact ...

upon export performance” are prohibited,159 while Article 3.1(b) omits the phrase

“in law or in fact” in providing that “subsidies contingent ... upon the use of

domestic over imported goods” are also prohibited. As with the omission of the

phrase “purchase of services” in Article 1.1(a)(1), there is likewise an omission in

Article 3.1(b) of the SCM Agreement. The Appellate Body emphasised the

possibility of circumvention of the SCM Agreement when it found that Article

3.1(b) nevertheless covers de facto contingency on the use of domestic over

imported goods, despite the omission.160 In particular, the Appellate Body

explained:

Finally, we believe that a finding that Article 3.1(b) extends only to contingency “in law” upon the use of domestic over imported goods would be contrary to the object and purpose of the SCM Agreement because it would make circumvention of obligations by Members too easy. We expressed a similar concern with respect to the GATS in European Communities – Bananas ….161

Similarly, in this dispute, given the other considerations required by the Vienna

Convention interpretation of Article 1.1(a)(1), the focus on the omission of the

phrase “purchase of services” would lead to an interpretation that is contrary to the

object and purpose of the SCM Agreement. And as in Canada – Autos, it “would

make circumvention of obligations by Members too easy”. 162

121. In fact, the loophole that would be created by excluding purchases of services from

the scope of Article 1.1, even if it impacts trade in goods, would be far greater than

the risk of circumvention that concerned the Appellate Body in Canada – Autos.

159 Emphasis added. 160 See Appellate Body Report, Canada – Autos, paras. 142-143. 161 Appellate Body Report, Canada – Autos, para. 142.



46

That is because if a measure cannot get beyond the Article 1.1 analysis, then it can

never reach the point where the disciplines of either Part II or Part III are even

considered.

122. The Appellate Body similarly expressed concern about the possible creation of

loopholes in the SCM Agreement in US – Countervailing Measures on Certain EC

Products. In that case, the United States argued that when the recipient of the

benefit is a firm, the benefit cannot be extinguished by the sale of that firm under

any circumstances because the firm and the owner are two different legal

persons.163 The Appellate Body rejected this interpretation in view of its

implications for the overall coverage of the SCM Agreement, explaining as

follows:

Furthermore, the approach advocated by the United States could potentially undermine the SCM Agreement by opening wide a door enabling subsidizing governments to circumvent that Agreement’s provisions by bestowing benefits directly on the firm’s owners rather than on the firms themselves.164

123. The Panel’s test to evaluate whether a transaction is properly characterised as a

“purchase of services” does not eliminate the loophole created by an exclusion of

“purchase of services” from the scope of the SCM Agreement. In the context of

considering the DOD RDT&E Program, the Panel explained its test as inquiring

“whether the R&D that Boeing was required to conduct was principally for its own

benefit and use, or whether it was principally for the benefit and use of the U.S.

Government (or unrelated third parties)”.165 Pursuing this enquiry in a different

context reveals that the loophole persists. Consider, for example, a scenario where

the Secretary of the US Department of Defense pays Boeing $2 billion to fly him

on a company jet from Washington, DC to a conference in Geneva, Switzerland.

Was the “service” (i.e., the flight) “principally for {Boeing’s} own benefit and use,

or ... principally for the benefit and use of the U.S. Government”? In this case,

following the Panel’s test, there is no doubt that the “service” was properly

162 Appellate Body Report, Canada – Autos, para. 142. 163 Appellate Body Report, US – Countervailing Measures on Certain EC Products, para. 107 (summarising US argument). 164 Appellate Body Report, US – Countervailing Measures on Certain EC Products, para. 115. 165 Panel Report, para. 7.1137.



47

characterised as such, as it was for the principal benefit and use of an agent of the

US Government. Consequently, the direct transfer of $2 billion in funds for a

service likely valued at no more than $100,000 would escape the disciplines of the

SCM Agreement.

124. Thus, the test envisioned by the Panel allows Members to package together in one

transaction: (1) a transaction properly characterised as a purchase of services

(whether or not for market value); and (2) an enormous direct transfer of funds in

the form of a grant. The grants would be shielded from all disciplines of the SCM

Agreement, allowing Members to frustrate the object and purpose of the

Agreement. Consequently, even if the Panel is correct that “{t}here is every

reason to believe that WTO panels and national investigating authorities will be

able to detect transactions that are not properly characterized as purchases of

services”, this does not prevent Members from combining transactions properly

characterised as purchases of services with grants in a manner that shields the

grants from disciplines of the SCM Agreement.

125. With respect to supplementary means of interpretation under Article 32 of the

Vienna Convention, the negotiating history provides limited insight into the

conclusions that can already be drawn under the Article 31 interpretation. While

the Panel correctly points out that the phrase “purchase of services” was

eliminated from earlier drafts of what would ultimately become Article 1.1(a)(1) of

the SCM Agreement,166 neither the Panel nor the Parties could identify any explicit

explanation by the negotiators as to why this phrase was not included in the final

draft.

126. In particular, there are no indications that the negotiators of the SCM Agreement,

by not including “purchase of services” in sub-paragraph (iii), intended to exempt

purchases of services that affect trade in goods from the disciplines of the SCM

Agreement. As set out above, such an understanding would go against the object

and purpose of the SCM Agreement. Whereas it remains unclear why the drafters

omitted an explicit reference to “purchase of services” in sub-paragraph (iii), it is

unambiguously clear that the drafters did not insert an exemption in the SCM

166 Panel Report, para. 7.962.



48

Agreement according to which a transaction that “involves a direct transfer of

funds” or “provi{sion} {of} goods or services other than general infrastructure”

falls outside the scope of Article 1.1(a)(1) to the extent that it is also considered a

“purchase of services”.

127. In conclusion, the Appellate Body should reverse or modify the Panel’s finding

that transactions properly characterised as purchases of services are excluded from

the scope of Article 1.1(a)(1) of the SCM Agreement. Because there are a number

of contested facts related to the DOD RDT&E Program measures that were found

to constitute purchases of services, the European Union does not request that the

Appellate Body complete the analysis.

IV. SUBSIDIES CONTINGENT/CONDITIONAL IN FACT UPON EXPORT


128. The US authorities granted Boeing subsidies (HB 2294 and instances of

application) contingent/conditional upon the construction in Washington State of a

facility with a capacity to produce at least thirty-six superefficient airplanes (i.e.,

787s) per year. The European Union considers that that

contingency/conditionality is a proxy in fact for exports, because 787s are sure to

be exported (as well as sold in the domestic US market). Further, we consider that

the measure favours or differentiates exports because it excludes other products

that will certainly not be exported. In the alternative, we argue that the subsidy

was granted because of (and is tied-to) the anticipation of exports.

129. In addition, embedded within HB 2294, the B&O tax rate reduction is a subsidy

contingent/conditional upon sales, including export sales. We consider that this

favours or differentiates exports for the same reasons.

130. Thus, we consider that HB 2294 as a whole and the B&O tax rate reduction, and

instances of application, are subsidies contingent/conditional in fact upon export,

prohibited by Article 3.1(a) and footnote 4 of the SCM Agreement, albeit for

different reasons.



49

131. The discussion is complicated by the fact that at least three legal issues are

currently before the WTO Appellate Body: (i) is there a single standard of

contingency/conditionality on export, or is there a double standard that also

captures the grant of a subsidy "because of" the “anticipation of” exports; (ii) does

the term “actual or anticipated” in footnote 4 refer to exports that exist when the

measure is enacted (actual) or future exports (anticipated) - or does it refer to

exports occurring (actual) (whether in the past or the future) or the notional state

of mind of the granting authority (anticipation); and (iii) must there be favouring or

differentiation of exports. Thus, in the present case, the European Union claims

that each of the measures at issue is inconsistent with the prohibition on subsidies

contingent/conditional in fact upon actual or anticipated export, regardless of how

any one or more of these three issues is determined. The European Union reserves

the right to withdraw this appeal, in whole or in part, in light of any subsequent

clarification from the Appellate Body on one or more of these three issues.

132. With respect to HB 2294 as a whole and instances of application, the first EU

claim and argument is based on the contingency/conditionality single standard; the

terms “actual or anticipated” meaning past or future; and is not dependent on

whether there is any favouring/differentiation requirement. The same claim and

argument is made with respect to the B&O tax rate reduction and instances of

application. The second EU claim and argument is based on the “because of”

double standard; the terms “actual or anticipated” meaning realised or state of

mind; and is not dependent on whether there is any favouring/differentiation

requirement.

133. In order to provide the Panel with a full understanding of the European Union’s

systematic approach to the interpretation of Article 3.1(a) and footnote 4, the

European Union explained in a Reference Interpretation the circumstances in

which the reasons for the adoption of a backward looking measure might be

evidence of contingency/conditionality in some other forward looking measure.

However, we carefully explained to the Panel that we were not pursuing this line

of argument in the present case.167

167 EU Response to Panel Question 56.



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134. The United States defended itself by arguing that the European Union’s export

subsidy claims are based on a failure to understand that HB 2294 does not require

Boeing to actually produce thirty-six airplanes a year, merely to have the capacity

to do so. The United States also argued that the EU's claims were precluded by the

second sentence of footnote 4 of the SCM Agreement, which provides that the

grant of a subsidy to an enterprise that exports shall not for that reason alone be

considered to be an export subsidy.

135. With respect to HB 2294 as a whole and instances of application, the Panel

focussed its analysis on the second EU claim and argument, rejecting it on the

grounds that the European Union had not demonstrated the requisite tie between

the subsidy and the anticipation of exports. We appeal for two reasons. First,

because in failing to adequately deal with the first EU claim and argument, the

Panel erred in the interpretation and application of Article 3.1(a) and footnote 4

and failed to make an objective assessment, including an objective assessment of

the facts, as required by Article 11 of the DSU. Second, with respect to the second

EU claim and argument, we appeal because, in concluding that the requisite tie

was not demonstrated, the Panel also erred in the interpretation and application of

Article 3.1(a) and footnote 4 and failed to make an objective assessment, including

an objective assessment of the facts, as required by Article 11 of the DSU.

Furthermore, we request the Appellate Body to complete the analysis and find that

HB 2294 as a whole and instances of application are subsidies

contingent/conditional in fact upon export, prohibited by Article 3.1(a) and

footnote 4 of the SCM Agreement.

136. With respect to the B&O tax rate reductions, the Panel rejected the EU claim on

the basis of the second sentence of footnote 4 of the SCM Agreement. The Panel

also failed to adequately consider the EU arguments regarding favouring or

differentiation. For both of these reasons we appeal the Panel findings on the basis

that the Panel erred in the interpretation and application of Article 3.1(a) and

footnote 4 and failed to make an objective assessment, including an objective

assessment of the facts, as required by Article 11 of the DSU. Also with respect to

this matter, we request the Appellate Body to complete the analysis and find that

the B&O tax rate reductions and instances of application are subsidies



51

contingent/conditional in fact upon export, prohibited by Article 3.1(a) and

footnote 4 of the SCM Agreement.

B. Three Legal Issues: the Meaning of Contingent/Conditional; the Meaning of Actual or Anticipated; and the Requirement of Favouring or Differentiation

137. The European Union identifies the following three legal issues relating to the

question of what is the correct standard for determining whether or not a measure

is consistent with the prohibition on subsidies contingent/conditional upon export:

• is there a single standard of contingency/conditionality on export, or is there a double standard that also captures the grant of a subsidy “because of” the “anticipation of” exports;168

• the related question: does the term "actual or anticipated" in footnote 4 refer to exports that exist when the measure is enacted (actual) or future exports (anticipated); or does it refer to exports occurring (actual) (whether in the past or the future) or the notional state of mind of the granting authority (anticipation); and

• does there have to be a favouring or differentiation of exports in order for the measure to be prohibited.

138. Each of these issues remains subject to judicial scrutiny in pending WTO dispute

proceedings. Thus, in the present case, the European Union claims that each of the

measures is inconsistent with the prohibition on subsidies contingent/conditional

in fact upon actual or anticipated export, regardless of how any one or more of

these three issues is determined. The European Union reserves the right to

withdraw this appeal in whole or in part in light of any subsequent clarification

from the Appellate Body on one or more of these three issues.

168 Panel Report, para. 7.1537, first sentence: “In the Panel's view, a “tie” exists where a subsidy is granted because of the granting authority's expectation of exports."; Panel Report, para. 7.1540, final sentence: “… but also refers to granting a subsidy to a company because it is expected to export or will actually export.”.



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C. HB 2294 as a Whole and Instances of Application

1. Summary of the facts

139. The facts regarding the HB 2294 measure as a whole, including the B&O tax rate

reductions, and instances of application, are not controversial, and have never been

contested by the United States nor questioned by the Panel.169

140. HB 2294, by its own terms, is contingent on the requirement to establish a capacity

to produce “at least thirty-six” 787s per year. Various market forecasts, including

those by Boeing itself, demonstrate that a significant portion of 787 sales will be

exports. Applying conservative assumptions, Boeing's overall demand

assessments, as evidenced by the future delivery predictions from Boeing’s market

outlook reports from 2004 through 2006, would result in an estimate of between 27

and 33 deliveries of 787 aircraft per year in the US market. Boeing’s 2003 Current

Market Outlook confirms that over 77% of twin-aisle aircraft were expected to be

delivered outside the United States in a 20-year period. Of the 448 orders for 787s

as of year-end 2006, under 9% were directly placed by US airlines.

141. Moreover, in addition to the fact that the 787 is an export-oriented project, Boeing

itself is a highly export-oriented company. Indeed, Boeing is the largest exporter

in the United States, by sales. In 2006, for example, the US aerospace industry

had a $52 billion positive trade balance. It is also the largest exporter in

Washington State, which is the “most trade-dependent state” in the United States,

and accounts for approximately 50% of Washington State’s total exports. Based

on Boeing’s publicly reported information, it is estimated that Boeing’s annual

LCA export sales ranged from 46% to 75% of total LCA sales, by value, during

the period 1989 through 2005. From 1989 through 2005, an estimated 60% of

total Boeing LCA sales revenue was reported as export sales revenue.

142. In a speech by Washington State’s Governor approximately three weeks prior to

enacting HB 2294, he detailed the importance of exports to the state, and his

understanding that the 787 must be produced in Washington State to maintain

169 See, particularly, EU FWS, Section VI.B and paras. 981-987.



53

those strong exports. Further, in the November 2003 letter from Governor Locke

restating the commitments undertaken in the Master Site Agreement he recalled

the importance of Boeing LCA exports to China.

143. Finally, statements by the US Federal Government also reflect the export oriented

nature of Boeing’s LCA business. NASA, for example, has often characterized its

support of Boeing and the US aerospace industry as “ensuring that the U.S.

industry has the technology for a strong competitive position in the international

aviation market” and as providing “benefit [for] the civil aviation industry’s

international competitiveness.” Appearing before the US House of

Representatives, Wesley Harris, NASA’s Associate Administrator, testified that

the objective of the NASA AST Program was to provide “U.S. industry with a

competitive edge to recapture market share [and] maintain a strongly positive

balance of trade.”

144. In summary, the facts demonstrate that the contingency/conditionality expressly

provided for in the HB 2294 subsidy and instances of application was in fact a

proxy for exports.

2. Summary of the Claims and Arguments Before the Panel

145. The European Union advanced its claims and arguments in the alternative.170

146. The first EU claim and argument is based on the contingency/conditionality

standard; the first meaning of the terms “actual or anticipated” (past or future); and

whether or not there is any favouring/differentiation requirement.171 The second

EU claim and argument is based on the “because” standard; the second meaning of

the terms “actual or anticipated” (realised or state of mind); and whether or not

there is any favouring/differentiation requirement.172

170 EU FWS, para. 992. 171 EU FWS, paras. 971-991. 172 EU FWS, paras. 992-996.



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147. With respect to the first EU claim and argument, the main issue was not whether or

not the grant of the subsidy had a contingency/conditionality attached to it.

Clearly, the grant of the subsidy was contingent/conditional upon the decision to

site in Washington State a facility with the capacity to produce at least thirty-six

superefficient airplanes a year. Rather, the more limited question was whether or

not that contingency/conditionality could reasonably be construed as a proxy in

fact for production and sale, including export sales. The European Union

explained that to be the case, given that capacity is not created to stand idle, the

size of the US market, the export oriented nature of the project and Boeing, and

various other evidence. If a subsidy is contingent upon "X" and "X" is in fact a

proxy for exports, then clearly the subsidy is contingent in fact upon exports.173

148. A second question was whether or not, notwithstanding the neutral treatment of

787 aircraft sales in the domestic and export markets, there was nevertheless a

favouring or differentiation of exports. The European Union explained this to be

the case by reference to the non-exported products excluded from the measure

entirely.174

149. With respect to the second EU claim and argument the Panel found that the

measure provided for subsidies and that the grantor anticipated exports. The

central question was whether or not the grant of the subsidy was “tied-to” the

anticipation of exports. Citing in large part the same evidence, the European

Union explained that it considered this to be the case. In summary, given all the

evidence, it is simply inconceivable that the subsidies would have been provided to

firms that had been selling and would be expected to continue selling only into the

US market. The anticipation of exports was therefore a reason for the grant of the

subsidy, and absent that reason or anticipation the subsidy would not have been

granted. The anticipation of exports was therefore a necessary pre-condition to the

grant of the subsidy. Hence, the grant of the subsidy was tied to anticipated

exports.175

173 EU FWS, paras. 981-987; EU FNCOS, para. 100; EU Response to Panel Question 54, para. 177; EU Response to Panel Question 269, para. 473. 174 EU FWS, paras. 980 and 989; EU FNCOS, para. 100. 175 EU FWS, paras. 992-996.



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150. The United States argued that the EU's export subsidy claims are based on a failure

to understand that HB 2294 does not require Boeing to actually produce 36

airplanes a year, merely to have the capacity to do so. The United States also

argued that the EU's claims were precluded by the second sentence of footnote 4 of

the SCM Agreement.176

3. Summary of the Panel Report

151. The Panel began by summarising its understanding of the existing case law.177

The Panel concluded that de facto export contingency “must” be demonstrated on

the basis of the legal framework reflected in the second EU claim and argument.178

In this respect, the Panel considered that “anticipated” refers to the state of mind of

the granting authority179 and that “actual” refers to an export that is realised.180

Consistent with this, the Panel based its analysis on the “because” standard.181 In

doing so, the Panel made the following observation:

We acknowledge that establishing the existence of a “tie” under footnote 4 of Article 3.1(a) by determining whether the subsidy was granted because of the granting authority's expectation of exports could be considered problematic in some respects. The interpretation could lead to the result that two subsidy programmes, which may operate identically and have the same distorting effect in the market, may not necessarily be subject to the same finding regarding de facto export contingency under Article 3.1(a), where the evidence differs regarding the government’s reasons in providing the subsidy. Further, in some circumstances, establishing the necessary “tie” through a focus on the reasons for the grant of the subsidy may make circumvention of Article 3.1(a) relatively easy. … Perhaps an approach that considers the reasons for the grant of the subsidy may encourage governments to be more discrete without necessarily changing their underlying policies. …182

176 US FWS, paras. 684-702, particularly para. 687; US FNCOS, paras. 36-39; US SWS, paras. 149-158, particularly para. 157; US Responses to Panel Questions 54 and 55; US Comments on EU Responses to Panel Questions 54-57. 177 Panel Report, paras. 7.1517-7.1529. 178 Panel Report, para. 7.1530. 179 Panel Report, para. 7.1533. 180 Panel Report, para. 7.1535. 181 Panel Report, para. 7.1537. 182 Panel Report, para. 7.1538.



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152. The Panel then applied its understanding of the law to the facts. First, the Panel

found that the HB 2294 and instances of application involved subsidies.183

Second, the Panel found, as a matter of fact, that the grantor of the subsidy

anticipated export performance.184 Third, the Panel found that the European Union

had not demonstrated that the grant of the subsidy was tied-to the anticipated

exportation.185

153. In this respect, the Panel first reviews certain evidence, including: the capacity

requirement; a speech by the Washington State Governor expressing a desire to

keep Boeing in Washington because of its export performance (considered by the

Panel as of “low probative value”186); a letter attached to the Master Site

Agreement regarding the Governor's promotion of Boeing sales in China

(considered by the Panel to do little to support the EU case187); and the fact that

HB 2294 acts as a filter, such that only companies which produce products that

will necessarily be exported may be recipients of the subsidies.188

154. The Panel then reviews other evidence, concluding that at least one of the reasons

for the grant of the subsidy was to encourage Boeing to locate its 787 final

assembly facility in Washington State because this would have positive effects on

the State's economy, including its employment rate. This evidence includes: the

preamble and Sections 1 and 16 of the legislation itself; recitals D and E of the

Master Site Agreement; Recital C of the Memorandum of Agreement; the House

and Senate Floor Debates for HB 2294; and two press releases from the Office of

Governor Gary Locke dated 9 June 2003.189 The Panel also referred to a

declaration by Andrew Gordon, Head of Market Analysis and Research at Airbus,

183 Panel Report, para. 7.1531, note 3261 and para. 7.302; Panel Report, para. 7.1545, final sentence. 184 Panel Report, paras. 7.1546-7.1565. 185 Panel Report, paras. 7.1566-7.1583. 186 Panel Report, para. 7.1578. 187 Panel Report, para. 7.1579. 188 Panel Report, para. 7.1567. 189 Panel Report, paras. 7.1568-7.1574.



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to the effect that the US market is incapable of absorbing a production level of

thirty-six superefficient airplanes per year.190

155. The Panel considered that “on a generous view” the evidence supported a finding

that there was an expectation of exports, but that this was not sufficient to establish

a “tie” and that further “corroborating” evidence would be necessary. The Panel

thus concluded that the European Union had not established that the grant of the

subsidies was tied-to anticipated export.191

4. HB 2294 as a Whole and Instances of Application are Subsidies Contingent/Conditional in Fact Upon Export

156. Referring to and summarising the claims and arguments set out in its submissions

to the Panel, the European Union submits that HB 2294 as a whole, including the

B&O tax rate reductions, and instances of application, are subsidies

contingent/conditional in fact upon export.

157. The grant of the subsidies was contingent/conditional upon the decision to site in

Washington State a commercial airplane final assembly facility with the capacity

to produce at least thirty-six superefficient airplanes a year. In light of all the facts

and evidence, that contingency/conditionality could and should reasonably be

construed as a proxy in fact for production and sale, including export sales. This is

particularly the case in light of the fact that capacity is not created to stand idle, the

size of the US market, the export oriented nature of the project and Boeing, and the

various other evidence before the Panel. If a subsidy is contingent upon “X” and

“X” is in fact a proxy for exports, then clearly the subsidy is contingent in fact

upon exports.192

158. Furthermore, notwithstanding the neutral treatment of sales of 787 aircraft in the

domestic and export markets, there was nevertheless a favouring or differentiation

of exports by reference to the non-exported products excluded from the measure

190 Panel Report, para. 7.1577. 191 Panel Report, paras. 7.1575-7.1577 and 7.1583. 192 EU FWS, paras. 981-987; EU FNCOS, para. 100; EU Response to Panel Question 54, para. 177; EU Response to Panel Question 269, para. 473.



58

entirely.193 Accordingly, the grant of the subsidy was contingent/conditional in

fact upon exports and thus prohibited by Article 3.1(a) and footnote 4 of the SCM

Agreement.

159. With respect to the second EU claim and argument, the grant of the subsidy was

“tied-to” the anticipation of exports. Given all the evidence, it is simply

inconceivable that the subsidies would have been provided to firms that had been

selling and would be expected to continue selling only into the US market. The

anticipation of exports was therefore a reason for the grant of the subsidy, and

absent that reason or anticipation the subsidy would not have been granted. The

anticipation of exports was therefore a necessary pre-condition to the grant of the

subsidy. Hence, the grant of the subsidy was tied to anticipated exports.194

Accordingly, the grant of the subsidy was contingent/conditional in fact upon

exports and thus prohibited by Article 3.1(a) and footnote 4 of the SCM

Agreement.

5. Legal Errors in the Panel Report and Request for Reversals

160. The Panel has failed to properly assess the first EU claim and argument. Rather, it

has conducted its analysis by focussing on the because standard, and rejected the

second EU claim and argument on the basis that a tie has not been demonstrated.

The European Union submits that this constitutes an error in the interpretation and

application of Article 3.1(a) and footnote 4 and a failure to make an objective

assessment of the matter, including an objective assessment of the facts, as

required by Article 11 of the DSU. For these reasons we request the Appellate

Body to reverse the Panel's finding that the European Union has failed to

demonstrate that HB 2294, including the B&O tax rate reductions, and instances of

application, are subsidies contingent/conditional in fact upon export.195

161. With respect to the Panel’s assessment of the second EU claim and argument, and

in particular the Panel’s rejection of the argument that the grant of the subsidy was

193 EU FWS, paras. 980 and 989; EU FNCOS, para. 100. 194 EU FWS, paras. 992-996. 195 Panel Report, paras. 7.1590 and 8.2(b).



59

tied-to the anticipation of exports, the European Union submits that, based on the

evidence, it is simply inconceivable that the subsidies would have been provided to

firms that had been selling and would be expected to continue selling only in the

US market. The anticipation of exports was therefore a reason for the grant of the

subsidy, and absent that reason or anticipation the subsidy would not have been

granted. The anticipation of exports was therefore a necessary pre-condition to the

grant of the subsidy. Hence, the grant of the subsidy was tied to anticipated

exports. In concluding otherwise the European Union submits that the Panel erred

in the interpretation and application of Article 3.1(a) and footnote 4 and a failed to

make an objective assessment of the matter, including an objective assessment of

the facts, as required by Article 11 of the DSU. For these reasons we request the

Appellate Body to reverse the Panel's finding that the European Union failed to

demonstrate that HB 2294, including the B&O tax rate reductions, and instances of

application, are subsidies contingent/conditional upon export.196

6. Completion of the Analysis

162. Having reversed the Panel's findings, the European Union requests the Appellate

Body to complete the analysis, in light of the facts and evidence before the Panel,

and find that HB 2294 as a whole and instances of application are subsidies

contingent/conditional in fact upon export.197

D. HB 2294 B&O Tax Rate Reductions and Instances of Application

1. Summary of the Facts

163. The facts regarding the HB 2294 B&O tax rate reductions and instances of

application are not controversial, and have never been contested by the United

States nor questioned by the Panel.198

196 Panel Report, paras. 7.1590 and 8.2(b). 197 Paragraphs 156-159 of this submission. 198 EU FWS, paras. 103-109.



60

164. HB 2294 requires the State of Washington to reduce B&O tax rates for businesses

that produce and sell commercial airplanes or components within Washington

State. The B&O tax is a gross receipts tax imposed on business activities within

the State, such as manufacturing or sales. For businesses engaged in manufacturing

activities in Washington State, the B&O tax rate is applied to the “value of

products” manufactured, which is generally derived from the “gross proceeds of

sales.” For businesses engaged in sales activities in Washington State, the B&O

tax rate is applied to the “gross proceeds of sales.”

165. Generally, the B&O tax rate in Washington State is 0.484% for manufacturing and

wholesaling activities, and 0.471% for retailing activities. For commercial

airplane manufacturers, the B&O tax rate, prior to HB 2294, was 0.484% for sales

to consumers for use in interstate commerce (i.e., to airlines) or for sales to

resellers (i.e., to leasing companies), and 0.471% for sales to other consumers (i.e.,

to government entities or private individuals).

166. HB 2294 reduced the B&O tax rate for commercial airplanes and components in

two stages: first, to 0.4235% effective 1 October 2005; and second, to 0.2904%

effective 1 July 2007, or “the date final assembly of a superefficient airplane

begins in Washington state,” whichever is later. Relative to the pre-October 2005

rates: (1) the first change results in a 12.5% tax rate reduction; and (2) the second

change results in a 40% tax rate reduction. “Final assembly of a superefficient

airplane” is defined to mean “the activity of assembling an airplane from

components parts [sic] necessary for its mechanical operation such that the

finished commercial airplane is ready to deliver to the ultimate consumer.” These

reduced rates are in effect until 1 July 2024.

167. The Project Olympus Master Site Agreement confirms that the State must extend

these B&O tax rate reductions specifically to Boeing. Exhibit B-1 to the Project

Olympus Master Site Agreement essentially reiterates the requirements for the

B&O tax rate reductions specified in HB 2294, including the extent of the rate

reductions, effective date, term, and reporting requirements. LCA component

manufacturers that locate in Washington State and produce components there for

Boeing LCA will also receive these B&O tax rate reductions.



61

168. Thus, in summary, the measure at issue in effect provides for the grant of a subsidy

(in the form of a 40% reduction in the normally applicable rate of Washington

State sales tax) contingent/conditional upon the sale of a commercial airplane or

component, whether in the US market or in an export market.

2. Summary of the Claims and Arguments Before the Panel

169. The European Union argued that the HB 2294 B&O tax rate reductions and

instances of application are subsidies contingent/conditional in fact upon export.

In particular, the European Union pointed out that, by their own terms, the

measures at issue are contingent/conditional upon a sale, including an export sale.

Insofar as the legal standard requires a favouring or differentiation of exports, the

European Union argued that the measures at issue favour certain goods, a

substantial percentage of which are inevitably exported or incorporated within an

exported product. Companies manufacturing other goods, including goods not

destined for export, are excluded from the measures.199

170. Thus, this EU argument is based on a standard of contingent/conditional; the first

meaning of “actual or anticipated” (future); and whether or not there is a

favouring/differentiation requirement.

171. The United States argued that the EU’s export subsidy claims are based on a

failure to understand that HB 2294 does not require Boeing to actually produce 36

airplanes a year, merely to have the capacity to do so. The United States also

argued that the EU's claims were precluded by the second sentence of footnote 4 of

the SCM Agreement.200

199 EU FWS, paras. 977-996, particularly paras. 980 and 989; EU FNCOS, paras. 99-115, particularly para. 111; EU SWS, paras. 641-644; EU Responses to Questions 54-57; EU Comments on US Response to Panel Questions 54 and 55. 200 US FWS, paras. 684-702, particularly para. 687; US FNCOS, paras. 36-39; US SWS, paras. 149-158, particularly para. 157; US Responses to Panel Questions 54 and 55; US Comments on EU Responses to Panel Questions 54-57.



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3. Summary of the Panel Report

172. The Panel found that the HB 2294 B&O tax rate reductions and instances of

application are subsidies.201 However, the Panel also found that the European

Union had not demonstrated that the HB 2294 B&O tax rate reductions and

instances of application are contingent upon export. The Panel reasoned as

follows:202

However, any form of conditionality or dependence between the B&O tax reduction and exports arises simply because the recipient of the subsidy is an exporter. If this is the case, the B&O tax reduction is contingent upon either domestic or export sales. The European Communities does not make any other submissions regarding why the grant of the B&O tax reduction is "tied to" exportation. Therefore, it is clear that a "tie" between the B&O tax reduction and exportation arises simply because the subsidy is granted to an enterprise that exports. However, the final sentence of footnote 4 to Article 3.1(a) provides that the grant of a subsidy to an enterprise that exports “shall not for that reason alone be considered to be an export subsidy”. Therefore, it is clear from footnote 4 that the standard for de facto export contingency is not met.203

4. HB 2294 B&O Tax Rate Reductions and Instances of Application are Subsidies Contingent/Conditional in Fact Upon Export

173. The Panel found that the HB 2294 B&O tax rate reductions and instances of

application are subsidies.204 It is not controversial and was not disputed before the

Panel that the HB 2294 B&O tax rate reduction subsidies are

contingent/conditional upon sales, whether they occur in the US market or in an

export market.

174. Consequently, if there is no requirement of favouring or differentiation (issue 3

referred to above), it is self-evident that the HB 2294 B&O tax rate reductions are

subsidies contingent/conditional upon export. To the extent that the term "actual

or anticipated" has the first meaning outlined above (past or future), then we argue

that the HB 2294 B&O tax rate reductions are subsidies contingent/conditional

upon anticipated export. To the extent that it has the second meaning (realised or

201 Panel Report, para. 7.1531, note 3261 and para. 7.302. 202 Panel Report, paras. 7.1541-7.1543. 203 Panel Report, para. 7.1542. 204 Panel Report, para. 7.1531, note 3261 and para. 7.302.



63

notional state of mind), then we argue that the HB 2294 B&O tax rate reductions

are subsidies contingent/conditional upon actual export.

175. To the extent that there is a requirement of favouring or differentiation (issue 3

referred to above), the European Union does not compare the treatment of the

relevant good when sold in the US market with the treatment of the same good

when sold in an export market.

176. Rather, we compare the treatment of goods that are excluded from HB 2294 B&O

tax rate reductions with the treatment of goods that benefit from HB 2294 B&O

tax rate reductions. We point out that the terms of the HB 2294 B&O tax rate

reduction measure expressly limit its availability to commercial airplanes and

goods to be incorporated within commercial airplanes, including the 787. We

assert, and provide supporting evidence, to the effect that it is inconceivable that

787 aircraft will not be exported.205 On the other hand, we point to the fact that

other goods that do not benefit from HB 2294 B&O tax rate reductions will not be

exported. Therefore, by its own terms, the measure enacting HB 2294 B&O tax

rate reductions effectively focuses or targets the available subsidies on goods that

will be exported, excluding other goods that will not be exported. In other words,

what is on its face a neutral measure granting subsidies contingent/conditional

upon performance is, by its own terms, in fact skewed or slanted towards export

performance. This constitutes the favouring or differentiation required to

demonstrate an inconsistency with Article 3.1(a) and footnote 4 of the SCM

Agreement. In other words, it demonstrates that the grant of the subsidy has been

made contingent/conditional, whether solely or as one of several other conditions,

upon export.

177. To the extent that the term “actual or anticipated” has the first meaning outlined

above (past or future), then we argue that the HB 2294 B&O tax rate reductions

are subsidies contingent/conditional in fact upon anticipated export. To the extent

that it has the second meaning (realised or state of mind), then we argue that the

HB 2294 B&O tax rate reductions are subsidies contingent/conditional in fact

upon actual export.



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5. Legal Errors in the Panel Report and Request for Reversals

178. First, the Panel states that contingency/conditionality arises in this case “simply

because the recipient of the subsidy is an exporter” and “simply because the

subsidy is granted to an enterprise that exports”.206 The Panel thus assimilates the

fact pattern in this case to the second sentence of footnote 4.207 The Panel's

analysis is obviously erroneous.

179. The European Union does not rely in its arguments only on the proposition that the

subsidy is granted to an enterprise, and that such enterprise exports. Rather, in the

present case, it is not contested that the subsidy is granted contingent/conditional

upon sales, whether in the US market or in an export market. This is different

from and more than what is described in the second sentence of footnote 4. The

Panel therefore erred when it reasoned that the second sentence of footnote 4 was

sufficient basis on which to dismiss the EU claim.

180. Second, the Panel states that "The European Communities does not make any other

submissions regarding why the grant of the B&O tax reduction is “tied to”

exportation".208 That analysis is obviously erroneous. The fact of the

contingent/conditional relationship between the subsidy and a sale was not in

dispute (and could not reasonably be disputed). Insofar as more was required in

terms of the favouring or differentiation of exports, the European Union carefully

explained how the measure at issue, by its own terms, was focussed on goods in

large part destined for export, to the exclusion of other goods that would certainly

not be exported.209

181. Consequently, the Panel's analysis is based on an erroneous interpretation and

application of Article 3.1(a) and footnote 4 of the SCM Agreement and a failure to

make an objective assessment, including an objective assessment of the facts

205 In particular, EU FWS, paras. 981-987. 206 Panel Report, para. 7.1542, second and fifth sentences (italic emphasis added). 207 Panel Report, para. 7.1542, sixth sentence. 208 Panel Report, para. 7.1542, fourth sentence. 209 EU FWS, paras. 977-996, particularly paras. 980 and 989; EU FNCOS, paras. 99-115, particularly para. 111; EU SWS, paras. 641-644; EU Responses to Panel Questions 54-57; EU Comments on US Responses to Questions 54 and 55.



65

pursuant to Article 11 of the DSU. For these reasons we request that the Panel's

findings210 be reversed.

6. Completion of the Analysis

182. Based on the analysis set out above211 the European Union respectfully requests

the Appellate Body to complete the analysis and find that the HB 2294 B&O tax

rate reductions and instances of application are subsidies contingent/conditional in

fact upon export.

V. ADVERSE EFFECTS


183. The European Union appeals three errors in the Panel’s adverse effects analysis.

The first two of these errors are substantive errors of law and legal interpretation,

while the third error stems from the Panel’s failure to accord due process rights to

the European Union in violation of Article 11 of the DSU.

184. Beginning with the substantive errors of law, the first error is the Panel’s refusal to

cumulate (i) the effects, in the 200-300 seat LCA market,212 of the B&O tax

subsidies with (ii) the effects of the aeronautics R&D subsidies in that same

market.213 The second substantive error is the Panel’s failure to aggregate with the

FSC/ETI and B&O tax subsidies (collectively “Tax Subsidies”) various other

subsidies, including the other Washington State and City of Everett tax subsidies;

property and sales tax abatements provided to Boeing pursuant to industrial

210 That is, the findings at Panel Report, paras. 7.1541- 7.1543, particularly para. 7.1543, and para. 8.2(b). 211 At paras. 173-177 of this submission. 212 The European Union recalls that it challenged the effects of the US subsidies at issue in three separate product markets in which subsidised Boeing LCA compete with Airbus LCA. See Panel Report, paras. 7.1595, 7.1669-7.1674. These markets are the world markets for (i) single-aisle 100-200 seat LCA with a short to medium range (covering the subsidised Boeing 737, and the Airbus A320), (ii) 200-300 seat wide-body LCA with a medium to long range (covering the subsidised Boeing 787 and 767, and the Airbus A330, Original A350 and A350XWB-800), and (iii) 300-400 seat wide-body LCA with a long to ultra-long range (covering the subsidised Boeing 777, and the Airbus A340, as well as the A350XWB-900 and -1000). 213 Panel Report, para. 7.1824.



66

revenue bonds issued by the State of Kansas and municipalities therein; and tax

credits and other incentives provided to Boeing by the State of Illinois and

municipalities therein (collectively the “Remaining Subsidies”),214 and to

aggregate the effects of these subsidies in all LCA markets at issue.215

185. The European Union’s first appeal specifically concerns the legal question whether

a panel must assess collectively the effects of two different subsidies that

contribute to the same form of adverse effects (e.g., significant price suppression,

lost sales, and/or displacement). The Panel erred in answering that question in the

negative. The only reason it gave was that the subsidies affected the market

through “entirely distinct causal mechanisms”.216

186. Yet, a panel must not atomise or compartmentalise its analysis so as to mask the

contribution of any subsidy to adverse effects. Under Articles 5 and 6.3 of the

SCM Agreement, a panel must assess whether the “use” of “any” subsidy causes

adverse effects. The ordinary meaning of these terms requires that potential effects

of any use of any subsidy be considered. Both provisions focus on whether the

subsidies cause particular forms of effects; they are not segregated and limited to

particular causal mechanisms. Imposition of such a test would create an entirely

new requirement on a complaining Member that is not found in the text, context or

object and purpose of the SCM Agreement. Thus, where different subsidies

contribute through different causal mechanisms to the same form of adverse

effects, their effects must be assessed cumulatively.

187. The requirement to cumulate the effects of subsidies causing similar effects is

confirmed by the context of Article 6.1 of the SCM Agreement. While Articles

6.1(b)-(d) specifically require the isolation of effects of particular forms of

subsidies, Article 6.1(a) requires the summation of all forms of subsidies. It

follows that, had the drafters intended to limit the assessment under Articles 5 and

6.3 to the effects of subsidies under the same causal mechanism, they would have

done so explicitly.

214 See Panel Report, paras. 7.1431-7.1433, 7.1826-7.1827. 215 Panel Report, para. 7.1828. 216 Panel Report, para. 7.1824.



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188. The Panel’s approach is also contrary to the object and purpose of the SCM

Agreement. It would weaken the actionable subsidy disciplines by allowing

Members to subsidise a single product through a diverse range of subsidies, and

then require an assessment of the effects of these subsidies separately for each

“distinct causal mechanism{}”.217 Clinical isolation in the assessment of effects

from subsidies that benefit the same product and that are alleged to cause the same

adverse effects could fail to yield an adverse effects finding where cumulating the

effects from all subsidies would demonstrate that a causal link exists.

189. Thus, the Panel erred by failing to cumulate the effects from the B&O tax

subsidies – that it found to exist in the 100-200 and 300-400 seat LCA markets –

with the effects from the aeronautics R&D subsidies on Airbus’ 200-300 seat

LCA, and by failing to find that they collectively caused adverse effects. In

making its adverse effects finding and based on a proper interpretation of Articles

5 and 6.3, the Panel was not entitled to ignore the additional negative effects from

the B&O subsidies on the market for 200-300 seat LCA.

190. The second error specifically relates to the Panel’s failure to aggregate, for

purposes of assessing their effects on Boeing’s prices, the Remaining Subsidies

with the Tax Subsidies, despite the fact that both subsidies had a sufficient nexus

to the subsidised product and the effects-related variable – i.e., price. Under the

approach adopted by the panel in EC and Certain Member States – Large Civil

Aircraft, this Panel was required to find that the Remaining Subsidies caused

adverse effects because they “complemented and supplemented”218 the effects of

the Tax Subsidies. Were the Appellate Body, in the appeal in EC and Certain

Member States – Large Civil Aircraft, to uphold the test articulated by the panel in

that dispute, then the Appellate Body must reverse the Panel’s reasoning and find

that the Panel should have examined the collective effects of the Remaining

Subsidies and the Tax Subsidies.

191. The Panel’s failure to cumulate the effects of the Remaining Subsidies with the

Tax Subsidies also constitutes error under Articles 5 and 6.3 of the SCM

217 Panel Report, para. 7.1824. 218 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1956.



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Agreement for the reasons set forth in respect of the first adverse effects appeal,

above. The Panel examined these subsidies in isolation without examining

whether they contributed to any particular form of serious prejudice and found

that, on their own, they did not “give rise to serious prejudice”.219

192. The Appellate Body should reverse the Panel’s finding on either, or both, basis and

find that the Tax Subsidies and the Remaining Subsidies collective cause adverse

effects.

193. The Panel’s third error arises under Article 11 of the DSU, and is based on the

Panel’s failure to uphold the principle of due process when it excluded from its

adverse effects assessment the effects of assistance instruments funded through the

RDT&E programmes, other than those funded pursuant to the ManTech and

DUS&T programmes.220 The Panel did so based on a standard that first appeared

in the Final Panel Report, without providing the Parties with an opportunity to

comment on this standard, and without requesting information on the facts

(pursuant to Article 13 of the DSU) that would demonstrate whether or not that

standard was satisfied. This error is aggravated given the Panel’s failure to draw

reasonable inferences from the related instances of US non-cooperation in the

production of key documents and evidence within its exclusive control.

B. The Panel Erred in Not Aggregating the Effects from the B&O Tax Subsidies and the Aeronautics R&D Subsidies Benefiting the 787


194. Before the Panel, the European Union argued that “the subsidies to Boeing have

resulted in {adverse effects} through two causal mechanisms”.221 Specifically, for

219 Panel Report, para. 7.1828. 220 Panel Report, para. 7.1701, particularly sixth and ninth to eleventh sentences. 221 Panel Report, para. 7.1596, citing EU SWS, para. 711. See also EU FWS, paras. 1334 (“The US subsidies benefiting Boeing’s 787 family LCA have had two principal effects (1) they have expedited the launch and future delivery of Boeing’s technologically-advanced 787 family LCA (the ‘technology effect’); and (2) they have directly allowed Boeing to lower the prices at which it offers its 787 family LCA (the ‘price effects’). Both effects have contributed to the significant price suppression, significant lost sales, and displacement and impedance suffered by Airbus in the 200-300 seat wide-body LCA market”) (underlining



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the 200-300 seat LCA market, the European Union argued (i) that “the aeronautics

R&D subsidies ... ‘have helped Boeing develop, launch and produce a

technologically-advanced 200-300 seat LCA much more quickly than it could have

on its own’”,222 and (ii) that “all of the subsidies have ... ‘price effects’ in that they

have enabled Boeing to charge lower prices for its LCA”.223 The European Union

provided sales campaign-specific evidence in support of its claim that both causal

mechanisms resulted in significant price suppression and significant lost sales.224

195. The United States argued that the US aeronautics R&D measures had no effect on

Boeing’s ability to launch, develop and produce the 787,225 and that the subsidies

Boeing received also had no price effects.226 Accordingly, the United States did

not address the issue of aggregation of the effects from these two groups of

subsidies.


196. The Panel split its adverse effects analysis into several parts. First, it assessed, and

properly found, that the US “aeronautics R&D subsidies contributed in a genuine

and substantial way to Boeing’s development of technologies for the 787 and that,

added), 1341 (“the combined technology and price effects of the US subsidies for the 787 have resulted in the substantial loss of revenue and market-share by Airbus in the 200-300 seat wide-body LCA market”) (underlining added) 997 (“The US subsidies have had two principal effects: (1) they have provided Boeing sales negotiators with millions of dollars to price down each Boeing LCA in sales campaigns against Airbus, forcing Airbus to lower its LCA prices and lose LCA sales to Boeing; and (2) they have financed Boeing’s development of the latest technology and production methods used on the 787, further forcing Airbus to lower its LCA prices and lose sales to Boeing in the 200-300 seat LCA marker”) (emphasis in original, underlining added) 998 (“Reduced to its essence, this dispute is about Boeing using federal, state and local subsidies to win sales and suppress Airbus’ prices”) (not distinguishing between subsidies), 1003 (“The evidence presented by the European Communities displays a consistent theme and goal – it demonstrates that Airbus lost sales and suffered suppressed prices because the US subsidies facilitated Boeing’s offering of lower prices and its use of advanced technologies. But for the effects of the US subsidies, Airbus would have won certain additional sales and Airbus’ average LCA prices would be higher”) (emphasis in original, underlining added), 1070 (In assessing the causal link between the US subsidies and adverse effects to the interests of the European Communities, the Panel should assess the cumulative effect of subsidies to Boeing.”) (emphasis in original), 1070-1073. 222 Panel Report, para. 7.1597, citing EU FWS, paras. 1343, 1335 and 1345. 223 Panel Report, para. 7.1598, citing EU FWS, para. 1229 (emphasis added). 224 Panel Report, para. 7.1622. 225 Panel Report, paras. 7.1626-7.1634. 226 Panel Report, paras. 7.1635-7.1641.



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in the light of the conditions of competition in the LCA industry, these subsidies

conferred a competitive advantage on Boeing”.227 The Panel concluded that the

aeronautics R&D subsidies “caused Airbus to lose a significant number of sales of

its A330 and Original A350 between 2004 and 2006, and significantly suppressed

the prices of those aircraft” in the 200-300 seat LCA market.228

197. Second, with respect to the B&O and FSC/ETI tax subsidies, the Panel found it

“inescapable to arrive at the conclusion that in law the effects of the{se} subsidies

on Airbus’ prices and sales constitute significant lost sales and significant price

suppression, within the meaning of Article 6.3(c) of the SCM Agreement, as well

as displacement and impedance of exports from third country markets, within the

meaning of Article 6.3(b)”.229

198. Nonetheless, the Panel found adverse effects from the B&O and FSC/ETI tax

subsidies in only two of the three product markets at issue – i.e., the single-aisle

100-200 seat LCA market and the 300-400 seat wide-body LCA market.230 With

respect to the third product market (200-300 seat wide-body LCA), it reasoned that

“there is insufficient evidence before us that would enable us to conclude that these

{B&O tax} subsidies are of a magnitude that would enable them, on their own, to

have such an effect on Boeing’s prices of the 787 as would lead to a finding that

their effects in the 200-300 seat wide-body market were significant price

suppression, significant lost sales or displacement or impedance of European

Communities imports into the United States or exports to third countries”.231 The

Panel then recalled its finding that the US aeronautics R&D subsidies cause

serious prejudice to EU interests in that third product market.232 It concluded that

“owing to the very different way in which the aeronautics R&D subsidies operate,

we do not consider that it is appropriate to aggregate the effects of the B&O tax

subsidies on Boeing’s prices of the 787 with the effects of the aeronautics R&D

227 Panel Report, para. 7.1773. 228 Panel Report, paras. 7.1780, 7.1797, 7.1854, 8.3(a)(i). 229 Panel Report, para. 7.1822. 230 Panel Report, paras. 7.1823, 7.1833, 7.1854, 8.3(a)(ii) and 8.3(a)(iii). 231 Panel Report, para. 7.1824 (emphasis added). 232 Panel Report, para. 7.1824.



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subsidies on Boeing’s development of technologies applied to the 787, as it is

clear that the two groups of subsidies operate through entirely distinct causal

mechanisms”.233 The Panel offered no other reason in support of its finding that it

was not appropriate to aggregate the established effects of the B&O and the

aeronautics R&D subsidies.

3. The Panel Erred in its Interpretation and Application of Articles 5 and 6.3 of the SCM Agreement

199. The Panel erred in its interpretation and application of Articles 5 and 6.3 of the

SCM Agreement when it declined to assess the cumulative effects of two groups of

subsidies benefiting Boeing’s LCA in the 200-300 seat LCA market. The Panel

improperly isolated its assessment of the effects of the B&O tax subsidies from its

separate assessment of the effects of the aeronautics R&D subsidies, even though

both contributed to negative commercial impacts on Airbus LCA in the 200-300

seat market. Specifically, the Panel erred in explaining that it “do{es} not consider

that it is appropriate to aggregate” such effects, given the “entirely distinct causal

mechanisms”234 through which the two groups of subsidies operate.

200. As explained below, the existence of “distinct causal mechanisms”235 from various

subsidies is not a legitimate basis to refrain from assessing the cumulative effects

of all subsidies. A proper interpretation of Articles 5 and 6.3 of the SCM

Agreement reveals that a cumulative assessment is required.

201. At the outset, the European Union recalls the Appellate Body’s finding that “a

panel has a certain degree of discretion in selecting an appropriate methodology

for determining whether the ‘effect’ of a subsidy”236 amounts to adverse effects.

That discretion is not, however, without bounds. It is circumscribed by the

requirement that a panel find adverse effects where the enumerated “effect of the

233 Panel Report, para. 7.1824 (emphasis added). 234 Panel Report, para. 7.1824. 235 Panel Report, para. 7.1824. 236 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 370; Appellate Body Report, US – Upland Cotton, para. 436.



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subsid{ies}”237 are “cause{d}”238 by the use of subsidies. In conducting that

assessment, a panel must consider whether the alleged effects, in fact, “result from

a chain of causation that is linked to the impugned subsid{ies}”,239 and whether

that chain of causation amounts to a “genuine and substantial relationship of cause

and effect”.240 In other words, a panel must consider the collective effects of any

and all subsidies that have an impact on the competing product of the complaining

Member in the market at issue, and determine whether collectively they cause

effects that amount to adverse effects. A panel does not enjoy the discretion to

atomise or compartmentalise its analysis so as to mask the contribution of any

subsidy to adverse effects.

202. The following initial considerations are useful to guide the analysis:

• Initially, a panel should examine the nature of the individual subsidies, in terms of their structure, design and operation,241 and aggregate in a group those specific subsidies that have a sufficient nexus to the subsidised product242 and have a similar structure, design and operation. Depending on the facts at issue, there could be more than one group of subsidies.

• A panel would then be expected to assess, by individual subsidy or group of subsidies, if and how the subsidies (or groups of subsidies) provide a competitive advantage to the subsidised producer and its products in the market at issue.243 At this stage of its analysis, a panel would focus on the

237 Article 6.3 of the SCM Agreement. 238 Article 5 of the SCM Agreement. 239 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 372. 240 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 374; Appellate Body Report, US – Upland Cotton, para. 438 (quoting Appellate Body Report, US – Wheat Gluten, para. 69). 241 See, e.g., Appellate Body Report, US – Upland Cotton, para. 450; Panel Report, US – Upland Cotton, paras. 7.1289-7.1290. 242 Panel Report, US – Upland Cotton, para. 7.1191. 243 See, e.g., Panel Report, paras. 7.1773 (“The Panel concludes that the aeronautics R&D subsidies contributed in a genuine and substantial way to Boeing’s development of the 787 and that, in the light of the conditions of competition in the LCA industry, these subsidies conferred a competitive advantage on Boeing. The Panel now proceeds to analyse whether the aeronautics R&D subsidies, as a result of this competitive advantage, affected Airbus’ sales and prices in the 200-300 seat wide-body LCA product market in the 2004-2006 period”) (emphasis and underlining added), 7.1818 (“We have no doubt that the availability of the FSC/ETI subsidies, in combination with the B&O tax subsidies, enabled Boeing to lower its prices beyond the level that would otherwise have been economically justifiable, and that in some cases, this led to it securing sales that it would not otherwise have made, while in other cases, it led to Airbus being able to secure the sale only at a reduced price”) (underlining added). See also Panel Report, EC and Certain Member States – Large Civil Aircraft, paras. 7.1880-7.1976 (assessing the impact on Airbus’ ability to



73

type of market impact that the subsidies (or groups of subsidies) have, and their ability to cause, or contribute to causing, adverse effects.244 This is the fact-intensive aspect of the analysis addressed by the Appellate Body, when it found that a panel has the discretion to structure its approach,245 and to select the evidence on which to rely.246

• Irrespective of how a panel exercised its discretion to structure its causation analysis of the market impact of the various subsidies (or groups of subsidies), ultimately, it must assess – quantitatively or qualitatively – whether the collective competitive impact of the different (groups of) subsidies at issue amounts to adverse effects. That is, a panel must assess the collective effects from all subsidies at issue in deciding whether the “use” of these subsidies, collectively, causes one or more of the particular forms of adverse effects.

203. Thus, once a panel finds that a specific subsidy (or group of subsidies) negatively

impacts competition in the market at issue,247 then it must combine its assessment

of the effects of that subsidy (or group of subsidies) with the effects of all other

(groups of) subsidies that also impact competition in that market.248 That

assessment may involve quantitatively adding the levels of, for example, price

effects from various (groups of) subsidies. It may also involve qualitatively

combining the effects of certain (groups of) subsidies on the existence of a new

product with the effects of other (groups of) subsidies on prices for that product.

204. Under Articles 5 and 6.3, a panel has no discretion to clinically isolate, and assess

solely “on their own”,249 the effects of one of several (groups of) subsidies.

compete in the LCA markets) and 7.1977-7.1984 (assessing the collective impact of Member State Financing and other subsidies on Boeing’s sales and market shares). 244 For example, a panel could assess how a subsidy causes, or contributes to, the development of a new product by its recipient, or how it enables a recipient to charge lower prices in the market. See, e.g., Panel Report, paras. 7.1764 (and analysis of the product launch impact of the aeronautics R&D subsidies leading to that finding in paras. 7.1701-7.1763) and 7.1818 (and analysis of the price impact on Boeing’s prices of the FSC/ETI and B&O tax subsidies leading to that finding in paras. 7.1801-7.1817). 245 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 370; Appellate Body Report, US – Upland Cotton, para. 436. 246 If no such negative impact on competition in the relevant market is found, then the causation analysis for that particular subsidy or group of subsidies would end. 247 As set out in the second bullet in paragraph 202, above. 248 As set out in the third bullet in paragraph 202, above. 249 Panel Report, para. 7.1824.



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Instead, a panel’s assessment whether the subsidies at issue cause adverse effects

must be made on the basis of the effects on competition in a particular market from

all subsidies. This requirement flows from a proper interpretation of the text of

Articles 5 and 6.3, in its context, and taking into account the object and purpose of

the SCM Agreement.

205. Textually, Article 5 disciplines adverse effects caused by “the use of any subsidy

referred to in paragraphs 1 and 2 of Article 1”.250 Article 6.3 relies on the concept

of a “subsidized product”, without limitation on the scope of subsidies that might

benefit that “subsidized product”. Thus, neither provision addresses, or

distinguishes between, the wide variety of subsidies covered by the term “any

subsidy”. Nor do these provisions differentiate between different “groups of

subsidies {that} operate through entirely distinct causal mechanisms”.251 Instead,

the broad language of Articles 5 and 6.3, in particular the use of the terms “any

subsidy” and “subsidized product”, suggests that these provisions discipline the

collective impact of any and all subsidies benefiting the subsidised product in the

market at issue.

206. Thus, the causation analysis required by Articles 5 and 6.3 does not focus on any

particular causal mechanisms – it simply requires a finding of causation resulting

from the use of “any” subsidy. Accordingly, where two subsidies support the same

subsidised product and negatively impact competition in the market at issue, then a

panel must consider the effects of these subsidies collectively in determining

whether they amount to any form of adverse effect.252

250 Emphasis added. 251 Panel Report, para. 7.1824. 252 Indeed, the panel in US – Upland Cotton properly rejected the notion that the use of the singular in Article 6.3 – “the effect of the subsidy” (underlining added) – required the clinical isolation of the effects of each subsidy. See Panel Report, US – Upland Cotton, para. 7.1191 (“We do not see the Article 6.3(c) reference to ‘the effect of the subsidy’ (in the singular, rather than the plural) as meaning that a serious prejudice analysis of price suppression must clinically isolate each individual subsidy and its effects …. {W}hile due attention must be paid to each subsidy at issue as it relates to the subsidized product, a serious prejudice analysis may be integrated to the extent appropriate in light of the facts and circumstances of a given case …. {T}extual references to ‘any subsidy’ and ‘the effect of the subsidy’ permit an integrated examination of effects of any subsidies with a sufficient nexus with the subsidized product and the particular effects-related variable under examination”).



75

207. Conversely, there is no textual support in Articles 5 and 6.3 of the SCM Agreement

for an interpretation that the effects of two different subsidies, which both

negatively impact competition in the market at issue, cannot be assessed

cumulatively, simply because those subsidies affect competition through “distinct

causal mechanisms”.253 The text of these provisions does not even refer to any

“mechanism” or manner in which subsidies cause adverse effects.

208. The context of now-expired Article 6.1 of the SCM Agreement further supports an

interpretation of Articles 5 and 6.3 that requires panels to cumulate the effects of

subsidies, or groups of subsidies, that negatively impact competition in the market

at issue. Article 6.1(a) established a presumption of serious prejudice where “the

total ad valorem subsidization14 of a product exceed{ed} 5 per cent”. Footnote 14

provided that “{t}he total ad valorem subsidization shall be calculated in

accordance with the provisions of Annex IV”. Paragraph 6 of Annex IV, in turn,

required that “subsidies given under different programmes and by different

authorities in the territory of a Member shall be aggregated”. Thus, in determining

whether subsidies rise to an ad valorem level of subsidisation sufficient to trigger

the presumption of serious prejudice, Article 6.1(a) and Annex IV mandate that all

subsidies be included (except, pursuant to paragraph 8 of Annex IV, those that are

non-actionable).

209. Significantly, when the drafters of the SCM Agreement wished to require isolation

of the effects of particular types of subsidies, they did so explicitly. For example,

now-expired Articles 6.1(b), (c) and (d) created a presumption of serious prejudice

from subsidies covering operating losses for an industry or enterprise, as well as

direct forgiveness of debt. Textually, each of these provisions expressly identified

types of subsidies that benefit the subsidised product and affect the market at issue

through a particular causal mechanism. By contrast, Article 6.3 focuses on the

effects of subsidies – it does not distinguish between subsidies based on their type;

nor does it limit the particular causal mechanisms that may be relevant.

210. The Panel’s refusal to assess cumulatively the effects of the B&O tax subsidies and

the aeronautics R&D subsidies is also contrary to the object and purpose of the




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SCM Agreement, which is “to strengthen and improve GATT disciplines relating to

the use of both subsidies and countervailing measures”,254 and “to impose

multilateral disciplines on subsidies which distort international trade”.255 The

Panel’s interpretation and application of Articles 5 and 6.3 would permit panels to

avoid cumulating the effects of two or more subsidies benefiting the same product,

and alleged to cause the same form of adverse effect, on the basis of differences in

the “causal mechanisms”256 – even in situations where both groups of subsidies

cause identical forms of adverse effects. Yet, consistent with the object and

purpose of the SCM Agreement, Articles 5 and 6.3 must not be interpreted so as to

undermine, rather than “strengthen and improve”, the actionable subsidy

disciplines.

211. Under the Panel’s interpretation, Members could provide a series of smaller

subsidies that each affect the recipient slightly differently and that, on their own,

cause a degree of trade distortion that is insufficient to amount to adverse effects.

The Panel’s approach would lead to a finding that, because these small subsidies

work along different causal pathways, their effects may not be cumulated, and “on

their own”257 cause no adverse effects. In reality, however, the Member would

have, “through the use of any subsidy referred to in paragraphs 1 and 2 of Article

1, {caused} adverse effects”. Thus, rather than “strengthen{ing} and

improv{ing}”258 the disciplines on subsidies, the Panel’s approach undermines the

object and purpose of the SCM Agreement.

212. Finally, the European Union recalls the Appellate Body’s suggestion, in US –

Upland Cotton, that a panel might have erred in excluding non-price-contingent

subsidies from its adverse effects finding because of their different structure,

design and operation. The Appellate Body explained, in obiter dicta, that it was

important to examine whether the non-price-contingent subsidies “contribute to

254 Appellate Body Report, US – Softwood Lumber IV, para. 64, citing Appellate Body Report, US – Carbon Steel, paras. 73-74. 255 Panel Report, Brazil – Aircraft, paras. 7.26. 256 Panel Report, para. 7.1824. 257 Panel Report, para. 7.1824. 258 Appellate Body Report, US – Softwood Lumber IV, para. 64, citing Appellate Body Report, US – Carbon Steel, paras. 73-74.



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price suppression”.259 That statement is fully consistent with the particular focus

of an Article 5 and 6.3 assessment – i.e., whether each challenged specific subsidy

benefiting a common subsidised product contributes to the same adverse effects

claimed.

213. Applying these legal principles to the facts in this dispute reveals that the Panel

erred in relying on “distinct causal mechanisms” when it refused to assess

cumulatively whether the B&O tax subsidies and the aeronautics R&D subsidies

cause adverse effects in the 200-300 seat LCA market.

214. To recall, having initially isolated the B&O tax subsidies, the Panel concluded that

it had “insufficient evidence”260 to find that, “on their own”,261 they affected

Boeing’s prices for the 787 sufficiently enough to cause adverse effects. However,

as established above, the Panel did not need to find that the B&O subsidies caused

adverse effects “on their own”.

215. More significantly, having made a finding on the effects of the B&O “on their

own”, the Panel had not yet properly discharged its obligations under Articles 5

and 6.3 to assess the effects of “any” subsidies. Given that the European Union

had raised claims, and presented arguments, regarding the adverse effects caused

jointly in the market for 200-300 seat LCA by the B&O tax subsidies and the

aeronautics R&D subsidies,262 the Panel was required to make that joint

assessment.

216. In this respect, it is significant that the Panel found “inescapable”263 its conclusion

that the cumulative effect of FSC/ETI and B&O tax subsidies caused, in the single-

259 Appellate Body Report, US – Upland Cotton, note 589 (“We do not exclude the possibility that challenged subsidies that are not ‘price-contingent’ (to use the Panel’s term) could have some effect on production and exports and contribute to price suppression”). The European Union notes that Brazil had not appealed that panel’s refusal to cumulate any effects of non-price-contingent subsidies. 260 Panel Report, para. 7.1824. 261 Panel Report, para. 7.1824 (emphasis added). 262 See paragraph 194 and note 221, above. For example, the European Union argued that “the combined technology and price effects of the US subsidies for the 787 have resulted in the substantial loss of revenue and market-share by Airbus in the 200-300 seat wide-body LCA market”. See EU FWS, para. 1341 (underlining added). 263 Panel Report, para. 7.1822.



78

aisle and the 300-400 seat LCA markets, the same forms of adverse effects at issue

in the 200-300 seat LCA market.264 Thus, the evidence before the Panel suggested

that the B&O tax subsidies could, at a minimum, contribute to the adverse effects

from the aeronautics R&D subsidies. With both sets of subsidies benefiting the

subsidised 787 and contributing to the negative commercial effects on Airbus’

200-300 seat LCA, these facts triggered the requirement that the Panel assess the

effects of these subsidies cumulatively – even if, “on their own”, the B&O tax

subsidies were not shown to cause adverse effects in that market. The Panel’s

failure to do so amounts to reversible legal error.

217. In sum, in light of the argumentation and evidence before the Panel that the two

groups of subsidies, although “operat{ing} through entirely distinct causal

mechanisms”,265 jointly cause particular market phenomena that amount to adverse

effects, the Panel was required to undertake that combined assessment. By

declining to do so – because it considered it “not appropriate to aggregate {those}

effects”266 based solely on the “distinct causal mechanisms” of the two subsidies –

the Panel erred in its interpretation and application of Articles 5 and 6.3 of the

SCM Agreement.

218. Accordingly, the European Union requests the Appellate Body to reverse the

Panel’s finding.267

264 Panel Report, para. 7.1822. The Panel found that the FSC/ETI and B&O tax subsidies caused significant price suppression, significant lost sales, and displacement and impedance in the single-aisle and 300-400 seat LCA markets. 265 Panel Report, para. 7.1824. 266 Panel Report, para. 7.1824. 267 The European Union recognises that the Panel did not undertake the necessary factual analysis to assess the joint effects of US aeronautical R&D and B&O tax subsidies. Accordingly, the European Union does not consider that there is a basis for the Appellate Body to complete the analysis. However, reversal of the Panel’s finding is important, as it avoids creating findings that might bind an arbiter in possible subsequent proceedings in this dispute.



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C. The Panel Erred in Not Aggregating the Effects of the Tax Subsidies With the Effects of the Remaining Subsidies

219. The Panel also erred in its interpretation and application of Articles 5 and 6.3 of

the SCM Agreement, by failing, at paragraph 7.1828, to aggregate with the Tax

Subsidies the approximately $550 million268 in Remaining Subsidies.269


220. Throughout its submissions, the European Union argued that the Panel should

examine, on a cumulative basis, the price effects of the subsidies to Boeing.270

221. The European Union argued that the Remaining Subsidies have a sufficient nexus

with the subsidised Boeing LCA at issue, in the sense that they benefit Boeing’s

LCA. The operation of these subsidies was such that they freed up cash for

Boeing’s LCA division to reduce prices for these LCA.271 While the Remaining

Subsidies are not tied to the production of individual, or particular families of,

Boeing LCA, they are “fungible” and should, therefore, be treated as the functional

equivalent of additional cash flow available to Boeing’s LCA division to price

down its products.272 Thus, they have a sufficient nexus with the effects-related

variable that negatively impacts competition in the relevant markets at issue – i.e.,

price.

268 See Panel Report, para. 7.1828; see also Panel Report, para. 7.1433 (“Amount of subsidies to Boeing’s LCA division over the period 1989-2006”). 269 The Remaining Subsidies are comprised of the Washington State and City of Everett tax subsidies other than the B&O tax subsidies; the property and sales tax abatements provided to Boeing pursuant to industrial revenue bonds issued by the State of Kansas and municipalities therein; and the tax credits and other incentives provided to Boeing by the State of Illinois and municipalities therein. See Panel Report, paras. 7.1431-7.1433, 7.1826-7.1827. 270 See, e.g., EU FWS, paras. 1070-1073, 1092, 1333, 1470, 1564. See also EU Response to Panel Question 383, para. 542 (“{the} European Communities’ claim that US subsidies caused Boeing to engage in an aggressive pricing of a cumulative effect of approximately $17 billion, causing serious prejudice to EC LCA-related interests. The total price effects from US subsidies translates into per-aircraft price effects that vastly exceed any “significance” threshold under the European Communities serious prejudice claim”) (underlining added). 271 Panel Report, paras. 7.1609, 7.1827. 272 Panel Report, paras. 7.1609, 7.1827.



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222. The United States contended that the Remaining Subsidies are unlikely to affect

Boeing’s pricing decisions.273 The United States argued that in an analysis of

serious prejudice, the effects of the subsidy depend on whether the subsidy creates

or maintains LCA “supply” that would not otherwise exist.274 According to the

United States, if subsidies – like the Remaining Subsidies – that are not tied to the

development, production or sale of a particular product, are provided to a company

that enjoys unfettered access to capital markets, they are unlikely to affect pricing

decisions, unless the subsidy is such that, absent the subsidy, the company would

not be economically viable.275 However, the United States also agreed that “the

absence of a direct link between subsidies and the development, production, or sale

of large civil aircraft ‘should not be determinative of the outcome of the Panel’s

causation analysis’”.276


223. After having found that the US aeronautics R&D subsidies cause adverse effects in

the 200-300 seat LCA market277 and that the Tax Subsidies cause adverse effects

in the single-aisle and 300-400 seat LCA markets,278 the Panel turned to the

Remaining Subsidies. The Panel considered that the “comparatively small”279

amount of US subsidies that “are not directly related to Boeing’s production or sale

of LCA”280 did not, on their own, cause adverse effects. The Panel explained its

finding as follows:

273 Panel Report, para. 7.1635. 274 Panel Report, para. 7.1635. 275 Panel Report, para. 7.1635. 276 Panel Report, note 3786; see also US Comments on EU Response to Panel Question 379, para. 435. 277 See, e.g., Panel Report, paras. 7.1773 and 7.1780. 278 Panel Report, para. 7.1822 279 Panel Report, para. 7.1827. 280 Panel Report, para. 7.1827.



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the Panel is assessing the effects on Boeing’s LCA pricing of approximately $550 million in subsidies, the receipt of which is not directly tied to the production or sale of particular LCA. We are not persuaded that subsidies of this nature and of this amount have affected Boeing’s prices in a manner that could be said to give rise to serious prejudice to the European Communities’ interests.281

3. The Panel Erred in its Interpretation and Application of Articles 5 and 6.3 of the SCM Agreement

224. The Panel’s finding, at paragraph 7.1828, that the Remaining Subsidies, on their

own, do not cause adverse effects, amounts to an error in the interpretation and

application of Articles 5 and 6.3 of the SCM Agreement, because the Panel failed

to analyse the price effects of the Remaining Subsidies and the Tax Subsidies on

an aggregated basis.

225. The European Union’s first argument relates to the initial aspect of a causation

analysis, as set out in paragraph 202, above.282 This argument relies on a finding

by the panel in EC and Certain Member States – Large Civil Aircraft (currently on

appeal). That panel held that it is appropriate, for purposes of a panel’s adverse

effects analysis, to aggregate subsidies that “complement{} and supplement{}”283

each other in circumstances where the subsidies have a “sufficient nexus with the

subsidized product ... {and} they also have a sufficient nexus with ‘the particular

effects-related variable{s} under examination’”.284 On that basis, and without

significant further analysis, the panel included in its adverse effects findings a

series of subsidies that it found “complemented and supplemented”285 to the effects

of Member State financing.

281 Panel Report, para. 7.1828 (underlining added). 282 As set out above, a panel has the discretion to examine individual subsidies to determine whether their nature is such that they should be aggregated in a particular group of subsidies. A panel should also add to that group any subsidies that “complement{} and supplement{}” the likely effect of those subsidies. Depending on the case, there could be more than one such group of subsidies. A panel would then be expected to assess whether the aggregated subsidies within these particular groups cause any negative competitive effects in the relevant market. 283 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1956. 284 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1961. 285 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1956.



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226. Should the Appellate Body uphold that panel’s analysis, it follows that, under a

proper interpretation of Articles 5 and 6.3 of the SCM Agreement, a panel must not

segregate its adverse effects analysis so that it cannot take account of the combined

market effect of subsidies that collectively enhance Boeing’s cash flow and its

ability to price down its LCA.

227. Here, the Remaining Subsidies and the Tax Subsidies both contribute to price

effects. Aggregating them for purposes of assessing their effects is consistent with

the rejection by the panel in US – Upland Cotton of US arguments that the effects

of each individual subsidy had to be examined separately. The panel in that

dispute held that an “integrated examination of effects of any subsidies” was

permitted in circumstances where subsidies had “a sufficient nexus” with (i) “the

subsidized product”; and (ii) “the particular effects-related variable under

examination”.286

228. The Remaining Subsidies in this dispute fulfil these requirements. First, the

Remaining Subsidies have a “sufficient nexus with the subsidized product”287 –

i.e., Boeing LCA. Although the Remaining Subsidies are not tied to the

production of individual, or particular families of, Boeing LCA, they were received

by Boeing’s LCA division for its benefit, and constitute the functional equivalent

of additional cash flow available to Boeing’s LCA division.288

229. Second, the Remaining Subsidies impacted the same “effects-related variable”289

as the Tax Subsidies – i.e., price.290

286 Panel Report, US – Upland Cotton, para. 7.1191 (“We do not see the Article 6.3(c) reference to ‘the effect of the subsidy’ (in the singular, rather than the plural) as meaning that a serious prejudice analysis of price suppression must clinically isolate each individual subsidy and its effects …. {W}hile due attention must be paid to each subsidy at issue as it relates to the subsidized product, a serious prejudice analysis may be integrated to the extent appropriate in light of the facts and circumstances of a given case …. {T}extual references to ‘any subsidy’ and ‘the effect of the subsidy’ permit an integrated examination of effects of any subsidies with a sufficient nexus with the subsidized product and the particular effects-related variable under examination”) (underlining added). 287 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1961; see also Panel Report, US – Upland Cotton, para. 7.1191. 288 Panel Report, paras. 7.1609, 7.1827; see also EU FWS, paras. 1330-1332. 289 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1961; see also Panel Report, US – Upland Cotton, para. 7.1191. 290 Panel Report, paras. 7.1827-28.



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230. In US – Upland Cotton, the Appellate Body found that “challenged subsidies that

are not ‘price-contingent’ (to use the Panel’s term) could have some effect on

production and exports and contribute to price suppression”.291 (The panel in that

dispute had found that the “price-contingent” subsidies caused significant price

suppression through their effects on “production and exports” of cotton.292) The

Appellate Body, therefore, implied that the panel in that dispute could have

aggregated non-price-contingent subsidies with the price-contingent subsidies.

Similarly, in this dispute, the Remaining Subsidies were all alleged to have “some

effect on”293 Boeing’s ability to charge lower prices for its LCA,294 and thus

“contribute to price suppression”, lost sales, and displacement and impedance.

231. Indeed, even the United States acknowledged that “the absence of a direct link

between subsidies and the development, production, or sale of large civil aircraft

‘should not be determinative of the outcome of the Panel’s causation analysis’”.295

Similarly, the Panel found that, “where a subsidy is not tied to production of a

particular product, the subsidy may still affect the behaviour of the recipient of the

subsidy in a manner that causes serious prejudice”.296

232. Thus, under the reasoning of the panel in EC and Certain Member States – Large

Civil Aircraft, this Panel was entitled – and indeed, required – to find that the

Remaining Subsidies, amounting to $550 million, also caused adverse effects.

These subsidies “complemented and supplemented”297 the effects of the Tax

Subsidies, which had already been found to cause adverse effects.298 In examining

the effects from the Remaining Subsidies, the Panel, therefore, should have

conducted an analysis of the price effects of the Tax Subsidies and the Remaining

291 Appellate Body Report, US – Upland Cotton, note 589. 292 Panel Report, US – Upland Cotton, paras. 7.1308-7.1309, 7.1351-7.1354. 293 Appellate Body Report, US – Upland Cotton, note 589. 294 EU Comments on US Response to Panel Question 90, paras. 295-296; 295 Panel Report, note 3786; see also US Comments on EU Response to Panel Question 379, para. 435. 296 Panel Report, para. 7.1828 (emphasis added). 297 Panel Report, EC and Certain Member States – Large Civil Aircraft, para. 7.1956. 298 Panel Report, para. 7.1822



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Subsidies on an aggregated basis. Given the adverse effects finding for the Tax

Subsidies alone, cumulative analysis must also result in an adverse effects finding.

233. The European Union’s second argument in relation to this appeal is based on the

argument set forth in Section V.B.3, above. In particular, the Panel erred in not

cumulating the effects of the Remaining Subsidies with the effects of the

aeronautics R&D subsidies and the effects of the Tax Subsidies. Again, the Panel

was tasked with assessing whether the use of subsidies caused the adverse effects,

not whether they did so on their own. Yet, the Panel never addressed their

cumulative effect and, instead, limited its assessment to the question whether the

Remaining Subsidies, on their own, caused adverse effects. By failing to take the

proper analytical steps to cumulate the effects of the Remaining Subsidies with the

effects of the aeronautics R&D subsidies and the effects of the Tax Subsidies, the

Panel failed to comply with the causation requirements under Articles 5 and 6.3 of

the SCM Agreement.

234. Based on the errors detailed above, the European Union requests that the Appellate

Body reverse the Panel’s finding that the Remaining Subsidies do not cause

adverse effects, and find that, aggregated with the Tax Subsidies (or the

aeronautics R&D subsidies and the Tax Subsidies) that were found to cause

adverse effects, the Remaining Subsidies also cause adverse effects.

D. The Panel Failed to Satisfy the Due Process Rights Required by Article 11 of the DSU When It Excluded Certain DOD RDT&E Subsidies From Its Adverse Effects Analysis Based on a Surprise Standard, and Without Allowing for Necessary Factual Development

235. The Panel acted inconsistently with the principle of due process required by

Article 11 of the DSU when it excluded from its adverse effects assessment the

effects of assistance instruments funded through the RDT&E programmes, other

than those funded pursuant to the ManTech and DUS&T programmes.299 The

Panel did so based on a standard that first appeared in the Final Panel Report,

without providing the Parties with an opportunity to comment on this standard, and




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without requesting information on the facts that would demonstrate whether or not

that standard was satisfied.


236. As described above in Section III.C.1, the European Union argued that the transfer

of funds, and provision of goods and services, pursuant to all of the contracts with

Boeing issued pursuant to the DOD aeronautics R&D programmes at issue

constituted financial contributions within the meaning of Article 1.1(a)(1). While

the European Union maintained the position that purchases of services are not

excluded from the scope of the SCM Agreement, the European Union attempted to

demonstrate that, regardless of the Panel’s view on that threshold issue, none of the

DOD contracts at issue can properly be characterised as purchases of services.300

237. The United States advanced the contrary position – i.e., that all of the contracts

with Boeing pursuant to the DOD aeronautics R&D programmes at issue

constituted “purchases of services”,301 which according to the United States’ legal

theory implied that they were not “financial contributions” and therefore not

disciplined by the SCM Agreement. In responding to the Panel’s questions,302 both

the United States and the European Union maintained their positions that the type

of contract used by DOD303 makes no difference to the evaluation of whether or

not those contracts provided financial contributions to Boeing, within the meaning

of Article 1.1(a)(1) of the SCM Agreement.304 Likewise, there were no arguments

by either the United States or the European Union that the type of contract used by

DOD should be considered when evaluating whether the alleged subsidies cause

adverse effects and serious prejudice, within the meaning of Articles 5 and 6 of the

SCM Agreement.

300 Panel Report, para. 7.1154. 301 US FWS, paras. 90-97. 302 Panel Report, para. 7.1153, referencing questions 19, 20, 152, 154, 191, 192, 195, 197, and 321. 303 In a single footnote in its First Written Submission, the United States explained that some of the contracts at issue are “procurement contracts”, while others are “assistance instruments”, with the latter category including “cooperative agreements, technology investment agreements or other transactions”. Panel Report, para. 7.1153, citing US FWS, para. 91.



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238. Thus, throughout the dispute, both parties considered that the substance of the

EU’s challenges to the DOD RDT&E programmes, and the United States’ defence

to those challenges, would not, and should not, be impacted by the types of

contracts used by DOD to fund those programmes. As detailed in the next

subsection, however, the Panel surprised the parties with a novel theory of its own.


239. Despite the consistent position of both the European Union and the United States

that the type of contract at issue made no difference for the consideration of

whether the DOD aeronautics R&D programmes at issue provided financial

contributions within the meaning of Article 1.1(a)(1) of the SCM Agreement, the

Panel, on its own initiative, came to a different conclusion. Specifically, the Panel

found that the contract type was determinative of the question of whether the DOD

funding at issue constituted a proper purchase of services, and therefore a

“financial contribution”.305 The Panel explained as follows:

The evidence relating to DOD aeronautics R&D, reviewed above, leads to the conclusion that the work that Boeing performed under its aeronautics R&D {procurement} contracts with DOD was principally for the benefit and use of DOD, and is therefore properly characterized as a “purchase of services”. Therefore, the Panel finds that the payments and access to facilities provided to Boeing under DOD contracts are not financial contributions within the meaning of Article 1.1(a)(1). However, the evidence demonstrates that the work performed under its aeronautics R&D “assistance instruments” with DOD was principally for the benefit and use of Boeing itself. Accordingly, the Panel concludes that DOD’s R&D agreements (i.e. “assistance instruments”) with Boeing are not properly characterized as “purchases of services”. Therefore, the Panel finds that payments made to Boeing under these agreements are covered by Article 1.1(a)(1)(i) of the SCM Agreement as a direct transfer of funds. The Panel further finds that the access to DOD facilities provided to Boeing under these agreements constitutes a provision of goods or services within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement.306

304 Panel Report, para. 7.1154. 305 Panel Report, para. 7.1171. 306 Panel Report, para. 7.1171.



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240. When considering whether the DOD RDT&E aeronautics programmes at issue

cause serious prejudice, the Panel recalled its earlier finding that only “assistance

instruments” provided pursuant to the challenged DOD RDT&E programmes are

subsidies, in contrast to “procurement contracts”, which constitute purchases of

services outside the scope of the SCM Agreement.307 The Panel acknowledged that

the European Union did not “distinguish{} between effects which are attributable

to procurement contracts under those programmes, and those which are attributable

to assistance instruments”.308

241. With respect to two programmes, however, the ManTech and DUS&T

Programmes, the Panel found that there was evidence of record that they “were

predominantly funded through cooperative agreements or other assistance

instruments”, and the Panel included these programmes in its subsequent adverse

effects analysis and findings.309 As for all other DOD RDT&E programmes –

including programmes that were known to include at least some assistance

instruments310 – the Panel excluded them from the scope of the measures

attributing to its adverse effects findings, reasoning as follows:

The Panel considers that there is insufficient evidence on the record that those other RDT&E programmes funded predominantly assistance instruments, as opposed to procurement contracts, or a mixture of assistance instruments and procurement contracts. The end result is that the European Communities has not advanced sufficient argument or evidence regarding the effects of assistance instruments funded through RTD&E programmes other than in relation to the ManTech and DUS&T programmes.311

242. Consequently, the analysis of the effects of the DOD RDT&E subsidies that

followed was limited to the ManTech and DUS&T programmes, despite the fact

307 Panel Report, para. 7.1701. 308 Panel Report, para. 7.1701. 309 Panel Report, para. 7.1701. 310 Panel Report, para. 6.124 (“{T}he Panel is aware that assistance instruments were funded through RDT&E programmes other than ManTech and DUS&T, and of evidence on the record linking the assistance instruments on record to the RDT&E programmes that funded them.”); see also EU Comments on the Interim Panel Report, Annex A (“Table Listing PE #s Providing Funding for Each DOD Assistance Instrument on the Record”). 311 Panel Report, para. 7.1701.



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that the Panel had found that assistance instruments funded through other DOD

programmes constituted subsidies.312

3. The Panel Failed to Make the Objective Assessment Required by Article 11, Due to Deficiencies in its Provision of Due Process

243. As described above, the Panel formulated its own theories on: (i) the types of DOD

RDT&E contracts that constitute “financial contributions”; and (ii) the distribution

of contract types within a challenged DOD RDT&E programme that must be

demonstrated before that challenged programme can be found to cause adverse

effects. While a panel is not prohibited from formulating an analysis that is

explicitly opposed by both parties, under Article 11 of the DSU, “a panel is also

duty bound to ensure that due process is respected”, particularly because “{d}ue

process is an obligation inherent in the WTO dispute settlement system”.313

244. In this dispute, the Panel failed to meet the standard required by Article 11 of the

DSU because it failed to provide the European Union with an opportunity to

respond to the Panel’s unexpected approach to its adverse effects analysis, or to

seek the necessary information from the United States. As the Appellate Body

stated in US – Gambling, “as part of their duties, under Article 11 of the DSU, to

make ‘an objective assessment of the matter’ before them, panels must ensure that

the due process rights of parties to a dispute are respected”.314 The Appellate Body

explained that a “panel may act inconsistently with this duty if it addresses a

defence that a responding party raised at such a late stage of the panel proceedings

that the complaining party had no meaningfully opportunity to respond”.315 In this

instance, it was not one of the parties that raised an argument at a late stage of the

proceedings, but rather the Panel, itself. And the effect was that the European

Union “had no meaningfully opportunity to respond” to a theory that eliminated all

but two DOD RDT&E Project Elements (“PEs”) from the scope of the R&D

subsidies found to cause adverse effects.

312 Panel Report, paras. 7.1709-7.1797. 313 Appellate Body Report, Chile – Price Band System, para. 176. 314 Appellate Body Report, US – Gambling, para. 273.



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245. As detailed further below, the Panel’s failure was particularly egregious and

harmful in view of the United States’ persistent failure to provide the DOD

RDT&E contracts necessary to conduct the type of analysis required by the Panel.

Indeed, the European Union had asked the Panel to impose adverse inferences in

view of the US non-cooperation in revealing information about the DOD RDT&E

programmes.316

246. It was not until the European Union received the final Panel Report that it had any

hint that the Panel was going to limit its findings of adverse effects to those DOD

programmes that “funded predominantly assistance instruments, as opposed to

procurement contracts, or a mixture of assistance instruments and procurement

contracts”.317 The Panel had not even articulated this approach in its interim

report.318 Instead, the interim report had stated that the Panel included the

ManTech and DUS&T programmes in its adverse effects analysis because they

were funded through cooperative agreements, but that the Panel was excluding all

other RDT&E programmes due to insufficient evidence about whether they funded

assistance instruments or procurement contracts.319 In response, the European

Union prepared a detailed comment drawing the Panel’s attention to the limited

evidence on record of assistance instruments linked to RDT&E programmes.320

Rather than expand its adverse effects analysis to encompass RDT&E programmes

funding at least one assistance instrument as the European Union had expected, the

Panel announced its new “predominan{ce}” standard in the Final Panel Report,

and continued to exclude all but the ManTech and DUS&T Programmes.

247. Given that the European Union and United States both rejected the proposition that

the subsidy or adverse effects analysis should be impacted by the types of contracts

315 Appellate Body Report, US – Gambling, para. 273 (emphasis added). 316 See, e.g., EU FWS, para. 763; EU Response to Panel Question 2(c). 317 Panel Report, para. 7.1701 (emphasis added). 318 This standard and the quoted language was added only after the Panel had reviewed the EU’s interim comments, and found the need for “further clarification” of the Panel’s findings on the effects of assistance instruments funded by projects other than ManTech and DUS&T. Panel Report, para. 6.124. 319 Interim Panel Report, para. 7.1701. 320 Comments of the European Union on the Panel’s Interim Report, p. 22 (comment on para. 7.1701) and Annex A thereof (“Table Listing PE #s Providing Funding for Each DOD Assistance Instrument on the Record”).



90

funded by each DOD RDT&E PE, this finding was even more surprising. Having

decided on an approach to subsidisation and adverse effects dependent on contract-

type, the Panel should have provided the European Union with the opportunity to

explain how the evidence of record relates to that approach, or to point out what

further inquiries and evidence would be necessary for an objective assessment of

the matter.

248. This situation is similar to the one considered by the Appellate Body in US –

Continued Zeroing, where the panel had decided on its own initiative that it needed

a certain type of evidence in order to be satisfied that the complainant had met its

burden. In that dispute, the panel required the European Union to submit original

documents from the US Department of Commerce (“USDOC”) (from the time of

review) before it was willing to accept the EU’s contention that the United States

had made use of the simple zeroing practice in the periodic reviews at issue.321

The Appellate Body found that the panel had violated Article 11 of the DSU, in the

following terms:

{I}t is not enough for a panel to leave it to the parties to guess what proof it will require. Moreover, while a panel cannot make the case for a party, Article 11 requires a panel to test evidence with the parties, and to seek further information if necessary, in order to determine whether the evidence satisfies a party’s burden of proof. As the Appellate Body has explained “{a} panel may, in fact, need the information sought in order to evaluate evidence already before it” so as to make an objective assessment of whether the complaining party has established a prima facie case, regardless of whether a party has requested such information. In our view, the Panel required evidence that was authenticated as USDOC documents, but then did not take the necessary steps to elicit from the parties information that might, in the words of the Panel, “elucidate its understanding of the facts and issues in the dispute before it”.322

249. Just like the requirement for “evidence that was authenticated as USDOC

documents” in the US – Continued Zeroing dispute, the Panel in this dispute

required evidence that the RDT&E programmes funded “predominantly assistance

instruments, as opposed to procurement contracts, or a mixture of assistance

321 Appellate Body Report, US – Continued Zeroing, para. 347. 322 Appellate Body Report, US – Continued Zeroing, para. 347, quoting Appellate Body Report, Canada – Aircraft, para. 192 (internal footnote omitted).



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instruments and procurement contracts”, before it was willing to find that those

RDT&E programmes caused adverse effects.323 Yet, neither party was ever asked

to provide this information. In the words of the Appellate Body, it was “not

enough for a panel to leave it to the parties to guess what proof it will require”.324

Nor did the European Union in this dispute have any reason to believe that such

evidence of “predominance” of contract-type would be relevant, yet alone

determinative, for the Panel’s analysis of whether DOD RDT&E programmes (to

the extent they provide subsidies) would be found to cause adverse effects.

250. While the Panel did ask a series of questions about the distinction between

procurement contracts and assistance instruments, the US and EU answers were

always the same – i.e., in their view, this distinction made no difference for the

Panel’s analysis of the existence and effect of the subsidies stemming from the

challenged DOD RDT&E programmes.325

251. Moreover, it is essential to recall that the United States had refused to provide the

information that would have permitted a contract-by-contract analysis. The United

States failed to disclose all of the contracts funded by the challenged DOD

RDT&E PEs,326 and redacted key information (e.g., statements of work) in a

number of the contracts that were actually provided. It did so despite the existence

of two levels of confidentiality protection, including protection for Highly

Sensitive Business Information.327 As the European Union explained:

323 Panel Report, para. 7.1701. 324 Appellate Body Report, US – Continued Zeroing, para. 347, quoting Appellate Body Report, Canada – Aircraft, para. 192 (internal footnote omitted). 325 EU Response to Panel Questions 19 and 20(b), paras. 71-73, 74 (“the form of the instrument chosen ... is not decisive for the analysis of whether a transaction is properly characterised as a ‘purchase of services’”); US Response to Panel Questions 19 and 20(a), paras. 42-60; EU Comments on US Responses to Panel Questions 19 and 20(a), paras. 67-78. 326 EU Comment on US Response to Panel Question 212, paras. 256-257 (clarifying the EU critique of the “overly narrow US selection criteria” for identifying contracts to share with the Panel, and pointing to “evidence calling into question the completeness of the US process for identifying relevant contracts.”). 327 EU Response to Panel Question 190(b), para. 321.



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Unless the United States discloses all of the contracts (including “procurement contracts,” “cooperative agreements,” “technology investment agreements,” “other transactions,” etc.) and sub-contracts pursuant to which Boeing and McDonnell Douglas received funding and support under the 23 DOD RDT&E PEs at issue, including all relevant dollar figures, statements of work, indications and values of goods and services provided under the contracts, etc., there is no way to conduct an adequate bottom-up analysis of the financial contributions to Boeing’s LCA division from the DOD RDT&E Program.328

While the European Union consistently criticised this lack of cooperation with

respect to its ability to value the DOD RDT&E subsidies at issue, it did not

appreciate the further implications that would arise from an unexpected focus by

the Panel on contract-type in evaluating existence of subsidies and adverse effects.

As discussed above, the European Union did not know of the full extent of this

focus until it received the Final Panel Report, at a point where the record was

closed. Thus, to the extent the Panel was determined to focus on contract-type in

order to evaluate existence and effects of DOD RDT&E subsidies, it was even

more imperative that the Panel not let the parties speculate on what information it

would require. Instead, in this situation it was imperative for the Panel to request

the contract information from the United States that the European Union had been

seeking to enable it to make the assessment it considered necessary to resolve the

dispute.

252. Yet, despite the failure of the United States to provide the detailed contract-

specific and PE-specific information requested repeatedly by the European Union,

the Panel did not ask any questions that would enable it to determine the precise,

or even approximate, division of contract types within each of the challenged DOD

RDT&E programmes. Nonetheless, it was this division that served as the basis for

the Panel’s decision to exclude all but two of the challenged programmes. In

particular, the Panel found that only those DOD programmes that funded

“predominantly assistance instruments, as opposed to procurement contracts, or a

mixture of assistance instruments and procurement contracts”329 could be found to

328 EU SWS, para. 464. 329 Panel Report, para. 7.1701.



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cause adverse effects, without asking for a breakdown of contract-types funded by

each challenged programme.

253. The closest the Panel came to asking about the allocation of contract types within

particular DOD RDT&E PEs was the following, where the Panel asked for

confirmation of its erroneous assumption that each PE was exclusively funded by

the same contract type:

Question 321 Is the Panel correct in its understanding that some of the DoD RDT&E project elements at issue were funded through cooperative agreements or other “assistance” instruments, whereas others were funded through procurement contracts? If so, please clarify which project elements were funded through cooperative agreements or other “assistance” instruments, and which project elements were funded through procurement contracts.

254. In response, the European Union stated that the Panel’s understanding was

incorrect, but noted also that “as the information linking contracts and contract

types to PEs rest with the United States – information that the United States only

began to share, in limited part, at the late stage of responding to the Panel’s

questions following the second substantive meeting – it remains for the United

States to confirm the EC understanding”.330 The United States confirmed the EU’s

understanding (and the Panel’s misunderstanding), explaining that “program

elements typically do not, by their terms, provide funding through one type of

instrument” and noting that “{n}one of the 23 PEs challenged by the EC make

such specifications”.331

255. After receiving this clarification, the Panel decided that it would nevertheless find

adverse effects from only those DOD PEs “predominantly” made up of assistance

instruments. Yet, the Panel erred when it opted to make its decision based on the

evidence of record and failed to seek from the United States the necessary

information that the United States had failed to disclose on its own initiative. It

was imperative for the Panel to enquire as to which DOD RDT&E PEs would

satisfy the Panel’s test. In finding that it had evidence of only two DOD RDT&E

330 EU Response to Panel Question 321, para. 29. 331 US Response to Panel Question 321, paras. 20-21.



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PEs that were composed predominantly of assistance instruments, the Panel

referenced a few non-exhaustive examples submitted in passing by the United

States as part of its response to Question 321.332 In particular, the United States

referred to the ManTech and DUS&T programmes as examples of programmes

that tended to make use of assistance instruments.333

256. The United States never stated that these were the only two programmes that

tended to use assistance instruments, and the Panel never exercised its right to ask

pursuant to Article 13 of the DSU. And there was no reason for the parties to

know that the Panel, at any point, was considering whether to include or exclude

entire DOD RDT&E PEs on the basis of whether they predominantly used

assistance instruments.

257. Moreover, the Panel failed to draw reasonable inferences from instances of US

non-cooperation in disclosing the relevant contracts, as “an ordinary aspect of the

task of all panels to determine the relevant facts of any dispute involving any

covered agreement”,334 and as it could have pursuant to paragraphs 6 to 9 of

Annex V of the SCM Agreement.335

258. Consequently, the Panel failed to protect the due process rights of the European

Union, in violation of Article 11 of the DSU. The impact of these errors on the

EU’s due process rights was escalated by the United States’ continuing failure to

disclose the RDT&E contracts and details about the RDT&E project elements that

were exclusively in its possession. As demonstrated above, the European Union

“had no meaningful opportunity to respond”336 to the Panel’s novel theory, and the

Panel did not conduct a factual enquiry that would enable it to consider the

evidence necessary to reach a conclusion based on that theory. Just like the US –

Continuing Zeroing panel, this Panel “required evidence ..., but then did not take

332 Panel Report, para. 7.1701. 333 US Response to Panel Question 321, para. 21. 334 Appellate Body Report, Canada – Aircraft, at para. 202 (footnote omitted). 335 See supra Section II. 336 Appellate Body Report, US – Gambling, para. 273 (emphasis added).



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the necessary steps to elicit from the parties information that might ... elucidate its

understanding of the facts and issues in the dispute before it”.337

259. In summary, the Appellate Body should reverse the Panel’s finding that the DOD

RDT&E programmes (other than ManTech and DUS&T) do not cause the same

effects as the other aeronautics R&D subsidies,338 at least to the extent that those

remaining DOD RDT&E programmes are funded through assistance instruments.

This finding was reached in violation of Article 11 of the DSU. The European

Union does not, however, ask the Appellate Body to complete the analysis.339

VI. CONCLUSION

260. For the reasons set out herein, the European Union requests the Appellate Body to

reverse or modify the legal findings and conclusions appealed by the European

Union in this appellant submission, and complete the analysis where requested to

do so.

337 Appellate Body Report, US – Continued Zeroing, para. 347 (internal quotation marks omitted). 338 Panel Report, para. 7.1701. 339 The European Union recognises that the Panel did not undertake the necessary factual analysis (and could not do so given the United States’ failure to provide the required un-redacted documents). Accordingly, the European Union does not consider that there is a basis for the Appellate Body to complete the analysis. However, reversal of the Panel’s finding is important, as it avoids creating findings that might bind an arbiter in possible subsequent proceedings in this dispute.

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