SICE - WTO Dispute Settlement WTO Report WT/DS126/R

World Trade

Organization

WT/DS126/R
25 May 1999
(99-1888)
Original: English

Australia - Subsidies Provided to Producers and
Exporters of Automotive Leather

VII. Main Arguments of the Parties: D. Article 3.1 (a) of the SCM Agreement, 4. Application of Article 3.1 (a) of the SCM Agreement in this dispute

7.251 The United States submits that, given the large disparity between Howe’s increased capacity and the domestic demand for its product, Howe’s increased sales and production capacity will necessarily be targeted towards, and tied to, foreign markets. Even if the Australian market for automotive leather were to double between 1997 and 2000 (to almost 3,000 hides per week), this increased demand would take up less than 15 per cent of Howe’s new production capacity. Clearly, the United States argues, for Howe to reach its sales goals and use its expanded capacity, it must increase its exports dramatically.

7.252 According to the United States, the anticipated increases in sales and production are consistent with promises Howe made in its bid for the replacement package. It has been reported that Howe “promis[ed] untold export riches ($600 million over the four years to the 2000)” to the Australian government in order to secure the new subsidies.[160] Specifically, Howe projected that its automotive leather sales would mushroom from $88.6 million in 1997 to $214 million by 2000, with the lion’s share of the growth coming from exports.

7.253 Australia submits that the loan contract plainly has no possible connection with any sort of performance, let alone a tie to exports. Indeed, the United States has not even seriously tried to make a connection beyond questioning how the loan contract will be serviced. The loan contract itself provides the conditions under which the actual money was lent, including the assets of the parent company, ALH, being security for the loan and the terms under which payments are to be made by the parent company and Howe. Virtually all companies have loans as a matter of normal business practice, loans which have to be serviced and turned over as part of the normal cash flow of a company’s operations. There is nothing particularly different about this loan. The loan contract was made on 9 March 1997. While it does extend to 1 February 2012, the government has no call on the money so long as the company makes repayments according to schedule. The level of sales is irrelevant so long as the company pays the government any monies owing, and the United States has not made any allegations or produced any facts to the contrary. How much the company produces and to whom it sells is irrelevant. The money is simply not recoverable except according to the loan contract, i.e. the repayments of principal and interest owing. There is no connection with sales, let alone exports, under the contractual relations between the company and the government.

7.254 With respect to the grant contract, Australia maintains that only the first two payments under the grant contract are measures before the Panel. These were both made by July 1997. The monies are not recoverable regardless of the actual level of sales by the company and so cannot be considered to be in some way in fact tied to exports. According to Australia, there is no way in which they could be linked in even the most tenuous way to future exports, let alone satisfy the stringent requirements for the “in fact” condition in Article 3.1(a) of the SCM Agreement. The first payment of A$5 million was made following the signing of the grant contract. This was an automatic payment. It was not tied to anything, let alone export performance. The second payment of A$12.5 million (the other measure before the Panel) was the maximum allowed. It was made on the basis that the company had satisfied its investment and sales targets on a best endeavours basis. There is no way that the company could have obtained more money regardless of how much it invested or sold.

7.255 In Australia’s view, subsequent payments are not measures before the Panel. However, the maximum amount under the grant contract has been all but paid out, with the company exceeding its investment targets. The third payment was made on the basis of an assessment in July 1998 that the company had on balance performed satisfactorily on a best endeavours basis in respect of a combination of investment and production in 1997/98, as well as normal due diligence considerations such as whether the company was functioning properly. The government cannot take back that money provided that the company continues in business. The money has been paid out lawfully. The company could expand or reduce sales and the status of the payments under the grant contract would be unchanged. The money is gone and there is no connection with future sales, including sales for export.

7.256 The United States underlines that the terms of the assistance package and the limited size of the Australian market for automotive leather make clear that the subsidies are in fact tied to Howe's export performance. The fact that Australia thus far has paid out the maximum amounts in grants allowed under the assistance package -- coupled with the fact that Howe's business is almost exclusively dedicated to exporting -- indicate that Australia, in effect, has provided Howe with substantial financial benefits based on its export performance.

7.257 In respect of Australia's claim that the grants in the assistance package are calculated based on Howe's total production, not on exports, and therefore are not tied to export performance, the United States asserts that, given the large disparity between Howe's increased capacity and the domestic demand for its product, its increased production capacity resulting from the assistance package will necessarily be targeted towards, and tied to, foreign markets.

7.258 In respect of Australia's argument that the loan had no conditions for disbursement and therefore is not tied in any way to exports, the United States asserts that, first, although the loan contract is a separate measure, it is inextricably linked to the grant contract. Both these measures, which were announced at the same time, were provided to Howe to compensate for its exclusion from the export subsidies under the ICS and EFS programmes. In addition, the United States points out, Australia states with regard to the loan that "the level of sales is irrelevant so long as the company pays the government any monies owing…." The Australian government has stated publicly that the new subsidies were the minimum amount necessary to ensure the viability of the company and that "any amount less than provided by the assistance package would in all likelihood have seen the company fold." In the view of the United States, given the fact the company has no choice but to increase its exports in order to increase its sales given the limited size of the domestic market, the fact that the company exports over 90 per cent of its production, and the acknowledgement by the Australian government that the company's survival depended upon the new subsidies, the viability of the loan is necessarily contingent upon Howe's export earnings. If Howe does not export, the Australian government will not be repaid. Consequently, the loan is "in fact tied to Howe's actual or anticipated exportation or export earnings" as provided in Article 3.1 of the SCM Agreement.

7.259 According to the United States, it is also significant that the replacement subsidies provided to Howe have not been provided to other Australian producers of automotive leather for the Australian market. This reinforces the notion that the replacement package is not part of a general domestic subsidy programme intended to benefit the leather industry, but instead is more narrowly focused on a unique Australian business that overwhelmingly exports its products.

7.260 Australia responds by stating that it is unclear what is meant by the statement of the United States that the loan contract is "inextricably linked to" the grant contract, given that the time periods and conditions are quite different. Moreover, this does not explain how under Article 3.1(a) of the SCM Agreement, there is any justification for looking at a number of measures simultaneously to determine their WTO status. For a violation case, each measure before the Panel needs to be looked at separately, and the United States has not sought to rebut that through argument. Australia maintains that the loan is a separate measure that needs to be assessed separately in its own right.

7.261 With respect to the loan, Australia submits that there is no basis for the United States' assertions that ‘if Howe does not export, the Australian government will not be repaid and that, consequently, the loan is “in fact tied to Howe’s actual or anticipated exportation or export earnings.”’, and no argument is presented by the United States to support them. In fact, there is no commercial or legal basis on which the loan contract could be interpreted in this way. The loan is to ALH and Howe. The loan is secured by ALH. The servicing of the loan contract will not commence before 2003. Precisely how the borrowers finally acquit the loan is a matter solely for the borrowers themselves, and there is nothing to support a claim that the loan can only be serviced through income generated from export sales, in particular export sales of automotive leather. The ability of ALH to repay does not rely solely on the domestic or export markets for automotive leather. These are currently important elements of the Group’s operations, but it is impossible to say what the markets or the product mix will be when the major repayments are due. The loan contract determines the interest rate payable and the schedule for repayments of principal. It does not prescribe how ALH will fund the repayments or from where it will source these funds. There is no tie to sales or export performance or to the product or products concerned.

7.262 Australia asserts that the continued commercial viability of the ALH Group, as with all firms, depends on sales in all markets and not just export markets. In Howe’s case specifically the company has two main facilities: the tannery at Rosedale; and the finishing plant at Thomastown. The tannery produces wet blue hides and crust leather. These can go to many types of leather, both on domestic and export markets. While at the moment the production of Rosedale is going in the main to Thomastown, technically there is nothing fixed about this. In the longer term if the market changed, hides could go for other than automotive leather at Thomastown. Similarly, while some of the finishing and cutting machinery is adapted to the production of automotive leather, this is by no means fixed. The works can, and currently do, produce leather other than automotive leather. If the market for automotive leather changed, then the output from both Rosedale and Thomastown would change. This is the way all businesses work and adapt. Australia observes that the loan contract does not prevent Howe from producing and selling other products. It is impossible to say what the nature of the fashion and global market for automotive leather and other leathers will be by the end of the loan contract’s repayment period. Certainly, there is nothing to suggest that it has to be paid back through production, let alone exports, of automotive leather.

7.263 Australia asserts that, regarding the first two payments under the grant contract (the only ones that Australia considers are before the Panel), the first payment was simply A$5 million, while the second payment was capped at A$12.5 million and this was paid in full. The first payment was made in March 1997 following the completion of the grant contract in March 1997. This was simply a flat payment and not subject to any assessment of investment or sales. It was not contingent on the company doing anything and so could not be linked in any way to export performance. The second payment was made in July 1997 against investment as well as sales. The maximum amount was paid of A$12.5 million because the government assessed that the company had used its best endeavours regarding investment and production in 1996/97. There was no way in which more could have been paid regardless of the actual amount of investment or sales. Australia argues that further payments are not before the Panel. However, the third payment was again made on the basis of an assessment in July 1998 that the company had on balance performed satisfactorily on a best endeavours basis in respect of a combination of investment and production in 1997/98, as well as normal due diligence considerations such as whether the company was functioning properly. Australia asserts that business confidential information it provided to the Panel supports its position that the payments to Howe under the grant contract were not based on Howe's export performance.

7.264 The United States considers that Australia's arguments regarding the "automatic" nature of the first grant payment and the fact that it preceded performance under the grant contract is flawed for two reasons. First, this payment, like the other payments, was made pursuant to the single grant contract which is tied to Howe's export performance. The facts in this case -- including the prior "in law" automotive and textile export subsidies, Howe's exceptional export performance, the small size of the Australian market, the statements by high level Australian government officials and Howe -- prove that the grant contract, which subsumes the grant payments, was provided in anticipation of exportation and export earnings. Furthermore, it is immaterial that this initial payment was automatically made prior to Howe's performance under the grant contract. Footnote 4 encompasses subsidies "tied to … anticipated exportation or export earnings" (emphasis supplied by the United States); thus, exportation can follow the granting of the benefit. To be actionable as a prohibited subsidy, the facts need only demonstrate that, like in this case, the subsidy was provided because of foreseeable or probable export conduct.

7.265 Further, the United States contends, Australia asserts that the second and third grant payments are not "in fact" export subsidies because the grant contract does not require Howe actually to achieve any sales targets; instead, Howe only has to use its "best endeavours" to do so. The strict prohibition against export subsidies cannot, however, be so easily circumvented. Clearly, Australia conferred these payments in the expectation that Howe would attempt substantially to increase its exports. That Australia would provide grant payments even if Howe did not fulfill its ambitious promises only underscores the extent of Australia's commitment to this export-oriented company. In other words, regardless of whether it actually met its performance commitments, Howe would receive additional grant payments because any increased production would – given the small size of the Australian automotive market – necessarily be shipped abroad.

7.266 With respect to the grant contract, Australia asserts that Article 3.1(a) and footnote 4 of the SCM Agreement are about a panel reaching the conclusion demonstrated through an objective assessment of facts that the granting of a subsidy is contingent upon export performance, even though it may not be required in law. This contrasts sharply with the situation under the grant contract, where the official responsible for administering the Australian government’s obligations under the contract is required in law to consider total sales and so does not discriminate between domestic and export sales. Indeed, Australia states, the United States has not even made an allegation that the administration of the grant contract, i.e. the actual disbursement of the grants, is in any way contingent on export performance.

7.267 Australia notes that the United States seems to consider that providing assistance to only one producer of automotive leather in Australia is significant. The fact is that Howe is the automotive leather industry in Australia. There is nothing in the WTO Agreement that says that Members cannot provide assistance to such firms, and the United States has not made any legal argument about this. This is a natural occurrence in a small country. Similarly, Australia points out, the United States seems to consider that it is significant that this company is the only firm to be benefiting from the arrangement. Again the history of this is clear, i.e. the arrangements cover just automotive leather with Howe being the only significant producer in Australia.

7.268 The United States repeats that the terms of the assistance package and the limited size of the Australian market for automotive leather make clear that subsidies are in fact tied to Howe’s export performance. The Australian government conditioned receipt of the grant monies upon Howe dramatically increasing its sales and meeting certain capital investment requirements.

7.269 Australia responds that the United States has not demonstrated its assertion that the Australian government conditioned receipt of the grant money upon Howe dramatically increasing its sales. Indeed, the record shows that Howe simply received the first payment ($A5 million) on execution of the grant contract. The second payment of $A12.5 million was on the basis of the next three months, which was hardly time for a dramatic increase in exports. The third payment was on the basis of 1997/98, and again the record shows that this was not on the basis of increased sales of automotive leather. Australia bases these assertions on business confidential information it provided to the Panel.

7.270 Australia states that, in referring to “conditioned receipt of the grant money”, the United States again appears to have moved from its position that the issue is the information available at the time of granting the grant contract to the issue of the basis for granting the individual payments. Otherwise it must be saying that the Australian Government did not care what the actual outcomes would be – if so, the standard of footnote 4 of the SCM Agreement can hardly have been met.

7.271 In addition, Australia submits, “conditioned receipt” is an interesting phrase. “Conditioned” means “subjected to conditions or limitations.[161] Thus, this phrase can only refer to the granting of the payments after the first payment and not to anything else. Clearly, the granting of the loan contract, the money under the loan contract, and the grant contract were not subject to any requirements. Moreover, the first payment under the grant contract was not subject to any conditions. In addition, the record shows that there was no such “conditioned receipt” related to exports. The United States asserts that the capital expenditure implies an enormous increase in production. The capital expenditure was on a new finishing plant and on a tannery. A tannery does not increase Howe’s capacity to produce automotive leather. It aims to improve Howe’s efficiency as an integrated operation. However, Howe sourced hides from other companies before the plant was established and still does. Some semi-processed hides are even imported. The capacity for producing automotive leather depends on the finishing plant. This was a replacement for an old plant. It was not an additional plant. Its purpose was to increase efficiency not to increase capacity. The efficiency dividend has had the effect of increasing practical capacity by about a quarter, but capacity does not reflect production levels. In the real world, plants rarely run at anything like the full theoretical capacity for extended periods of time. Indeed, a maximum weekly capacity figure cannot be directly translated into annual figures. The United States has simply taken an old press figure on production levels, derived a capacity figure, and come to the conclusion that production has doubled.[162]

7.272 The United States contends that, at the time the Australian government agreed to provide the assistance package, the Australian domestic automobile market could not absorb all of Howe’s production, let alone any increased production. To the United States, the fact that Australia thus far has paid out the maximum amounts in grants allowed under the assistance package -- coupled with the fact that Howe’s business is almost exclusively dedicated to exporting -- strongly indicates that Australia provided Howe with substantial financial benefits based on its export performance.

7.273 Australia responds that these arguments do not demonstrate that the granting of a subsidy was contingent upon export performance. Indeed, the record shows quite the contrary. The grants paid to Howe were not based on Howe's export performance. The final sentence of the United States' arguments in the previous paragraph -- “[t]he fact that Australia has thus far paid out the maximum amounts in grants …” – underscores that the United States is moving between its two stools of whether it is talking about the payments or the grant contract.

7.274 The United States insists that, because of the large disparity between Howe’s increased capacity and the domestic demand for its product, Howe's increased production capacity resulting from the assistance package will necessarily be targeted towards, and tied to, foreign markets. The Australian government realized that Howe could not meet its "sales target" -- that is, its expanded "export" goals -- unless it substantially expanded its capacity. Thus, the capital investment made by Howe was needed before it could achieve the anticipated export levels. Simply saying that this money was tied to production and spent on Howe's investments is therefore not sufficient to break the link between the export‑nature of these substantial benefits.

7.275 Australia responds that, clearly, if a firm exports, then in a trivial sense, some of its sales go to foreign markets. However, this is not the same as being “tied to, foreign markets” as stated by the United States. The grant contract shows that that was not the case. On the issue of investment, Australia has informed the Panel, and the United States has not denied, that it was at the insistence of the United States that the company was obliged to implement an investment programme amounting to much of the A$30 million of the grant contract. This was done to meet the wishes of the United States not with any idea of linkage to exports in mind.

7.276 The United States asserts that the fact that export promotion is merely one of several objectives for a programme does not mean that a programme is not an export subsidy. Article 3.1(a) of the SCM Agreement specifically notes that export subsidies are prohibited when the subsidies are contingent upon export "whether solely or as one of several other conditions." Clearly, the United States argues, other conditions may be imposed on the recipient, but so long as the benefit is tied to exports, an export subsidy still exists. Indeed, in many instances, a subsidy may have more than one objective. As Australia has admitted in this case, the subsidy programme was given for two reasons: (1)to allow Howe to increase its investment; and (2) to ensure that Howe would reach its "sales" (or export) targets.[163] Thus, nothing in the SCM Agreement indicates or suggests that subsidy programmes must only have a single goal of promoting exports. The express language of the Agreement makes this clear. Rather, if one component of the subsidy programme is that the aid is tied to actual or anticipated exports, then the programme is an export subsidy.

7.277 The United States repeats that, although the loan contract is a separate measure, it is inextricably linked to the grant contract. Both these measures, which were announced at the same time, were provided to Howe to compensate for its exclusion from the export subsidies under the ICS and EFS programmes.[164] Finally, the Australian government stated publicly that the total replacement package was the minimum amount necessary to ensure the viability of the company and that “any amount less than provided by the assistance package would in all likelihood have seen the company fold.'[165] Clearly, the Australian government considers that the loan and the grant were always part of a single benefit package given to Howe.

7.278 Australia notes that the United States recognizes that the loan contract is a separate measure and does not deny that the two contracts (i.e. grant and loan) are legally separate instruments. Under Article 3.1(a) of the SCM Agreement, a panel is required to look at each subsidy separately to determine whether it meets the standards set out in that article. There is no provision for cumulating subsidies as there is under Parts III and V of the SCM Agreement. The Panel’s terms of reference are clear that the loan contract is a separate measure and so needs to be looked at separately on its own merits.

7.279 According to Australia, the language of the contracts is simply the standard legal terminology used in contracts by the Australian Department of Industry, Science and Resources (previously Industry, Science and Tourism) and does not represent any legal relationship between them that would result in a nexus under Article 3.1(a) of the SCM Agreement. To the extent that the United States argues on the basis that the two contracts replaced the application of the ICS and EFS to automotive leather, then it is not logical to consider the two contracts together. The loan contract runs until 2012. The grant contract runs until 2000 for auditing purposes but its payments are on the basis of the period to mid-1998. On the other hand, the ICS and EFS terminate in 2000. Following the termination of the ICS in mid-2000, automotive leather is to be covered by the new general textile, clothing and footwear industry arrangements.

7.280 According to the United States, it is also significant that the replacement subsidies were designed and structured specifically for Howe after an accounting firm was commissioned to study the issue[166] and that no similar subsidies have been provided to other Australian producers of automotive leather for the Australian market. This reinforces the notion that the replacement package is not part of a general domestic subsidy programme intended to benefit the leather industry, but instead is more narrowly focused on supporting a unique Australian business that overwhelmingly exports its products.

7.281 In response, Australia states that the arrangements were designed and structured to try to meet the requests of the United States government. The circumstances of why these applied to automotive leather alone are clear and there are no other substantial, dedicated producers of automotive leather in Australia. In particular, there are no other producers of automotive leather for the original equipment manufacturers (OEM) market.

7.282 The United States asserts that Australia's argument that the United States has failed to demonstrate an "in fact" export subsidy is without merit. The argument of the Australian government that the grant and the loan are not "tied" to exports because Howe would not be required to return either the grant or loan if the company ceased exporting is both factually and legally incorrect. First, Howe was principally an exporter when the initial funds were given and it continues to export in significant volumes. As the Australian government indicated, Howe met its "sales target" as established by the grant contract, and the second and third payment of the grant were in fact dependent on Howe having met these goals. Thus, any export goals the Australian government may have expected from Howe were being met.

7.283 Australia states that these comments must arise from a misunderstanding by the United States. The relevant paragraphs to which the United States refers are in respect of the loan contract. The loan contract has nothing about sales, let alone exports. Moreover, there is nothing that says where the money has to come from to service the obligations of ALH (including Howe) under the loan contract. There is nothing that ties the servicing of the loan contract to automotive leather, let alone to exports of automotive leather. The other provisions cited by the United States are about the grant contract and are about the past rather than the future, i.e. about 1996/97 and 1997/98. These payments were not based on Howe meeting any “export goals”. The success or otherwise of Howe in making sales of automotive leather in the future, including to overseas markets, is not relevant. If Howe is unable to sell more automotive leather, or indeed if sales happened even to fall, there would be no recovery of the monies. The future performance of the company is not an issue. In addition, the grant contract was about investment and sales by the company and not just sales of automotive leather, i.e. it was not limited to automotive leather. There is clearly no connection to future sales of automotive leather, let alone any aspect of the grant contract being contingent upon export performance.

7.284 The United States argues that whether the grant or loan is recoverable if the recipient ceases to export is not dispositive of whether the programme is an "export subsidy" in law or in fact. Rather, the dispositive question is whether, at the time the subsidies were granted, they were tied to the actual or anticipated exportation or export earnings. In this case, the answer to this question is manifestly "yes." These funds were not given to just any company with the potential to increase its investment and sales. The funds were given to a company who was well known for its aggressive export plans and its past performance of exporting 90 per cent of its sales. Moreover, these funds were given to compensate Howe for losing two "in law" export subsidies, with the publicly stated purpose of promoting exports, and were given to Howe to increase its capacity even though the Australian market could in no way absorb Howe's expanded capacity to produce automotive leather. The United States maintains that thus, the overwhelming evidence -- evidence that was never rebutted by Australia -- demonstrates that the grant and loan were tied to anticipated exports and that the Australian government's expectations in this respect were not disappointed.

7.285 Australia contends that the United States appears to be arguing here about the conditions of the granting of the loan contract and the conditions of the granting of the grant contract. The United States is arguing that the fact that an enterprise exports and is anticipated to continue to export is equivalent to the granting of a subsidy being tied to exports or the anticipation of exports. The two concepts are not the same, apart from this linkage being ruled out by footnote 4 of the SCM Agreement. The acceptance of such a linkage would mean that giving a subsidy to any enterprise that is dependent on export markets would be prohibited. Conceptually, a company might export less than 50% of its production and still be financially dependent on exports. Indeed, this would often be the case.

7.286 Australia submits that, in the case of the grant contract, the United States appears to be arguing that the conditions under which the actual payments were made is irrelevant. This can only mean that the United States is saying that it does not matter on what basis decisions were taken to pay the money to the company. As a result, the United States is falling back on a level of exports test. This is not the standard set out in footnote 4 of the SCM Agreement. It does not demonstrate thetie required to conclude that the granting of the grant contract was contingent upon export performance.

7.287 According to the United States, the Australian government's suggestion that subsidies can only be "tied" to exports if the monies are refundable if export goals are not met would effectively negate the explicit language of the SCM Agreement. Footnote 4 to Article 3.1(a) of the SCM Agreement states that an export subsidy in fact exists "when the facts demonstrate that the granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings"(emphasis supplied by the United States). The ordinary meaning of the term “anticipate” is “expect, foresee, or regard as probable."[167] The ordinary meaning of the term is incompatible with Australia’s argument that a subsidy would only be conferred upon actual exportation or lost if the recipient is unable to demonstrate that the goods were exported.

7.288 Australia responds that the standard of footnote 4 of the SCM Agreement requires that thetie to actual or anticipated exportation or export earnings must be demonstrated. Australia has not said that this meant that there had to be a requirement for monies to be repaid if anticipated exports were not achieved. Presumably, if there was a legal requirement in respect of anticipated exports, then the subsidy would be in law contingent on export performance. There are many ways in which this could be handled administratively. For example, the administration might want to see delivery contracts for exports before paying money out or might penalize a company by reducing future payments. This goes to the crux of what is meant by “in fact” in Article 3.1(a) of the SCM Agreement. This is supposed to be about administration of schemes whereby payments are contingent on export performance while not being legally contingent upon export performance. In this particular case, the legal nature of the contracts specify the terms under which the monies are paid out and so remove the scope for such administrative action.

7.289 In response to questioning from the Panel, Australia asserted that the phrase “anticipated exportation or export earnings” has to be read not only in the context of the full phrase “actual or anticipated exportation or export earnings”, but also in the context of the whole of Article 3.1(a) and footnote 4 of the SCM Agreement. The phrases “actual exportation or export earnings” and “anticipated exportation or export earnings” relate to the timing of the payments contingent upon export performance. The two phrases cover concrete exports that have been made or will be made, respectively. The distinction between exportation and earnings relates to product volumes and earnings to cover all variations. For Australia, this underlines that the discipline is in respect of real export performance, and not some more far-reaching rule based on level of exports as proposed by the United States.

7.290 The United States asserts that, in making its assertion that the benefits were not "tied" to exports, the Australian government has misinterpreted a portion of the United States' argument. Australia suggests that the United States is arguing that "the cap" on the grant of A$30 million subsidy makes the measure prohibited. The United States is not arguing that the cap on the amount of the grant somehow affected the nature of the subsidy. Rather, as the Australian government itself indicates, the continued payment of the grant was tied to the volume of "sales." Given that the overwhelming majority of these "sales" could only be exports because of the small domestic market for automotive leather, the Australian government's own admission reveals that in fact, the grant was "tied" to exports.

7.291 Australia counters that the statement on which the United States comments in the above paragraph simply pointed out the false logic in the United States' argument about the company needing to increase its sales to A$600 million in order to obtain the full A$30 million and so this cap apparently meant that it was an export subsidy. The hypothetical point was made that Article 3.1(a) of the SCM Agreement is not supposed to prohibit bounty payments (i.e. payments based on the amount of production or sales). Many bounty schemes are uncapped and the more that is produced, the more the monies paid out. That does not make them prohibited. It would be absurd to have the situation where a cap on the amount of money suddenly made a bounty prohibited, which seemed to be the logic of the United States' position. This particular case is not about a bounty and the company did not have to achieve the levels of sales being talked about by the United States.

7.292 The United States contends that the Australian government's attempt to distort the facts and arguments raised in this case and apply them to some potential future situation should not dissuade the Panel from carefully analyzing the facts in this case. Despite Australia’s claim, there would be no bias against smaller WTO Members if the Panel rules in favour of the United States in this proceeding. This case does not turn on the fact that Australia only has one exporter of automotive leather. If 100 companies had been excluded from Australia’s textile and automotive leather programmes; and if those companies had high export levels; and if each then received the same grant and preferential loan bestowed on Howe; and if high-level government officials stated that the replacement subsidies were being given to ensure the continuation of their exports; and if the Australian automotive leather market could not absorb additional production; then an "in fact" export subsidy would still have been conferred – even though 100 companies were involved. In other words, this case does not turn on the fact that only one exporter received this benefit. Rather, the relevant fact highlighted by the United States was that only the exporter of leather received this benefit, not other Australian leather tanners that were not exporting. If the Australian government was interested simply in expanding its leather industry in Australia, presumably it would have provided benefits to all leather tanners, not just the one exporter. Thus, the Australian government's attempt to apply the facts of this case to a situation involving smaller WTO Members is not valid. As this demonstrates, smaller WTO Members will not be disadvantaged by an affirmative finding in this proceeding.

7.293 Australia maintains that the small country issue is about the relative size of domestic markets and the economies of scale in manufacturing processes. In a small country such as Australia, there would be a limited range of manufactured products where there would be 100 companies producing that product let alone with each having a high level of exports. On the other hand, in a country the size of the United States, it might be more likely for there to be 100 manufacturers of a particular product line, though it would be limited by the nature of the industry. For example, the automotive leather industry is highly concentrated in the United States.

7.294 Australia states that the United States' argument about other leather companies not receiving the same arrangements is irrelevant, given the background to this case. Automotive leather will be part of the new general textile, footwear and clothing industry arrangements due to come into force on 1 July 2000.

7.295 The United States argues that Australia’s concern about the same subsidy being treated as a domestic and export subsidy is unwarranted. In determining the existence of an "in fact" export subsidy, a panel must consider all of the facts surrounding the provision of the aid. It should look at whether and to what extent an industry is currently engaged in exporting and whether the proposed aid is provided in order to encourage increased exports. The fact that some entities in an industry export while others do not is just one of many facts that the Panel should consider in making its decision. If, on the basis of all of the facts surrounding the granting of the aid, the Panel makes an affirmative decision, the aid will be treated as an "in fact" export subsidy – regardless of whether it is provided to an exporting or non‑exporting entity. In other words, all recipients will be treated the same once the decision on the nature of the subsidy is rendered.

7.296 To Australia, the previous paragraph highlights the inconsistency of the United States' position with the SCM Agreement and underlines the risk of moving away from normal rules of treaty interpretation in examining the meaning of Article 3.1(a) of the SCM Agreement. The United States says that ‘the aid will be treated as an “in fact” export subsidy -- regardless of whether it is provided to an exporting or non-exporting entity.’ Thus, the United States admits that the logic of its argument is that the provision of a subsidy to an enterprise that does not even export anything at all could be prohibited as an export subsidy. There is no way in which a normal reading of the text could reach the conclusion that the granting of a subsidy to a non-exporting enterprise is contingent upon export performance. That sort of conclusion would be inconsistent with Article 3.2 of the DSU that sets out that: “[t]he dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system.” (emphasis supplied by Australia).

"Continue on to: VII. MAIN ARGUMENTS OF THE PARTIES: D. Article 3.1 (a) of the SCM Agreement, 4. Application of Article 3.1 (a) of the SCM Agreement in this dispute: Factors including level of exports, 7.297"

[160] "Sacred Cows vs. The Hide of Howe,” The Weekend Australian, Sept. 20‑21, 1997, p. 52, United States Exhibit 22.

[161] Shorter Oxford English Dictionary, third ed.

[162] Australia disputes the United States argument on this point, referring for support to business confidential information that it provided to the Panel regarding Howe's sales.

[163] The United States cites certain paragraphs of Australia's first written submission in this regard. Australia states that it did not say this and that the United States has misunderstood its arguments.

[164] The United States also referred to certain business confidential information in making this argument.

[165] United States Exhibit 18.

[166] Ibid.

[167] The Concise Oxford Dictionary, Clarendon Press, 8th ed.

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Australia - Subsidies Provided to Producers and Exporters of Automotive Leather

Australia - Subsidies Provided to Producers and
Exporters of Automotive Leather