7.162 The United States believes that the replacement subsidy package accorded to Howe by the Australian government is a prohibited export subsidy within the meaning of Article 3 of the SCM Agreement; for this reason it requested that the Panel ask Australia to produce certain documents which would demonstrate, inter alia, whether the package is de jure  or de facto an export subsidy.

7.163 Australia submits that the United States has put forward no evidence that any of the measures is contingent “in law” upon export performance.  Indeed, in Australia's view, the issue of “in law” is not before the Panel, since in WT/DS126/1, while “in law or in fact” is part of a quote in the second paragraph, the terms of reference depend on the third paragraph which only discusses the “in fact” case.  Australia observes that the United States does raise the issue of “in law” (or rather it refers to “de jure” by which it presumably means “in law”) in its first written submission to the Panel.  However, it presents no evidence and its argument appears to be the same as for its “in fact” case, i.e. that the measures were put in place following the excision of automotive leather from the ICS and EFS.  This does not demonstrate the “in law” condition.  Indeed, Australia asserts, it demonstrates that is not germane even to the demonstration of the “in fact” condition.  Similarly, the United States chose not to avail itself of the proper procedures under the SCM Agreement (Article 25.8) to seek information and so it can hardly argue on the basis of the lack of information.

(b) "contingent … in fact … upon export performance" 

(i) General

7.164 The United States asserts that, even if the grant and loan contracts presented by Australia do not demonstrate that the replacement package is a de jure export subsidy, the Panel should find that the prohibition on export subsidies applies in situations like the one presented here: where a subsidy exists; and where that subsidy is de facto contingent on export performance. The Panel should determine that the grants and loan provided to Howe by the Australian government constitute de facto export subsidies on the basis of the totality of the facts and circumstances in this case. 

7.165 According to the United States, the new financial aid package was specifically designed to compensate Howe for the export subsidies it forfeited under the settlement agreement with the United States.  In addition, the Australian government intended that the new package would support Howe’s current and future exports.  When it provided these subsidies, the Australian government was fully aware that Howe was first and foremost an exporter and that the Australian market for automotive leather goods was minimal in comparison to the existing and potential export market for these goods. The Australian government was aware that, by 1997, exports constituted 90 per cent of Howe’s sales.  There can be no doubt that Howe’s increased production will be destined for exportation, since Australia’s small automotive leather market cannot absorb Howe’s current production, much less any increase in sales or production.  Finally, the structure of the aid package itself reveals that the new subsidies are in fact tied to Howe’s anticipated export earnings.  In light of the totality of the circumstances surrounding the provision by the government of Australia of these replacement subsidies to Howe, the United States considers that Australia has unquestionably bestowed a prohibited export subsidy upon Howe.

7.166 Australia submits that there is a clear distinction between “law” and “fact” in ordinary language.  The terms “in law” and “in fact” are clearly used to distinguish between the ways in which the granting of a subsidy is made contingent upon export performance.  “In law” means just that, “legally contingent” as used in Footnote 4 of the SCM Agreement.  “In fact” is where the implementation is such as to tie the granting of the subsidy to actual or anticipated exportation or earnings.  In particular, this occurs where a scheme is administered in such a way as to favour exports without being legally contingent on export performance.  The loan contract and the grant contract prove that in neither case was there any legal contingency.  In addition, there was no legal contingency for the payments under the grant contract.  The contracts also show that there was no way in which they could be administered to tie the granting of subsidies to actual or anticipated exportation or earnings.  There is no way in which they could be administered to favour exports over domestic sales.

7.167 According to Australia, the loan and grant contracts are separate legal instruments.   The loan contract and other measures need to be considered separately on their merits in respect of consistency with Article 3.1(a) of the SCM Agreement.  Australia asserts that it has shown that the granting of the loan contract clearly had no linkage to export performance, and that this is evident from the loan contract itself. Australia states that it has shown that the loan contract does not meet the “in fact” standard of Article 3.1(a) of the SCM Agreement. 

7.168 Australia observes that there is a difference of views over the terms of reference of the Panel in respect to the grant contract.  If the Panel accepts that it is the conditions of the granting of the individual payments that is at issue, then the United States has not even sought to show that the “in fact” standard was met.  In addition, only the granting of the first payment and the granting of the second payment are before the Panel.  Assuming, in the alternative, that the Panel concludes that the issue before it is the granting of the grant contract, then the granting of the grant contract clearly has no linkage to export performance.  Australia maintains that it has shown this and that this is, in any case, evident from the grant contract itself.  The functioning of the grant contract is shown by the way in which the actual payments were made where the record[107] shows that there was no tie to export performance.   Australia states that it has shown that the grant contract does not meet the “in fact” standard under Article 3.1(a) of the SCM Agreement.

7.169 Australia asserts that the issue of the nature of the ICS and the EFS as they applied to automotive leather is not before the Panel and should not be addressed by the Panel.  In Australia's view, under the WTO Agreement, there is a presumption that measures taken by Members are in conformity unless successfully challenged under the appropriate dispute settlement procedures of the DSU and the appropriate covered agreements.

(ii) Prior measures and the designing of alternative assistance to Howe

7.170 The United States argues that the A$30 million grant and the A$25 million preferential loan were provided to Howe solely because automotive leather was removed from the ICS and EFS export schemes.  Since these industry programmes were clearly export subsidies and since the new financial aid was expressly designed to replace these benefits, the new assistance qualifies as a prohibited export subsidy. 

7.171  In the view of the United States, there can be little doubt that the ICS and EFS export schemes are de jure export subsidies.  The explicit purpose of both the ICS and the EFS programmes is export promotion.  In order to achieve this goal, subsidies available under these programmes were made legally contingent upon export performance.The greater the value of a company’s exports, the greater the value of subsidies it was eligible to receive.  Between 1992 and 1997, Howe received at least A$29 million under the ICS programme and more than A$5 million under the EFS programme.  By making subsidies under these programmes legally contingent upon exportation, both the ICS and EFS programmes clearly fell within the Article 3.1(a) of the SCM Agreement, which prohibits “subsidies contingent, in law . . . upon export performance.”

7.172 The United States described the ICS and EFS as follows[108]:

"Enacted in 1988, the Textiles, Clothing and Footwear Development Authority Act established the Australian Textiles, Clothing and Footwear Development Authority, the stated object of which is "to promote the restructuring and revitalization of the [textile, clothing and footwear] industries so as to improve their efficiency and international competitiveness."[109]  To this end, the functions of the Authority are, inter alia, to “encourage and facilitate the development of plans aimed at increasing the international competitiveness of [Australian textile, clothing and footwear] producers by providing financial assistance to them for that purpose” and to develop “measures calculated to . . . increase the exports of TCF products produced in Australia . . . ."[110]

Pursuant to this mandate, in 1991, the Australian government announced the creation of the [ICS] program, to be in effect from July 1, 1991, through June 30, 2000.[111]  Under the [ICS] program, exporters of eligible textile, clothing and footwear products can earn import credits that may be used to reduce the import duties payable on eligible textile, clothing and footwear items by an amount up to the value of the credits held.[112] However, exporters are not required to use their credits as offsets against import duties.  These credits may be transferred from one holder to another in exchange for a cash payment.[113]

Under the ICS program, the level of import credits that may be earned is explicitly conditioned upon export performance.  Specifically, the value of import credits that can be earned is calculated as the F.O.B. value of an eligible export sale, multiplied by the Australian value-added content of the export sale (expressed as a percentage of sales volume).[114] This total, in turn, is multiplied by a specified “Export Phasing Rate.”[115]  Between 1991 and 1997, the Export Phasing Rate stood at .30 (ie, 30% of the F.O.B. value of the Australian value-added content of eligible textile, clothing and footwear exports).  The Export Phasing Rate was recently reduced to .20.[116] Expressed as a formula:

Import credit = Export sale (FOB A$) x Australian value-added expressed as a percentage of sales volume x Export phasing rate[117]  …

The Australian government designed the EFS program to encourage the export of passenger motor vehicles ("PMV") and PMV components from Australia.[118]  In its current form since 1991,[119] the EFS program allows Australian manufacturers to earn A$1 of export credit for every dollar of eligible exports of covered automotive items.[120]  The value of exports eligible to earn exports credits is equal to the Australian value-added content of eligible exports, calculated as the F.O.B. sales price less the value of any imported components and raw materials.[121]

Export credits earned under this program can be used to obtain rebates on the duties payable on eligible imports of automotive vehicles and automotive components,[122] or may be sold for cash to any importer of eligible goods who may similarly seek such rebates.[123]  The amount of import duty that can be rebated under this program is determined by a tariff reduction schedule that varies depending on the year in which the export credit is used.  From a high of 37.5% of the tariff rate for export credits used in 1991, the schedule slowly scales back the amount of rebatable duty to 15% in the year 2000, the last scheduled year of the program.[124]  For instance, in 1996 a company could receive a rebate equal to 25% of the export credit earned.  Thus, if an exporter received A$1,000,000 of export credits, he or his transferee could obtain a rebate of $250,000 for import duties paid during that year."

7.173 The United States maintains that even Australia’s Industry Commission recognized that the programmes are inconsistent with the Australia’s WTO obligations:

The Commission finds the [automotive] export facilitation scheme has been valuable to the industry.  It has served its main purpose of introducing Australian products to world markets and will expire in 2000.  The Commission will not recommend its continuation because its strategic value has been undermined by its vulnerability to challenge under the rules of the World Trade Organization.[125]

7.182 Australia argues that to accept that the legal status or nature of a previous measure in some way determines the status of an existing measure under the WTO, would be to inject a level of uncertainty and subjectivity into the WTO that would be quite inappropriate for a rules-based treaty.   This would mean, amongst other things, that if there were two cases, one where an enterprise had been in receipt of, say, a subsidy and another enterprise had not been, a new measure could be prohibited when given to the first enterprise but not when given to the other. This would make a farce of a rules-based system.  Article 3.1(a) of the SCM Agreement deals with a situation of law or fact where the type of the measure must determine its status.

7.183 According to Australia, the company concerned does not receive benefits under these programmes (ICS and EFS), since automotive leather was removed from their scope on 1 April 1997, and the United States recognizes this.  The claim of the United States is limited to the measures before the Panel.  The United States has not made a claim in respect of these programmes and that matter is not before this Panel.  Rather, the United States has made an assertion about their status.  It did not even provide any argumentation in WT/DS126/1 for that assertion.

7.184 Australia states that the United States has made a claim that the measures provided to Howe are inconsistent with Article 3.1(a) and so Article 3.2 of the SCM Agreement.  This is not an issue of a trade effects test, but a matter regarding WTO rules.  The United States has to establish that the conditions of footnote 4 of Article 3.1(a) are met. This is not a matter of whether or not when one measure is replaced by another there should be a markedly different production or trade outcome.

7.185 For the sake of argument, Australia asks the Panel to assume that a Member has a measure that has been found by a Panel to be inconsistent with the WTO Agreement.  Its obligations are to remove the inconsistency.  It does not have any obligation to ensure a particular trade outcome to satisfy the complainant.  That is a political problem for the complainant, not the respondent. In the case of a subsidy, nothing in the WTO Agreement asserts that a subsidy inconsistent with Article 3.1(a) of the SCM Agreement cannot be replaced by a subsidy consistent with the SCM Agreement, or that any new subsidy or other measure must have a particular trade impact.  This is in contrast to non-violation cases, including cases under Article 7 of the SCM Agreement, where the impact of an aggregation of measures may need to be dealt with.

7.186 Australia declares that Article 3.1(a) and footnote 4 of the SCM Agreement do not talk about replacement measures, but require that the United States establish certain facts.  These must be facts in relation to the actual measures before the Panel and not the relationship to programmes which are no longer in effect for the product and company in question.

7.187 In the alternative, Australia continues, if the Panel decides to look at the trade impact of previous measures, it would still be unnecessary and outside of the Panel’s terms of reference for it to make any finding on what the status of ICS and EFS were under the SCM Agreement when they applied to automotive leather.  These programmes do not apply to the product and company in question and so are not before the Panel.  It would be inappropriate and an abuse of process to allow the Panel proceedings to be used to reach findings on programmes that are not before the Panel as measures and on which no claims are being made.  For the Panel to reach any views on the nature of these programmes as they apply to any products other than automotive leather would also be outside its terms of reference.

7.188 According to Australia, any argument based on previous measures and their trade effect for a particular company when compared to that of an existing measure has no place in the WTO rules environment.  The idea that somehow a government would have to disrupt a firm’s commercial linkages in order to ensure WTO compliance has no basis under the WTO Agreement and is not consistent with the WTO’s focus on rules. Indeed, it might even be inconsistent with Article XI of GATT 1994 or the prohibition on grey area measures under Article 11 of the Agreement on Safeguards.

7.189 Nevertheless, since the United States has put forward, as exhibits, information provided under confidential, inter-governmental consultations, Australia states that it is worthwhile setting the record straight about the process leading to the current arrangements.  The United States government was never in any doubt, and accepted, that there would be new assistance arrangements for Howe following the excision of automotive leather from ICS and EFS.  Indeed, there were a large number of bilateral discussions on this issue between the Australian and United States Governments both before and after the public announcement of the proposed arrangements in late December 1996.

7.190 Indeed, Australia states, it was at the repeated request of the United States that Howe was obliged by the Australian government to devote such a major proportion of payments under the grant contract to investment, with the United States even objecting to having research and development counted against payments under the grant contract.  One side effect of this was the new production premises at Thomastown and Rosedale.  It was the United States that demanded this investment be made where it could well have asked for the money to be paid as a simple bounty on production.

7.191 At the same time, Australia continues, the United States wanted assurances that serious prejudice would not be caused by the new arrangements.  According to Australia, the United States said that it would judge the new arrangements on that basis.  To comply with this, Australia sought to ensure that the impact on the United States was minimized through limiting the level of per unit subsidy on sales.  Australia understood that the United States government wanted Australia to ensure that the 5 per cent level in Article 6.1(a) of the SCM Agreement was not exceeded.  The issue was how to meet the twin objectives of putting the money into investment, which basically meant paying the money at an early stage (unlike a traditional bounty, which could have been paid after production), and of keeping the level of subsidy below 5 per cent.  The approach adopted was to cap the aggregate of payments under the grant contract at A$30 million to limit the overall level of ad valorem subsidization of sales over the period to mid-2000 while imposing investment targets, and of course the normal due diligence considerations associated with checking on the continued viability of the company before payments were made.

7.192 According to Australia, the intent was to meet the twin requests from the United States.  This was the actual basis of the nature of the grant contract (and loan).  The payments were not tied to exports.  Indeed the first payment was simply made following the signing of the grant contract.  Subsequent payments were related to best endeavours by the company on investment levels and sales.  According to Australia, the United States recognizes this.  This emphasis by the United States on the link to investment, while correct, underlines that the payments were not linked to export performance.  If even investment subsidies were to be taken as measures falling under Article 3.1(a) of the SCM Agreement, then it is difficult to see what limitations would exist to such an open ended interpretation of “in fact” in Article 3.1(a) of the SCM Agreement.

7.193 The ultimate dispute with the United States, as Australia understands it, is in reality about the size of the subsidies, about the aggregation of the subsidization provided.  In retrospect, it turned out that the discussions between Australian and United States officials had not resulted in a meeting of minds on this issue of size.  On the other hand, the United States never came forward with any claims of serious prejudice to the United States industry, which Australia had undertaken to address if it arose.  Moreover, the level of aggregate subsidization is irrelevant for the purposes of Article 3.1(a) of the SCM Agreement.  If the United States had a problem with that, it could have taken the matter up under, for example, Part III of the SCM Agreement. 

7.194 Australia submits that the “facts” adduced by the United States in the form of newspaper articles and Ministerial statements have to be taken in their political context.  In any event, it would be difficult to accept that such articles, sometimes involving stories without attribution, should be considered to provide acceptable evidence. The company involved is competitive and innovative.  It is not surprising in a small trading nation that comments on successful companies include references to export markets.  That, however, does not mean that there was an attempt to circumvent Australia’s WTO obligations and the United States has not produced any facts to show this.

7.195 Australia contends that the United States has tried to make much of some comment in the press.  This hardly passes as proof.  Indeed, the use by the United States of newspaper stories to demonstrate facts is questionable in the extreme.  Newspaper comment in Australia cannot be taken as an accurate record of, or even to reflect, the views of government.  It would be highly inappropriate for a Panel to take newspaper comment as the basis for determining that a Member was in breach of its treaty commitments.

7.196  In this regard, Australia comments on one United States exhibit by way of example.  This purports to be a Media Release by the Minister for Industry, Science and Tourism on 27 December 1996, together with an attachment.  The first page is a copy of a Media Release, which was provided to the United States in its Exhibit 2.  According to Australia, this exhibit shows that the government was concerned about jobs, not about exports.  The second page of this exhibit, which is portrayed as being part of the Media Release, was not that at all.  It was a set of confidential talking points for discussions between the Australian Embassy and the United States government (USTR).  What they demonstrate is no more than that the loan contract and grant contract were designed with the objectives of the United States government in mind and in consultation (though not ultimately agreement) with the United States, and not in isolation by Australia.

7.197 In Australia's view, when the United States seeks to argue that the company was in some way obliged to export to obtain the maximum amount of money it is unclear what it is suggesting.  The SCM Agreement does not prohibit bounty, i.e. payments per unit of production by enterprises, or subsidies on investment by enterprises.  Any enterprise receiving bounty or subsidies linked to investment would get more for more production or investment.  What the United States is noting is that in this case there is a cap, a maximum of A$30 million, on what the company could receive in total regardless of how much it sold.  There is no basis for arguing that to limit subsidization in this way should suddenly make a measure prohibited.  The United States has not argued that the allocation of the limited quantum of money available in any way favours exports.  Thus, there is no basis for this argument by the United States that any of the payments (or the grant contract) falls under Article 3.1(a) of the SCM Agreement.

7.198 The United States repeats that the grant and loan contracts at issue in this case were specifically and explicitly designed to compensate Howe for the prohibited export subsidies that it would have received under the ICS and EFS.  The fact that the ICS and EFS programmes were export subsidies is highly relevant in determining the nature of the grant and loan contracts.  Despite Australia’s demand that each measure be judged on its own merits, the replacement subsidies that Howe received were not provided in a vacuum.  The Australian government itself linked the ICS and EFS programmes with the grant/loan package by proudly announcing that "[t]he Government has provided the [grant and loan] package to Howe and Co. following the decision to excise automotive leather from the Import Credit and Export Facilitation Schemes."[133]  Since footnote 4 to Article 3.1(a) directs the Panel to examine all "facts demonstrat[ing] that the granting of a subsidy … is in fact tied to actual or anticipated exportation or export earnings," the Panel is obligated to consider these facts.[134]

7.199 Accordingly, the United States urges the Panel to consider the nature of the ICS and EFS programmes in determining whether the replacement subsidies constitute “in fact” export subsidies.  The United States is not seeking a remedy with regard to these programmes (i.e., is not asking that the Panel request Australia to bring them into compliance with its obligations under the SCM Agreement).  However, as the United States considers that the new subsidies are expressly linked to the old programmes, the nature of the prior programmes provides useful and important information in evaluating the nature of the subsequent measures.

7.200 The United States argues that, beginning in 1991, and continuing through April 1997, the Australian government gave Howe a series of overt, de jure export subsidies through the ICS and EFS.  The United States avers that it has demonstrated that the explicit purpose of both the ICS and EFS programmes is export promotion.  Under these programmes, Howe received import credits based on the domestic value-added content of its exports.  Receipt of these import credits was directly contingent upon export performance.  The more Howe exported, the more benefits it received and so the ICS and EFS programmes are plainly inconsistent with Article 3 of the SCM Agreement.  According to the United States, when the new package is considered in this context, the link between it and Howe’s export performance is obvious.  The fact that the replacement package was specifically designed to compensate Howe for its exclusion from receipt of ICS and EFS export subsidies indicates that the replacement package is no more than a thinly disguised attempt by the Australian government to continue to promote exportation by Howe by modifying only the form, but not the substance, of its export subsidies.

7.201 The United States declares that Australia does not dispute and, indeed, cannot dispute that the ICS and EFS programmes are prohibited export subsidies.  Rather, Australia contends that the Panel may not consider the nature of these programmes in determining whether the alternative assistance provided to Howe were export subsidies.  However, the United States is not asking the Panel to find that Australia must withdraw the ICS and EFS programmes because they are prohibited export subsidies.  Rather, the United States is simply asking that the Panel consider the nature of these prior measures in determining whether the replacement subsidies are in fact tied to export performance.  The fact that the new subsidies were explicitly designed to compensate Howe for its exclusion from these two programmes means that the prior measures were factors in Australia's decision to grant Howe the new subsidies.  This renders the nature of those measures highly relevant to the Panel's determination in this case regarding the nature of the current measures.

7.202 The United States submits, in the alternative, that even if the Panel were to decide not to consider the nature of the ICS and EFS programmes, the other evidence presented by the United States -- which Australia did not in any way refute -- leads to the inevitable conclusion that the grant and the preferential loan were tied to actual as well as anticipated exports and export earnings within the meaning of footnote 4 to Article 3.1(a).  That evidence includes, among other supporting facts: the Australian government’s statements at time of the new subsidies; the Australian government’s knowledge at the time it conferred these benefits that Howe's exports constituted 90 per cent of its sales and the company had aggressive export plans; the grant and loan required Howe to increase its production even though the Australian leather market is too small to absorb any increased sales; and the benefits were provided only to Howe, which exports virtually all of its production, and not to any leather manufacturer that supplies the domestic market.

7.203 With respect to Australia's suggestion that the United States has somehow waived its claim that the new subsidies are prohibited export subsidies because it was consulted during the period that Australia was designing the replacement package, the United States asserts that, although it was consulted, it never agreed that a new subsidy package would necessarily comply with the requirements of Article 3 of the SCM Agreement.  Australia, in fact, acknowledges this.  The fact that the United States was consulted cannot change the nature of the replacement subsidies.

7.204 The United States adds that the consultations during the time that the replacement measures were being designed were in the context of settlement negotiations which ultimately proved unsuccessful.  There was no agreement or endorsement by the United States with regard to the various settlement proposals.

7.205 In any event, the United States continues, statements or offers made during the course of settlement discussion in this case are of no legal consequence to this proceedings.  Article 4.6 of the DSU provides that:  "Consultations shall be confidential, and without prejudice to the rights of Members in any further proceedings."  The question of whether statements made during settlement negotiations are relevant was address in the panel report in United States – Underwear.[135] In that dispute, Costa Rica improperly used information on settlement offers made by the United States to advance certain arguments to the panel.  That panel found: 

In our view, the wording of Article 4.6 of the DSU makes it clear that offers made in the context of consultations are, in case a mutually agreed solution is not reached, of no legal consequence to the later stages of dispute settlement, as far as the rights of the parties to the dispute are concerned.  Consequently, we will not base our findings on such information.[136] (emphasis supplied by the United States)