World Trade

Organization

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

7.207 Australia emphasizes that the proposition by the United States that somehow the status or nature of a prior measure can determine the WTO status of a new measure, (or in this case measures) has no basis in the WTO and is without legal argument from the United States. GATT contracting parties, and now WTO Members, bring themselves into conformity with new rules, or after having lost disputes, by imposing new, consistent measures. There is nothing to suggest that losing a dispute means that suddenly a Member has less rights than before in maintaining a WTO-consistent regime. The idea of a penal regime where a Member was on parole in some sense after losing a case has no legal basis. It would be up to the United States to make a case. The United States has lost a number of disputes in the WTO, and in none of them has it said that that means it has to remove all measures bearing any relationship to the inconsistent ones. Nor has it said that its replacement measures were potentially inconsistent because they were measures aimed at replacing those found to be inconsistent. There is nothing in the WTO Agreement that suggests that existing measures can only be replaced with no policy at all. Australia makes the following additional points by way of rebuttal:

(a) EFS and ICS do not apply to automotive leather. 

(b) Automotive leather was excised from EFS and ICS from 1 April 1997, before the request for consultations for this Panel. 

(c) The nature and WTO status of EFS and ICS for automotive leather prior to 1 April 1997 are beyond the Panel’s terms of reference. 

(d) The nature and WTO status of EFS and ICS for products other than automotive leather are beyond the Panel’s terms of reference. 

(e) No GATT or WTO panel has found against EFS or ICS.

(f) Indeed, no GATT contracting party, no signatory to the Tokyo Round Subsidies Agreement, and no WTO Member has taken Australia to a Panel on EFS and ICS.

(g) In the absence of a panel report finding against these schemes, it would be highly inappropriate for this Panel to go outside its terms of reference to examine measures that are not before the Panel and indeed do not even apply to automotive leather. If the United States wants a ruling on the WTO status of the two schemes, then it is always open to it to take such a Panel. It is not for this Panel to do the United States work outside the Panel’s terms of reference.

7.208 Australia observes that arguments about the EFS and ICS form the major part of the United States' case, and that it is the United States' allegations over these schemes that represent the United States' evidence that the new assistance also qualifies as a prohibited export subsidy. According to Australia, the concentration on the EFS and ICS, in circumstances where the United States has not sought to have its allegations about these schemes addressed by a panel under the DSU, is one more example of the United States seeking to override proper procedures in this Panel process. For the United States to be allowed to conduct these fishing expeditions would be another diminution of the legitimacy of the nature of WTO dispute settlement where panels have been tightly constrained in what they look at and on what they make findings.

7.209 Australia recalls that Article 11 of the DSU requires that the “panel should make an objective assessment of the matter before it, including an objective assessment of the facts of the case….” The Panel needs to limit itself to the facts in relation to subsidies provided to producers and exporters of automotive leather that are covered in its terms of reference. These do not include EFS and ICS. Australia fails to understand the logic behind the United States' assertions. Members are permitted to change their industry settings with the obligation being that the new measures comply with their obligations. There is nothing in the WTO that suggests that existing measures can only be replaced with no policy at all. Australia avers that clearly, the new arrangements were part of the outcome from the bilateral settlement between Australia and the United States that also led to the excision of automotive leather from the EFS and ICS. Australia acknowledges that it is unlikely that the grant contract and the loan contract would have been provided in a circumstance other than the removal of automotive leather from the EFS and ICS. However, it is too simplistic to argue that that was the sole reason for providing them. In particular, they were provided because of the government's concern about regional job retention in the absence of any support for the company in the shorter term. To Australia, the argument by the United States that "since the EFS and ICS 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" is a simple fallacy along the lines of: if a man has A and replaces it with B, then B is A.

7.210 In response to the assertion by the United States that the "benefits were provided only to Howe"[137], Australia states that since only one firm was involved, the arrangements were necessarily for only one firm. This is to state the obvious. It does not, however, have any significance in relation to the legal status of the measures involved.

7.211 Australia points out that the argument of the United States would make it very difficult for a Member to ever bring itself into conformity without simply removing all subsidization. For example, if a Member provided export subsidies in law and it wished to bring itself into conformity, under normal logic it could simply remove the provision that favoured exports over domestic sales and not discriminate. The United States would, in those circumstances, seem to start from the position that the new scheme was prohibited because of the nature of the previous arrangements. On the other hand, had that new arrangement been introduced in a case where there had been no subsidization, it would be consistent. This severance between the nature of a measure and its status is inconsistent with the rules-based regime of the WTO governing violation of treaty commitments.

7.212 Relying on business confidential information, the United States argues that there was clearly a link -- which had been recognized by the Australian government -- between the elimination of automotive leather from eligibility under the ICS and EFS and the granting of new assistance to Howe.

7.213 Furthermore, Australia argues, the disciplines on export subsidies are in respect of certain types of measures. This is not a matter of how much money is provided by way of subsidy. Where a measure is replaced by another, all that matters is whether the new measure is consistent. Whether the level of subsidy is lower or higher is irrelevant.

7.214 Australia submits that, while the United States said that it was not proposing a trade effects test, it is proposing that the Panel in reality base its findings on the following: (a) the nature and status of prior measures; and (b) the level of exports of Howe of automotive leather.

7.215 According to Australia, the United States exhibits purporting to show what was in Australian Ministers’ minds at the time the new assistance arrangements were designed do not demonstrate that what they had in mind was an export subsidy. Indeed, to the contrary, if the covert scenario originally implied by the United States had any semblance of truth in it, and if Ministers thought that there was any linkage with exports in the way suggested, it would not be credible that they would make any statements about exports at all. Australia provided business confidential information to the Panel concerning 1997-1998 audited sales data which, it asserts, underlines the lack of probative value of evidence submitted by the United States regarding, for example, Howe's high export levels.

7.216 In Australia's view, it is not credible that the United States and Australia would have been discussing a settlement that the United States considered to have been WTO-inconsistent. Discussions between the United States and Australia always envisaged that it was possible to provide WTO-consistent subsidies to Howe, but it was recognized that there was a risk of adverse effect, in particular, serious prejudice. The United States has not denied this. But its arguments about prior measures and the high level of exports of automotive leather by Howe were just as true then as now. Australia is not saying that the United States has given Australia a “waiver” in regard to the new assistance arrangements. Australia would agree that in the circumstances, the United States should not have brought this case, but Australia is not arguing here that the United States is estopped from doing so. However, the fact that the United States was involved in discussions with Australia over the details of the assistance package, until at least July 1997, demonstrates that the United States basic problem was about either the size of the loan and grants or some other aspect of the specific arrangements. Australia believes it is the former. If this is the case, then instead of taking and doing the work for a serious prejudice case, the United States is seeking to push out the boundaries of the SCM Agreement to obtain an export level test under Part II of the SCM Agreement. At the same time, the United States also appears to be attempting to push out the boundary of the DSU to obtain a prior measure test, which would have general application.

7.217 Australia asserts that, in respect of the specific arrangements, nothing could be more anodyne than the loan, with the United States making no substantial argument on its status. Similarly, once the trade effects test is taken away, the allegations about the grant contract and the payments under it also collapse.

7.218 Australia observes that the United States argues that although the United States was indeed consulted about the new subsidies, the United States never agreed that a new package would necessarily comply with the requirements of the Article 3 of the SCM Agreement. As the United States recognizes, Australia never said that the United States accepted any particular assistance arrangements. However, the United States clearly accepted that some arrangements would be acceptable, i.e. including being WTO consistent. Otherwise, it would have been being duplicitous during discussions where it sought and obtained in particular the devotion of much of the money provided under the grant contract to investment. Now, of course, the United States seeks to draw adverse inferences from the allocation of money to investment.

7.219 The United States responds that throughout Australia’s submission and in response to written questions of the Panel, Australia states that the United States “understood and accepted” that an alternative assistance arrangement would be provided to producers of automotive leather. Although the United States notes that statements or offers made during the course of settlement discussions in a case are of no legal consequence to the proceeding[138] the United States asserts that it is necessary to correct this misstatement. According to the United States, it never “accepted” that alternative assistance would be provided to Howe. Australia never sought permission or acceptance from the United States to provide this assistance. Rather, Australia simply informed the United States that further assistance would be supplied. Although the United States was consulted in order to avoid further dispute settlement proceedings; as Australia acknowledges, the United States asserts that it never “agreed to or endorsed the assistance arrangement eventually implemented.”

7.220 Australia states that the bilateral discussions between Australia and the United States, of course, did not reach the point of the United States signing off on the WTO status of the new assistance arrangements. Australia was prepared to engage in a lengthy consultative process to try and reach a mutually satisfactory solution to this issue. However, Australia contends, it should be noted that the pace of this case, and the long delays involved in it, were determined by the United States and throughout this period commercial uncertainty has hung over Howe. Nevertheless, the lengthy process of bilateral consultations also underlines the commitment of the Australian government to implement WTO-consistent arrangements. It demonstrates that the intent of the government was not to implement an export subsidy arrangement but, quite the contrary, to implement measures that would be not only completely WTO-consistent but also not cause adverse effects to the United States, while recognizing that the United States could always bring a case of serious prejudice to Australia and then, if necessary, to the WTO.

7.221 Australia recalls that there were a large number of bilateral discussions between the Australian and United States government both before and after the public announcement of the new assistance arrangements in late December 1996. These consultations included exchanges between officials from the Australian Embassy in Washington and USTR officials as well as direct contact between policy officers in Canberra involved in the development of the new assistance arrangements and officials in USTR.

7.222 According to Australia, in discussions prior to the 27 December 1996 announcement of the new assistance arrangements, USTR officials were advised of the broad framework proposed for the alternative assistance arrangements, including the fact that the arrangements would contain a one-off up-front grant payment. Australia asserts that the United States was concerned over the size of the alternative arrangements (originally A$80 million was proposed) and the likely impact the arrangements would have on the United States industry. This reflected the nature of the bilateral settlement. USTR officials made it clear immediately following the bilateral settlement between Ambassador Barshefsky and Mr. Fischer that they would judge the WTO-consistency or otherwise of the new scheme on whether it caused problems or serious prejudice to the United States industry. In response to the concerns expressed by the United States over the level of the arrangements, the amount originally proposed was reduced markedly and the loan element introduced.

7.223 Australia observes that, in the pre-announcement discussions on the alternative assistance arrangements, the United States also expressed particular concern over the proposed "up-front" payment and suggested that the arrangements may be more acceptable if the size of this up-front payment could be reduced and that the remainder could be paid conditionally (based mainly on investment activity) over the next couple of years or paid as a production warrant over the period 1April 1997 to 31 December 2000. It was this broad payment structure that emerged in relation to the grant contract.

7.224 Australia notes that, after the 27 December 1996 announcement of the assistance arrangements, the bulk of the discussion between Australia and the United States was about how to adjust the arrangements to address the concerns of US industry. As a result of these discussions, a number of changes were made to the details of the arrangements. The adjustments were made continually until the grant and loan contracts were signed on 9 March 1997. Moreover, further discussions, at both Ministerial and senior officials levels, continued between Australia and the United States concerning the provisions on investment and other details of the assistance arrangements of concern to the United States until July 1997.

7.225 Australia underlines that the consultations on the new assistance arrangements were extensive. They were, of course, without prejudice to either Australia's or the United States' WTO rights, but they do reflect that at least throughout this period the United States accepted that alternative assistance arrangements, consistent with Article 3.1(a) of the SCM Agreement, could be provided to Howe. Australia acknowledges that, despite these efforts, no final agreement could be reached with the United States government which met the concerns of the United States companies that initiated this complaint. Australia has not claimed that the United States ever agreed to or endorsed the assistance arrangements eventually implemented.

7.226 According to Australia, the panel report cited by the United States, United States - Underwear[139], is not applicable to this case. The United States - Underwear case was in the context of consultations under the DSU leading to the establishment of that particular panel and the allegedly compromising offer by the respondent. This case is the opposite, where Australia, in good faith, discussed with the United States what the new arrangements might be and how Australia might modify them to meet concerns of the United States.

7.227 Australia asserts that the record shows that the two governments were involved in discussions about the new support arrangements, where the prime issue was the extent of support. In Australia's mind there is and was no question about the acceptance by the United States that subsidies would be provided. There was no agreement on the new arrangements, but the discussions that took place on how the subsidies should be delivered, in particular the United States requests that the bulk of the money under the grant contract be on capital expenditure, had only one reasonable interpretation, i.e. that the United States accepted that subsidies were to be provided in one form or another.

7.228 Australia contends that the issue between the two countries was one of serious prejudice. If there had been any suggestion that the United States considered that there might potentially be a breach of Article 3.1(a) of the SCM Agreement, or indeed any other provision of the WTO, then the Australian government would have addressed it. Instead, there was the opposite scenario of the United States only raising the “in fact” provision of Article 3.1(a) of the SCM Agreement six months after binding legal domestic arrangements had been entered into by the Australian government and after the loan had been provided and the first two tranches of the grant contract paid out.

7.229 In Australia's view, the record shows that Australia was concerned to ensure WTO-consistency and, in particular, to ensure that there was no linkage with exports. Any government that was intent on doing something underhanded would have handled the issue quite differently. The reported comments on exports would, to the extent that they are accurate, simply demonstrate that the Australian government did not have anything in mind about linkages with export performance. This is also borne out by the nature of the grant contract and the basis on which actual payments were made under it. Clearly, there was no tie to export performance.

(iii) Intent

7.230 The United States submits that the Australian government intended the replacement package to support Howe's current and future exports.

7.231 The United States contends that the fact that the replacement package is meant to compensate Howe for its exclusion from the ICS and EFS export programmes is strong evidence that the true purpose of the replacement package -- like the subsidy programmes that preceded it -- is export promotion. Any doubts as to this fact are resolved by the numerous statements by Australian government and Howe officials that confirm that the replacement package is in fact tied to Howe’s actual or anticipated exportation or export earnings. For instance, Australian Trade Minister Tim Fischer made it clear that the purpose of the replacement package is continued export promotion, in stating:

by dint of effort we [the Australian government] have ensured that Howe Leather has been able to continue its export activity over the last 18 months.[140]

7.232 Similarly, Australia’s Minister for Industry, Science and Tourism, John Moore, announced during negotiation of the replacement package that:

We are working constructively with Howe Leather to ensure that they receive fair compensation. I am determined that this strongly performing export company should not be unfairly disadvantaged by the agreement reached at Manila.[141]

7.233 According to the United States, the Australian government was aware that, at the time the new subsidies were granted in 1997, exports constituted 90 per cent of Howe’s sales. The fact that exports play the overwhelmingly dominant role in Howe’s overall sales mix is not coincidental. As part of a nearly decade-long effort, the Australian government has financed Howe’s transformation into a world-class exporter of automotive leather. As the Australian government has itself admitted, since at least 1991, Howe has received in excess of A$30 million worth of subsidies through two export-contingent subsidy programmes: the ICS and EFS. Because these subsidies were so lucrative, Howe was able to dramatically increase its exports. From less then 10 per cent of its total sales in 1988, exports increased to 90 per cent of Howe’s total sales for the nine months through March 1997.[142]

7.234 The United States alleges that, because the value of prior subsidies was legally tied to the value of Howe’s exports, the Australian government necessarily had detailed information concerning Howe’s export sales and their exponential increase throughout the 1990s. Beyond simply being aware of Howe’s general level of exports, however, the Australian government was also aware that of the relative importance of exports in Howe’s overall sales mix. For instance, even before the replacement package was announced, opposition employment spokesman Martin Ferguson is reported to have boasted that “[t]he company was a shining light with 90 per cent of Howe’s production being for exports . . . .”[143]

7.235 In addition to being aware of Howe’s past and current export performance, the Australian government was also aware of Howe’s aggressive export plans. In Howe’s November 1996 proposal to the Australian government seeking new subsidies, Howe reportedly predicted that its annual sales would roughly double -- to $214 million -- by 2000, “with the lion’s share of the growth coming from exports.”[144] In fact, not only was the Australian government aware of Howe’s export ambitions, but it actually designed the replacement package to further facilitate and encourage Howe’s ambitious export goals.

7.236 According to the United States, the fact that the replacement package is being provided to promote Howe’s exports was also recognized, and welcomed, by Howe itself. During negotiation of the replacement package in late 1996, Howe’s Managing Director, Chris Heysen, stated that he had been “assured” that Howe “would be compensated with an alternative arrangement that would help it continue to expand exports."[145] Similarly, in a 1997 interview with World Leather Magazine, Mr. Heysen noted that “[w]e have been strongly supported by the Australian Government and we are very confident now that our investment and export growth can continue as planned."[146]

7.240 According to Australia, an assessment of the imputed objectives of governments is not the basis on which a rules-based system such as the WTO is supposed to operate. Rules about violation are not supposed to be based on guesses at the objectives of governments. They need to be based on facts and soundly based arguments. In Australia’s view, neither of these is present in the case presented by the United States.

7.241 The United States insists that, in addition to the fact that the new subsidies were explicitly designed to replace the forfeited de jure export subsidies, there is strong evidence that the Australian government intended the replacement subsidies to support Howe’s current and future exports. There are numerous statements by both Howe and the Australian government which confirm that the replacement package is, in fact, tied to Howe’s actual or anticipated exportation or export earnings.

7.242 Furthermore, the United States argues, when providing the new assistance package to Howe, the government of Australia knew that the vast majority of Howe’s operations were export-oriented and that additional subsidies would serve to increase Howe’s exports. This is clear from Howe’s long-standing participation in the ICS and EFS programmes, the information that Howe was obligated to provide to the government in order to obtain benefits under those programmes and information Australia relied upon in crafting the terms of the assistance package. Australian government officials have acknowledged that Howe’s business is essentially an exporting business, and the Australian media has acclaimed Howe as an Australian exporting success story. Thus, according to the United States, there can be no doubt that the Australian government knew at the time it agreed to the assistance package that benefits conferred would finance the continuation of Howe’s exports. The fact that the replacement package was provided to promote Howe’s exports was also recognized and welcomed by Howe itself.

7.243 Australia argues that the facts of the situation are straightforward. In its view, automotive leather was removed from two entitlement programmes at the request of the United States. However, for the Australian government, politically and socially, there was a requirement to provide some new arrangements for Howe. Australia questions whether anyone would seriously think that Australia would intentionally engage in a dispute with the United States in order just to export more automotive leather. Australia notes that it had hoped that, with the new arrangements, the matter would have been resolved. Australia asserts that it is the legal structure and administration of the subsidy arrangements that should be assessed, rather than the issue of intent or the nature of any prior measures. Australia submits that the Panel should look at the contracts, to evaluate what they actually say and how they are administered. Referring to business confidential information it provided to the Panel, Australia argues that the payments under the grant contract were not based on Howe's export performance.

(iv) Conditions of the assistance and the size of the domestic market

Factors including level of exports

7.244 The United States submits that the conditions of the replacement package and the limited size of the domestic market demonstrate that it is in fact tied to Howe’s export earnings. According to the United States, to ensure that Howe would use these funds to increase its exports, the Australian government conditioned the grant on Howe dramatically increasing its sales, which, given the size of the domestic market, in turn meant dramatically increasing its exports. Howe had no choice but to continue to expand its exports in order to obtain the full benefits offered. The Australian government also conditioned receipt of the grant money upon Howe undertaking A$22.8 million in approved capital investment before the year 2000. In fact, according to the United States, Howe’s ultimate parent, Schaffer Corp., Ltd. has admitted that the conditions of the subsidy were tied to future exports. In its half yearly report, Schaffer stated that the A$30 million grant was “based on projected exports and paid on performance criteria … ” and stated that the loan was given “to assist with the capital programme.”

7.245 The United States observes that the terms of the grant provide that Howe will receive grant monies equal to 5 per cent of its estimated sales from April 1997 through December 2000, with a cap of A$30 million. Thus, in order for Howe to receive the full A$30 million grant for which it is eligible, it must generate A$600 million in sales over the life of the replacement programme. This means that Howe must dramatically increase its annual sales. In 1996/97, Howe’s sales totaled approximately A$114.4 million.[151] Accordingly, Howe must increase its annual sales by an average of A$45.6 million a year qualify for the entire A$30 million grant.[152] Given that Howe tanned approximately 10,000 hides per week during the 1996/97 fiscal year, it would need to tan approximately 4,000 additional hides per week for it to achieve such a sales goal.[153]

7.246 According to the United States, the Australian government also conditioned receipt of the grant upon Howe undertaking A$22.8 million in approved capital investment before the year 2000. Howe fulfilled this requirement by constructing a new state-of-the-art finishing plant and a new processing facility.[154] Howe now has a production capacity of approximately 22,000 hides per week; almost double its 1996 capacity of 11,500 hides per week.[155]

7.247 However, the United States maintains, the, Australian leather market is now -- and will remain in the future -- too small to absorb Howe’s increased production. At the time the replacement package was provided in 1997, the total weekly demand for automotive leather in Australia was approximately 1,400 hides per week.[156] This figure is unlikely to grow significantly in the near future. The Federation of Automotive Products Manufacturers projects that annual automobile production in Australia will increase by 15 per cent between 1997 and 2000.[157] Assuming a corresponding (15 per cent) increase in the demand for automotive leather, by 2000 the Australian market for automotive leather will require approximately 1,600 hides per week.[158] Needless to say, the United States asserts, the 200 additional hides that the Australian automotive leather market will demand by 2000 is far less than the 4,000 additional hides per week that Howe must sell in order for it to earn the full A$30 million grant, or the 22,000 hides per week that Howe is now capable of producing. The United States believes that the information it presents is sufficient to raise a presumption that the alleged facts are correct. Because Australia has not presented any evidence refuting this affirmative showing, the Panel should accept the evidence presented by the United States as reasonable estimates of the current and future demand in Australia for automobiles and automotive leather.

7.248 In response to questioning by the Panel about whether Australia agreed with the estimates submitted by the United States concerning the projected production of motor vehicles in Australia and the projected demand for cattle hides through 2000, Australia responded that it considered "that the question is not relevant to the issues before the Panel, since projected demand figures are quite unrelated to the issue of whether any of the measures is contingent upon export performance." Australia also considers that the Federation of Automotive Products Manufacturers projections are conservative. According to Australia, the medium-term outlook for the automobile market in Australia is buoyed by strong economic conditions but is also currently subject to another of other factors, including prevailing economic conditions in Asian markets, which potentially affect both exports and imports to Australia, as well as the transitional arrangements for the introduction of a goods and services tax. The current outlook is for stronger growth in domestically produced vehicles than was the outlook when the Federation of Automotive Products Manufacturers conducted its survey. However, Australia did not have "any other or more up-to-date public forecasts to provide to the Panel." Furthermore, Australia states that the evidence submitted by the United States relating to the projected demand in cattle hides rests "on several contestable assertions and assumptions." According to Australia, the current proportion of new vehicles ordered and/or sold containing leather seating and interior trimming could well be in excess of the 10 per cent penetration first estimated by the United States, and could perhaps even exceed the 15 per cent level later canvassed. Given that leather interiors as an option have grown from negligible levels over the past decade, there is scope for such growth to continue into the foreseeable future. Similarly, Australia asserts, there is scope for growth in the after-market for automotive leather, which is not well developed when compared with the United States market. However, Australia did not provide the Panel with any forecasts based on these different assumptions.

7.249 The United States notes that, although Australia states that the projected demand for automobiles in Australia as calculated by the Federation of Automotive Products Manufacturers is conservative, Australia states that it “does not have any more up to date public forecasts to provide to the Panel.” According to the United States, the factual information concerning the projected demand for automobiles in Australia presented by the United States is therefore unrebutted.