ANNEX 3-5

ANSWER OF THE UNITED STATES TO QUESTION POSED BY BRAZIL

(14 February 2000)
 

Q1. Please confirm the United States' statement, at the 6 February Meeting of the Panel, that it did not receive Brazil's Rebuttal Submission, dated 17 January 2000.

Response

The United States confirms the referenced statement.

ANNEX 3-6

ANSWERS OF THE UNITED STATES TO QUESTIONS POSED BY THE PANEL

(14 February 2000)

Questions to third parties

US

Q1. The US argues that the items contained in the Illustrative List are not, in Canada's words, 'exceptions' to the rest of the SCM Agreement, but rather are particular applications of the general standards in Article 1 to particular types of government practices. Would the US please elaborate on this statement. In particular, is the US suggesting that Canada's view is that the entire Illustrative List consists of exceptions to the rest of the SCM Agreement? Whatever the response to the preceding question, would the US disagree with a statement that the second paragraph of item (k) might at least in some circumstances be characterized as an "exception" to the first paragraph, in the sense that measures defined in the first paragraph of item (k) are prohibited export subsidies except if nevertheless they conform to the provisions of the second paragraph?

Response

1. With respect to the Panel's request that the United States elaborate on its statement, the question of the status of the items contained in the Illustrative List is connected to the so-called "a contrario issue". Because the US position regarding the latter issue has been set out more fully in its written submissions in other dispute settlement proceedings, the United States will restate this position below for the benefit of this Panel, and hopes that this more detailed treatment of the issue will assist the Panel in its resolution of the matter before it. Following that discussion, the United States will address the other questions posed by the Panel in Question #1.

The "A Contrario" Issue

2. The basic question underlying the a contrario issue is this: In the case of a measure that is described by a particular item of the Illustrative List, is the measure's status as a prohibited or non-prohibited export subsidy governed by the standards contained in the item itself or by the general standards set forth in Article 1 and Article 3.1(a) of the SCM Agreement? For example, in the case of Canadian export financing under the Canada Account, if one assumes that the type of financing in question is of a type dealt with by item (k), is the prohibited/non-prohibited status of such financing controlled by item (k) or by Article 1 and Article 3.1(a)?

3. In the view of the United States, as a general matter of public international law, it is item (k) which is controlling. The principle of generalia specialibus non derogant holds that "a matter governed by a specific provision, dealing with it as such, is thereby taken out of the scope of the general provision dealing with the category of subject to which that matter belongs, and which otherwise might govern it as part of that category."¹ While the Appellate Body has not necessarily invoked this principle by name, it repeatedly has emphasized the importance of analyzing a measure based on the provision of the WTO agreements that most specifically addresses the measure.² Of all the provisions in the SCM Agreement, item (k) clearly is the provision that most specifically addresses export credit practices.

4. In addition to general principles of public international law, the items of the Illustrative List are controlling - where they apply - by virtue of footnote 5 of the SCM Agreement. Specifically, while Article 3.1(a) prohibits export subsidies, including those described in the Illustrative List, footnote 5 to Article 3.1(a) provides that "[m]easures referred to in Annex I as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement." Footnote 5 makes clear that a practice identified by the Illustrative List as not constituting an export subsidy is not prohibited by Article 3.1(a) or any other provision of the SCM Agreement. Thus, if, for example, an export credit practice is permitted under item (k) - rather than prohibited - that is the end of the matter; no further analysis is needed. As such, footnote 5 constitutes an express incorporation into the SCM Agreement of the generalia principle.³

5. The disagreement as to whether an item of the Illustrative List is controlling appears to focus on the word "illustrative". While all of the parties and third parties involved in this dispute agree that the Illustrative List is "illustrative", they disagree on the manner in which it is illustrative. Canada and the EC appear to argue that if a particular type of financial contribution is described by a particular item in the Illustrative List, but cannot be considered as an export subsidy under the standard contained in the particular item, that financial contribution nonetheless can be found to be an export subsidy under some other standard.

6. In the view of the United States, this is not what the drafters intended when they used the term "illustrative" to refer to Annex I of the SCM Agreement. Instead, a more reasonable interpretation is that the drafters used the term "illustrative" simply to signify that not all types of financial contributions are covered by the Illustrative List.⁴ However, where an item of the Illustrative List does address a particular type of financial contribution - as is the case with respect to item (k) and export credits - that item sets forth the standard for determining whether the financial contribution is or is not an export subsidy.

7. Consider, for example, item (j) of the Illustrative List, which deals with export guarantee and insurance programmes. Looking just at the standard for premium rates, premium rates give rise to an export subsidy if they are "inadequate to cover the long-term operating costs and losses of the programmes." Implicit in item (j), however, is the notion that premium rates do not give rise to an export subsidy if they are "adequate" to cover long-term operating costs and losses. Thus, on its face, item (j) provides Members with a predictable standard to use in establishing and administering export guarantee and insurance programmes.

8. Under the approach to the Illustrative List taken by Canada and the EC, however, any predictability is lost. For example, if item (j) was only "illustrative", there would be numerous ways in which an export insurance or guarantee programme could be considered to be an export subsidy even though the premium rates conform to the standard in item (j). If premium rates were inadequate to cover short-term operating costs or losses, a programme could be considered to be an export subsidy. If premium rates were inadequate to cover short- or long-term non-operating costs, a programme could be considered to be an export subsidy. If premium rates were less than what an exporter might pay for comparable coverage in the marketplace, there could be an export subsidy under a "benefit to recipient" approach. This would be particularly true in a situation where a specific export transaction involves an unusually severe risk of nonpayment or currency fluctuation.⁵

9. It is extremely unlikely that the drafters of the SCM Agreement went to the trouble of crafting in the Illustrative List specific and detailed rules for particular types of financial contributions, such as the rules in item (j) and item (k), with the intent that those rules could be readily ignored in favor of more general standards found elsewhere in the SCM Agreement. Instead, a more plausible reading is that the drafters intended to use the Illustrative List as a vehicle for establishing detailed rules for certain types of financial contributions, rules that elaborate on the general principles contained in Article 1 but that cannot be ignored in favor of those more general principles.

10. The counter-arguments that have been made against this interpretation are not persuasive. For example, the EC has argued that in order for footnote 5 to exclude a measure from the prohibitions of the SCM Agreement, there has to be "a clear statement in Annex I that a measure does not constitute an export subsidy."⁶ In its prior submissions to the Appellate Body on this issue, the EC stated that "footnote 5 requires an 'affirmative statement' in the Illustrative List to the effect that a measure does not constitute an export subsidy.⁷ Under either standard, the EC has identified only the second paragraph of item (k) as falling within the purview of footnote 5.⁸

11. However, the text of footnote 5 does not require such a "clear" or "affirmative" statement, and there is a reason for this: the drafters had a different intent. Footnote 5 first appeared in the third draft agreement prepared by the Chairman of the Negotiating Group on Subsidies.⁹ In this draft, footnote 5 appeared for the first time - as footnote 4 to Article 3.1(a). Footnote 4 read as follows: "Measures expressly referred to in the Illustrative List as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement." (Emphasis added). Thus, the original version of footnote 5 had an additional word - "expressly" - which, had it been retained, might have supported the EC interpretation.

12. The word "expressly" was not retained, however. In the very next draft, the word was deleted from the footnote (still numbered as footnote 4).¹⁰ This change demonstrates that the drafters intended to expand, rather than restrict, the scope of footnote 5.¹¹ The change also demonstrates that the drafters did not intend the sort of narrow construction of footnote 5 advanced by the EC.

13. The second principal argument - advanced by both Canada and the EC - is that the US interpretation somehow would transform the Illustrative List into an exhaustive list that allegedly would allow "all sorts of measures" to escape the export subsidy prohibition.¹² Both Canada and the EC have offered as an example item (a) of the Illustrative List, which prohibits "direct subsidies," claiming that under the US approach, indirect export subsidies would escape item (a) and, thus, prohibition under Article 3.1(a).¹³

14. However, this is a mischaracterization of the US position. First, as noted above, the US position is not that the Illustrative List is exhaustive. Instead, the US position is that the Illustrative List does not deal with all possible financial contributions, but for those that it does deal with, it establishes, by virtue of footnote 5, a dispositive legal standard insofar as prohibited subsidies are concerned. Second, in the case of the EC's item (a) example, the US position is that item (a) simply does not address "indirect" subsidies. Thus, indirect subsidies do not "escape" any prohibition. Instead, the standard for a prohibited indirect subsidy must either be found elsewhere in the Illustrative List or, if the specific provisions of the Illustrative List are silent, in the general principles of Articles 1 and 3.1(a) of the SCM Agreement.

15. Finally, the opponents of the a contrario interpretation have never been able to explain how their approach to footnote 5 and the Illustrative List does not render various portions of the Illustrative List ineffective. For example, they have been unable to explain how their approach does not render the "material advantage" clause of item (k) superfluous. Because such an outcome is incorrect under public international law,¹⁴ a correct interpretation of footnote 5 and the Illustrative List is that the provisions of the Illustrative List are controlling with respect to the measures addressed therein.

Canada's View

16. Canada's view appears to be that footnote 5, as well as any item in the Illustrative List that - in Canada's view - is encompassed by footnote 5, is an exception to Article 3.¹⁵ In the view of the United States, neither footnote 5 nor the items in the Illustrative List constitute "exceptions". To the contrary, footnote 5 and the Illustrative List are part of Article 3, not exceptions to it.

The Second Paragraph of Item (k)

17. Whether one considers the second paragraph of item (k) to be an "exception to", a "qualification of", or a "refinement of" the first paragraph is, in the view of the United States, essentially a semantic exercise with no legal significance. The Appellate Body has stated that the assignment of the burden of proof is not affected by describing a particular provision as an "exception" to something else.¹⁶ Likewise, characterizing a provision as an "exception" does not affect the interpretation of the provision. As the Appellate Body has stated:

[M]erely characterizing a treaty provision as an "exception" does not by itself justify a "stricter" or "narrower" interpretation of that provision than would be warranted by examination of the ordinary meaning of the actual treaty words, viewed in context and in the light of the treaty's object and purpose, or, in other words, by applying the normal rules of treaty interpretation.¹⁷

18. Thus, whether or not one characterizes the second paragraph of item (k) as an exception to the first paragraph, the complainant in a dispute - in this case, Brazil - has the burden of proving that the alleged offending practice fails to satisfy the terms of the second paragraph.

Q2. In any case, what are the practical implications, if any, for the issues before the Panel (and for the parties' arguments) of the US argument concerning the parties' characterizations of the Illustrative List (or at least of the second paragraph of item (k) thereof)? That is, the parties seem to agree that it would be for Canada eventually to choose whether to invoke that provision as a defense, and if it did so, to provide evidence to demonstrate its compliance therewith. Does the US agree or disagree with this? Please explain.

Response

1. The practical implications of the US argument depend upon whether the Panel considers itself bound by an agreement between the two parties as to how the SCM Agreement should be interpreted; i.e., the parties' agreement that Canada bears the burden of proving that Canada Account financing now conforms to the second paragraph of item (k). If the Panel simply decides that it will accept the parties' interpretation because it happens to be something on which they agree, then the US argument is irrelevant.

2. However, in the view of the United States, a panel is not obliged to accept the interpretation of an agreement that happens to be shared by the two litigants present before it. Although it is true that WTO dispute settlement is a Member-driven process, that does not mean that a panel can ignore its mandate under Article 11 of the DSU to "make an objective assessment of the matter before it ... ."

3. Thus, the United States believes that the Panel must interpret the SCM Agreement objectively and independently of any agreement between the parties. When it does so, the United States believes that it should interpret the SCM Agreement - and, in particular, item (k) - in the manner described by the United States in its response to Question #1. Such an interpretation leads to the conclusion that the burden is on Brazil to demonstrate that the Canada Account does not conform to the second paragraph of item (k).

Q3. Concerning the verification mechanism proposed by Canada, the US argument seems to be that were the Panel to endorse any such mechanism, this would constitute a violation of Article 19.1 of the DSU, in that it would constitute a "modification" thereof which the Appellate Body has ruled is impermissible. Is this a correct understanding of the US argument. Please elaborate.

Response

1. The Panel's understanding is correct. Under the DSU, panels may suggest methods of implementation, not methods of monitoring implementation. Surveillance of implementation is the subject of other provisions of the DSU, not Article 19.

ANNEX 3-7

RESPONSES BY THE EUROPEAN COMMUNITIES

TO THE QUESTIONS FROM THE PANEL AND

FROM BRAZIL

(14 February 2000)

Question 1 to the EC

The EC takes the view that because Canada has "undertaken" to respect all the provisions of the OECD Arrangement, Canada has prima facie correctly implemented the Panel's findings. Would the EC please elaborate on what it means by "undertaken". That is, is the EC's position dependent on the specific nature of characteristics of that undertaking, and if so, what are the elements that persuade the EC that the undertaking does constitute prima facie correct implementation? Under what circumstances, if any, would the EC consider that a statement issued by a government body, or made by a government employee acting in an official capacity, did not have the status of an undertaking constituting prima facie evidence of compliance with a ruling by the DSB ?

Response

1. The EC did not use the term "undertaken" to suggest that Canada had entered into a binding commitment. Canada has rather declared that it will not in future approve Canada Account financing "which does not comply with the OECD Arrangement."¹

2. In the original proceeding, the Panel took the view that since Canada Account financing was discretionary, it could only rule on particular cases of support.² This finding was not challenged on appeal. As a result, the Panel merely found a number of transactions to have been de jure export contingent.

3. There is not therefore any finding of an export subsidy programme to implement although Canada has taken some steps to ensure that the programme will not in future give rise to the same problems.

4. There is a change in Canada's practice on Canada Account financing since before the declaration it claimed that this financing was "consistent" with the OECD Arrangement, which can be taken simply to mean that Canada did not consider that Canada Account financing fell under the OECD Arrangement. Now, it positively declares that future Canada Account financing will comply with the Arrangement.

5. But this is not really the question before the Panel. If it was not possible in the original proceeding to declare the Canada Account financing incompatible with the SCM Agreement as a programme, that is in general, because it was discretionary, then it is still not possible now. The existence of the Panel Report cannot add to or diminish the rights and obligations of Members (Article 3.2 DSU).

Question 2 to the EC

Would the EC please elaborate on the specific reasons why it does not believe that it would be appropriate for the Panel to suggest a transparency agreement, as proposed by Canada. In particular, does the EC consider that such a suggestion by the Panel would be impermissible under the DSU and/or the SCM Agreement, or simply inadvisable for other reason? Please explain.

Response

1. The EC finds itself in agreement with the statement of the US that Article 19.1 DSU, by its plain terms, allows a panel to suggest ways of implementing the recommendations that it makes after concluding that a measure is inconsistent with the covered agreement. A transparency agreement is not capable in itself to achieve the result of bringing Canada's subsidies into conformity. It is rather a means of verifying compliance, which is not a matter in which panels should become involved.

2. Accordingly, Article 19.1 DSU does not give to the Panel the necessary authority to make the suggestion and it is therefore impermissible.

QUESTION FROM BRAZIL

Brazil notes several references to its Rebuttal Submission, dated 17 January 2000, in the European Communities' Statement for the Meeting of the Panel on 6 February 2000. Please identify from whom the European Communities received this document.

Response

1. The European Communities received Brazil's second written submission by e-mail. No record of the origin of the transmission was kept. It expected to have received the text from Brazil.

2. The European Communities is concerned that Brazil contests its right of have received the second submission and states that it did declined to send a copy to the EC as required by the Working Procedures of the Panel. How can the EC usefully contribute to the consideration of this matter by the Panel if it is not aware of all the arguments that have been presented to the Panel prior to the meeting?

3. Article 10:3 of the Understanding on Rules and procedures governing the settlement of disputes (DSU) states that :

4. Third parties shall receive the submissions of the Parties to the dispute to the first meeting of the Panel. (emphasis added).

5. Furthermore, the DSU does not foresee any specificity in the application of this rule to panels reconvened pursuant to Article 21.5.

6. As the meeting of 6 February 2000 was the first and only meeting of the Panel in this case, the EC was entitled to receive all submissions made to that meeting.

7. A refusal by Brazil to allow the EC to have its second written submission would be a breach of the DSU and the Working Procedures an undermine the validity of the procedure.

8. The European Communities can assure Brazil that there has been no breach of confidentiality since its second written submission has only been made available to Members participating in the proceeding and for that purpose, as required by the DSU.