World Trade Organization.
UNITED STATES – COUNTERVAILING MEASURES CONCERNING CERTAIN
PRODUCTS FROM THE EUROPEAN COMMUNITIES.
{Edited}
AB-2002-5
December 9, 2002
Countervailing duties were imposed or maintained by
the United States Department of
Commerce ("USDOC") in the course of 12 investigations: six
original investigations, two administrative reviews, and four sunset reviews.
Certain analyses in these investigations were undertaken pursuant to a United
States statute, 19 U.S.C. § 1677(5)(F) ("Section 1677(5)(F)"), which
reads as follows:
Change of ownership. A change in ownership of
all or part of a foreign enterprise or the productive assets of a foreign
enterprise does not by itself require a determination by the administering
authority that a past countervailable subsidy received by the enterprise no
longer continues to be countervailable, even if the change in ownership is
accomplished through an arm's
length transaction.
The subject products
in the 12 original investigations and reviews in issue were produced by
formerly state-owned enterprises that had been privatized at the time of the 12
underlying administrative determinations.
The European Communities alleges that the privatizations
in all 12 cases took place at arm's
length and for fair market value. The
United States did not rebut these allegations.
Both participants agree that
the changes in ownership relevant to this dispute concern only privatizations,
that is, the change in ownership from government to private hands. All the privatizations concerned in this
dispute involved a full change in ownership in the sense that in all 12 cases,
governments had sold all, or substantially all, their ownership interests and,
clearly, no longer had any controlling interests in the privatized producers.
The 12
investigations relate to the impact of
privatization of the firms under investigation on the existence of a
countervailable benefit. The imposition
or maintenance of countervailing duties in the 12 determinations was based on
the existence of subsidies for the privatized producers, specifically, on the
continuing benefit conferred by non-recurring financial contributions bestowed
by the governments on the producers prior to privatization.
The Panel found that the United States had acted
inconsistently with Articles 10, 14, 19.1, 19.4, 21.1, 21.2, 21.3, and 32.5 of
the Agreement on Subsidies and
Countervailing Measures (the "SCM
Agreement") and Article XVI:4 of the Marrakesh Agreement Establishing the World Trade Organization (the
"WTO Agreement"), and that
it had nullified or impaired benefits accruing to the European Communities
under these Agreements. The Panel
recommended that the Dispute Settlement Body (the "DSB") request the
United States to bring its measures into conformity with its obligations under
the SCM Agreement and the
WTO Agreement.
1.
The USDOC applied one of two different methods (referred to as the
"gamma" and "same
person" methods) in conducting the 12 determinations to assess the impact
of a change in ownership effected through privatization on the continued
existence of the benefit of a countervailable subsidy. The gamma method was formerly used by the USDOC to determine the
extent to which a non-recurring financial contribution provided to a
state-owned enterprise should be amortized over time to arrive at a
countervailable subsidy rate, particularly after sale of the subsidized entity
to a private firm. In applying this
method, the USDOC employed an "irrebuttable presumption" that the
benefits of that financial contribution would remain with the recipient over a
standard period of time, such that "USDOC does not undertake an inquiry
into whether and, if so, to what extent the subsidy continues to benefit production
at any subsequent point in time.
Rather, the USDOC simply will countervail the amount of the subsidy
originally allocated to the year" under review. When confronted with a change in ownership of the producer under
investigation, the USDOC would devise a ratio so as to allocate the
"irrebuttably presumed" benefit between the seller and
purchaser. This allocation "can
result in the full pass through of benefits from prior subsidies, or absolutely
no pass through of benefits, or anything in between, depending on the facts of
a particular case."
2.
The "same person" method was devised as a replacement for
the gamma method. This method provides for a
two-step test. The first step consists
of an analysis of whether the post-privatization entity is the same legal
person that received the original subsidy before privatization. For this purpose, the USDOC examines the
following non-exhaustive criteria: (i)
continuity of general business operations;
(ii) continuity of production facilities; (iii) continuity of assets and liabilities; and (iv) retention of personnel. If, as a
result of the application of these criteria, the USDOC concludes that no new legal person was created, the analysis of whether a
"benefit" exists stops there, and the USDOC will not assess whether
the privatization was at arm's length and for fair market value. The subsidy is automatically found to
continue to exist for the post-privatization firm. By contrast, if, as a consequence of the application of these
criteria, the USDOC concludes that the post-privatization entity is a new legal person, distinct from the entity
that received the pre-privatization subsidy, the USDOC will not impose duties on goods produced after privatization
on account of the pre-privatization subsidy.
The following issues are raised in this appeal:
One
is whether the Panel erred in finding that privatization, at arm's length and
for fair market value, "systematically”
extinguishes the "benefit" from previously-bestowed non-recurring
financial contributions.
Another
is whether the Panel erred in finding that the United States failed to comply
with its obligations under Articles 10, 14, 19.1, 19.4, 21.1, 21.2, and 21.3 of
the SCM Agreement, in using a
method of calculating the "benefit" to the "recipient" that
presumes conclusively that if the state-owned enterprise and the
post-privatization firm are the same "legal person", the
"benefit" received by the
state-owned enterprise automatically
continues to exist with the newly-privatized firm.
A
third is whether the Panel erred in finding that 19 U.S.C. § 1677(5)(F) is,
per se, inconsistent with
Articles 10, 14, 19, and 21 of the SCM
Agreement, because it prevents the USDOC from automatically concluding that, following privatization at
arm's length and for fair market value, the "benefit" of a prior
non-recurring financial contribution bestowed on the state-owned enterprise no
longer "accrue[s]" to the privatized producers; and, consequently, that the "United
States has failed to ensure conformity with Article 32.5 of the SCM Agreement and
Article XVI.4 of the WTO
Agreement”.
Having dealt with the procedural issues, we turn now
to the substantive issues in this appeal.
Before doing so, it is useful to recall briefly the relevant law, the
particular facts and circumstances, and the precise measures relevant to the appeal.
Article
VI:3 of GATT 1994 permits Members of the WTO to impose a "countervailing
duty" on products imported from other Members of the WTO "for the
purpose of offsetting any bounty or subsidy bestowed, directly, or indirectly,
upon the manufacture, production or export of any merchandise." Article 10 of the SCM Agreement provides that "Members shall take all
necessary steps to ensure that the imposition of a countervailing duty on any
product of the territory of any Member imported into the territory of another
Member is in accordance with the provisions of Article VI of GATT 1994 and
the terms of this Agreement." (footnote omitted)
Article 1 of the SCM Agreement sets out when a "subsidy" that may be
"offset[]"by "countervailing dut[ies]" "shall be
deemed to exist" for the
purpose of the SCM Agreement.
(emphasis added) To satisfy the
definition of a "subsidy", a "benefit" must be
"conferred" on a "recipient". Only a "subsidy" that "exist[s]" and that
"confer[s]" a "benefit" on a "recipient" may be
"offset" by "countervailing duties".
Article 19 of the SCM Agreement deals with the "Imposition and Collection
of Countervailing Duties". Article
19.1 provides that, after, inter alia,
"a final determination of the existence
and amount of the subsidy", a
Member may impose a countervailing duty "in accordance with the
provisions" of that Article. (emphasis added) Among those provisions is Article 19.4, which provides that
"[n]o countervailing duty shall be levied on any imported product in
excess of the amount of the subsidy found to exist, calculated in terms of subsidization per unit of the
subsidized and exported product." (emphasis added, footnote omitted).
Article 21 of the SCM Agreement deals with the "Duration and Review of
Countervailing Duties and Undertakings".
Article 21.1 provides, "A countervailing duty shall remain in force
only as long as and to the extent necessary to counteract subsidization which
is causing injury."
Article 21.2 imposes certain obligations relating to
"reviews" of countervailing duties, including the administrative
reviews before us on appeal, and Article 21.3 imposes certain obligations
relating to "sunset reviews" of countervailing duties.
Article 14 of the SCM Agreement requires that "any method used by the
investigating authority" of a WTO Member "to calculate the benefit to
the recipient … shall be provided for in the national legislation or
implementing regulations of the Member concerned and its application to each
particular case shall be transparent and adequately explained."
Article 32.5 of the SCM Agreement provides, "Each Member shall take all
necessary steps, of a general or particular character, to ensure … the
conformity of its laws, regulations and administrative procedures with the
provisions of this Agreement".
Similarly, Article XVI:4 of the WTO
Agreement provides, "Each Member shall ensure the conformity of
its laws, regulations and administrative procedures with its obligations as
provided in the annexed Agreements", which include the SCM Agreement.
…………………………
[o]nce an importing Member has determined that a privatization has
taken place at arm's-length and for fair market value, it must reach the conclusion that no
benefit resulting from the prior financial contribution (or subsidization)
continues to accrue to the privatized producer. (emphasis added)
…………………………
In sum, we reject the characterization made by the
United States of our rationale in US
– Lead and Bismuth II, and
we reaffirm our finding in that case that an investigating authority, in an
administrative review, when presented with information directed at proving that
a "benefit" no longer exists following a privatization, must determine whether the
continued imposition of countervailing duties is warranted in the light of that
information. This obligation is
premised, not on the
creation of a new legal person, as the United States insists, but on the
possibility that such a change in ownership has affected the continued
existence of a benefit.
In our view, this finding, relating to administrative
reviews, leads inevitably to the conclusion that the "same person"
method, as such, is also inconsistent with the obligations of the SCM Agreement relating to original
investigations. In an original
investigation, an investigating authority must establish all conditions set out
in the SCM Agreement for
the imposition of countervailing duties.
Those obligations, identified in Article 19.1 of the SCM Agreement, read in conjunction with
Article 1, include a determination of the existence of a
"benefit". As in the
administrative reviews, the "same person" method necessarily
precludes a proper determination as to the existence of a "benefit"
in original investigations where the pre- and post-privatization entity are the
same legal person. Instead, in such
cases, the "same person" method establishes an irrebuttable presumption
that the pre-privatization "benefit" continues to exist after the
change in ownership. Because it does
not permit the investigating authority to satisfy all the prerequisites stated
in the SCM Agreement
before the imposition of countervailing duties, particularly the identification
of a "benefit", we find that the "same person" method, as
such, is inconsistent with the WTO obligations
that apply to the conduct of original investigations.
……………………….
In the light of these reasons, as they apply to
original investigations, administrative reviews, and sunset reviews, we uphold
the Panel's conclusion that "the same person methodology is itself inconsistent with the SCM
Agreement". (emphasis added) We find that the same person method as such is inconsistent with the
SCM Agreement.
………………………….
Having upheld the Panel's conclusions in paragraphs
8.1(a) through (c) of the Panel Report, we now turn to evaluate the Panel's
conclusion, in paragraph 8.1(d), regarding the relevant United States statute.
The Panel concluded, in paragraph 8.1(d) of the Panel
Report, that:
To the extent that Section 1677(5)(F), as interpreted
by the US Court of Appeals for the Federal Circuit and the SAA, requires the US
Department of Commerce to apply a methodology where the benefit from a prior
financial contribution is not systematically found to no longer accrue to the
privatized producer solely by virtue of an arm's-length for fair market value
privatization, is preventing the United States from exercising a WTO-compatible
discretion. Therefore, Section
1677(5)(F) is inconsistent with Articles 10, 14, 19 and 21 of the SCM, as
interpreted by the Panel and the Appellate Body Reports in US – Lead and Bismuth II and this Panel. As Section 1677(5)(F) is found to be inconsistent with the SCM Agreement, the United States has
failed to ensure conformity with Article 32.5 of the SCM Agreement and Article XVI.4 of the WTO Agreement respectively.
Section 1677(5)(F), the so-called "change in
ownership" provision, provides:
[a] change in ownership of all or part of a foreign enterprise
or the productive assets of a foreign enterprise does not by itself require a
determination by the administering authority that a past countervailable
subsidy received by the enterprise no longer continues to be countervailable,
even if the change in ownership is accomplished through an arm's-length
transaction.
The Panel acknowledged that this
"statutory language alone indicates that the competent authority could
have the discretion to implement Section 1677(5)(F) consistently with WTO
law." However, in looking at the
statute in the light of "other domestic interpretive tools such as the
legislative history, the SAA, and relevant judicial interpretations", the
Panel found that it "prohibit[ed] the United States from exercising its
executive discretion so that it can systematically conclude that in cases of
[a]rm's-length privatization for fair market value, no benefit accrues to the
privatized producer from [a] prior financial contribution bestowed to the
state-owned producers".
……………………………
In short, the Panel found that Section 1677(5)(F)
prevents the USDOC from determining automatically and in every case that,
pursuant to a "per se"
rule, upon privatization at arm's length and for fair market value, the
remaining part of a benefit conferred by a prior financial contribution on the
formerly state-owned enterprise does not "accrue" to the private
owner. In the Panel's view, Section
1677(5)(F), as described in the SAA and as interpreted by the United States
Court of Appeals for the Federal Circuit, "bound [the USDOC] to a
non-compliant application of
Section 1677(5)(F)." The
Panel reached this conclusion because it saw the statute as compelling the USDOC to make its
determinations in a way that prevents it from applying the irrebuttable presumption
that the Panel erroneously saw as required by the SCM Agreement. On this
basis, the Panel found that Section 1677(5)(F) mandates the United States to
act inconsistently with the SCM
Agreement and with Article XVI:4 of the WTO Agreement, and, as such,
is inconsistent with United States' WTO obligations.
As stated earlier, we agree with the Panel that privatization at arm's length and at fair market price
will usually extinguish
the remaining part of a benefit bestowed by a prior, non-recurring financial
contribution. However, we disagree with
the Panel that this result will necessarily and and always
follow from every privatization at arm's length and for fair market value. For this reason, we reversed the Panel's
conclusion that, under the SCM
Agreement, investigating
authorities
"must" determine, automatically,
that the remaining part of a benefit bestowed by a prior financial contribution
does not continue to exist for a privatized firm following a transaction at
arm's length and for fair market value.
Accordingly, we have also found that, contrary to the Panel's
understanding, the SCM
Agreement permits an investigating authority to evaluate evidence
directed at proving that, regardless of privatization at arm's length and for fair
market value, the new private owner may nevertheless enjoy a benefit from a
prior financial contribution bestowed on the state-owned enterprise. In the light of these earlier conclusions,
we disagree with the Panel that Section 1677(5)(F) is inconsistent per se with the WTO obligations of
the United States. The Panel's basis
for this finding is incorrect.
………………………………….
For all these reasons, we reverse the Panel's
conclusion that:
To the extent that Section 1677(5)(F), as interpreted
by the US Court of Appeals for the Federal Circuit and the SAA, requires the US
Department of Commerce to apply a methodology where the benefit from a prior
financial contribution is not systematically found to no longer accrue to the
privatized producer solely by virtue of an arm's-length for fair market value
privatization, is preventing the United States from exercising a WTO-compatible
discretion. Therefore, Section
1677(5)(F) is inconsistent with Articles 10, 14, 19 and 21 of the SCM, as
interpreted by the Panel and the Appellate Body Reports in US – Lead and Bismuth II and this Panel. As Section 1677(5)(F) is found to be inconsistent with the SCM Agreement, the United States has
failed to ensure conformity with Article 32.5 of the SCM Agreement and Article XVI.4 of the WTO Agreement respectively.
3.
For the reasons set out in this Report, the Appellate Body:
(a)
upholds the Panel's findings, in
paragraphs 8.1 (a), (b) and (c) of the Panel Report, that the United States has
acted inconsistently with Articles 10, 14, 19.1, 19.4, 21.1, 21.2 and 21.3 of
the SCM Agreement, by imposing
and maintaining countervailing duties without determining whether a
"benefit" continues to exist in the following countervailing duty
determinations:
(b)
reverses the Panel's finding, in
paragraph 8.1(d), first sentence, of the Panel Report, that "[o]nce an
importing Member has determined that a privatization has taken place at
arm's-length and for fair market value, it must reach the conclusion that no
"benefit" resulting from the prior financial contribution (or
subsidization) continues to accrue to the privatized producer"; and
(c)
reverses the Panel's conclusion, in
paragraph 8.1(d), second sentence, of the Panel Report, that Section 771(5)(F)
of the Tariff Act 1930, as amended, 19 U.S.C. § 1677(5)(F), is
inconsistent with the SCM
Agreement and that, therefore, "the United States has failed to
ensure conformity with Article 32.5 of the SCM Agreement and Article XVI.4 of the WTO Agreement respectively."
(d)
upholds the Panel's conclusion, in paragraph 8.2 of the
Panel Report, that, insofar as the United States has infringed its obligations
under the SCM Agreement, as set
out in paragraphs 8.1(a), (b), and (c) of the Panel Report, these actions of
the United States constitute prima
facie nullification or impairment of benefits accruing to the
European Communities, pursuant to Article 3.8 of the DSU; and, because the
United States has failed to rebut this presumption, the United States has in
fact nullified or impaired benefits accruing to the European Communities under
the SCM Agreement.
The Appellate Body recommends that the Dispute Settlement Body request the United States to bring its measures and administrative practice (the "same person" method), as found in this Report and in the Panel Report as modified by this Report, to be inconsistent with the SCM Agreement, into conformity with its obligations under that Agreement.