Detecting Prohibited Subsidies and Determining Continued Compliance: WTO Panel Rules (Again) for the US in the Airbus Dispute with EU

On 22 September 2016, the United States Trade Representative (USTR) scored another victory in its long-running dispute with the European Union (EU) over subsidies provided by certain EU Member States to large civil aircraft manufacturer Airbus. The USTR sought to prove that 36 challenged EU measures remained inconsistent with its duty to comply with the rulings and recommendations issued by the WTO Dispute Settlement Body (DSB) after adopting the original 30 June 2010 Panel Report in this case.  Specifically, the US challenged four types of subsidies allegedly made by the EU and/or certain EU Member States to Airbus for continuing inconsistency with the Subsidies and Countervailing Measures (SCM) Agreement: 1) launch aid or member State financing; 2) equity infusions for the corporate restructuring of Aerospatiale and Deutsche Airbus; 3) infrastructure related measures of German and Spanish authorities; and 4) research and technological development funding provided by the EU and certain member States.

The 22 September 2016 WTO Panel Report European Communities and Certain Member States – Measures Affecting Trade in Large Civil Aircraft [hereafter, “2016 Panel Report”] found, among others, that: 1) French, German, Spanish, and UK launch aid or member State financing for the Airbus A350XWB constituted actionable specific subsidies (2016 Panel Report, para. 7.1.c.ii.); 2) the EU and certain member States have failed to comply with their obligation to withdraw the subsidies for other Airbus aircraft (2016 Panel Report, para. 7.1.c.ix.); 3) the EU continues to be in violation of Articles 5(c) and 6.3(a)(b) and (c) of the SCM Agreement by failing to comply with previous recommendations and rulings of the WTO Dispute Settlement Body in the original 30 June 2010 Panel Report (2016 Panel Report, para 7.2); 4) to the extent that the challenged EU measures remain inconsistent with the SCM Agreement, they have nullified or impaired benefits accruing to the US under that Agreement (2016 Panel Report, para. 7.3); and 5) the EU and certain member States failed to bring 34 of its 36 challenged measures into conformity with their obligations under the SCM Agreement (2016 Panel Report, para. 7.4).

The 2016 Panel Report – the subject of mutual multi-billion dollar countermeasures claims by the United States (alleging US$10 billion in EU subsidies to European company Airbus) and the EU (alleging US$23.6 billion in US subsidies to American company Boeing) for countermeasures against allegedly prohibited subsidies made respectively to these two transatlantic competitors  – comes at a most contentious time in US electoral politics. With less than 50 days left before election day, it is highly significant that both the Republican and Democrat presidential nominees seek an American retreat from global free trade, allegedly to protect U.S. companies from fraudulent or anti-competitive acts of foreign rivals. US Trade Representative Mike Froman hails the decision as a “a sweeping victory for the United States and its aerospace workers…EU aircraft subsidies have cost American companies tens of billions of dollars in lost revenue…We will not tolerate our trading partners ignoring the rules at the expense of American workers and their families.”

Subsidies are among the “thorny” issues in world trade law. As famously pointed out by Alan Sykes, there are “conceptual and practical difficulties in determining what constitutes an undesirable ‘subsidy”. [A.O. Sykes, Subsidies and Countervailing Measures, pp. 84-106 in P. Macrory, A. Appleton, and M. Plummer (eds.), The World Trade Organization: Legal, Economic and Political Analysis Vol. I, (Springer, 2005)]. It is for this reason that the 2016 Panel Report is particularly significant, since it contains a detailed clarification of the methods for detecting a subsidy (where “a financial contribution by a government or public body within the territory of a Member…confers a benefit”, 2016 Panel Report, para. 6.224). A ‘benefit’ is conferred if a financial contribution is “offered on terms that are more advantageous than those that would have been available to the recipient on the market.” (2016 Panel Report, para. 6.293) Both the EU and the US disputed the existence of a “benefit” arising from the financial contributions of the EU and/or certain Member States, with both sides presenting extensive economic analysis, expert testimony, and copious data on market-based comparisons of the terms indicated in the launch aid or Member State financing arrangements of certain EU Member States for Airbus. The Panel concluded that a benefit was indeed conferred by the financial contributions made by France, Germany, Spain, and the UK for the Airbus A350XWB aircraft, because “the rates expected under [these financial contribution] contracts are lower than a relevant market benchmark.” (2016 Panel Report, para. 6.656).

The Panel rejected two further claims of the United States.  On the first, the Panel held that the United States did not establish that the said launch aid or Member State financing for the Airbus A380 or A350XWB constituted prohibited export subsidies, since the United States “failed to demonstrate that [the measures are] de facto contingent on export performance.” (2016 Panel Report, para. 6.744).  As to the second, the Panel rejected the United States argument that several EU measures for the Airbus A350XWB are “contingent on the use of domestic over imported goods, and therefore each is a prohibited subsidy under Articles 3.1(b) and 3.2 of the SCM Agreement…each measure is contingent on Airbus producing certain [large civil aircraft] components…in the territories of the member States granting the A350XWB measures, components that Airbus will then use in downstream [large civil aircraft] production activities.” (2016 Panel Report, para. 6.745.) The Panel dismissed this claim due to insufficient evidence. (2016 Panel Report, para. 6.790).

Most importantly, however, the 2016 Panel Report provided clarity on the interpretation of Article 7.8 of the SCM Agreement, which says:

When a panel report or an Appellate Body Report is adopted in which it is determined that any subsidy has resulted in adverse effects to the interests of another Member within the meaning of Article 5, the Member granting or maintaining such subsidy shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy.

The United States had argued that the EU and certain member States violated Article 7.8 of the SCM Agreement, specifically by failing to “take appropriate steps to remove the adverse effects” or “withdraw the subsidy” in the context of the substantive disciplines of Article 5 of the SCM Agreement, focusing on the question whether the trade effects attributed to a measure continue to exist. (2016 Panel Report, para. 6.792.) The EU argued that it did not have any obligation to adopt any compliance measures with respect to any of the challenged subsidies that already ceased to exist prior to the beginning of the six-month implementation period within which a subsidizing Member must remove adverse effects. (2016 Panel Report, para. 6.794.) The United States stressed that the fact that one or more subsidies may have ceased to exist prior to the DSB’s adoption of the rulings and recommendations in the dispute “does not excuse the EU from the Article 7.8 obligation triggered by its earlier violations of Article 5”. (2016 Panel Report, para. 6.796.) Other interested WTO Members such as Brazil and Canada made third party submissions on the interpretation of Article 7.8 of the SCM Agreement.

The issue of a WTO Member guaranteeing continuing compliance as required under Article 7.8 of the SCM Agreement had, before this case, been one of the most obscure areas of subsidies law. (See previous WTO panel and Appellate Body rulings in US-Upland Cotton). As the Panel conceded, when read in isolation, the provision “may arguably be viewed to suggest that a Member found to have caused adverse effects through the use of a subsidy would have no obligation to ‘take appropriate steps to remove the adverse effects’ or ‘withdraw the subsidy’, if the subsidy at issue no longer exists at the time of the Dispute Settlement Body’s adoption of the adverse effects findings.” (2016 Panel Report, para. 6.802.) The Panel stressed that “WTO compliance obligations [such as Article 7.8 of the SCM Agreement] are intended to bring about conformity with the covered agreements, thereby maintaining the balance of Members’ rights and obligations….A violation of WTO law carries with it an obligation to bring the WTO-inconsistent measure into conformity with the covered agreement that is the basis of the infringement….once a Member is found to have breached its WTO obligations, it will be under an obligation to cease its WTO-inconsistent conduct for as long as the violation of the covered agreement continues.” (2016 Panel Report, paras. 6.805 and 6.809.)

Because the analysis on compliance with adopted rulings and recommendations of the DSB in relation to the SCM Agreement is inherently “effects-based”, “a subsidy found to have caused adverse effects in an original proceeding need not always continue to exist during the implementation period in order for an implementing Member to have a compliance obligation with respect to that subsidy under the terms of Article 7.8 of the SCM Agreement.” (2016 Panel Report, para. 6.822.) Ultimately, the Panel found that even for the supposed subsidies that the EU argued had already ‘expired’, the adverse effects from these measures were caused over a period of time that “followed the full or partial expiry of almost all of those subsidies…the United States has established that the European Union has failed to withdraw the subsidy for the purpose of Article 7.8 of the SCM Agreement.” (2016 Panel Report, paras. 6.1102-6.1103.)

It may well be the case that the actual economic impact of this 2016 Panel Report is less than that projected by the USTR. After all, EU allegations that the United States has also not complied with DSB recommendations and rulings adopted in United States – Measures Affecting Trade in Large Civil Aircraft (involving US subsidies to American company Boeing) remain pending. At the very least, however, this latest 2016 WTO Panel Report in the matter of EU subsidies to Airbus provide useful jurisprudential guidance on conceptual methods for detecting prohibited subsidies under the SCM Agreement, and for scrutinizing whether a WTO Member is observing compliance obligations in this Agreement to “take appropriate steps to remove adverse effects of prohibited subsidies” as well as to “withdraw” such prohibited subsidies.  One can only await if these methods would also be endorsed and adopted by the WTO DSB in regard to the EU’s allegations that the United States is in non-compliance with its duties to take appropriate steps to remove adverse effects of prohibited subsidies to, and to withdraw any such subsidies, to American company Boeing.