On 2nd October 2019, the decision of a World Trade Organization (WTO) Arbitrator was released in the long-running European Communities and Certain Member States – Measures Affecting Trade in Large Civil Aircraft (DS316) dispute. The purpose of the arbitration was to determine the exact amount of the countermeasures that the United States is authorized to take against the European Union, further to the Appellate Body’s findings in May 2018 that certain subsidies provided by the European Union and certain EU Member States to the large civil aircraft (LCA) manufacturer Airbus have caused serious prejudice to the US industry within the meaning of the Agreement on Subsidies and Countervailing Duties (SCM Agreement).
The Arbitrator’s decision authorizes the United States to take countermeasures against the European Union in the amount of almost US $7.5 billion annually (i.e., US $7,496,623,000). The countermeasures may take the form of (i) the suspension of tariff concessions and related obligations under the General Agreement on Tariffs and Trade, 1994 (GATT 1994), and/or (ii) the suspension of horizontal or sectoral commitments and obligations contained in the United States’ schedule to the General Agreement on Trade in Services (GATS) with regard to all services defined in the Services Sectoral Classification List, except for financial services.
The United States has announced its intention to impose the countermeasures, as authorized, on 18th October (see Office of the United States Trade Representative (USTR), “U.S. Wins $7.5 Billion Award in Airbus Subsidies Case”, Press Release (2 October 2019), and Notice of Determination and Action Pursuant to Section 301: Enforcement of U.S. WTO Rights in Large Civil Aircraft Dispute). The countermeasures will take the form of additional duties applied to imports of new EU aircraft (10 percent) and a range of other EU products (25 percent), including certain dairy, fruit, shellfish, processed food, and manufactured goods (see the Final Product List published on the USTR website). The United States intends to apply the “bulk of the tariffs” to goods imported from “France, Germany, Spain, and the United Kingdom” on the basis that these are “the four countries responsible for the illegal subsidies”.
The arbitration was conducted under Article 22.6 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) (i.e., “if the Member concerned objects to the level of suspension proposed, or claims that the principles and procedures set forth in [Article 22.3] have not been followed …, the matter shall be referred to arbitration”) and Article 7.10 of the SCM Agreement (i.e., “[i]n the event that a party to the dispute requests arbitration under paragraph 6 of Article 22 of the DSU, the arbitrator shall determine whether the countermeasures are commensurate with the degree and nature of the adverse effects determined to exist”).
The legal issues in dispute required the Arbitrator to consider (i) the role of Article 7.10 of the SCM Agreement in an arbitration pursuant to Article 22.6 of the DSU, and (ii) whether adverse effects that are first determined to exist in a compliance report prior to the arbitration can be included in the proposed level of countermeasures.
In this regard, the Arbitrator’s reasoning includes the following notable considerations:
- The Arbitrator’s mandate is determined under Article 7.10 of the SCM Agreement because this is a special or additional rule and procedure that prevails over Article 22.6 of the DSU.
- In determining whether the proposed countermeasures are commensurate with the degree and nature of the adverse effects determined to exist, the standard in Article 7.10 has three basic elements:
- (a) “countermeasures” (i.e., a temporary suspension of concessions or other obligations), which defines the type of measures that the United States may take;
- (b) “commensurate with” (i.e., a less precise degree of equivalence than exact numerical correspondence, but a relationship of correspondence and proportionality between the other two elements that may be qualitative as well as quantitative), which defines the relationship that must exist between the level of countermeasures and the degree and nature of adverse effects determined to exist; and
- (c) “the degree and nature of the adverse effects determined to exist” (i.e., the adverse effects within the meaning of Articles 5 and 6 of the SCM Agreement, with the term “degree” corresponding to a quantitative element and the term “nature” corresponding to a qualitative element), which is the metric for determining the permissible level of countermeasures.
- Requests pursuant to Article 22.2 of the DSU for authorization to take countermeasures are comparable to requests for the establishment of a panel in the following respects:
- (a) Such requests must comply with the applicable requirements “on their face”;
- (b) The text of such requests must be examined “as a whole, and in the light of attendant circumstances”; and
- (c) The analyses of such requests must be made “on the merits of each case”.
- Where a request to take countermeasures is made before a compliance proceeding is conducted (i.e., under Article 21.5 of the DSU) in the same dispute, findings of adverse effects in the compliance proceeding can fall within the terms of reference in an arbitration under Article 22.6 of the DSU.
- The maximum level of countermeasures can be determined by reference to a past reference period and may take the form of an annual level of suspension (i.e., of concessions or other obligations under the covered agreements) that might have to be adjusted over time.
- With respect to the timeframe of the reference period, there is no fixed time period that arbitrators are required to use. Rather, the reference period must be representative of the adverse effects determined to exist, taking into account all circumstances. In order to place as accurate a value as possible on the adverse effects, a panel may take into account evidence that was not available during the reference period, provided that this does not alter the adverse effects established in the underlying proceedings or establish any additional adverse effects. In this respect, there is no categorical bar to considering facts that were not placed on the record in the previous proceedings of the dispute.
- In determining the level of countermeasures, it is acceptable to include the value of the components used in the production of the like product at issue (i.e., in this case, Boeing LCA produced in the United States) that were supplied from outside the Member requesting authorization (e.g., inputs secured through international supply chains). To exclude the value of such components from the maximum level of countermeasures would weaken the effectiveness of the WTO dispute settlement mechanism and diminish the compliance-inducement function of authorized countermeasures. The more internationalized the production of an export good is, the more difficult it would be, in practice, for the Member exporting the final good to induce compliance through countermeasures.
- Finally, the value of adverse effects found to exist during the reference period does not have to be adjusted for inflation up until the year in which the countermeasures or suspension could be authorized.
Tereposky & DeRose LLP regularly provides advice and acts as counsel in international trade disputes, including WTO dispute settlement proceedings.