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TWN Info Service on WTO and Trade Issues (Oct19/05)
7 October 2019
Third World Network


US can seek $7.5 billion in retaliation in Airbus dispute, says WTO

Published in SUNS #8990 dated 4 October 2019

Geneva, 3 Oct (Kanaga Raja) – A panel of WTO arbitrators has ruled that the United States may impose counter-measures at a level not exceeding US$7,496.623 million annually as a result of the failure of the European Union to comply with a WTO ruling over subsidies provided by the EU and certain member states to the European aircraft manufacturer Airbus.

In a ruling issued on Wednesday, the three-member panel of Arbitrators said the countermeasures may take the form of (a) suspension of tariff concessions and related obligations under the GATT 1994, and/or (b) suspension of horizontal or sectoral commitments and obligations contained in the United States’ services schedule with regard to all services defined in the Services Sectoral Classification List, except for financial services.

This is the largest retaliatory award in the history of the WTO.

Following the Arbitrators’ ruling, the US can now seek authorization from the Dispute Settlement Body (DSB) to impose the countermeasures to the tune of some $7.5 billion annually on EU goods and services trade.

The US has requested a special meeting of the DSB for 14 October, to seek authorization.

According to US media reports, the US is targeting a variety of imports which it will notify to the WTO for retaliation against the EU.

[Commenting, in a post on the IELP blog, on the Arbitrators’ ruling in the Airbus subsidies dispute, Sungjoon Cho, a professor of law, said: “While there can be a number of issues, legal and political, around this decision, let me offer three observations of my own.

[“First, whether or how much would the US government eventually utilize this ammunition bestowed by the WTO? US tariffs hurt its own economy, and (that) of others. Also, according to Bloomberg Law, Airbus buys about 40% of parts and components from US companies. Of course, the EU may also retaliate based on a future parallel WTO decision against the US (over Boeing subsidies).

[“Second, if the US does retaliate, this will be “legal” under the WTO system. Then, how about the current trade war against China? Will the WTO’s approval of the US retaliation on the EU change the US attitude toward the WTO? Or, will the US government still try to have it both ways, i.e., retaliation within and outside of the WTO?

[“Finally, would it be desirable for this kind of case to be adjudicated in the WTO? The late Robert Hudec might have thought that it is a “wrong case” for the WTO.”

[See full post at: https://ielp.worldtradelaw.net/2019/10/a-75-billion-ammunition-from-the-wto.html]

BACKGROUND

According to the Arbitrators’ report, the arbitration proceeding arose in the dispute initiated by the United States concerning certain measures by the European Union and certain member States affecting trade in large civil aircraft (LCA).

On 1 June 2011, the Dispute Settlement Body (DSB) of the World Trade Organization adopted the Appellate Body report in this dispute, together with the report of the original panel as modified by the Appellate Body.

The original panel and the Appellate Body found that certain subsidies provided by the European Union and certain member States to the European LCA manufacturer Airbus caused displacement and significant lost sales within the meaning of Article 6.3(a)-(c) of the Agreement on Subsidies and Countervailing Measures (SCM Agreement) which constitutes serious prejudice under Article 5(c).

On 1 December 2011, the European Union notified the DSB that it had taken appropriate steps to bring its measures fully into conformity with its WTO obligations, and to comply with the DSB’s recommendations and rulings.

The United States considered that these steps failed to bring the European Union and certain member States into compliance with the DSB recommendations and rulings.

On 13 April 2012, at the request of the United States, the DSB established the compliance panel under Article 21.5 of the DSU.

On 22 September 2016, the compliance panel found that the European Union and certain member States had “failed to comply with the DSB recommendations and rulings and, in particular, the obligation under Article 7.8 of the SCM Agreement “to take appropriate steps to remove the adverse effects or … withdraw the subsidy”.”

The Appellate Body reached the same conclusion, albeit generally on the basis of different reasoning.

Significantly, the Appellate Body based its reasoning solely on the effects of the following measures: (a) Launch Aid/Member State Financing (LA/MSF) subsidies for the A380 aircraft in the very large aircraft (VLA) product market; and (b) LA/MSF subsidies for the A350XWB aircraft in the twin-aisle product market.

The compliance panel had based its conclusions on a broader set of subsidy measures. Based on the effects of those measures, the Appellate Body confirmed certain of the compliance panel’s findings with respect to impedance and significant lost sales within the meaning of Article 6.3(a)-(c) of the SCM Agreement.

More specifically, the Appellate Body confirmed that A380 and A350XWB LA/MSF caused five lost sales as well as impedance in six different geographic markets in the relevant reference period, i.e. the 2011-2013 reference period (“2011-2013 Reference Period”).

On 28 May 2018, the DSB adopted the Appellate Body report and the report of the compliance panel, as modified by the Appellate Body report.

In relation to the arbitration request and arbitration proceeding, on 9 December 2011, the United States requested DSB authorization to “take countermeasures with respect to the European Union at an annual level commensurate with the degree and nature of the adverse effects caused to the interests of the United States by the failure of the European Union and certain member States to withdraw subsidies or remove their adverse effects in compliance with the recommendations and rulings of the DSB”.

In its request, the United States “estimate[d] this figure to be between $7 and $10 billion per year”.

(The EU objected but did not propose a lower figure.)

At the DSB meeting on 22 December 2011, the European Union objected to the United States’ proposed level of countermeasures, and claimed that the United States had not followed the principles and procedures set forth in Article 22.3 of the DSU.

At the same meeting, the DSB agreed that the matter raised by the European Union in its statement had been referred to arbitration, as required by Article 22.6 of the DSU. The Arbitrator was constituted on 13 January 2012.

In accordance with the terms of the parties’ Sequencing Agreement, and upon a joint request from the parties, the Arbitrator suspended arbitration proceedings from 20 January 2012 until either party requested the resumption of its work.

On 13 July 2018, the United States made such a request, and the Arbitrator resumed its work on that day.

In relation to the second compliance proceedings, on 17 May 2018, the European Union communicated to the DSB that it had taken appropriate steps to bring its measures fully into conformity with its WTO obligations, and to comply with the DSB’s recommendations and rulings.

At the DSB meeting of 28 May 2018, the United States noted that “based on the [United States’] review [of the communication from the European Union dated 17 May 2018], the EU document did not reflect new developments that might somehow resolve this long-standing dispute”.

Subsequently, on 27 August 2018, at the European Union’s request, the DSB established a second panel under Article 21.5 of the DSU.

This second compliance panel had not yet issued its report at the time the Arbitrator issued this Decision.

MAIN FINDINGS OF THE ARBITRATOR

The Arbitrator noted that in its preliminary ruling request, the European Union requested that the Arbitrator await the outcome of the second compliance panel proceeding before completing the arbitration proceeding.

The Arbitrator, after careful consideration of the parties’ arguments, transmitted to the parties its conclusion on the European Union’s preliminary ruling request and indicated that it would provide the supporting reasons in its Decision.

“We concluded that it was neither necessary nor appropriate to await the outcome of the second compliance proceedings before proceeding to determine the maximum level of countermeasures that the United States could be authorized to impose. We therefore declined the European Union’s request that we coordinate our work with the second compliance panel and decided to proceed with our work,” said the Arbitrator.

The Arbitrator did not agree with the European Union that the second compliance panel proceeding has a “direct bearing” on this arbitration proceeding.

“Rather, as will be evidenced throughout our Decision, it is the first compliance proceedings that have a direct bearing on this arbitration proceeding, because it is in those proceedings that the adverse effects with which the United States’ countermeasures must be commensurate were determined to exist.”

“Moreover, we focus our inquiry on the adverse effects determined to exist during the 2011-2013 Reference Period, i.e. in the past, whereas the second compliance panel focuses its inquiry on whether there were still adverse effects more recently, on the date of establishment of that panel. We thus perceive neither a “complementary” relationship nor a relationship of “interdependence” between the mandates of these two separate WTO adjudicators.”

“We are thus unable to accept the European Union’s claim that there is a “unique interdependence” between this arbitration proceeding and the second compliance panel proceeding,” said the Arbitrator.

The Arbitrator noted that in this proceeding, the United States sets out a proposed methodology for determining a level of countermeasures in its methodology paper.

In its methodology paper, the United States asks the Arbitrator to grant the United States countermeasures in the form of Annual Suspension.

The United States determines the proposed level of Annual Suspension by calculating the value of the five lost sales and six instances of impedance that were found in the previous compliance proceedings to have existed during the 2011-2013 Reference Period, and then annualizing that amount. That annualized amount is the basis for the proposed level of the Annual Suspension.

Five lost sales were identified in the compliance proceedings, involving three Airbus LCA models within the A350XWB and A380 model “families”, namely the A350XWB-900 (Singapore Airways lost sale), the A350XWB-1000 (Cathay Pacific Airways and United Airlines lost sales), and the A380 (Emirates and Transaero Airlines lost sales).

On the valuation of impedance, the United States contends that in this proceeding the scope of its valuation of impedance is determined by the impedance findings from the compliance proceedings, which involve Airbus A380 deliveries to six geographic markets (Australia, China, the European Union, Korea, Singapore and the United Arab Emirates).

The Arbitrator noted that, using its three-step approach, the United States calculates the total annualized value of the adverse effects determined to exist, stated in 2013 US dollar terms, as approximately USD 10,130 million.

In the methodology, the United States recalled that, in the compliance proceedings, the panel and Appellate Body found that certain LA/MSF measures caused adverse effects in the forms of lost sales and impedance within the meaning of Article 6.3(a)-(c) of the SCM Agreement in the 2011-2013 Reference Period.

The United States proposed that the Arbitrator calculate the value of the lost sales and impedance associated with those findings, and assign those values to the 2011-2013 Reference Period.

The United States then sums up these individual instances of lost sales and impedance and annualizes the total value.

The United States proposes that the United States be authorized to take “countermeasures”, within the meaning of Article 7.9 of the SCM Agreement, up to that annualized amount every year going forward, adjusted for inflation, until the authority to impose countermeasures ends under the terms of Article 22.8 of the DSU.

Following its analysis, the Arbitrator considered it appropriate to determine the maximum level of Annual Suspension based on the value of the adverse effects determined to exist during the 2011-2013 Reference Period and to grant countermeasures in the form of Annual Suspension.

“This approach is harmonious with our mandate as set out in Article 7.10, the text and object and purpose of the DSU, the adverse effects determined to exist and the reference period used in the prior compliance proceedings, the task of the second compliance panel proceeding currently under way, and, insofar as Annual Suspension with no specified end-date is concerned, with the approach followed in prior arbitration decisions,” it said.

Following its analysis, the Arbitrator considered that the United States’ assumption that Boeing would have replaced all of the A380 Impedance Deliveries with deliveries of an equal number of 747-8I aircraft within the 2011-2013 Reference Period is reasonable in the light of the adopted findings of this dispute, and the evidence and arguments offered by the parties.

More specifically, it concluded that a reasonable estimate is that, in the counterfactual, Boeing would have delivered an additional 18 747-8I aircraft in 2012 and an additional 29 747-8I aircraft in 2013 to the six geographic markets in question taken as a whole.

In particular, the Arbitrator noted that this conclusion takes into account the fact that (a) the relevant customers desired a confirmed number of A380 aircraft during this time-period (evidenced by the A380 Impedance Deliveries), (b) Boeing would have had the means with which to replace all such deliveries with deliveries of 747-8I aircraft in the counterfactual, and (c) the 747-8I and A380 aircraft were the only two VLA available for delivery in the 2011-2013 Reference Period.

It said the factors determining LCA supply and demand are complex, often involving unquantifiable factors.

“However, we discern no reasonable basis upon which to assume that the counterfactual number and general timing of relevant counterfactual 747-8I deliveries would have been different from the number and general timing of the A380 Impedance Deliveries.”

In fact, the European Union offers no alternative number Boeing LCA that would have been counterfactually delivered to the six geographic markets at issue during the 2011-2013 Reference Period, it said.

Among the findings of the Arbitrator are:

* Adverse effects were determined in relation to five sales campaigns that Airbus won during the December 2011-2013 reference period and that Boeing would have won in the absence of LA/MSF subsidies, as found in the first compliance panel proceedings. These sales campaigns resulted in orders for 104 Airbus aircraft in the twin-aisle and Very Large Aircraft product market;

* Impedance was found based on deliveries of 47 Airbus A380 aircraft into six geographic markets (Australia, China, the European Union, Korea, Singapore and the United Arab Emirates) during the December 2011-2013 reference period, as found in the first compliance panel proceedings;

* The United States had proposed to value the lost sales by calculating the value of an equal number (i.e. 104) of Boeing aircraft that most closely competed with the Airbus models that had been actually ordered (i.e. the Boeing 747-8I model for the Airbus A380, and the Boeing 787-10 and 777-300ER models for the Airbus A350XWB-900 and -1000 models respectively).

The arbitrator broadly accepted the US methodology and used prices contained in comparable actual orders for Boeing aircraft by the same or similar airline customers to determine the value of the lost sales;

* The United States had proposed to value impedance by assuming that, in the absence of LA/MSF subsidies, Boeing would have made 47 deliveries of the Boeing LCA model that most closely competes with the Airbus A380 model – the Boeing 747-8I model – into the same geographic markets during the 2011-2013 reference period, and at the same time that Airbus actually made the relevant A380 deliveries.

The Arbitrator concluded that the US assumption that Boeing could have delivered an additional 47 747-8I aircraft to the same six geographic markets within the December 2011-2013 reference period was reasonable.

However, it also determined that the time-frame during which Boeing could have made these 47 747-8I deliveries would have been different from the time-frame of the 47 A380 deliveries that Airbus actually made during the reference period.

It determined the value of these impeded deliveries using delivery prices contained in an actual 2006 Lufthansa order for 20 747-8I aircraft.

The Arbitrator recalled that the United States requests that the countermeasures that it will seek authorization to impose be based on the 2013 Annualized Value of adverse effects.

“The United States calculates the 2013 Annualized Value as USD 10,560 million. We have calculated it as USD 7,496.623 million.”

Following its analysis, the Arbitrator said it thus perceived neither a need nor a justification, in the particular circumstances of this proceeding, for establishing the 2013 Annual Suspension Value at a level that is higher than the 2013 Annualized Value of adverse effects that it has established.

“Accordingly, we determine that the “commensurate” 2013 Annual Suspension Value is USD 7,496.623 million.”

OVERALL CONCLUSIONS

The Arbitrator concluded as follows:

a. with reference to Articles 7.10 of the SCM Agreement and 22.6 of the DSU, the level of countermeasures “commensurate with the degree and nature of the adverse effects determined to exist” during the 2011-2013 Reference Period amounts to USD 7,496.623 million per annum;

b. with reference to Article 22.3 of the DSU, the European Union has not demonstrated that the United States failed to follow the principles and procedures set forth in Article 22.3 of the DSU in determining that it is not practicable or effective to suspend concessions or other obligations in trade in goods and that the circumstances are serious enough; and

c. with reference to Article 22.5 of the DSU, the European Union has not demonstrated that the countermeasures proposed by the United States are not allowed under the covered agreements at issue, i.e. the GATT 1994 and the GATS.

The United States may therefore request authorization from the DSB to take countermeasures with respect to the European Union and certain member States, as indicated in document WT/DS316/18, at a level not exceeding, in total, USD 7,496.623 million annually.

According to the Arbitrator, these countermeasures may take the form of (a) suspension of tariff concessions and related obligations under the GATT 1994, and/or (b) suspension of horizontal or sectoral commitments and obligations contained in the United States’ services schedule with regard to all services defined in the Services Sectoral Classification List, except for financial services.

 


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