by Chakravarthi Raghavan

Geneva, 11 May 2000 -- The Appellate Body of the WTO has held that in deciding, through administrative review, to continue levy of countervailing duties under the Subsidies and Countervailing Measures Agreement, on certain steel imports from Britain, the US had not carried out its obligation to determine whether in fact the British steel producer had an accrued "benefit" after changes in ownership.

The ruling has a bearing on public sector undertakings that are privatized, with the state in one way or another assuming the loss of obligations before privatization, and how far this results in a subsidy to the private company that produces and export goods.

The speciality steel products, certain hot-rolled lead and bismuth carbon steel bars (known in the trade as lead bars) by a British steel producer.

The claim by the US of UK government subsidy relates to the period of privatization of the British Steel Corporation (BSC), a state-owned enterprise, and equity infusions to it provided by the government between 1977 and 1986. In 1986, the BSC and GKN (a privately owned company), created a joint venture UES. Both BSC and GKN provided assets to UES and received equal shares. The BSC spun off its leaded bar producing assets to UES. The spinoff negotiations were conducted at arms length and under commercial considerations. In 1988, preparatory to privatization, British Steel plc (BSplc) assumed the assets, property and obligations of BSC, and the privatization was completed by BSplc shares being sold by the government on the stock-market.

The United States Department of Commerce ("USDOC") found the sale of BSplc shares was at arm's length, for fair market value and consistent with commercial considerations and on 20 March 1995, BSplc purchased GKN's holding in UES. The UES was renamed British Steel Engineering Steels ("BSES").

Countervailing duties on imports of leaded bars were originally imposed in 1993. Since then, the USDOC has undertaken a number of annual reviews of the countervailing duties applied to imports of leaded bars originating in the United Kingdom.

In the dispute, the EU (on behalf of the UK) claims in this case relate to the countervailing duties imposed following administrative reviews initiated in 1995, 1996 and 1997, which dealt with leaded bar imports in the calendar years 1994, 1995 and 1996, respectively.

In each of these reviews, the USDOC applied its allocation methodology for untied, non-recurring subsidies to determine the amount of the benefit from the pre-1986 subsidies to BSC allocable to the relevant period of review. The USDOC also applied its "change-in-ownership" methodology to determine the extent to which the pre-1986 subsidies granted to BSC "travelled" to UES and/or BSplc/BSES.

The USDOC imposed countervailing duties on the basis that a certain proportion of the subsidies granted to BSC had "passed through" to UES and BSplc/BSES.

In its Report on 23 December 1999, the Panel concluded that: ... by imposing countervailing duties on 1994, 1995 and 1996 imports of leaded bars produced by UES and BSplc/BSES respectively, the United States had violated Article 10 of the SCM Agreement, and that the US be asked by the DSB to bring its measures into conformity with the SCM Agreement.

The Panel also suggested that the United States [take] all appropriate steps, including a revision of its administrative practices, to prevent in future such violation of Article 10 of the SCM Agreement.

The US appealed the panel's ruling and recommendations.

In the appeal, the US contended that the dispute panels, in the disputes under the SCM should apply the special standard of review provisions under Art. 17.6 of the Anti-Dumping Agreement, and cited the Marrakesh declaration that members recognized that in dispute settlements relating to anti-dumping and subsidy and countervailing measures, there should be consistent resolution of disputes.

In rejecting this view, the Appellate Body said the Ministerial declaration was only hortatory, and specified no particular course of action to pursue. And while the decision on review of Art 17.6 of the anti-dumping agreement (standard of review) provided for the review to determine whether it was capable of general application including the SCN agreement, the DSB has conducted no such review.

The AB said that under Art 19.1 and 19.4 of the SCM agreement, an existing countervailing duty has to be administratively reviewed by the authorities on their own, or on representation, and a determination made whether the duty is necessary to offset subsidization and whether injury to domestic producers was likely to continue or recur if the duty were removed or varied. The SCM agreement, Art 21.2, also provides that the countervailing duty shall remain in force only so long as and to the extent necessary to counteract subsidization causing injury.

In this view, the AB agreed with the panel, that while an administrative authority could presume that the original finding of subsidy continued, this was rebuttable. In this case, the USDOC in review should have examined whether there was continued existence of the 'benefit' to BSC, after the change in ownerships.

The US itself had acknowledged that in the change of ownership, fair market value was paid for all productive assets (of the nationalized company) and the privatization had been conducted at "arms length" for fair market value.

In this view, the AB agreed with the panel that the benefit conferred by the UK government to British Steel between 1977 and 1986, could not be deemed to confer a "benefit" to the present owners of the spun company.

In adjudicating the claim of the EC, the panel had rightly addressed the issues raised, namely, whether USDOC had examined and determined whether there was any continuing benefit to the new enterprise, and given the USDOC's own determination that the sale of assets had been at arms length and fair market value, there could be no benefit to UES or BSplc/BSEC.

The Appellate Body held:

* that the panel had hence been correct in applying the standard of review of the DSU to the dispute over the SCM Agreement,

* that the USDOC should have examined in its administrative reviews whether in fact a benefit accrued to UES and BSplc/BSES following changes in ownership, and

* in the circumstances of the case no "benefit" had been conferred on UES or BSplc/BSES as a result of the government's financial contribution to BSC.

The DSB should hence request the US to bring its measures into conformity with its WTO obligations. (SUNS4666)

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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