TWN Info Service on WTO and Trade Issues (Oct16/04)
6 October 2016
Third World Network

EU has failed to comply with ruling in Airbus dispute, says WTO
Published in SUNS #8319 dated 26 September 2016

Geneva, 23 Sep (Kanaga Raja)-- A compliance panel at the World Trade Organisation (WTO) has ruled that the European Union and four of its Member States (France, Germany, Spain and the United Kingdom) have failed to comply with an earlier ruling that had called for an end to the illegal subsidies provided to the aircraft manufacturer Airbus.

In a 574-page ruling issued on 22 September, the panel, established at the request of the United States, said that by continuing to be in violation of Articles 5(c) and 6.3(a), (b) and (c) of the SCM Agreement, the European Union and certain member States have 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 panel further said that in cases where there is an infringement of the obligations assumed under a covered agreement, the action is considered prima facie to constitute a case of nullification or impairment.

It concluded that, to the extent that the measures at issue are inconsistent with the SCM Agreement, they have nullified or impaired benefits accruing to the United States under that Agreement.

“We therefore conclude that the European Union and certain member States have failed to implement the recommendations and rulings of the DSB to bring its measures into conformity with its obligations under the SCM Agreement. To the extent that the European Union and certain member States have failed to comply with the recommendations and rulings of the DSB in the original dispute, those recommendations and rulings remain operative,” the panel said.

Either the US or the EU can appeal the findings of the compliance panel. Reportedly, under a prior procedural agreement, either party can request for the adoption of the compliance panel report within 20 days, if neither of them appeals the findings.

[Two other related WTO rulings in which the European Communities/EU is the complainant against the US over alleged subsidies for Boeing aircraft are reportedly expected in the months ahead: first is United States - Measures Affecting Trade in Large Civil Aircraft - Second Complaint (DS353), where compliance proceedings have been ongoing since 23 October 2012; and the other being United States - Conditional Tax Incentives for Large Civil Aircraft (DS487), with the panel in this dispute being composed on 22 April 2015.]

Hailing the ruling as an “important victory”, a USTR press release said that the EU did not come into compliance with respect to the subsidies previously found, and that it further breached WTO rules by granting more than $4 billion in new subsidized financing for the A350XWB aircraft, causing tens of billions of dollars in adverse effects to the US industry.

According to the press release, in total, the panel found that there have been nearly $22 billion in subsidized financing from the EU and Germany, France, the United Kingdom and Spain, and continuing lost US exports worth tens of billions of dollars.

“This report is a sweeping victory for the United States and its aerospace workers,” said USTR Michael Froman, in the press release.

“We have long maintained that EU aircraft subsidies have cost American companies tens of billions of dollars in lost revenue, which this report clearly proves. ... We expect the EU, Germany, France, the United Kingdom, and Spain - some of our closest trading partners - to respect WTO rules. We call on them to end subsidized financing of Airbus immediately,” he added.

A separate news release issued by the European Commission Directorate-General for Trade pointed out that the panel had rejected new US claims that the repayable support for the Airbus models A350XWB and A380 are ‘prohibited subsidies’, which it said is an important win for the EU.

The panel has also found that all previous repayable support to other aircraft, such as the A320, had ended, it added.

“But there are certain findings of the panel that we consider to be unsatisfactory. We are still analysing the detail of the report,” said the EU in the news release, noting that under the DSU, the EU and the US have the right to appeal the ruling.

According to the EU news release, the findings of the report also need to be read in the larger context, namely that two other WTO rulings are expected in the coming months as regards US subsidies for Boeing - one regarding US compliance with a previous ruling concerning Boeing (DS353) and a case regarding massive subsidies to Boeing from the State of Washington (DS487).

According to the compliance panel report, in the original proceeding, the panel found that the United States had demonstrated that the European Communities (EC) and certain member States had caused adverse effects, in the form of certain kinds of serious prejudice to the United States’ interests, within the meaning of Articles 5(c), 6.3(a), (b) and (c) of the Subsidies and Countervailing Measures Agreement (SCM Agreement), through the use of the following specific subsidies:

(a) “launch aid” or “member State financing” (LA/MSF) for the A300, A310, A320, A330, A330-200, A340, A340-500/600, and A380 models of large civil aircraft (LCA); (b) French and German government “equity infusions” provided in connection with the corporate restructuring of Aerospatiale and Deutsche Airbus; (c) certain infrastructure and infrastructure-related measures provided by German and Spanish authorities; and (d) research and technological development (R&TD) funding provided by the European Communities and certain member States.

The original panel also concluded that the United States had established that the German, Spanish and UK A380 LA/MSF agreements constituted prohibited export subsidies within the meaning of Article 3.1(a) and footnote 4 of the SCM Agreement.

In relation to the findings made under Articles 5 and 6.3(a), (b), and (c) of the SCM Agreement, the original panel recommended that: “(U)pon adoption of this report, or of an Appellate Body report in this dispute determining that any subsidy has resulted in adverse effects to the interests of the United States, the Member granting each subsidy found to have resulted in such adverse effects ‘take appropriate steps to remove the adverse effects or ... withdraw the subsidy’”.

As regards the findings made under Article 3.1(a) and footnote 4 of the SCM Agreement, the original panel recommended that: “(T)he subsidizing Member granting each subsidy found to be prohibited withdraw it without delay and specify that this be done within 90 days.”

The original panel report was circulated to the Members on 30 June 2010, and both parties appealed certain issues of law and legal interpretations developed by the original panel.

The Appellate Body reversed or modified several aspects of the original panel’s findings.

Where the Appellate Body found sufficient factual findings or undisputed facts on the record in relation to the matters it had reversed, it went on to “complete the analysis”.

Thus, after “completing the analysis” with respect to certain aspects of the original panel’s subsidization and adverse effects findings, the Appellate Body ultimately upheld the original panel’s conclusion that the United States had established that the effects of the challenged LA/MSF measures caused serious prejudice to the United States’ interests within the meaning of Article 6.3(a), (b) and (c) of the SCM Agreement, and that the effects of the challenged “equity infusions” and infrastructure measures the Appellate Body had found to constitute specific subsidies, “complemented and supplemented” the effects of the challenged LA/MSF measures.

The Appellate Body also attempted to “complete the analysis” after having reversed the original panel’s finding that the German, Spanish and UK A380 LA/MSF measures constituted prohibited export subsidies within the meaning of Article 3.1(a) and footnote 4 of the SCM Agreement. However, the Appellate Body found that it was unable to do so because there were insufficient factual findings or undisputed facts on the record.

In the light of its findings, the Appellate Body concluded that: “(H)aving reversed the Panel finding, in paragraph 7.689 of the Panel Report, that certain A380 LA/MSF contracts amounted to prohibited export subsidies, the Panel’s recommendation pursuant to Article 4.7 of the SCM Agreement, in paragraph 8.6 of the Panel Report, consequently must be reversed; however, to the extent we have upheld the Panel’s findings with respect to actionable subsidies that caused adverse effects, as set out in paragraph 8.2 of the Panel Report, or such findings have not been appealed, the Panel’s recommendation pursuant to Article 7.8 of the SCM Agreement, in paragraph 8.7 of the Panel Report, that “the Member granting each subsidy found to have resulted in such adverse effects, ‘take appropriate steps to remove the adverse effects or ... withdraw the subsidy’”, stands.”

The Appellate Body report and the report of the original panel, as modified by the Appellate Body report, were adopted by the DSB on 1 June 2011.

According to the compliance panel report, on 1 December 2011, the European Union informed 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 European Union provided “(i)nformation concerning the steps” it had taken to achieve compliance in a list containing 36 numbered paragraphs attached to its communication.

The European Union described this “course of action” to include: (a) the repayment and/or termination of LA/MSF; (b) the imposition of increased fees and lease payments on infrastructure support in accordance with market principles; and (c) ensuring that capital contributions and regional aid subsidies have, “in the Appellate Body’s words, ‘come to an end’ and are no longer capable of causing adverse effects”.

On 9 December 2011, the United States requested consultations with the European Union and certain member States, explaining in the same request for consultations, that it was of the view that “the actions and events listed in the EU Notification do not withdraw the subsidies or remove their adverse effects for purposes of Article 7.8 of the SCM Agreement and the EU has therefore failed to implement the DSB’s recommendations and rulings”.

Following the failure of consultations to resolve the dispute, On 30 March 2012, the United States on 30 March 2012 requested the establishment of a compliance panel and at its meeting on 13 April 2012, the DSB agreed to refer the dispute to the original panel, if possible.

According to the compliance panel report, in this proceeding, the United States maintains that the European Union and certain member States have failed to comply with the recommendations and rulings adopted by the DSB in the original proceeding for two main reasons.

First, the United States claims that the European Union and certain member States have failed to act in conformity with the obligation in Article 7.8 of the SCM Agreement to “take appropriate steps to remove the adverse effects” or “withdraw the subsidy” because not only do the subsidies found to have caused adverse effects in the original proceeding allegedly continue to cause adverse effects today, but also because by agreeing to provide Airbus with LA/MSF for Airbus’ latest model of LCA (large civil aircraft), the A350XWB, the United States submits that France, Germany, Spain and the United Kingdom have “continued and even expanded” the subsidization of Airbus’ LCA activities, thereby causing “additional adverse effects”, within the meaning of Articles 5(c) and 6.3 of the SCM Agreement.

Second, the United States claims that France, Germany, Spain and the United Kingdom have failed to comply with the recommendations and rulings adopted by the DSB because, according to the United States, the A350XWB LA/MSF measures are prohibited export and/or import substitution subsidies, within the meaning of Articles 3.1 and 3.2 of the SCM Agreement, claims that the United States also makes in relation to the A380 LA/MSF subsidies.

The European Union rejects the entirety of the United States’ claims, arguing that the European Union and certain member States have fully implemented the recommendations and rulings adopted by the DSB.

In particular, the European Union submits that the subsidies found to cause adverse effects in the original proceeding have either been “withdrawn” or no longer cause “adverse effects”, thereby bringing the European Union and certain member States into conformity with their obligations under Article 7.8 of the SCM Agreement.

Moreover, the European Union maintains that the United States’ claims against the A350XWB LA/MSF measures and the prohibited subsidy claims that the United States raises against the A380 LA/MSF subsidies are outside of the scope of this compliance proceeding or, in any case, are without merit.

According to the compliance panel, the parties’ positions raise essentially three broad sets of issues pertaining to: (a) the scope of the claims and measures that can be challenged in this proceeding; (b) the extent to which the A350XWB and A380 LA/MSF measures are prohibited subsidies, within the meaning of Articles 3.1 and 3.2 of the SCM Agreement; and (c) whether the European Union and certain member States have complied with their obligations under Article 7.8 of the SCM Agreement.

OVERALL CONCLUSIONS AND RECOMMENDATIONS

In relation to the 36 alleged compliance “steps” notified by the EU in its Compliance Communication of 1 December 2011, the compliance panel said that two can be characterized as “actions” concerning the degree of ongoing subsidization of Airbus LCA in response to the recommendations and rulings adopted in the original proceeding - namely, “step” 28, the imposition of additional fees for the use of the Bremen Airport runway extension, and “step” 29, revision of the terms of the Muhlenberger Loch lease agreement.

It added that the remaining 34 alleged compliance “steps” are not “actions” relating to the ongoing (or even past) subsidization of Airbus LCA, but rather the assertion of facts or the presentation of arguments for the purpose of supporting the European Union’s theory of compliance.

Thus, said the compliance panel, apart from the “actions” identified in “steps” 28 and 29, the European Union’s affirmation of compliance is not grounded in any specific conduct on the part of the European Union and certain member States with respect to the subsidies provided to Airbus or the adverse effects those subsidies were found to have caused in the original proceeding.

“Rather, fundamentally, the European Union’s assertion of full compliance is based on its understanding of the scope and nature of its obligations arising out of the adopted recommendations and rulings as well as its own interpretation of the applicable law and legal provisions, including Article 7.8 of the SCM Agreement.”

In relation to the European Union’s requests for preliminary rulings concerning the scope of this compliance proceeding, the panel concluded as follows:

(i) the French, German, Spanish and UK A350XWB LA/MSF measures are within the scope of this compliance proceeding;

(ii) the United States’ prohibited subsidy claims against the French, German, Spanish and UK A380 LA/MSF measures under Article 3.1(a) of the SCM Agreement are within the scope of this compliance proceeding;

(iii) the United States’ prohibited subsidy claims against the French, German, Spanish and UK A380 LA/MSF measures under Article 3.1(b) of the SCM Agreement are outside the scope of this compliance proceeding; and

(iv) the United States’ claims of threat of displacement and impedance under Article 6.3(a) are within the scope of this compliance proceeding.

In relation to the United States’ prohibited subsidy claims against the A380 and A350XWB LA/MSF measures, the panel found that:

(i) The United States has demonstrated that the French, German, Spanish and UK A350XWB LA/MSF measures are specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement;

(ii) The United States has failed to demonstrate that the French, German, Spanish and UK A350XWB LA/MSF subsidies are prohibited export and/or prohibited import substitution subsidies within the meaning of Articles 3.1 and 3.2 of the SCM Agreement; and

(iii) The United States has failed to demonstrate that the French, German, Spanish and UK A380 LA/MSF subsidies are prohibited export subsidies within the meaning of Articles 3.1(a) and 3.2 of the SCM Agreement.

In relation to the United States’ claim that the European Union and certain member States have failed to comply with Article 7.8 of the SCM Agreement, the panel said:

(i) the fact that one or more of the subsidies challenged in this proceeding may have ceased to exist prior to 1 June 2011 does not ipso facto mean that the European Union and certain member States do not have a compliance obligation under the terms of Article 7.8 of the SCM Agreement in relation to those subsidies.

As regards the “lives” of the pre-A350XWB LA/MSF subsidies, the panel concluded that:

(ii) the European Union has demonstrated that the ex ante “lives” of the French, German and Spanish LA/MSF subsidies for the A300B/B2/B4, A300-600, A310, A320, A330/A340, the UK LA/MSF subsidies for the A320 and A330/A340, and the capital contribution subsidies, “expired” before 1 June 2011;

(iii) the European Union has demonstrated that the ex ante “lives” of the French LA/MSF subsidies for the A330-200 and the French and Spanish LA/MSF subsidies for the A340-500/600 has “expired”;

(iv) even accepting the entirety of the European Union’s assertions, the ex ante “lives” of five of the regional development grant subsidies will not “expire” until sometime between 2054 and 2058, with the other two having “expired” around 2014;

(v) the European Union’s submissions concerning the alleged “extraction” of subsidies were already considered and rejected by both the panel and the Appellate Body in the original proceeding and, for this reason, the European Union is not entitled to have the Panel evaluate the merits of the same arguments, for a second time, in this compliance dispute;

(vi) the European Union has failed to demonstrate that the alleged partial privatization of Aerospatiale in 1999, the transactions leading to the creation of EADS (European Aeronautic Defence and Space Company N. V.) in 2000, and BAE Systems’ 2006 sale of its 20% ownership stake in Airbus SAS to EADS, were “intervening events” that resulted in the “extinction” of the benefit of all of the subsidies at issue in this proceeding that were granted prior to those transactions, in the light of each of the three separate opinions expressed by the Appellate Body Division serving in the original proceeding on the question whether “partial privatizations and private-to- private sales” transactions can “extinguish” prior subsidies;

(vii) the ex ante “lives” of the subsidies identified in subparagraphs ii, iii, and iv have “expired” not because they were somehow brought to a premature end by, for example, having been repaid or because of the alignment of their terms with a market benchmark, but rather simply because the total period of time over which their “projected value” was expected to “materialize” has transpired in the absence of any “intervening event”. In other words, the ex ante “lives” of the relevant subsidies have “expired” simply because they have been fully provided to Airbus as originally planned and expected.

As regards whether the European Union and certain member States have complied with the obligation to “withdraw the subsidy”, the panel concluded that:

(viii) the fact that the ex ante “lives” of the subsidies identified in subparagraphs ii, iii, and iv passively “expired” before the end of the implementation period does not amount to the “withdrawal” of those subsidies by the European Union and certain member States for the purpose of Article 7.8 of the SCM Agreement;

(ix) the European Union and certain member States have, therefore, failed to comply with the obligation to “withdraw the subsidy” for the purpose of Article 7.8 of the SCM Agreement;

As regards whether the European Union and certain member States have complied with the obligation to “take appropriate steps to remove the adverse effects”, the panel concluded that:

(x) the European Union has failed to establish that the United States’ claims under Article 6.3(b) and (c) of the SCM Agreement should be rejected on the grounds that the United States’ like product is not “unsubsidized” within the meaning of Articles 6.4 and 6.5 of the SCM Agreement;

(xi) the United States has brought its continued adverse effects claims with respect to appropriately defined product markets for LCA, namely, the global markets for single-aisle LCA, twin-aisle LCA and VLA (very large aircraft);

(xii) the direct and indirect effects of the aggregated pre-A350XWB LA/MSF subsidies continue to be a “genuine and substantial” cause of the current market presence of the A320, A330 and A380 families of Airbus LCA using either the “plausible” or “unlikely” counter-factual scenarios adopted in the original proceeding in relation to the effects of the same subsidies in the 2001 to 2006 period as the starting point of the analysis;

(xiii) the direct and indirect effects of the aggregated LA/MSF subsidies, with the exception of the LA/MSF subsidies provided for the A300 and A310, are a “genuine and substantial” cause of the current market presence of the A350XWB family of Airbus LCA using either the “plausible” or “unlikely” counter-factual scenarios adopted in the original proceeding in relation to the effects of the pre-A350XWB LA/MSF subsidies in the 2001 to 2006 period as the starting point of the analysis;

(xiv) the “product” effects of the LA/MSF subsidies identified in subparagraphs xii and xiii are a “genuine and substantial” cause of the displacement and/or impedance of the imports of a like product of the United States into the markets for single-aisle, twin aisle and very large LCA in the European Union, within the meaning of Article 6.3(a) of the SCM Agreement, constituting serious prejudice to the interests of the United States within the meaning of Article 5(c) of the SCM Agreement;

(xv) the “product” effects of the LA/MSF subsidies identified in subparagraphs xii and xiii are a “genuine and substantial” cause of the displacement and/or impedance of exports from the market for single-aisle LCA in Australia, China and India, the market for twin-aisle LCA in China, Korea and Singapore and the market for very large LCA in Australia, China, Korea, Singapore and the United Arab Emirates, within the meaning of Article 6.3(b) of the SCM Agreement, constituting serious prejudice to the interests of the United States within the meaning of Article 5(c) of the SCM Agreement;

(xvi) the “product” effects of the LA/MSF subsidies identified in subparagraphs xii and xiii are a “genuine and substantial” cause of significant lost sales in the global markets for single-aisle, twin-aisle and very large LCA, within the meaning of Article 6.3(c) of the SCM Agreement, constituting serious prejudice to the interests of the United States within the meaning of Article 5(c) of the SCM Agreement;

(xvii) the effects of the aggregated capital contribution subsidies and certain regional development grants “complement and supplement” the “product” effects of the aggregated LA/MSF subsidies and, therefore, are a “genuine” cause of serious prejudice to the interests of the United States within the meaning of Article 5(c) of the SCM Agreement;

(xviii) the United States has failed to demonstrate that the regional development grants provided for the San Pablo facility in Spain that is used for Airbus’ military aircraft activities benefit Airbus’ LCA activities, thereby failing to establish that those subsidies “complement and supplement” the “product” effects of the LA/MSF subsidies; and

(xix) having found that the United States has established that the challenged subsidies cause present serious prejudice to its interests within the meaning of Article 5(c) of the SCM Agreement, “we make no findings with respect the United States’ conditional claim that the challenged subsidies threaten to cause serious prejudice to its interests.” +