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TWN Info Service on WTO and Trade Issues (Oct20/13)
15 October 2020
Third World Network


EU can seek $4 billion in retaliation in Boeing dispute, says WTO
Published in SUNS #9211 dated 15 October 2020

Geneva, 14 Oct (Kanaga Raja) – A panel of arbitrators at the World Trade Organization has determined that the European Union may impose countermeasures at a level not exceeding USD 3,993,212,564 annually as a result of the failure of the United States to comply with an earlier WTO ruling concerning subsidies provided to the US aircraft manufacturer Boeing.

In a decision (WT/DS353/ARB) issued on 13 October, the three-member panel of arbitrators (also referred to as the Arbitrator), concluded as follows:

(a) with reference to Articles 7.10 of the Subsidies and Countervailing Measures (SCM) Agreement and 22.6 of the Dispute Settlement Understanding (DSU), the level of countermeasures “commensurate with the degree and nature of the adverse effects determined to exist” amounts to USD 3,993,212,564 per annum; and

(b) with reference to Article 22.3 of the DSU, the United States has not demonstrated that the European Union 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.

The Arbitrator said that the European Union may therefore request authorization from the Dispute Settlement Body (DSB) to take countermeasures with respect to the United States at a level not exceeding, in total, USD 3,993,212,564 annually.

These countermeasures may take the following forms:

a. suspension of tariff concessions and other related obligations under the GATT 1994 on a list of US products to be established in due course;

b. suspension of concessions and other obligations under the SCM Agreement; and

c. under the General Agreement on Trade in Services (GATS), suspension of horizontal or sectoral commitments contained in the consolidated EU Schedule of Specific Commitments, as supplemented to incorporate individual Schedules of Specific Commitments of its Member States, with regard to all principal sectors identified in the Services Sectoral Classification List.

According to the Arbitrator, on 13 May 2020, it received a letter from the United States advising that the State of Washington had, effective 1 April 2020, eliminated the B&O (Business and Occupation) tax rate reduction.

In a press release issued on 13 October, the EU Commissioner for Trade, Valdis Dombrovskis, said: “This long- awaited decision allows the European Union to impose tariffs on American products entering Europe. I would much prefer not to do so – additional duties are not in the economic interest of either side, particularly as we strive to recover from the Covid-19 recession.”

“I have been engaging with my American counterpart, Ambassador Lighthizer, and it is my hope that the US will now drop the tariffs imposed on EU exports last year.”

“This would generate positive momentum both economically and politically, and help us to find common ground in other key areas,” he said.

“The EU will continue to vigorously pursue this outcome. If it does not happen, we will be forced to exercise our rights and impose similar tariffs. While we are fully prepared for this possibility, we will do so reluctantly,” he added.

In a separate statement issued on 13 October, the US Trade Representative (USTR) Robert Lighthizer claimed that the arbitration decision leaves the EU with “no lawful basis” to impose tariffs on imports from the United States.

“While we disagree with certain aspects of its valuation, the more important point is that the arbitrator did not authorize any retaliation for subsidies other than the Washington State tax break,” he said.

“Because Washington State repealed that tax break earlier this year, the EU has no valid basis to retaliate against any US products. Any imposition of tariffs based on a measure that has been eliminated is plainly contrary to WTO principles and will force a US response,” he added.

The USTR further said: “The United States is determined to find a resolution to this dispute that addresses the massive subsidies European governments have provided to Airbus and the harm to US aerospace workers and businesses. We are waiting for a response from the EU to a recent US proposal and will intensify our ongoing negotiations with the EU to restore fair competition and a level playing field to this sector.”

[In a dispute raised by the US against EU subsidies to Airbus, a panel of WTO arbitrators last October ruled that the United States may impose countermeasures at a level not exceeding US$7,496.623 million annually as a result of the failure of the European Union to comply with an earlier WTO ruling over subsidies provided by the EU and certain member states to the European aircraft manufacturer Airbus. See SUNS #8990 dated 4 October 2019.]

BACKGROUND

According to the Arbitrator’s report, the present arbitration proceeding arises in the dispute initiated by the European Union concerning certain measures by the United States affecting trade in large civil aircraft (LCA).

The Dispute Settlement Body (DSB) adopted the Appellate Body report and the panel report, as modified by the Appellate Body report, on 23 March 2012.

The panel and the Appellate Body in the original proceedings found that certain measures of the United States, including measures adopted at a sub-federal level, constituted specific subsidies to the US LCA industry and were inconsistent with the SCM Agreement.

On 23 September 2012, the United States provided a notification to the DSB identifying “a number of actions to withdraw the subsidies found to have caused adverse effects or to remove their adverse effects”, in light of which the United States considered that it “ha[d] fully complied with the recommendations and rulings of the [DSB] in this dispute”.

On 25 September 2012, the European Union requested consultations with the United States, explaining that it was of the view that “[t]he actions and events listed by the United States in its 23 September 2012 notification do not withdraw the subsidies or remove their adverse effects, as required by Articles 4.7 and 7.8 of the SCM Agreement” and that “the United States has failed to achieve compliance with the recommendations and rulings of the DSB”.

On 11 October 2012, the European Union requested the establishment of a panel “in accordance with Articles 4.4 and 7.4 of the SCM Agreement and Article 21.5 of the DSU”, with standard terms of reference.

A compliance panel was composed on 30 October 2012, and on 9 June 2017, the compliance panel issued its report, finding, inter alia, that:

a. the United States had failed to withdraw the subsidy within the meaning of Article 7.8 of the SCM Agreement with regard to the pre-2007 NASA and DOD (US Department of Defence)) aeronautics R&D (research and development) subsidies that were the subject of the DSB recommendations and rulings, and certain post-2006 measures of the United States that were challenged in the compliance proceedings and which were found by the compliance panel to involve specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement; and

b. the United States had failed to take appropriate steps to remove the adverse effects within the meaning of Article 7.8 of the SCM Agreement as regards the Washington State B&O (Business and Occupation) tax rate reduction, the effects of which were demonstrated by the European Union to be:

(i) a genuine and substantial cause of significant lost sales within the meaning of Articles 5(c) and 6.3 of the SCM Agreement of A320neo and A320ceo families of LCA in the single-aisle LCA market, in respect of the sales campaigns for Fly Dubai in 2014, Air Canada in 2013 and Icelandair in 2013, in the post-implementation period; and

(ii) a genuine and substantial cause of threat of impedance of imports of the A320ceo to the United States single- aisle market, and a threat of impedance of exports of Airbus single-aisle LCA in the United Arab Emirates (UAE) third-country market, within the meaning of Articles 5(c) and 6.3(a) and (b) of the SCM Agreement in the post-implementation period.

The compliance panel also made a number of other findings, including the following:

a. with respect to the European Union’s claim that the United States had failed to comply with its obligation to take appropriate steps to remove the adverse effects within the meaning of Article 7.8 of the SCM Agreement, the European Union had failed to establish:

(i) that the effects of certain aeronautics R&D subsidies and other subsidies were a genuine and substantial cause of significant lost sales, significant price suppression, impedance of imports to the United States market or impedance of exports to various third-country markets, or threats of any of the foregoing, within the meaning of Articles 5(c) and 6.3(a), (b) and (c) of the SCM Agreement, in respect of the A350XWB in the post- implementation period; or

(ii) that the original adverse effects of the pre-2007 aeronautics R&D subsidies in respect of the A330 and Original A350 continue in the post-implementation period as significant price suppression of the A330 and A350XWB, significant lost sales of the A350XWB, or a threat of impedance of exports of the A350XWB in the twin-aisle LCA market, within the meaning of Articles 5(c) and 6.3(a), (b) and (c) of the SCM Agreement in the post-implementation period; and

(iii) that the effects of the pre-2007 aeronautics R&D subsidies and the post-2006 subsidies are a genuine and substantial cause of significant price suppression of the A320neo or A320ceo, impedance of imports of the A320neo or A320ceo to the United States’ market, or displacement and impedance of exports of the A320neo or A320ceo to the third-country markets of Australia, Brazil, Canada, Iceland, Indonesia, Malaysia, Mexico, Norway, Russia, and Singapore, within the meaning of Articles 5(c) and 6.3(a), (b) and (c) of the SCM Agreement, or threats of any of the foregoing, in the post-implementation period; and

b. with respect to the European Union’s claims under Articles 3.1 and 3.2 of the SCM Agreement and Article III:4 of the GATT 1994 that, to the extent that the compliance panel had found that the claims were within the scope of the compliance proceeding, and that the measures at issue were subsidies within the meaning of Article 1 of the SCM Agreement, the European Union had failed to establish that the subsidies were inconsistent with Articles 3.1(a) and 3.2 or Articles 3.1(b) and 3.2 of the SCM Agreement, or with Article III:4 of the GATT 1994.

In light of the foregoing, the compliance panel concluded that, by continuing to be in violation of Articles 5(c) and 6.3(a), (b) and (c) of the SCM Agreement, the United 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”.”

On 27 June 2017, the European Union notified the DSB of its intention to appeal the compliance panel report and filed a notice of appeal.

On 28 March 2019, the Appellate Body issued its report in the compliance proceedings in this dispute.

According to the Arbitrator’s report, the Appellate Body upheld the panel’s findings concerning the existence of adverse effects in the post-implementation period, namely, that the European Union had established that the Washington State B&O tax rate reduction caused significant lost sales, within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement, in the single-aisle LCA market, with respect to the Fly Dubai 2014, Icelandair 2013 and Air Canada 2013 sales campaigns, as well as a threat of impedance of imports of Airbus single-aisle LCA to the United States and exports of Airbus single-aisle LCA to the UAE, within the meaning of Articles 5(c) and 6.3(a) and (b) of the SCM Agreement, in the post-implementation period.

The Appellate Body also reversed various other findings of the compliance panel. Among them were the findings that the European Union had failed to demonstrate that the pre-2007 aeronautics R&D subsidies continued to cause adverse effects in the post-implementation period and that the United States continued to grant or maintain the FSC/ETI (Foreign Sales Corporation/FSC Repeal and Extraterritorial Income Exclusion Act of 2000) subsidy in the post-implementation period.

More specifically, the Appellate Body:

a. reversed the compliance panel’s finding that the European Union had failed to demonstrate:

(i) that the acceleration effects of the pre-2007 aeronautics R&D subsidies in relation to Boeing’s technology development for the 787 have continued into the post-implementation period;

(ii) the existence of original subsidy technology effects of the pre-2007 aeronautics R&D subsidies in relation to Boeing’s technology development for the 787 in the post-implementation period; and

(iii) the existence of spill-over technology effects of the pre-2007 aeronautics R&D subsidies on the 787-9/10, the 777X, and the 737MAX in the post-implementation period, as a consequence of which (and to that extent) the Appellate Body also reversed the compliance panel’s findings that the European Union had failed to establish that the pre-2007 aeronautics R&D subsidies are a genuine and substantial cause of any of the forms of serious prejudice alleged with respect to the A350XWB and A320neo in the post-implementation period, through a technology causal mechanism.

The Appellate Body further found that it was unable to complete the analysis with regard to whether there remained acceleration effects of the pre-2007 aeronautics R&D subsidies in the post-implementation period.

b. reversed the compliance panel’s finding that the European Union had failed to establish that, after the expiry of the implementation period, the United States grants or maintains subsidies to Boeing in the form of FSC/ETI tax concessions.

The Appellate Body completed the analysis and found that, to the extent that Boeing remained entitled to FSC/ ETI tax concessions in the post-implementation period, the United States had not ceased to provide a financial contribution and thus had not withdrawn FSC/ETI subsidies with respect to Boeing within the meaning of Article 7.8 of the SCM Agreement.

The Appellate Body report and the compliance panel report, as modified by the Appellate Body, were adopted by the DSB on 11 April 2019.

SOME MAIN FINDINGS OF THE ARBITRATOR

In its Decision, the Arbitrator amongst others addressed the issue of the valuation of the 2004-2006 R&D adverse effects as part of the “adverse effects determined to exist” within the scope of this proceeding.

The European Union argued that the Arbitrator must value certain of the adverse effects that the original panel and Appellate Body determined were caused by the pre-2007 aeronautics R&D subsidies in the reference period used in the original proceeding, i.e. 2004-2006 (the 2004-2006 R&D Adverse Effects).

According to the European Union, this is so because the 2004-2006 R&D adverse effects are among “the adverse effects determined to exist” within the meaning of Article 7.10 of the SCM Agreement in the circumstances of this proceeding.

Following its analysis, the Arbitrator declined to value the 2004-2006 R&D Adverse Effects because “we discern no grounds upon which to conclude that the 2004-2006 R&D Adverse Effects are, or somehow represent, adverse effects caused in the post-implementation period by a subsidy with respect to which a respondent has failed to comply with the recommendations and rulings of the DSB.”

The 2004-2006 R&D Adverse Effects do not, therefore, fall within the scope of what “the adverse effects determined to exist” are for purposes of this specific proceeding, it said.

With regards to the reference period for the post-implementation Washington State B&O Tax Rate Reduction Adverse Effects, the European Union argued that the reference period used by the compliance panel to determine the existence of the post-implementation B&O Tax Rate Reduction Adverse Effects was a 33-month period from January 2013 until September 2015.

The United States argued that the compliance panel assessed the existence of adverse effects over a 36-month period that commenced with the expiration of the implementation period in September 2012, until September 2015.

The Arbitrator concluded that the period over which the compliance panel examined the existence of adverse effects in the post-implementation period ran from the commencement of that period (September 2012) until the date of the latest submission of the relevant sales campaign, order and delivery data, which was September 2015.

It accordingly considered that the period over which the compliance panel determined the existence of adverse effects in the post-implementation period is the 36-month period from September 2012 through September 2015.

Regarding the valuations of significant lost sales and threat of impedance, the Arbitrator considered that the European Union’s general methodology for valuing the significant lost sales in this proceeding, i.e. discounting back to the date of order the net delivery-date prices of all of the Airbus LCA that would have been delivered in the counterfactual for each lost sale, and then annualizing such values over the reference period, is consistent with the Arbitrator’s mandate.

However, the Arbitrator rejected the European Union’s proposal to value the threat of impedance using a lost sales approach.

The Arbitrator also said it cannot accept the European Union’s proposed alternative methodology for valuing the threat of impedance finding in the UAE market, but as was the case with respect to the proposed alternative methodology for the US market, the Arbitrator discerned certain aspects of the methodology that are similar to the so-called “delivery-centric” approach.

On the Arbitrator’s proposed “delivery-centric” approach, following the meeting with the parties, the Arbitrator said that it invited the parties to propose methodologies to value the threat of impedance based on the value of the counterfactual deliveries stemming from the two lost sales at the time of delivery, which it referred to as a “delivery-centric” approach.

In the light of its discussion of the delivery-centric valuation approach, “we must decline the European Union’s request to value deliveries occurring before the end of the reference period as part of the threat of impedance findings,” said the Arbitrator.

It said that it will value the threat of impedance as it was determined to exist by the compliance panel, i.e. with respect to counterfactual deliveries from the 2011 Delta Airlines and 2008 Fly Dubai lost sales that would have occurred in the post-reference period.

Therefore, in accordance with its mandate under Article 7.10 of the SCM Agreement to ensure that the level of countermeasures is commensurate with the degree and nature of the adverse effects determined to exist, the Arbitrator said it will use the following overall methodologies to value the adverse effects determined to exist in the compliance proceedings:

“a. For the adverse effects in the form of significant lost sales, we adopt an “order-centric” approach in which we value the net delivery-date prices of all of the Airbus LCA that would have been delivered in the counterfactual for each of the three lost sales at the time of the relevant LCA order.

b. For the adverse effects in the form of threat of impedance, we adopt a “delivery-centric” approach in which we value the net delivery-date prices of all of the Airbus LCA that would have been delivered in the post-reference period in the counterfactual for the 2011 Delta Airlines and 2008 Fly Dubai lost sales.”

The Arbitrator also addressed a number of more technical issues regarding the number of aircraft to be valued as part of the lost sales and threat of impedance, respectively, the time at which the counterfactual deliveries would have occurred, the relevant net delivery-date prices, and whether and how the discounting exercise is performed.

It concluded that the relevant counterfactual from the compliance proceedings was that, absent the Washington State B&O tax rate reduction, Airbus would have won the five LCA sales campaigns.

The Arbitrator therefore rejected the United States’ proposal to include in its valuation of the adverse effects a probabilistic adjustment to the expected value of the sales campaigns to account for the alleged uncertainty of Airbus winning those sales campaigns in the counterfactual.

The Arbitrator concluded that options clauses, whether exercised or not, are outside the scope of the compliance panel’s relevant lost-sales findings, and accordingly declined to consider options, whether exercised or not, in the Arbitrator’s determination of a maximum level of Annual Suspension.

As regards the number of firm orders that Airbus would have received in the five relevant sales campaigns in the counterfactual, and their respective delivery schedules, the Arbitrator concluded that:

a. it is reasonable to assume that, in the counterfactual, Airbus would have secured the same number of firm orders in its purchase agreements in all five relevant sales campaigns as Boeing secured in its actual purchase agreements;

b. the delivery schedules in the Airbus final offers better reflect both the demand- and supply-side pressures in the relevant negotiations had Airbus won the sales campaigns than do the Boeing delivery schedules and we therefore select the delivery schedules in the Airbus final offers as Airbus’ counterfactual delivery schedules; and

c. the delivery of the additional number of Airbus LCA is assumed to be [[***]].

([***] denotes business confidential information).

As regards the calculation and application of the risk that the relevant counterfactual Airbus deliveries would have been cancelled, the Arbitrator made the following assumptions:

a. Fly Dubai would have cancelled one Airbus single-aisle LCA order had Airbus won the 2014 Fly Dubai sales campaign, just as it cancelled one Boeing single-aisle LCA order, and the cancelled order would have been the latest-in-time delivery of the Airbus LCA [[***]] that would have been sold in connection with the 2014 Fly Dubai sales campaign;

b. each relevant airline would have taken delivery of, at least, the number of Airbus LCA that would have been scheduled for delivery before present day (i.e. before 2020); and

c. for the counterfactual Airbus orders associated with the five lost sales where the counterfactual deliveries are scheduled to occur after the present day (i.e. after 2019), we apply a survival rate to take into account the risk of future cancellations which is based on the universe of Airbus single-aisle LCA cancellations in the period 2003-2007.

It is reasonable to value the lost sales and threatened impeded deliveries by basing the counterfactual delivery prices of the relevant Airbus aircraft on the Net Fly-Away Prices in the Airbus final offers, it said.

The Arbitrator rejected the United States’ proposal to exclude the value of [[***]] from the counterfactual prices of the Airbus LCA.

In the context of valuing the threat of impedance, and in the light of the specific circumstances of the proceeding, the Arbitrator annualized the value of relevant post-reference period counterfactual Airbus deliveries in the US and UAE markets with reference to the number of months over which such counterfactual deliveries would have occurred in each market.

It annualized the aggregate lost sales value expressed in 2015 US dollars over the length of reference period, which was determined to last 36 months from October 2012 to September 2015.

The compliance panel had found threat of impedance in two different geographic markets, i.e. the United States and the UAE, and the Arbitrator valued the threat of impedance in each such market separately but followed the same methodology for each.

The total annualized value of the adverse effects determined to exist, expressed in 2015 US dollar terms, amounts to USD 3,993,212,564, the Arbitrator said.

It noted that its calculated 2015 Annualized Value of adverse effects (i.e. USD 3,993,212,564) is significantly lower than the European Union’s proposed 2015 Annual Suspension Value (i.e. USD 8,581,019,068), “a value that we have determined in this Decision was derived from an at-times flawed methodology.”

“Even assuming that, as a general matter, the commensurateness standard could permit some limited degree of discrepancy between the proposed level of countermeasures and the value of the adverse effects determined to exist, an adjustment from USD 3,993,212,564 to USD 8,581,019,068 would in our view exceed, by far, any permissible degree of discrepancy,” it said.

Accordingly, the Arbitrator determined that the “commensurate” 2015 Annualized Value, and thus the maximum level of Annual Suspension, is USD 3,993,212,564.

 


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