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COLLEGE OF EUROPE
BRUGES CAMPUS
DEPARTMENT OF LAW
Indirect Subsidies under WTO
Law The “private parties” provision of the SCM
Agreement after the report of the AB on US-
DRAMS.
Supervisor : Prof J Bourgeois Thesis presented by
Andrew Leyden for the
Degree of Master of European Studies
Academic Year 2005-2006
Statutory Declaration
I hereby declare that the thesis has been written by myself without any external
unauthorised help, that it has been neither presented to any institution for
evaluation nor previously published in its entirety or in parts. Any parts, words
or ideas, of the thesis, however limited, and including tables, graphs, maps etc.,
which are quoted from or based on other sources have been acknowledged as
such without exception.
Word count: 14,913.
ii
Abstract “Indirect subsidisation” occurs where a state grants a subsidy by acting through
private parties. Article 1.1(a)(1)(iv) of the WTO Agreement on Subsidies and
Countervailing Measures (SCM Agreement) allows for such subsidies to be
caught by the WTO disciplines where a government “entrusts or directs” a
private party to carry them out.
This language was imported into the SCM Agreement in order to overcome a
diplomatic impasse between the partisans of an “effects-based” approach to
subsidisation, and those who favoured a strict legal delimitation of the notion.
Its interpretation has been the subject of a string of Panel and AB rulings over
the last five years, culminating in the recent AB decision on US-DRAMS, which
concerned the indirect subsidisation of the Korean semiconductor giant, Hynix,
through a government-orchestrated bailout scheme.
From an initially restrictive interpretation, at each step there has been a
loosening of the notion of “entrustment or direction” and the corresponding
evidentiary standard. Nevertheless, the wording of the provision mandates a
strong standard of attributability, and this core concept has been respected by
the jurisprudence. In a parallel development, the Korea-Vessels Panel has set
down a “control” criterion for determining whether a given entity is a “public
body” for the purposes of the SCM Agreement. Both of these developments
enhance the armoury of authorities investigating alleged subsidy conduct, who
nevertheless face a considerable evidentiary burden.
This paper discusses the interpretation of Article 1.1(a)(1)(iv) in three parts.
Firstly, the jurisprudence concerning the interpretation of the “entrusts or
directs” language of Article 1.1(a)(1)(iv) and the related issue of what
constitutes a “public body” for the purposes of Article 1.1(a)(1)(i) are subject to
a critical analysis. Secondly, the practical implications of the provision are
explored by discussing how entrustment or direction might be proved or
disproved in a given case, in terms of the appropriate methodology and the
relevant evidence. Finally, the possible future evolution of Article 1.1(a)(1)(iv) is
charted, by speculating as to how certain fact scenarios might be dealt with
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under the provision, and analysing reform proposals put forward during the
Doha Round.
The paper concludes by drawing out the consequences of the developments
discussed for governments and financial institutions, particularly in terms of
industrial restructuring policy. Given the broad policy divergence between the
parties who intervened in the DRAMS disputes, the controversy surrounding
Article 1.1(a)(1)(iv) is an issue that is here to stay. Governments ought to be
circumspect in designing their industrial policy, lest any restructuring initiatives
unwittingly fall foul of Article 1.1(a)(1)(iv) SCM. In order to alleviate pressure on
financial institutions and enhance legal certainty, it is suggested that notification
and transparency obligations for such subsidy schemes ought to be instated.
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Table of Contents Statutory Declaration....................................................................................... ii Abstract ........................................................................................................... iii Keywords.......................................................................................................... v
List of Abbreviations .................................................................................... viii Introduction...................................................................................................... 1
0.1 Overview.............................................................................................. 1
0.2 The provision ....................................................................................... 2
0.3 Public and private conduct: a sliding scale .......................................... 3
0.4 Structure .............................................................................................. 5
1. The scope of Article 1.1(a)(1)(iv) ............................................................. 7
1.1 The nature of Article 1.1(a)(1)(iv)......................................................... 7
1.1.1 Historical context .......................................................................... 7
1.1.2 Negotiating History ....................................................................... 8
1.2 Interpretation of “entrusts or directs” in the WTO jurisprudence ........ 10
1.2.1 Export Restraints: A “strong” standard of attributability .............. 10
1.2.2 The DRAMS Disputes: Panel Reports........................................ 13
1.2.3 The US-DRAMS Appeal ............................................................. 16
1.2.4 Conclusion.................................................................................. 17
1.3 The “uninterpreted” elements of Article 1.1(a)(1)(iv) .......................... 19
1.3.1 “Which would normally be vested in government” ........................... 19
1.3.2 “In no real sense differs” from government practices...................... 21
1.4 An expanded “public bodies” provision .............................................. 22
1.4.1 The Korea-Vessels Report ......................................................... 23
1.4.2 Criticism of Korea-Vessels ......................................................... 24
1.4.3 Conclusion.................................................................................. 27
1.5 Synthesis ........................................................................................... 28
2 Practical questions: proving and disproving “entrustment or direction”........................................................................................................ 29
2.1 Choice of Methodology ...................................................................... 29
2.2 Indicators of entrustment or direction................................................. 31
2.2.1 Government motive and propensity to subsidise........................ 31
2.2.2 Proclivity for influencing private parties ...................................... 31
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2.2.3 Opportunity or capacity to influence private parties .................... 32
2.2.4 Non-commercial behaviour by private parties ............................ 33
2.2.5 Non-cooperation with investigating authorities ........................... 34
2.2.6 Weighing up the factors.............................................................. 35
2.3 Review of agency determinations...................................................... 35
3 Unresolved issues and possible future developments ....................... 38
3.1 Clarifying the criteria: interesting fact scenarios ................................ 38
3.1.1 PreussenElektra ......................................................................... 38
3.1.2 Pearle BV ................................................................................... 40
3.2 The Doha Proposals .......................................................................... 42
3.2.1 The EC Proposal ........................................................................ 42
3.2.2 The US Proposal ........................................................................ 43
3.2.3 Evaluation................................................................................... 44
4 Conclusions ............................................................................................ 45
4.1 Implications for governments and financial institutions...................... 45
4.2 Overall evaluation of the jurisprudence.............................................. 46
Bibliography................................................................................................... 48
Annex 1: Extract from MTN.GNG/NG10/W/4, "Subsidies and Countervailing Measures – Note by the Secretariat", 28 April 1987, Section 4.1.A. ............................................................................................................... 51
.
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List of Abbreviations
AB Appellate Body
ASCM / SCM Agreement on Subsidies and Countervailing
Measures
CVD Countervailing duties
DOC United States Department of Commerce
DSB Dispute Settlement Body
ECR European Court Reports
EC European Community
ECJ European Court of Justice
GOK Government of Korea
US United States
WTO World Trade Organisation
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Introduction
0.1 Overview
“The definition of a subsidy, like that of beauty, varies with the beholder whose
eye is focused on the object under scrutiny”.1
This observation is particularly apt in the context of “indirect” subsidies –
subsidies granted by governments through the intermediary of private parties.
In an international trade context, the sets of “eyes” focused on an indirect
subsidy include not only the subsidising government, the investigating
government and the beneficiary, but also the intermediate party granting the
benefit– often a financial institution under government pressure to offer loans
on non-commercial terms to an ailing industry- whose legitimate interests risk
being lost in the mix.
Any discussion of indirect subsidisation entails a complex balancing act. On the
one hand, it is vital that government subsidies granted indirectly through private
parties should be caught by the WTO disciplines. Obligations arising under the
WTO agreements constitute prohibitions and limitations on the use of State
power to distort trade. In other words, the WTO rules are “meta-regulation”:
they regulate the use of the power of the State with regard to private economic
actors, but not the conduct of private parties themselves. Thus, there is the risk
that governments will attempt to evade their own obligations by mandating
private actors to take their place. Therefore it is necessary to allow for the
conduct of private bodies to be “attributed” to the State. On the other hand, we
must avoid casting the net too wide. We need to limit the notion of a subsidy,
because unlike other WTO agreements, the ASCM allows for states to take
unilateral measures to counteract trade-distorting effects. A definition that
encompasses everything defines nothing. State measures influence every
aspect of private decisionmaking. When do we begin to consider that the
1 US Congress, House Committee on Agriculture, 1974.
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influence of the state is such that the actions of private parties are in effect
“public”? We need to define a legal standard of attributability that respects legal
certainty, private autonomy and the State’s right to regulate. In turn, this implies
appropriate standards of proof and review for such determinations.
0.2 The provision
In WTO law, the “indirect subsidies” issue plays out under Article 1.1(a)(1)(iv) of
the Agreement on Subsidies and Countervailing Measures. In order to
understand the significance of this provision it is necessary to place it in
context. Article 1.1 SCM provides:
For the purpose of this Agreement, a subsidy shall be deemed to exist if: (a) (1) there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as "government"), i.e. where
(i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees); (ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits); (iii) a government provides goods or services other than general infrastructure, or purchases goods; (iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice in no real sense, differs from practices normally followed by governments;
(…) and
(b) a benefit is thereby conferred.
The provision sets up a definition of a subsidy composed of two elements: (1) a
financial contribution by the government, and (2) a benefit conferred thereby.
The notion of a “financial contribution by the government” is the subject matter
of the present paper.. This concept should not be confused with “cost to the
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government”: It refers to a governmental measure, regardless of the source of
the financing. 2 Whereas the actions of governments and public bodies are
automatically imputed to the State, Article 1.1(a)(1)(iv) “bridge[s] the distance”3
between the behaviour of private parties and governments, allowing for a
finding of “financial contribution by the government” where a private party has
been “entrusted or directed” to perform a given task. It must be recalled that a
finding of entrustment or direction in this sense does not mean that a subsidy
exists; there must also be a “benefit”, which is subject to a separate analysis.
The “entrusts or directs” provision is “perhaps the most controversial”4 element
of Article 1. Diverging approaches have emerged, culminating in the Appellate
Body report on US-DRAMS. 5 As we shall see, the scope of what exactly
constitutes “entrustment or direction” under Article 1.1(a)(1)(iv) is still far from
clear.
0.3 Public and private conduct: a sliding scale
In order to conceptualise the problem of distinguishing between public and
private conduct in the context of subsidisation, it might be useful to imagine a
sliding scale between:
(1) Exclusively public subsidies,
(2) Publicly-funded subsidies administered by private parties,
(3) Subsidies granted through private funds at the instigation of the State,
(4) Government regulation or other intervention in the market factually
inducing behaviour on the part of private actors with an economic effect
equivalent to a subsidy, and
2 This was confirmed by the AB in Canada – Aircraft (WT/DS70 Brazil). 3 Report of the Panel on EC-DRAMS, WT/DS299/R at para 7.53. 4 CLARKE,, The Agreement on Subsidies and Countervailing Measures. The World Trade Organization : legal, economic and political analysis / ed. Patrick F.J. Macrory, Arthur E. Appleton, Michael G. Plummer. New York, NY: Springer [etc.], 2005, pp. 679-734 at 690. 5 Appellate Body Report, United States--Countervailing Duty Investigation on DRAMS from Korea, WT/DS296/AB/R, adopted July 26, 2005.(Hereinafter US-DRAMS (AB)).
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(5) Exclusively private “subsidies”.
At the top we could place “classic” subsidies, namely actual or potential direct
transfers of funds by the government. The second category would cover
situations such as that set out in the first alternative of Article 1.1(a)(1)(iv)
where the government makes payments to a privately operated funding
mechanism which would act to channel public funds to private parties. The third
category would cover those situations where the government obliges or puts
pressure on private parties to provide a financial contribution which would fall
under the first category if it were granted by the State itself. The State might
pressure the banking sector to support an ailing national industry by granting
loans on non-commercial terms. The fourth category concerns situations where
the State exercises its general regulatory powers so as to encourage certain
behaviour on the behalf of private parties which produces a benefit for a given
industry or enterprise. For example, an export restraint might force the
domestic producers of widgets to sell at depressed prices to domestic widget
processors, which consequently will enjoy their input at less than world-market
prices. Arguably this is tantamount to government subsidisation of the
downstream industry. In the final category we have situations where private
parties themselves engage in subsidy-like conduct without any State
compulsion.
It is interesting to note that the US rules once allowed for subsidies falling within
the fifth category to be countervailed.6 As Horlick points out,7 this authorisation
was usually employed against what amounted to export subsidies given by a
cartel of protected input producers to exporters of finished products. Obviously,
in the absence of any “entrustment or direction”, the imposition of countervailing
6 The US Tariff Act of 1930 and §701(a)(1)(b) of the US Trade Agreements Act of 1979. 7 For example, a 1926 case involved the imposition of countervailing duties against German steel producers. The German steel cartel had entered into an agreement with the steel consuming industries under which the latter received certificates upon export of the finished goods which could be used as credit for future orders of steel from the members of the cartel to an amount equal to the difference between the cartelised german price and the world price of the steel input in question. See HORLICK, Current Issues in Countervailing Duty Law, in The Trade Agreements Act of 1979 – Four Years Later (New York, 1983), at p.16.
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duties on purely private “subsidies” would never be compatible with the SCM
agreement.
However, the situation becomes more ambiguous if the government delegates
certain powers to a private association, enabling it to compulsorily levy its
members, but leaving any such concrete decisions to the initiative of private
parties.
Thus, insofar as the interpretation of Article 1.1(a)(1)(iv) is concerned, we can
see that the contentious territory is that portion of the scale between categories
three and five. Two questions immediately emerge: Where should one draw the
line between category three (financial contributions by private parties at the
instigation of the State) and category five (autonomous financial contributions
by private parties)? And to what extent should conduct falling within category
four be subject to the disciplines of the SCM Agreement?
0.4 Structure
It is proposed to answer these questions through an exhaustive analysis of
Article 1.1(a)(1)(iv) SCM. In part 1, the substantive scope of “entrustment or
direction” under subparagraph (iv) will be discussed through an analysis of the
nature and history of the provision, and its evolving interpretation in the WTO
jurisprudence. It will be demonstrated that there has been a gradual loosening
of the notion of “entrustment or direction” and the corresponding evidentiary
standard. Nevertheless, the wording of the provision mandates a strong
standard of attributability, and this has been respected by the jurisprudence.
We will also interpret those remaining elements of Article 1.1(a)(1)(iv) that have
been largely ignored by the caselaw and academic commentary. It will be seen
that no element of the provision is without its significance. Finally, it will be
argued that a parallel development, whereby the notion of a “public body” has
been broadened to include “state controlled” corporations is in need of further
clarification. In part 2, the more practical aspects of Article 1.1(a)(1)(iv) will be
treated – namely how it can be proved that there has in fact been entrustment
or direction, and how panels will review any such determinations. Part 3 will
concern possible future developments. It will be queried how interesting fact
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patterns that have been dealt with in the context of EC State aid law and in
doctrinal discussion might be resolved under Article 1.1(a)(1)(iv). The
amendments to Article 1.1(a)(1)(iv) proposed in the context of the Doha round
of trade talks will be evaluated. Finally, the paper will draw some general
conclusions regarding the evolution of the WTO jurisprudence, and the
implications that Article 1.1(a)(1)(iv) might have for governments and financial
institutions, particularly in the context of industrial restructuring policy.
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1. The scope of Article 1.1(a)(1)(iv)
1.1 The nature of Article 1.1(a)(1)(iv)
1.1.1 Historical context
The significance of Article 1.1(a)(1)(iv) is best understood in the light of pre-
WTO practice. Historically, the EC (and other GATT parties) favoured a subsidy
definition whereby greater emphasis was put on the contribution by the
government. In contrast, the US authorities employed an effects-based doctrine
whereby virtually any type of government program could confer a domestic
subsidy if it provided some opportunity or advantage that would not otherwise
be available in the marketplace.8 That is to say, unlike other GATT parties, the
US used a definition of “subsidy” which included only a “benefit” criterion,
which allowed the DOC to unilaterally countervail myriad schemes without
clearly demonstrated government participation.
This controversy crystallised in the Lead and Bismuth dispute involving the EC
and the US directly before the conclusion of the Uruguay Round.9 One of the
questions raised was whether private bank debt forgiveness resulting in a
benefit for the recipient steel company was a “subsidy” under the existing GATT
text. The EC argued that the schemes countervailed by the US did not
constitute subsidies because they amounted to private rather than public
conduct. The panel agreed with the EC’s interpretation. Matsushita argues that
this unadopted Report had a direct impact on the negotiations and the eventual
adoption of a “financial contribution” requirement. 10 In particular, the Panel
insisted upon a “governmental measure” before a subsidy could be deemed to
exist. The Panel did admit, however, the possibility of the actions of private
parties being attributed to the State on the condition that “the relationship
8 See SYKES, Countervailing Duty Law: An Economic Perspective, 89 Columbia L Rev 2 (1989) p. 204. 9 United States-Lead and Bismuth, 15 November 1994, GATT Doc SCM/185 (unadopted). 10 MATSUSHITA, The World Trade Organization: Law, Practice, and Policy, Oxford, 2003 at p. 267.
between the action of the private party and the government was such that the
action of the private party could be qualified as a governmental measure”.11
Broadly, this does seem to correspond to what emerged from the Uruguay
Round negotiations on subsidies. We have a compromise between the need for
a State measure (in order to draw outside limits on the scope of the subsidies
disciplines), yet the possibility for private actions to be attributed to the State (in
order to avoid circumvention).
1.1.2 Negotiating History
The Panel in US-Export Restraints conducted a detailed review of the available
documentary evidence concerning the negotiating history of Article 1. From
this, it is clear that the inclusion of the requirement of a “financial contribution”
was from the outset intended by its proponents to ensure that there were
“some outside limits on the scope of government activity that can be considered
to be a subsidy and subject to countervail.”12 Thus, regardless of their effects,
the SCM agreement posits a “difference between subsidies and various trade-
distorting measures”.13 Only those measures falling within the exhaustive list
set forth in Article 1 SCM are to be countervailable under the SCM agreement.
Turning to Article 1.1(a)(1)(iv) in particular, one document – a note from the
secretariat of the negotiating group on rules14 sheds light on its origins. The
negotiators referred to a 1960 Panel report which dealt with the question of a
non-governmental levy. It was held that such a levy would be non-notifiable
under the existing rules, “unless the government took a part either by making
payments into a common fund or by entrusting to a private body the functions
11 Ibid at paras 390, 393. 12 MTN.GNG/NG10/W/22 Statement made by Canada at the Negotiating Group meeting of 28-29 June 1988. In substance, this was also the position of the EC, India, Egypt, Japan, Switzerland and the Nordic Countries. See Panel report on US-Export Restraints at fn 155. 13 MTN.GNG/NG10/W/9, 7 September 1987, Section III.1 (emphasis added). 14 MTN.GNG/NG10/W/4, "Subsidies and Countervailing Measures – Note by the Secretariat", 28 April 1987, Section 4.1.A Reproduced in Annex 1.
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of taxation and subsidisation with the result that the practice would be in no real
sense different from those normally followed by governments”. 15 The
negotiating group noted that similar situations may exist where a “government
chooses to direct a private body to carry out certain functions related to the
sovereign right of governments to collect revenues and expend them.”16
The phrases “entrusts or directs” and “in no real sense, differs from practices
normally followed by governments” can both be traced directly to this Note. But
what does this tell us about what was actually meant by government
entrustment or direction? The report repeatedly emphasises the “necessary
link between a subsidy and the taxation function of government.” This
requirement can be explained by reference to the scenario the 1960 Panel was
considering (subsidisation through a non-governmental levy) and it would be
contra legem to require such a dual delegation in the Article 1.1(a)(1)(iv)
context.
What the negotiating history does make clear, however, is that entrustment or
direction implies something more than a government action causing subsidy-
like effects through the subsequent behaviour of private parties. It requires a
tight link between government policy and the physical actions of the private
body. Indeed, the language has echoes of the classic terminology used in
public international law to attribute the actions of private parties to the State.17
These rules envisage attribution only where a private party is acting in fact on
behalf of the State.18
15 Ibid. 16 Ibid. 17 These rules are codified in the International Law Commission’s Draft Articles on State Responsibility (ILC Report on the Work of its 53rd Session, UN Doc A/56/10, hereinafter “ILC Draft”). 18 See ILC Draft Article 8, which provides that the conduct of a person or group of persons shall be considered an act of a State “if the person or group of persons is in fact acting on the instructions of, or under the direction or control of, that State in carrying out the conduct. “
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1.2 Interpretation of “entrusts or directs” in the WTO
jurisprudence
The interpretation of this phrase has been the subject of a controversial saga at
the DSB. Taking a satellite view of the jurisprudence, one can state that from
an initially legalistic, facts-bound interpretation in US-Export Restraints, the
subsequent tendency has been to broaden the scope of the provision at each
step while respecting the core ratio of the founding decision.
1.2.1 Export Restraints: A “strong” standard of attributability
Despite its modification by subsequent panels, the seminal interpretation of
Article 1.1(a)(1)(iv) remains the Report of the Panel on US-Export Restraints.19
The dispute concerned the US position that in some circumstances export
restraints can be treated as subsidies and therefore be countervailed. This
might happen in a situation where an export restraint forces the domestic
producers of the restrained products to sell at depressed prices to domestic
downstream manufacturers, which consequently will enjoy cheaper inputs. In
terms of economic effect this is indeed functionally equivalent to a subsidy.
The US argued that export restraints can fall within the definition of Article
1.1(a)(1)(iv) on the basis that export restraints constitute government
“entrustment or direction” to “provide goods” at a favourable rate to the
downstream producers. The US argued that there is no difference, apart from a
semantic one, between an instruction to sell domestically and a limitation on
export sales. In their words,"[a]n export restraint is a direction to provide goods
to domestic purchasers if it can be shown, as a factual matter, that there is a
proximate causal relationship between the export restraint and the behaviour of
the producers of the restrained product.”20
19 US-Export Restraints (Panel) WT/DS194/R , 29 June 2001. 20 US-Export Restraints, Report of the Panel at page 80.
10
The Panel rejected the US argument, holding that “entrustment or direction”
implies affirmative government action and more than a mere causal relationship
between government conduct and the reaction of private parties. After referring
to dictionary definitions, the Panel concluded:
It follows from the ordinary meanings of the two words "entrust" and "direct"
that the action of the government must contain a notion of delegation (in the
case of entrustment) or command (in the case of direction). To our minds, both
the act of entrusting and that of directing therefore necessarily carry with them
the following three elements: (i) an explicit and affirmative action, be it
delegation or command; (ii) addressed to a particular party; and (iii) the object
of which action is a particular task or duty.21
Thus, the panel distinguished “entrustment or direction” from the situation in
which the government “intervenes in the market in some way”, which may or
may not have a particular result “simply based on the given factual
circumstances and the exercise of free choice by the actors in that market”.22
This could be labelled a “strong” standard of attributability. In those other cases
where the DSB has dealt (implicitly, at least) with the question of whether given
conduct can be attributed to the State, Villalpando suggests that the correct
metaphor is that of the “catalyst act”.23 The actions of private parties are not
imputed to the State per se, but rather their apparently voluntary conduct
reveals or “catalyses” an underlying act or omission by the State. It is
instructive to consider this in the light of an example. In Korea-Beef, the
Appellate Body dealt with a measure adopted by the Korean public authorities
in violation of Article III:4 of the GATT. Under a 1990 law, Korean retailers could
either sell domestic or imported beef, but not both. Hence, most retailers chose
“freely” to sell only domestic beef on commercial bases. The Appellate Body,
however, underlined the restricted nature of their choice:
21 Ibid at para 8.29. Italics in original, underlining added. 22 Ibid at 8.31. 23 VILLALPANDO, Attribution of Conduct to the State: How the Rules of State Responsibility may be applied within the WTO Dispute Settlement System, JIEL 2002 393-420.
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The choice was limited to selling domestic beef only or imported beef only. In
these circumstances, the intervention of some element of private choice does not
relieve Korea of responsibility under the GATT 1994 for the resulting
establishment of competitive conditions less favorable for the imported product
than for the domestic product.24
This contrasts directly with US-Export Restraints. Whereas measures entailing
a free, but limited choice by market operators may fall foul of other GATT
provisions, Article 1.1(a)(1)(iv) requires something more – the State must in fact
be performing its functions through private parties.
US-Export Restraints is an important ruling. It made clear that Article
1.1(a)(1)(iv) requires a strong element of State attributability and set down the
general rule that regulatory intervention does not fall within Article 1.1(a)(1)(iv).
The logic behind the report has strong anchorage in the text of the provision
and has not been seriously contested since. Under public international law, “the
attribution of conduct to the State as a subject of international law is based on
criteria determined by international law and not on the mere recognition of a link
of factual causality.”25 Similarly, entrustment or direction must imply more than
a mere causal nexus between government action and private reaction.
Otherwise the scope of government regulation liable to fall within the scope of
Article 1 SCM is potentially limitless. This would have the effect of reading the
“financial contribution” requirement out of the Agreement, leaving only the
“benefit” and “specificity” requirements to delimit its scope. As we have seen,
the need for this limit is particularly acute in the SCM context, because unlike
other WTO agreements, it allows for states to take unilateral measures to
counteract trade-distorting effects. 26 Thus, Clarke and Horlick assert: “the
24 Appellate Body Report on Korea - Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/ DS161/AB/R, WT/DS169/AB/R, adopted 11 December 2000, para 146. Emphasis added. 25 ILC Report on the Work of its Fifty-Third Session (2001), UN Doc. A/56/ 10 Commentary to Part One, Chapter II, para 4 (ILC Report (2001), 26 Normally export restraints would have to be dealt with under the WTO provisions dealing with quantitative restrictions.
12
Panel reaffirmed the negotiated balance of the subsidy definition as discussed
above”.27
The interpretation of the Panel is open to criticism on another front. In
attempting to define the scope of Article 1.1(a)(1)(iv), the Panel held that there
must be “an explicit and affirmative act of delegation or command”. This
language must be read in context. The Panel was eager to emphasise the
“strong” requirement of attributability, which clearly excludes export restraints
from the scope of Article 1. In making this point, however, the Panel unwittingly
set the evidentiary standard too high. In many scenarios – such as a covert
corporate bailout- an “explicit and affirmative act of delegation or command” will
simply be impossible to find, but this does not mean that entrustment or
direction has not taken place.
1.2.2 The DRAMS Disputes: Panel Reports
The more problematic aspects of the Panel’s interpretation of “entrusts or
directs” came home to roost in the DRAMS disputes. These disputes arose
from a countervailing duty investigation by the US and the EC respectively on
imports of Dynamic Random Access Memory Semiconductors (“DRAMS”) from
Korea. The relevant authorities determined that the ailing Korean
semiconductor giant, Hynix, was subsidised by the Korean Government (GOK),
which mobilised its various powers as a legislator, regulator, and economic
operator in order to orchestrate “the largest corporate restructuring in Korean
history.”28 Five initiatives were at issue:
1. A KRW800 billion (678 million euro) syndicated bank loan, to finance
short term debt
2. A debenture program, designed to address an impending liquidity crisis
27 CLARKE AND HORLICK, op cit at 691. 28 For a detailed history of the Hynix saga see Cherry, The 'Big Deals' and Hynix Semiconductor: State—Business Relations in Post-Crisis Korea, Asia Pacific Business Review; Winter 2003, Vol. 10 Issue 2, p178-198.
13
3. A restructuring program in May 2001, agreed between Hynix and its
creditors,
4. A bank guarantee, and
5. A restructuring program in October 2001, involving a debt to equity
swap, the forgiving of other debts, refinancing and repayment term
extensions.
The EC and US authorities determined that the financial contributions in
question were provided by four public bodies and a wide variety of private
bodies entrusted or directed by the GOK to provide loans and other forms of
financial assistance on non-commercial terms. Korea’s challenge to the
determination of subsidisation turned on the issue of the “entrustment or
direction” of the private bodies. Remarkably, the outcomes in each case were
very different.
The first report to be circulated concerned the US determination. Korea relied
on Export Restraints and argued for a strict reading of subparagraph (iv),
requiring an “explicit and affirmative government action” addressed to a
particular entity, entrusting or directing a particular task or duty. Korea
challenged the methodology of the DOC in that it relied on a “single
programme” approach to the evidence, whereby each transaction was analysed
as part of a greater whole. In their view, acts of entrustment or direction must
be individualised, that is to say, each transaction must be analysed individually
and there must be a demonstration of entrustment or direction on a bank-by-
bank and transaction-by-transaction basis. The US argued for a broader
interpretation, asserting that the correct standard is whether a reasonable
decisionmaker, looking at the evidence in its entirety could have concluded that
the government’s actions in toto reveal entrustment or direction.
The panel adopted the interpretation laid down in US-Export Restraints and
agreed that an “affirmative act of delegation or command” is required. But the
Panel disagreed with the Export Restraints decision insofar as that Panel
considered that the act must be “explicit”. In the view of the US-DRAMS panel,
this act could be “explicit or implicit, formal or informal”. Similarly, the degree of
14
detail in which the addressee and the object of the act of delegation or
command are described is to be assessed as a matter of evidence. Obviously,
the more specific they are, the easier it will be for the investigating authority to
establish entrustment or direction.
The Panel then examined whether the DOC properly found that there was
sufficient evidence to support a generalized finding of entrustment or direction
with respect to private bodies spanning multiple creditors and multiple
transactions over the period of investigation. Overall, the findings of the Panel
were very unfavourable to the US. While the DOC established that the
Government had a policy to save Hynix and this policy could explain the
participation of public body creditors, it was not sufficient to establish the
government's entrustment or direction of private body creditors. The Panel
concluded that the DOC failed to establish that the government actually
exercised its influence so as to entrust or direct those creditors. The Panel also
agreed with Korea that the “single programme” approach was flawed in the
circumstances.
In the EC case,29 the panel adopted the same interpretation as the panel in US-
DRAMS, concluding that the Export Restraints formulation requiring an
“explicit” act was very much influenced by the facts of that particular case.30
Turning to the substantive analysis, the Panel discussed the EC’s
determination of entrustment or direction with respect to the five programmes
enumerated above. In most of the cases, the Panel found that government
“direction” did in fact exist. Thus, as Matsushita points out, “two WTO Panels …
ended up, for all practical purposes, concluding in diametrically opposed
manners.”31 One explanation for this is that the EC took a more circumspect
approach, choosing to treat each transaction separately.
29 EC-DRAMS (Panel), WT/DS299/R. (hereinafter EC-DRAMS) 30 It is noteworthy that one of the panellists – Scott Gallacher – was also a panellist in the Export Restraints case. The same approach was also followed in the intervening decision of Korea-Vessels, discussed in another context, infra. 31 MATSUSHITA, The World Trade Organization: Law, Practice, and Policy (Second edition) Oxford, 2006 p 344.
15
1.2.3 The US-DRAMS Appeal
The United States appealed the original report, alleging, inter alia, that the
Panel erred in its treatment of the evidence, and in its interpretation of the
terms “entrusts or directs” as connoting “delegation or command”. The AB
overturned the Panel report, primarily on the grounds that the panel had erred
in its review of the evidence.32 It may well have been possible for the AB to
dispose with the matter on that ground alone. Nevertheless, it took the
opportunity to modify the Export Restraints formula. It considered that while
“entrustment” would encompass “delegation”, this is only one form that
entrustment might take. Concerning the term “directs”, the AB came to the
conclusion that an interpretation of “directs” limited to a “command” would be
too narrow because “governments are likely to have other means at their
disposal to exercise authority over a private body. Some of these may be more
subtle than a command or may not involve the same degree of compulsion.”33
The AB offers some very vague guidance as to the outer limits of this
interpretation at paragraph 114. It observes that “mere policy pronouncements”
by the government would not in isolation constitute entrustment or direction.
Furthermore, the terms “entrusts or directs” imply a more active role than “mere
acts of encouragement”. The AB also agreed with the US-Export Restraints
panel insofar as entrustment or direction cannot cover the situation in which the
government regulates the market in some way, which may or may not influence
the exercise of free choice by market actors. At paragraph 116 the AB further
observes:
It may be difficult to identify precisely, in the abstract, the types of government actions that constitute entrustment or direction and those that do not. The particular label used to describe the governmental action is not necessarily dispositive. Indeed, as
32 The treatment of evidence on review will be dealt with in detail in Chapter II, infra. 33 US-DRAMS (Report of the Appellate Body) WT/DS296/AB/R 27 Hereinafter US-DRAMS(AB))para 111.
16
Korea acknowledges, in some circumstances, "guidance" by a government can constitute direction. In most cases, one would expect entrustment or direction of a private body to involve some form of threat or inducement, which could, in turn, serve as evidence of entrustment or direction. The determination of entrustment or direction will hinge on the particular facts of the case.34
Unfortunately, the AB declined to complete the analysis by determining
whether the DOC’s finding of entrustment or direction was supported by
sufficient evidence in light of this new interpretation of Article 1.1(a)(1)(iv). The
fact that two panels had come to opposing conclusions on more or less the
same facts underscored the need for clarification on this count.
1.2.4 Conclusion
The above jurisprudence illustrates the dangers of over-reliance on complex
textual analysis and dictionary definitions in adjudication. 35 Much of the
confusion surrounding entrustment or direction can be traced back to the
original Export Restraints decision. While the outcome was correct, the
language used ought to have been expressly limited to the facts and drafted
accordingly. It is interesting to note that in arriving at the new interpretation in
US-DRAMS, the AB made reference to the “object and purpose” of the
provision.
[T]he object and purpose of the SCM Agreement is "to strengthen and improve GATT disciplines relating to the use of both subsidies and countervailing measures, while, recognizing at the same time, the right of Members to impose such measures under certain conditions". This balance must be borne in mind in interpreting paragraph (iv).36
34 US-DRAMS(AB) para 116. Footnotes omitted. 35 One exasperated commentator concludes that “the languages of the WTO now include legalese” See MOULIS, “Flour, eggs and law: cooking the Doha cake” available at <http://www.ag.gov.au/www/rwpattach.nsf/viewasattachmentPersonal/5E1000F3586B5785CA256C8A00132048/$file/DM%20AG%20Paper.htm> (Viewed 17th April 2006) . 36 WT/DS269/AB/R Page 42 para 115 (footnote omitted).
17
In contrast, the US-DRAMS Panel explicitly denied the existence of any
compelling “object and purpose” argument.37 It seems that the AB adopted a
“teleological” interpretation of Article 1.1(a)(1)(iv) in order to ensure that its
character as an anti-circumvention provision is upheld, by eliminating the
subliminal effect of the “delegation or command” language. As the AB itself
noted, the Export Restraints panel referred to a “notion” of delegation or
command, which might suggest that it implied more flexibility than one might
believe at first blush. However, some authors suggest that the AB may in fact
have modified the scope of Article 1.1(a)(1)(iv) to the detriment of the balance
of rights emerging from the Uruguay Round.38
It is submitted that this criticism is unfounded. The low watermark contemplated
by the AB seems to be “guidance”. In this regard, one might take inspiration
from the pre-WTO Semiconductors report. There, the Panel dealt with voluntary
export restrictions adopted by private companies in Japan. Japan argued that
these restrictions were adopted autonomously by private operators, acting in
their self-interest. The Panel, however, found that the Japanese Government's
“guidance” fell within the scope of Article XI:1 of the GATT because looking at
the overall picture, two criteria were fulfilled. “First, there were sufficient
incentives or disincentives for non-mandatory measures to take effect. Second,
the operation of the measures to restrict export of semi-conductors at prices
below company-specific costs was essentially dependent on Government
action or intervention.”39 This squares with the AB’s comment that entrustment
or direction, in most cases, will involve a threat or an inducement. If this is what
the AB had in mind when it spoke of “guidance” it would seem to be the case
that the pre-existing “strong” threshold of entrustment or direction has not been
fundamentally remodelled by US-DRAMS. Rather this is a mere case of
linguistic error-correction. The EC’s argument in the DRAMS dispute that “an
indication or a nudge by the government” could constitute entrustment or
37 US-DRAMS (Panel) Para 7.41. 38 VANDER SCHUEREN, MIZULIN, WTO Jurisprudence on non-agricultural subsidies: New Developments, Int. T.L.R. 2005 11(6) 197. 39 Japan - Semiconductors, (Panel) BISD 35S/116, adopted on 26 March 1988, at para 109; see also paras 108-15.
18
direction would still be rejected.40
1.3 The “uninterpreted” elements of Article 1.1(a)(1)(iv)
Although the jurisprudence has mostly focused on the issue of “entrustment or
direction”, the remainder of Article 1.1(a)(1)(iv) is not without its significance
either. In the interests of completeness the possible interpretation of these
elements will also be analysed in detail. Under Article 1.1(a)(1)(iv), the function
entrusted or directed to the private body must be one or more of the type of
functions illustrated (actual or potential transfer of funds, purchase or provision
of goods, etc.) which would “normally be vested in the government” and the
practice must “in no real sense, differ from practices normally followed by
governments”. The only decision in which these elements have received
attention is US-Export Restraints, which treated the “normally vested in
government” and “in no real sense differs” portions as one bloc.
Canada attempted to argue that these two requirements further limit the scope
of subparagraph (iv). Specifically, Canada claimed that this text requires that
there be a “habitual practice” on the part of governments to engage in one of
the practices enumerated. The US argued that these elements simply require
that the functions in question are those where the government would be
involved in subsidisation. The Panel expressed doubts about both arguments,
but ultimately held that it was not necessary to interpret this language in order
to resolve the dispute at hand.41 This is not to say that these elements are
without importance: they may well be crucial to the resolution of another
dispute.
1.3.1 “Which would normally be vested in government”
Looking at the first condition, it is necessary to ask when a function is
"normally" vested in the government. It is interesting to note that contrary to the
40 EC-DRAMS, para 7.31. 41 US-Export Restraints, para 8.59.
19
submission of the US in Export Restraints, and unlike the “in no real sense”
language, this portion of Article 1.1(a)(1)(iv) is supplementary to the language
used in the 1960 Report referred to in the negotiating history. It is unclear what
kind of limit it seeks to impose on the application of Article 1.1(a)(1)(iv). What is
“normal”? Reich suggests that at least two approaches to this requirement are
possible.42 On the one hand, we could take a factual approach. Under this
approach, a practice is “normally” vested in the government when such is the
practice of governments throughout the world. On the other hand, we could
take a standards-based approach. Under this approach we would test the
practice in question against a commonly accepted standard of what it is
“normal” for a government to do.
Both approaches have their problems. If we adopt the factual approach we run
the risk that the scope of the SCM agreement could be determined by purely
contingent factors. In many cases the “normally vested” criterion will be
uncontroversial: the EC’s determination that the provision of soft loans “for
reasons of industrial development” was “normally vested in the government”
was not contested. On the other hand, take the example of private parties
induced by the government to provide waste free of charge to recycling
plants.43 Would it be acceptable to conclude that this is not a function that is
“normally vested in the government” simply because most countries do not
have the capacity or the political will to put such schemes in place? The
standards-based approach has other problems. Reich argues that since the
scope of government action is a question of political culture, philosophy and
ideology that varies significantly throughout the world, it is unrealistic to expect
a WTO Panel to pronounce on it. Thus, Reich concludes that the value-neutral
factual approach would be adopted. In order to make the test workable, a
realistic approach as to what is “normal” would have to be taken. Rather than
requiring that the totality or the majority of governments follow a given practice,
42 REICH, “Privately Subsidized Recycling Schemes and Their Potential Harm to the Environment of Developing Countries: Does International Trade Law have a Solution?” 23 Va. Envtl. L.J. 203 43 Ibid.
20
a significant number of governments ought to suffice.
It is submitted that Reich’s analysis is illuminating, but that his conclusion is
incorrect. Given that the AB has now consecrated Article 1.1(a)(1)(iv) as an
anti-circumvention provision, in future it will probably opt for the interpretation
that does the least to narrow its scope. If the subparagraph really is an anti-
circumvention provision, why should an “unusual” form of subsidisation be
entitled to privileged treatment simply because an insufficient number of
governments engage in it? Furthermore, the use of the conditional (“would
normally be vested”) as opposed to the present (“is normally vested”) implies
that it is not necessary that governments in fact engage in such conduct. On
balance, of the two interpretations advanced by Reich, the “standards-based”
approach is the most satisfactory. Any function that can be characterised as
providing a “public good”, be it industrial development, environmental
protection,44 the provision of natural resources,45 monetary policy,46 etc. could
be deemed to fall within the scope of Article 1.1(a)(1)(iv). Fears of WTO panels
provoking uproar by engaging in such an analysis of “normal” government
conduct are overstated.
1.3.2 “In no real sense differs” from government practices
The final obstacle in subparagraph (iv) requires that the practice must “in no
real sense, [differ] from practices normally followed by governments.” As we
have seen, this language has a direct lineage in the 1960 Panel report which
dealt with the question of whether a non-governmental levy could constitute a
notifiable subsidy. The Panel concluded that this could be the case where a
government entrusts to a private body the functions of taxation and
subsidisation “with the result that the practice would be in no real sense
44 Ibid. 45 RIPINSKY, S., The system of gas dual pricing in Russia: compatibility with WTO rules, World Trade Review 2004, 3(3) 463-482. 46 See for instance the reflections of the China Currency Commission, available at:
<http://www.uscc.gov/hearings/2006hearings/written_testimonies/06_04_04wrts/06_04_04_hartquist.pdf>.
21
different from those normally followed by governments.” The negotiators of the
SCM Agreement then proceeded to reason by analogy and concluded that
there may be similar situations in which the government directs a private body
“to carry out certain functions related to the sovereign right of governments to
collect revenues and expend them.” Thus we can clearly see that this language
was developed by the 1960 Panel in the context of “entrustment”, and then
extended to “direction” by the drafters of Article 1.1(a)(1)(iv). The original Panel
used this language to refer to the delegation to private parties not only of the
subsidisation function of government but also that of taxation, such that the
delegatee was in effect behaving as a “private government”. However, this
requirement of a dual delegation is of no application where, for example, a
government “directs” a private party in order to provide a loan on non-
commercial terms.
Reich suggests that a better interpretation of this provision is to take it as
referring to the manner and particularly the objectives for which the financial
contribution is carried out. 47 Reich argues that the distinguishing feature of
“governmental” practices is that they are not profit-motivated. Government
subsidies are necessarily carried out in pursuance of public-policy and other
non-commercial objectives. If this is correct, where a bank engages in a
government-led restructuring to minimise its own losses (not including, of
course, any government-imposed penalty for non-compliance) it will
automatically fall outside the scope of Article 1.1(a)(1)(iv).
1.4 An expanded “public bodies” provision
It is impossible to discuss the scope of Article 1.1(a)(1)(iv) without an analysis
of what consititutes a “public body” for the purposes of Article 1.1(a)(1)(i). As
the panel held in US-Export Restraints, the term “private body” is used as a
counterpoint to the terms “government” or “any public body”. Any entity which
does not fall under those categories will be a “private body”. Hence, Article
47 REICH, loc cit. n42.
22
1.1(a)(1)(iv) is a residual clause whose scope depends essentially on the
definition of a public body. It will always be in the interests of an investigating
authority to show that a given body is “public” as this will obviate the necessity
of showing “entrustment or direction”.
1.4.1 The Korea-Vessels Report
The notion of a “public body” was given a very broad interpretation in the recent
Korea-Vessels report. 48 The EC attempted to argue that the Export-Import
Bank of Korea (KEXIM) was a public body on the grounds, inter alia, that it was
created and operated on the basis of a public statute giving the GOK control
over its decisionmaking. In Korea’s view, the public or private nature of a body
will depend on the nature of the activity it is undertaking at a given time. The
term “public body” should be limited to situations where such an enterprise is
“acting in an official capacity on behalf of the people as a whole; as a public
prosecutor.”49
The Panel agreed with the EC:
[A]n entity will constitute a "public body" if it is controlled by the government (or other
public bodies). If an entity is controlled by the government (or other public bodies),
then any action by that entity is attributable to the government, and should therefore fall
within the scope of Article 1.1(a)(1) of the SCM Agreement.50
The Panel rejected Korea’s argument that KEXIM acts both as a private and a
public body, on the basis that this would make question dependent on the
existence of benefit, which must be analysed separately. In the case at hand,
the Panel concluded that KEXIM was a public body on the basis of the fact that
it was 100 per cent owned by the GOK or other public bodies.
48 Panel Report, Korea- Vessels, WT/DS273/R, adopted April 11, 2005. 49 Ibid, para 7.37. 50 Ibid, para 7.50.
23
1.4.2 Criticism of Korea-Vessels
The control criterion potentially does disservice to commercial reality. In many
sectors, businesses established by the State compete against and behave in
almost every respect in the same way as private undertakings. A company may
be owned by the State, and therefore in principle subject to State control,
without being a de facto instrument of public policy. Indeed, as AG Jacobs
remarked in the EC State Aid context, “the day-to-day business decisions of a
publicly owned brewery taken without any interference by the public authorities
should be considered as falling outside the scope of the State aid rules.”51
The Panel’s reading can easily be defended on the basis that the term “public
body” must be read in the context of the SCM Agreement. If we were to use
particular control over individual decisions as the criterion to delimit “public” and
“private” conduct, we would blur the distinction set up by the SCM agreement,
by effectively requiring that “entrustment or direction” be shown for both
categories. Furthermore, the frontier between “public” and “private” is a flexible
one which varies widely across WTO members. In the absence of a body
equivalent to the EC Commission with a monopoly over the SCM Agreement, it
is to the investigating authorities in each State to make determinations as to
whether a given body is public or private. By adopting a “control” criterion, it
seems the Panel is laying the foundations of a “horizontal” conception of a
“public body”, free from the particularities of national law. This is a vital
development. Otherwise, WTO Members could unilaterally immunise
themselves from the subsidy disciplines.
There are tradeoffs, however. Firstly, the “control” criterion potentially casts the
net very wide indeed,52 and is in need of clarification. The panel made it clear
that government ownership was the preponderant consideration leading to their
51 Opinion of AG Jacobs on Case C-482/99 French Republic v. Commission, para 55. Emphasis in original. 52 It is worth noting that under public international law, the mere fact that the State has established a given company or owns the majority or even all of the shares in the company would be insufficient to attribute the conduct of this company to the State. E.g. the Workers’ Councils considered in Schering v. Iran, (1984) 5 Iran-U.S.C.T.R. 361.
24
finding of “control” over KEXIM. But KEXIM was an easy case, as it was 100%
government owned. Would the situation have been treated any differently if the
body was 80% government owned,53 or even 51% government-owned? To
take one example, in the context of the EC Merger Regulation, “control” over a
company has been found with shareholdings as low as 19% in situations where
the remainder of the shares are widely dispersed;54 where special rights are
attached to a shareholding; or where a shareholder is likely to get a majority of
votes at a shareholder’s meeting.55 This is not a fundamental critique, merely a
reminder that the concept of “control” is a flexible one that needs to be reined in
and clarified so that it makes sense in the SCM context. This is not necessarily
to say that the government must be the sole or even the majority owner. In
some cases, however, evidence of ownership might have to be complemented
by evidence of the hierarchical structure, management and policies of the
company, in order to make certain that State policy can at least potentially have
an incidence on individual investment decisions, as opposed merely to broader
decisions of overall strategy.56
One fascinating example is the case of the Russian gas giant, Gazprom.
Gazprom is nominally a private company, but the Russian Government owns
about 40 % of its shares. Given the structure of shareholdings in the company
this allows the Government to exercise a decisive influence over the business.
This dominion is further evidenced by the fact that Gazprom has never
questioned or attempted to challenge laws fixing domestic gas prices below
53 In EC-DRAMS, the panel held in the context of entrustment or direction, at para 7.127, that “we do not see much of a difference between 80 per cent shareholding and 100 per cent shareholding”. 54 Case IV/M.25 Arjomari/Wiggins Teape. 55 Case IV/M.343 Société Generale de Belgique / Générale de Banque. 56 It is interesting to note that this development has parallels in recent developments on the general law of state responsibility. In the Tadic case (The Prosecutor v Dusko Tadic, Case no. IT-94-1-A, Judgment of 15 July 1999), the ICTY rejected the traditionally stringent test for attributing the actions of private bodies to the State, and carved out a new rule, whereby the actions of “hierarchically structured” paramilitary groups which are “controlled” by the State could automatically be imputed to the State without the necessity of showing that the State exercised detailed command over the actions in question. VILLALPANDO, loc. cit., n23, argues that given the parallels between such groups and private corporations (which also will have a hierarchical structure) there may be a case for the transposition of this standard to the trade context. Arguably, this is what the Panel has done here, albeit by using the blunter instrument of labelling such state-controlled entities as “public bodies”.
25
cost. Thus, Ripinsky sensibly concludes that the “control” criterion would be met
for the purposes of Article 1.1(a)(i) SCM.57
Even with the above qualifications, however, one might still object that the fact
that the actions of “government controlled” entities are automatically imputed to
the state potentially places a wide range of institutions at a significant
disadvantage. At the benefit stage, the “private investor” test is applied,
whereby the transaction is tested against a benchmark derived from market
behaviour. One should be wary of such constructions, particularly when applied
by foreign investigating authorities. It is in those situations where the SCM
Agreement is likely to be invoked (corporate restructuring for example) that the
private investor test is most difficult to apply, because “it will generally be highly
unlikely there is a formulaic ‘market’ answer to the question of whether a private
investor would make the investment undertaken.” 58 There is the risk that
“government controlled” banks that happen to succeed in high-risk restructuring
projects without being micromanaged by the government will be deemed to be
engaging in subsidy conduct, simply by virtue of their efficiency.
Therefore, it might be argued that beyond the imputability question, it is
necessary to demonstrate that there is in fact a causal link between the
government’s control and the eventual benefit.59 Of course, such a “causal link”
could be seen as reintroducing the imputability question through the back door
at the benefit stage. Nevertheless, it seems intuitive that the questions of
imputability and benefit will be to some extent intertwined. A similar dynamic
emerged in EC State Aid jurisprudence, whereby the expansion of the notion of
“state control” made clear the case for a more rigorous imputability criterion.60
In Stardust Marine, the ECJ concluded:
57 RIPINSKY,loc. cit. n45. 58 PARISH, On the private investor principle, E.L. Rev. 2003, 28(1), 70-89. 59 See BOURGEOIS, EU Rules on State Aids and WTO Provisions on Subsidies Compared, European competition law annual 1999 : selected issues in the field of state aid st p 209(Hart, Oxford, 2001). 60 See MEROLA, Le critère de l’utilisation des resources publiques, in Aides d’Etat, Dony et Smits eds. Bruxelles, 2005.
26
[T]he mere effect that a public undertaking is under State control
is not sufficient for measures taken by that undertaking … to be
imputed to the State. It is also necessary to examine whether the
public authorities must be regarded as having been involved, in
one way or another in the adoption of those measures..61
That said, whether such an approach will be adopted in WTO law is doubtful.
Proving “imputability” in this sense would be as difficult as proving entrustment
or direction. Panels seem to be acutely aware of the difficulties inherent in
cross-border CVD investigations; 62 the Korea-Vessels development can be
seen as a means of lowering the bar on this count.
1.4.3 Conclusion
Investigating authorities now have a broad discretion to classify certain entities
as “public bodies” for the purposes of Article 1 SCM, which would certainly not
fulfil the equivalent criteria under general public international law. 63
Interestingly, in the DRAMS dispute, the DOC treated some of Hynix’s creditors
as “private bodies” despite the fact that the GOK held a 100 per cent ownership
interest. The Panel noted that the DOC might have been entitled to treat these
firms as “public bodies”, but having refused to do so the DOC was required to
establish entrustment or direction.64 In future, investigating authorities are much
less likely to make this mistake, and we can expect them to test the limits of the
control criterion in preference to showing “entrustment or direction”. If it is
upheld, which is likely, we can expect the AB to rein in the control criterion
61 C-482/99 France v Commission [2002] E.C.R. I-4397, para.52. 62 As the Panel noted in EC-DRAMS at para 7.109: “we are not blind to the problems of evidence gathering in countervail investigations, and do not want to be seen as requiring an investigating authority to come up with the smoking gun in the sense of a written order by the government to a private body to provide a financial contribution”. 63 The International Law Commission's Articles on State Responsibility provide for a two-step analysis: (1) An entity will be a public body if it "is empowered by the law of the State to exercise elements of the governmental authority". (2) The acts in question will be considered acts of state only if such entities are acting pursuant to such authority in the particular instance. 64 See US-DRAMS (Panel Report) footnote 29 to para. 7.8 and footnote 80 to para. 7.62).
27
along the lines outlined above. Furthermore, the broad nature of the “control”
criterion and the attendant risks should be compensated by a rigorous Panel
review of the application of the private investor principle by national authorities. 65
1.5 Synthesis
Synthesising the above analysis we can come to general conclusions as to the
nature of Article 1.1(a)(1)(iv). The provision is a residual clause, applying to
entities which are neither governments nor public bodies. It is an anti-
circumvention provision, designed to catch conduct performed by private
parties, but it maintains an outer limit on the definition of a subsidy by requiring
a strong threshold of State attributability in order to operate. Usually, this will
imply that the government has put significant pressure on private parties, by
way of threat or inducement, to ensure that its aims are carried out. Mere
Government regulation or other intervention, which has subsidy-like effects as a
by-product will not be caught, regardless of the intentions behind such
regulation. The provision is indifferent as to the type of evidence that can be
used to satisfy this strong threshold of state attributability, as long as
entrustment or direction is in fact demonstrated. The conduct performed by the
private party must be of the same type as that conduct that would constitute
subsidisation were it in fact carried out by the State, and the function must be
one which would normally be invested in the government in that it ostensibly
serves some public good and provokes non-commercially-motivated behaviour
on behalf of private operators.
65 However, as we will see below, Panels face an increasingly difficult task in meeting the standards of review set by the AB.
28
2 Practical questions: proving and disproving “entrustment or direction”
2.1 Choice of Methodology
Proving entrustment or direction is a difficult business. As the EC rightly points
out, the real issue in Article 1.1(a)(1)(iv) cases is an evidentiary one.66 The first
problem that an investigating authority will face in this context is the choice of
an appropriate methodology. We can isolate two approaches from the cases
that have reached the DSB so far. On the one hand, there is the “institution by
institution” and “bank by bank” analysis that Korea insisted on in the DRAMS
disputes. As we have seen, in the original panel reports, the EC’s transaction-
by-transaction analysis was treated much more favourably than the US “single
programme” approach. Obviously, one can construct a more watertight case if
each transaction can be unambiguously proven to be the result of entrustment
or direction, and this should be done where possible. Obviously, however, such
an approach may be highly impractical. It would be necessary to adduce
documentary evidence pertaining to each transaction, which in many cases will
be impossible.
On the other hand, there is the “program theory” advocated by the US whereby
it is possible to make a generalised finding of entrustment or direction, imputing
the actions of various private parties to the State, which is acting as a central
“puppet master”. Under this approach, investigating authorities have the
possibility of using circumstantial evidence to paint an overall picture of a
subsidy program. Much like a civil conspiracy, under this approach a multi-
stage, multi-actor subsidy programme “is not to be judged by dismembering it
and viewing its separate parts, but only by looking at it as a whole”.67 In US-
DRAMS, the AB summarises the approach of the US as follows:
66 EC-DRAMS para 7.32. 67 United States v. Patten, 226 U.S. 525, 544 (1913).
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The DOC drew three factual inferences from the evidence on the record before it: (i) the GOK maintained a policy of supporting Hynix's financial restructuring and thereby avoiding the firm's collapse; (ii) the GOK exercised the control or influence over Hynix's creditors necessary to implement this policy; and (iii) the GOK at times used this control/influence to "pressure" or coerce Hynix's creditors to continue supporting the financial restructuring of the firm. On the basis of these inferences, the DOC arrived at a conclusion of entrustment or direction covering virtually all of Hynix's creditors and their participation in any or all of the four financial transactions examined.68
The jurisprudence suggests that it is open to agencies to follow a “program
theory”, subject to the caveat that it is reasonable in the circumstances. While
this approach is arguably more practical from the point of view of investigating
authorities, it also carries the risk of significant errors. There is the danger that
contributions made by bodies not in fact entrusted or directed by the State will
be erroneously considered as part of the “conspiracy” and countervailed
nevertheless. For example, there is the risk of catching spillover effects– it may
be the case that a government entrusted-or-directed scheme reaches a critical
mass, such that a company is resuscitated, and certain operators are once
again willing to deal with it on favourable terms without being specifically asked
to by the government. Another issue is “conscious parallelism” 69 – the
government may take the lead in a restructuring plan for a company with both
public and private creditors, and be followed by private creditors. Catching such
conduct would be an error, as it amounts to private conduct whose only link
with the government is a mere causal nexus, falling far short of the strong
attributability requirement. Investigating authorities must be very careful in how
wide they cast their net, or risk having their determinations overturned on
review.
68 US-DRAMS Report of the AB, para 135. 69 In the pre-WTO Lead and Bismuth dispute, cited above, the Panel concluded that “conscious parallelism” in the context of a restructuring would not suffice in order to impute the actions of a private bank to the State.
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2.2 Indicators of entrustment or direction
The US Court of International Trade, in a review decision upholding the DOC’s
methodology in the DRAMS case, provides a colourfully-worded classification
of the types of evidence that might be used to prove “entrustment or
direction”. 70 Taking inspiration from this systematic categorisation, we will
explore the types of evidence that may be relevant in the Article 1.1(a)(1)(iv)
context.
2.2.1 Government motive and propensity to subsidise
The government’s motive to subsidise will relate to the concrete aspects of the
case at hand and will usually be easy to demonstrate. Hynix supported 150,000
jobs, and accounted for 20 per cent of the world semiconductor market and 4
per cent of Korean exports. The presence of government officials at creditors’
meetings71 and the motivation of regulatory decisions72 provided ample proof.
By showing a government’s “propensity” to subsidise we are in effect dealing
with the character of the government, and its tendency to subsidise given
companies or not. This could be established on the basis of its past conduct
and stated policies. Other relevant factors might include the political stripe of
the party in power, and its relationship with business.
2.2.2 Proclivity for influencing private parties
A government’s “proclivity” for influencing the actions of financial institutions
refers to its tendency to choose to act through financial institutions to achieve
its ends. One could imagine various reasons why a government might choose
70 The Court classified the evidence as falling under the following headings: “(1) The Korean government’s propensity to subsidize companies like Hynix; (2) the Korean government’s proclivity for influencing or coercing the actions of financial institutions to achieve its policy goals; (3) the Korean government’s opportunity or capacity to specifically influence or coerce the financial institutions involved in Hynix’s restructuring; and (4) direct commands by the Korean government to some of these institutions” Hynix v. US, Slip Op. 05-106 US CIT <http://www.cit.uscourts.gov/slip_op/Slip_op05/05-106.pdf>. (emphasis in original). 71 EC-DRAMS para 7.98. 72 Ibid para 7.83.
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to do so – notably it may have learned from bitter experience that subsidies
must be “hidden” in order to avoid the imposition of countervailing duties.
Budgetary constraints may necessitate recourse to private sector actors in
cases where the scale or nature of the project is such that the State would be
unable to undertake it alone. The economic, historical and political context may
be such that a culture of interventionism exists, perhaps due to the fact that the
banking sector has only recently been liberalised. A good example of such
evidence from the DRAMS dispute would be Kookmin bank’s 2002 SEC
prospectus in which they stated:
We expect that all loans made pursuant to government policies will be reviewed in
accordance with [Kookmin Bank's] credit review policies. However, we cannot
assure you that government policy will not influence [Kookmin Bank] to lend to
certain sectors or in a manner in which [Kookmin Bank] otherwise would not in the
absence of the government policy.73
Similarly, the fact that the KEB used to be a specialised government bank lead
the panel to draw the inference that it may have been subject to government
influence.74
2.2.3 Opportunity or capacity to influence private parties
This category refers to the diverse means that governments have at their
disposal to influence the decisionmaking of private bodies. This type of
evidence might include the government’s role as a lender, which may act as a
signalling mechanism to private banks. In DRAMS, the Korean Development
Bank, a public body, administered the debenture program. The DOC took this
as evidence of a signal to Korean private banks that this company was backed
by the GOK. Obviously, government ownership of banks and other economic
operators, in whole or in part, will give the government the capacity to influence
their decisionmaking. The government’s role as a legislator gives it the capacity
73 US-DRAMS (Panel) para 7.156. 74 EC-DRAMS para 7.134.
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to intervene in the banking sector. In a recovering “crisis” economy, a legislative
framework will be necessary in order to co-ordinate restructuring efforts;
however such a framework may promote certain restructuring initiatives, or
reinforce the capacity of the State to influence the restructuring of companies in
which it has a shareholding. The government’s role as a regulator will enable it
to exert pressure on banks (e.g. by threatening to revoke a licence, or to
subject a bank to a severe audit, if a bank refuses to participate in a given
transaction), and to facilitate certain transactions (e.g. by waiving statutory loan
ceilings,75 through selective enforcement of bankruptcy principles76 or through
disciplining credit-rating agencies).77 The government’s role as an important
economic actor in its own right means that it will be able to exert pressure
through threats to withdraw its custom should a bank refuse to follow a given
course of action. Similarly, promises of future business might induce a private
party to grant a loan to a start-up company.
2.2.4 Non-commercial behaviour by private parties
As the EC-DRAMS Panel held, “non-commercial behaviour may well be seen
as an indication of possible government entrustment or direction. It can thus be
taken into account as an element of evidence that the government was perhaps
entrusting or directing these private bodies to act in a certain way”.78 On the
other hand, as Parish points out:
[D]ifferent investors may allow themselves to be motivated by a
variety of different factors which are not strictly financial. … A
strong case can be made that private investors have regard to
“social, regional-policy and sector considerations” … as much as
public investors.79
75 Ibid para 7.100. 76 Ibid para 7.105. 77 Ibid para 7.135. 78 EC-DRAMS (Report of the Panel) at para 7.59. 79 PARISH, loc cit., n 25.
33
Thus, the Panel sensibly concluded that banks “may well take into account the
broader picture rather than pursuing a pure strategy of profit maximization”.80
Caution is required: It will often be in the strategic interest of a bank to ensure
that a particular creditor remains operational. Mavericks may engage in high-
risk venture capital, which may appear not to be motivated by normal
commercial considerations. On the other hand, entrustment or direction might
properly be inferred from internal ratings describing a given company as being
unsuitable for investment,81 or the fact that the investment was automatically
written off as a loss.82
If there is an alternative commercial rationale for a government entrusted-or-
directed scheme, investigating authorities ought to investigate it and refute it in
full. In August 2005, the US Court of international trade remanded the DOC’s
finding of entrustment or direction of Hynix’s creditors in light of its failure to
explore the possibility that the scheme was in fact orchestrated by Citibank, a
foreign-owned Hynix creditor, and made contingent upon commercial
benchmarks.83
2.2.5 Non-cooperation with investigating authorities
Another factor that will be taken into account is the non-cooperation of
interested parties with investigating authorities. As the EC-DRAMS Panel
noted, “If we were to refuse an authority to take such cases of non-cooperation
from interested parties into account when assessing and evaluating the facts
before it, we would effectively render Article 12.7 of the SCM Agreement
meaningless and inutile.”84
80 EC-DRAMS at para 7.121.Here the panel was discussing a 100% government-owned bank that was classified as “private”, but the observation appears to be a general one. 81 Ibid at 7.130. 82 Ibid at 7.113. 83 See note 70, supra. After redetermination, the original decision was upheld. See Hynix v. US (II) Slip op 06-39 <http://www.cit.uscourts.gov/slip_op/Slip_op06/06-39.pdf>. 84 EC-DRAMS at para 7.61.
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2.2.6 Weighing up the factors
As the Panel held in EC-DRAMS, “in most cases, the authority will have to base
its decision on a number of arguments and pieces of evidence which perhaps
when considered in combination may all point in the direction of government
entrustment or direction”.85 The “bottom line”86 of the available case law is that
the existence of entrustment or direction will turn on how active the government
was in giving the responsibility to or exercising its authority over a private body.
It is incumbent on investigating authorities to take the available (usually
circumstantial) evidence and paint as convincing a picture as possible. The
permutations are endless: a government may provide finance itself, issue
communications urging creditors to reschedule debt, mobilize institutions in
which it has a shareholding, waive statutory loan limits for certain transactions,
threaten banks with sanctions, etc. such that to all outward appearances it
seems that the government is orchestrating a subsidy scheme and forcing
private parties to go along with it. The Rubicon is crossed once the government
starts to force private parties into “doing its dirty work” and the strong threshold
of government attributability is satisfied.
2.3 Review of agency determinations
One of the fundamental points raised by the DRAMS appeal was the standard
of review to be applied by Panels dealing with CVD determinations. In the SCM
context, as “second tier” reviewers of an agency decisions, Panels must
“thoroughly examine” the adequacy of an agency’s reasoning but refrain from
engaging in a “de novo” review of the evidence.87 This is a fine distinction, as
the case well illustrates.
The AB found that the US-DRAMS panel erred in three respects, which led to
the overall conclusion that the panel had failed to apply the proper standard of
review. Firstly, the Appellate Body determined that the Panel had incorrectly
85 Ibid at 7.109. 86 VANDER SCHEUREN, MIZULIN, loc. cit. n38. 87 US-DRAMS (AB) para 187.
35
examined individual pieces of evidence selectively and, in effect, required that
entrustment or direction be established from particular pieces of evidence.
Thus, unlike the methodology originally applied by the DOC, the panel failed to
assess the evidence “in its totality” by considering inferences that might
reasonably have been drawn from the whole of the body of evidence, in effect
requiring a “smoking gun” in each case. Secondly, the panel wrongfully refused
to admit certain evidence submitted by the US that was contained in the DOC
record but which was not cited in the original DOC decision. The panel
considered that the reliance on such evidence in WTO proceedings constituted
an “ex post rationalization” by the US. The AB rejected this finding and
concluded that an agency does not need to discuss every piece of supporting
record evidence for each fact in the final determination. Finally, the AB
disagreed with the panel's conclusion that DOC ought have been aware of a
fact that was not reasonably based on the agency record. The AB concluded
that taken together, these errors led the Panel to concuct a de novo review of
the facts, beyond its role as a reviewer of agency decisions.
On the panel’s failure to review the totality of the evidence, it is interesting to
note that in EC-DRAMS, the EC argued that “evidence with regard to all of the
five programmes can be placed in a pot labelled ‘the totality of the evidence’
and then be drawn upon in justifying a conclusion as to financial contribution
and benefit with respect to each different programme.” The Panel accepted that
this approach could perhaps have been followed, “had the investigating
authority itself treated the five programmes as one big Hynix bail-out exercise
… [b]ut it did not do so.”88 Some commentators89 suggest that the EC might
have wished to appeal this point in light of the AB’s ruling on US-DRAMS
appeal. However, the AB decision was founded on the fact that such a
methodology was employed by the original decisionmaker. States will have to
defend their investigating authorities’ decisions in light of the methods actually
employed.
88 Para 7.63. 89 Worldtradelaw Dispute Settlement Commentary for EC-DRAMS (Panel), available at <http://www.worldtradelaw.net> (Viewed 20th April 2006).
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The DRAMS report sets down a benchmark for the standard of review in CVD
cases. As Becroft argues, panels “must increasingly tread a 'fine line' of having
to thoroughly review a domestic agency decision, but without substituting the
reasoning and factual conclusions of agencies”.90 This is a delicate balance,
which may “chill” panels from subjecting agency determinations to a more
rigorous review in future, particularly in Article 1.1(a)(1)(iv) cases, which will rely
on sophisticated webs of circumstantial evidence.
90 BECROFT, The Standard of Review Strikes Back, The Korea-US DRAMS Appeal, 9 J. Int'l Econ. L. 207.
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3 Unresolved issues and possible future developments
3.1 Clarifying the criteria: interesting fact scenarios
By its very nature, Article 1.1(a)(1)(iv) is a malleable provision susceptible of
application in any number of contexts. Recent discussion has queried whether
it might apply to a wide variety of situations, such as the system of dual gas
pricing in Russia, 91 environmental regulation in Germany, 92 and the
participation of private banks in China’s currency regime.93 We will attempt to
further clarify the interpretation of Article 1.1(a)(1)(iv) with reference to two
interesting fact scenarios which have arisen under EC State aid law.
3.1.1 PreussenElektra
In PreussenElektra,94 the ECJ dealt with the question of whether a German law
obliging regional electricity distributors to purchase certain quantities of
renewable energy at above-market prices constituted State aid. Unlike in WTO
law, for a measure to constitute State Aid under Article 87, there must be a
transfer of public resources. In a preliminary ruling, the ECJ decided that the
law did not constitute State aid because there was no such transfer, merely a
channelling of private resources through State intervention. But would the facts
of PreussenElektra fulfil the Article 1.1(a)(1)(iv) criteria? Slotboom asserts that
they would:
[T]he German government directed producers of conventional electricity to give
preferential treatment to procedures of electricity from renewable energy sources
(a). These producers of conventional electricity were private organs (b). The
purchase of electricity higher than the real economic value is a function mentioned
in Article 1.1(a)(1)(iii), i.e., the purchase of goods (c). The practice of buying
electricity from renewable energy sources higher than the real economic value in
91 RIPINSKY, op. cit., n 42. 92 Ibid. 93 See supra, note 46. 94 C-379/98, PreussenElektra AG v. Schleswag [1993] ECR I-887.
38
order to stimulate the use of renewable sources of energy is undeniably a function
which would normally be vested in the government, and it does not differ from
practices normally followed by government (d–e).95
Howse refutes Slotboom’s contention, arguing that the minimum purchase
requirement represents a “regulation” of the electricity market rather than the
entrustment of a governmental function to a private party.96 Thus, applying the
Export Restraints doctrine, this situation would fall outside the ambit of the SCM
Agreement.
Obviously this case brings up difficult issues of classification. Even if a measure
takes the form of “regulation”, this does not automatically mean that the Export
Restraints doctrine will apply. As the AB noted, “the particular label used to
describe the governmental action is not necessarily dispositive”. 97 If a
legislative measure results in “entrustment or direction” to a private party, it may
nevertheless be caught by Article 1.1(a)(1)(iv). The PreussenElektra situation
can easily be distinguished from an export restraint – in the latter case there is
a degree of separation between the government regulation and the eventual
“subsidisation”. In PreussenElektra the regulation imposes a direct positive
obligation on operators to buy goods which they would not purchase otherwise.
This effect is automatic and not contingent on the exercise of free choice by
market operators. The fact that this comes about via legislation rather than an
individual governmental command is hardly relevant.
If we accept that there is entrustment or direction, we are still left with the issue
of the remaining parts of Article 1.1(a)(1)(iv). In particular, would the practice of
buying electricity at above-market rates in order to stimulate the use of
renewable sources normally be vested in the government? Clearly, such a
policy is not a universal practice among WTO members. As we have seen, the
95 SLOTBOOM, “Subsidies in WTO Law and EC Law, Broad and Narrow Definitions” JWT 36(3) 517-542. 96 HOWSE, Trade Law and Renewable Energy: The Case of Non-Tariff Measures, <http://r0.unctad.org/trade_env/test1/meetings/dynamicsectors/Robert_House_study_3_February_av.pdf >(viewed 19th April 2006). 97 US-DRAMS (AB) para 116.
39
import of this element of Article 1.1(a)(1)(iv) is a matter of interpretation that
remains to be resolved. However, it is submitted that this requirement would be
satisfied by PreussenElektra. The regulation provokes non-commercial
behaviour on the behalf of private bodies in order to pursue the public good of
environmental protection. This is exactly the type of behaviour covered by
Article 1.1(a)(1)(iv)
3.1.2 Pearle BV
The Pearle98 case arose from proceedings in the Netherlands. Under Dutch
law, trade associations are entrusted with responsibility for the organisation and
development of their sector of activity. They may adopt bye-laws imposing
levies on their members in the interest of the activity of the undertakings in the
economic sector involved. At the request of a group of opticians, the relevant
trade association (HBA) imposed on its members a “compulsory earmarked
levy” which was intended to finance a collective advertising campaign for the
benefit of undertakings in the sector. Pearle sought the annulment of the
regulations, claiming they constituted state aid within the meaning of Art.87(1)
EC.
The ECJ first classified the HBA as a public body, but nevertheless concluded
that the advertising campaign in question was not funded by resources made
available to the national authorities. Furthermore, the initiative for the
organisation and operation of that advertising campaign was that of the private
opticians and not that of HBA - HBA served merely as a vehicle for the levying
and allocating of resources collected for a purely commercial purpose and had
nothing to do with a policy determined by the Netherlands authorities. Therefore
its activities were not imputable to the State.
The Pearle case raises interesting issues. Would such a levy be
countervailable under WTO law? The judgment was premised on the
classification of the HBA as a “public body”, but this was not free of
98 Pearle BV and Others v Hoofdbedrijfschap (Case C-345/02). Judgment of July 15, 2004.
40
controversy. The HBA was a multi-sector association responsible for organising
and developing the activities of its members. In the interests of efficiency, it was
allowed to enjoy some privileges such as compulsory membership and legally
binding decisions. While the body had public law status, it was governed
exclusively by representatives of its members. Furthermore, it was not shown
conclusively that the State was able to intervene in its affairs in any way. Thus,
the Advocate General concluded that the HBA was not a public body. It had at
most a “hybrid nature” and it “did not act qua State, but as the promoter of its
members’ interests.”99 How would such a body be classified under the SCM
Agreement? A Panel has yet to rule on the public or private nature of any such
trade association. Given that the governing body of the HBA consisted solely of
representatives of the industry, it seems unlikely that the criterion of “control”
set forth in Korea-Vessels would be satisfied.
Assuming for a moment that the HBA was a “private body”, would the standard
of “entrustment or direction” be met? In the Pearle-type scenario we are dealing
with a levy which finds its initiative in the private interests of commercial
operators. Nevertheless, the levy is dependent on the government for its
enforcement. On the one hand it seems that government regulation has in fact
“entrusted” the HBA with the functions of taxation and subsidisation just like the
hypothesis explored in the 1960 report. On the other hand, it was not instructed
to behave in any particular way. Thus, it does not seem that the “strong
attributability” requirement has been met. As the AB noted in US-DRAMS,
entrustment or direction will normally imply an element of threat or inducement.
Assuming that somehow there is “entrustment or direction”, then we must ask
whether “the practice, in no real sense, differs from that normally followed by
governments.” As we have seen, this will depend on the interpretation given to
this notion by subsequent panels. If we accept Reich’s conclusion that this
99 Case C-345/02 Pearle and Others, opinion of AG Colomer delivered on 11 March 2004. Para 69 Similarly, the ILC argues that attributability should be determined “not just the content of the powers, but the way they are conferred … the purposes for which they are exercised, and the extent to which the entity is accountable to government for their exercise” Commentary to Draft Article 5, para 6 (cited at n25, supra).
41
language refers to the objective pursued by the measure, then we can conclude
that the measure at issue is not attributable to the State, as here we are dealing
with a private, commercial initiative. However, if like the original panel we take
this language to refer to the means in which it is carried out (delegation to a
private party of the functions of taxation and subsidisation) then the actions of
the HBA will simply be classified as a subsidy.
3.2 The Doha Proposals
The issue of State attributability in the context of subsidisation has received
attention in the context of the Doha Round of Trade negotiations. Perhaps
unsurprisingly, both the US and the EC have tabled proposals calling for the
clarification and expansion of Article 1.1(a)(1)(iv).
3.2.1 The EC Proposal
The EC proposal100 argues that “the terms of the current Agreement … make it
extremely difficult to act against entities which may be providing the “subsidy”
under the covert direction of governments.”101. Thus, the EC argues that Article
1 ASCM should be clarified so that entities which are effectively controlled by
the state and acting on non-commercial terms are covered by this provision.
The EC argues in the alternative that the rules should explicitly cover situations
where “public direction is less apparent but nevertheless led to non-commercial
behaviour in terms of the financial operation in question.”102 Finally the EC
observes that while “not all state-owned entities or enterprises should be
considered part of the government” there should be a workable mechanism to
prevent the circumvention of subsidy disciplines, taking into account the WTO
jurisprudence.
100 Proposal by the European Communities, TN/RL/W/30, 21 November 2002, p. 1. 101 Ibid at page 3. 102 Ibid.
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3.2.2 The US Proposal
Like the EC, the US103 argues for clarification of the term “public body” as it is
used in the SCM Agreement. It further argues that Article 1.1(a)(1)(iv) needs to
be examined and the rules should be clarified to deal with cases where
government action influences the course of events but may not be clear or
explicitly documented. The paper suggests that one way of determining
whether there has been inappropriate government intervention would be to
further develop the specific terms of Article 14(b) SCM, regarding the provision
of government loans. Such clarification could include “certain
notification/transparency requirements in those instances in which a
government, government-owned or -controlled entity, or “public body”, becomes
involved in assisting a financially troubled company.”104
Other proposals go even further. A 2005 report presented to the US-China
Economic and Security Review Commission 105 suggested that the reforms
called for by the US proposal are insufficient. In particular, the report calls for
the amendment of Article 1.1(a)(1) SCM to “clarify” that an export restraint can
be a financial contribution (effectively overruling US-Export Restraints).
Interestingly, the report calls for an amendment to the effect that “the
government is presumed to direct private parties it owns in whole or in part.”106
This final amendment would further blur the already unclear distinction between
“public” and “private” bodies for the purposes of Article 1 SCM. The language
used is extremely broad. It would surely be excessive to presume that the
government directs a business in which it has a 10% shareholding.
103 Subsidies disciplines requiring Clarification and improvement, Communication from the United States WTO Doc TN/RL/W/78, 19 March 2003. 104 Ibid. 105 See the report to the US-China Economic and Security Review Commission (May 16. 2005) available at <http://www.uscc.gov/researchpapers/2005/05_05_16Trade_Importance.pdf> (Viewed 8 April 2006). 106 Ibid.
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3.2.3 Evaluation
There has been a “distinct polarization”107 of positions between developed and
developing countries on subsidies in general during the Doha Round. The EC
and the US are pushing for a broader “private parties” provision to the detriment
of emergent economies. However, the DSB may have foreclosed the
intergovernmental debate on Article 1.1(a)(1)(iv) through legal interpretation.
The two papers were lodged in 2002 and 2003 respectively. Since then, the
relaxation of the Export Restraints language to some extent alleviates the
burden of proof issue, and following Korea-Vessels, entities which are
“effectively controlled by the state and acting on non-commercial terms” will be
caught under the expansive notion of a “public body”. The jurisprudence
potentially goes even further than what the EC requested on the latter point.
The more troubling element of the EC proposal is the notion that privately-
granted “subsidies” could fall within the SCM Agreement, even in the absence
of clearly demonstrated government direction, simply because non-commercial
behaviour has occurred. The subsidies disciplines are designed only to catch
the conduct of States. This amendment would directly undermine the strong
attributability requirement and introduce the risk that restructuring initiatives
would be hobbled: any state activity would introduce the risk of countervailing
duties being imposed on exporting industries. The introduction of a notification
requirement may indeed be a sensible move. Aside from preventing the
circumvention of the SCM disciplines, and facilitating information retrieval, such
a mechanism could allow for legal certainty for financial institutions and their
debtors in a DRAMS-type scenario.
107 STEGER, The WTO Doha Round Negotiations on Subsidies and Countervailing Measures: Issues for Negotiators, <http://www.iibel.adelaide.edu.au/docs/StegerSubsidiesSpeechKITA.pdf> (visited 16 April 2006).
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4 Conclusions
4.1 Implications for governments and financial institutions
One clear implication of the DRAMS disputes is that members must be very
careful in their approach to industrial restructuring. After the initial imposition of
CVDs on Hynix DRAMS, the CEO of Hynix claimed in a press statement that
“the only possible explanation is that the DOC has decided to use this case to
pressure the Korean government on the question of economic restructuring”.108
Hyperbole aside, the DRAMS dispute has serious political implications.
As a recent World Bank report underlines, industry restructuring can take the
form of either a centralised or a decentralised approach. Under a decentralised
or “creditor-led” approach, the initiative is expected to come from the private
sector itself. Banks and creditors are “expected to work out the problems of
over-indebted corporations on a case-by-case basis”,109 while the role of the
State is limited to background legal reform and support for the banking system.
On the other hand, there is the possibility of a centralised approach, whereby
the government can directly intervene in the process, propose solutions and
provide direct financial assistance.
Governments have a fine line to toe. In most crisis-afflicted countries “it was …
recognised that a completely decentralised approach would not suffice given
the large scale of corporate sector distress and coordination problems among
creditors.”110 Thus, in order to prevent mass bankruptcies, a large direct role for
the government was deemed “both necessary and unavoidable.”111 Without
entering into the complexities of industrial restructuring policy, it is evident that
the introduction of centralised elements to the mix carries with it the added
108 EEtimes report, <http://www.eetimes.com/news/semi/showArticle.jhtml;jsessionid=VSVHYK42EPN1YQSNDBGCKHSCJUMEKJVN?articleID=10802125>, viewed 28 April 2006. 109 CLAESSENS, Policy Approaches to Corporate Restructuring Around the World: What Worked, What Failed? <http://info.worldbank.org/etools/library/latestversion.asp?83868> (Viewed 11 April 2006) at 4. 110 Ibid at 9. 111 Ibid.
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danger that certain actions may be caught by the SCM Agreement. In trying to
promote restructuring, governments may incentivise loans and debt
restructuring packages that commercial banks would not contemplate
otherwise. 112 Legal structures may enhance the State’s influence over
creditors: the fact that the October 2001 Hynix restructuring took place in the
framework of a formal government act (The CRPA) was crucial in the Panel’s
determination in EC-DRAMS.
Similarly, in order to entice risk capital, governments might promise future
business to start-up companies. Such promises, or even the evidence of
subsequent business, could be circumstantial evidence of a government
‘direction’ which could run afoul of Article 1.1(a)(1)(iv).
The biggest potential losers are perhaps the financial institutions themselves.
Post-DRAMS, banks may find themselves between a rock and a hard place.
Responding to government policies to provide restructuring finance may lead to
their contribution being countervailed, compromising the viability of the loan. On
the other hand, if they refuse to grant such finance they will be subject to
government sanctions. The recent jurisprudence has exposed the need for
reform in this area. The imposition of notification and transparency obligations
as proposed by the US might be an appropriate response. In the mean time,
financial institutions providing finance to exporting industries would be well
advised to retain a trade lawyer.
4.2 Overall evaluation of the jurisprudence
Certain authors critically draw attention to what they call a “new philosophy”113
at the DSB. In the past, the Appellate Body underlined that subsidies are not in
principle contrary to WTO Law. For example in Canada-Aircraft the AB
112 Ibid. 113 VANDER SCHUEREN, MIZULIN, loc. cit. n38, supra.
46
emphasised the fact that Member States retain, in principle, the right to
subsidise.114 However, in US-DRAMS and Korea-Vessels the DSB has shifted
its emphasis and has tended to favour the rights of national authorities seeking
to employ countervailing measures, arguably tipping the balance of rights
emerging from the Uruguay Round in their favour. A more balanced
interpretation of the AB report, however, would be to characterise it as a
correction of a legalistic interpretation inspired by a very particular factual
scenario. The strong attributability requirement lives on in the US-DRAMS
jurisprudence. Clarification on this point may be just around the corner. In early
2006, Japan imposed a countervailing duty of 27.2 percent on Hynix DRAMS
and Korea has commenced WTO proceedings.115
By way of conclusion, it suffices to say that the interpretation of Article
1.1(a)(1)(iv) is not a closed book. As we have seen, various elements of the
text have yet to be interpreted by Panels, and the implications of the existing
jurisprudence are far from clear. The interventions of China and Taiwan in US-
DRAMS, in which they advocated a restrictive interpretation of “entrusts or
directs” are perhaps telling. “The universe of subsidies is vast,”116 and this
issue will surely arise time and again as countries with a symbiotic relationship
between the public and the private sector engage in the progressive
liberalisation of their economies.
114 AB Report, Canada -Aircraft, WT/DS70/AB/RWat para 47. 115Japan DRAMS - Request for Consultations by Korea, WT/DS336/1, 20 March 2006. 116 AB Report, Canada--Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/RW, adopted August 4, 2000, DSR 2000:IX, 4299, at para.47.
47
Bibliography Articles ALTER, K.J., “Resolving or exacerbating Disputes? The WTO’s New Dispute
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49
Annex 1: Extract from MTN.GNG/NG10/W/4, "Subsidies and Countervailing Measures – Note by the Secretariat", 28 April 1987, Section 4.1.A.
It is suggested that there can be no subsidy in the absence of a financial
contribution by government, or in other words that a subsidy presupposes such
a contribution. Such an approach would seem to be useful to the extent that it
underlines that there is a necessary link between a subsidy and the taxation
function of government, exercised either directly or delegated to other, private
bodies as suggested by a panel report based on a review of Article XVI, set out
in BISD 9th Supplement. Paragraph 12 of the report examines the issue of
subsidies by a non-government levy. While the panel felt that no hard and fast
rule could be set down in view of the many forms action of this kind could take,
it nonetheless clearly stated that 'there was no doubt that there was an
obligation to notify all schemes of levy/subsidy affecting imports or exports in
which the government took a part either by making payments into a common
fund or by entrusting to a private body the functions of taxation and
subsidisation with the result that the practice would be in no real sense different
from those normally followed by governments'. There may be similar situations
in which a government chooses to direct a private body to carry out certain
functions related to the sovereign right of governments to collect revenues and
expend them. An examination of the possible subsidy practices enumerated in
Article 11.3 of the Code further illustrates the various forms government
financial contributions can take. There are practices which involve a direct
transfer of funds (e. g., grants and loans); those involving potential direct
transfers, or liabilities (e.g., loan guarantees); and those involving revenue
foregone or not collected (fiscal incentives such as investment tax credits to
specified industries). Such practices would seem to be simply specific
examples of the general principle suggested by the Panel report in BISD, 9th
Supplement, that subsidies exist where the government exercises its authority
to impose tax and expend revenue, whether directly or through delegation of its
taxing and [sic] authority.”