WORLD TRADE
ORGANIZATIONWT/DS126/R
25 May 1999
(99-1888)
Original:  English
AUSTRALIA – SUBSIDIES PROVIDED TO
PRODUCERS AND EXPORTERS OF AUTOMOTIVE
LEATHER
REPORT OF THE PANEL
The report of the Panel on Australia – Subsidies Provided to Producers and Exporters of Automotive
Leather is being circulated to all Members, pursuant to the DSU.  The report is being circulated as an
unrestricted document from 25 May 1999 pursuant to the Procedures for the Circulation and
Derestriction of WTO Documents (W T/L/160/Rev.1).  Members are reminded that in accordance with
the DSU only parties to the dispute may appeal a panel report.  An appeal shall be limited to issues of
law covered in the Panel report and legal interpretations developed by the Panel.  There shall be no
ex parte  communications with the Panel or Appellate Body concerning matters under consideration by
the Panel or Appellate Body.
Note by the Secretariat:  This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within 30 days after the
date of its circulation unless a party to the dispute decides to appeal or the DSB decides by consensus not to adopt the report .
If the Panel Report is appealed to the Appellate Body, it sha ll not be considered for adoption by the DSB until after the
completion of the appeal.  Information on the current status of the Panel Report is available from the WTO Secretariat.WT/DS126/R
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TABLE OF CONTENTS
I. INTRODUCTION................................................................................................................. .......................1
II. FACTUAL ASPECTS ............................................................................................................. ....................1
III. PREVIOUS WTO DISPUTE SETTLEMENT PROCEDURES BETWEEN THE PARTIES
WITH RESPECT TO THE SAME  OR RELATE D MATTER S .....................................................................3
IV. PROCEDURES ADOPTED BY THE PAN EL GOVERNING "BUSINESS CONFIDENTIAL
INFORMATION" ................................................................................................................... .............................3
V. FINDINGS AND RECOMMENDATIONS RE QUESTED BY THE PARTIES ...................................4
VI. PRELIMINARY ISSUES AND REQUES TS FOR PRELIMINARY RULINGS .............................5
A. REQUEST FOR DOCUMENTS BY THE UNITED STATES ...................................................................................5
B. E STABLISHMENT OF THE PANEL ..................................................................................................................9
C. "D ISCLOSURE " OBLIGATIONS UNDER ARTICLE 4 OF THE SCM A GREEMENT ...........................................16
D. A DMISSIBILITY OF EVIDENCE ...................................................................................................................21
VII. MAIN ARGUMENTS OF THE PARTIES.........................................................................................24
A. MEASURES ............................................................................................................................... .................24
B. N ATURE OF THE EVIDENCE PRESENTED ....................................................................................................29
C. A RTICLE 1 OF THE SCM A GREEMENT ......................................................................................................32
1. "financial contribution" ..................................................................................................... .................32
2. "benefit" .................................................................................................................... ..........................33
3. calculation and alloca tion of the "benefit" .................................................................................. .......36
D. A RTICLE 3.1( A) OF THE SCM AGREEMENT ................................................................................................41
1. Text of Article 3.1(a) ....................................................................................................... ....................41
2. Principles of treaty interpretation.......................................................................................... .............41
3. Interpretation of the phrase "contingent in law or in fact upon export performance"........................42
(a) application of the customary rules of in terpretation of public international law............................................ ..42
(b) operational considerations .................................................................................................. .............................57
4. Application of Article 3.1(a) of th e SCM Agreement in this dispute ...................................................60
(a) "contingent, in law … upon export performance" .............................................................................. .............60
(b) "contingent … in fact … upon export performance" ............................................................................ ...........60
(i) General..................................................................................................................... ...................................60
(ii) Prior measures and the designing of alternative assistance to Howe ......................................................... .62
(iii) Intent.................................................................................................................... .......................................75
(iv) Conditions of the assistance an d the size of the domestic market........................................................... ....78
Factors including level of exports............................................................................................. .......................78
Factors other than level of exports............................................................................................ .......................91
E. REMEDY ............................................................................................................................... ....................93
F. T IME PERIOD FOR IMPLEMENTATION ........................................................................................................93
VIII. INTERI M REVI EW............................................................................................................ ..................94
IX. FINDINGS .................................................................................................................... .........................94
A. PRELIMINARY ISSUES AND REQUESTS FOR PRELIMINARY RULINGS ...........................................................96
1. Australia's request for termination based on the existence of multiple panels regarding the same
matter......................................................................................................................... ..................................96
2. Compliance with Article 4.2 of the SCM Agreement...........................................................................983. Limitation on evidence and arguments ......................................................................................... ......99
4. Information acquired in the context of consultations held pursuant to the first request (WT/DS106/1)and Exhibit 2 to the United States first submission............................................................................ ........101
B.
ARE THE MEASURES BEFORE THE PANEL EXPORT SUBSIDIES WITHIN THE MEANING OF ARTICLE  3.1( A) OF
THE SCM A GREEMENT ? .............................................................................................................................. ...102WT/DS126/R
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1. What are the measures before the Panel?...................................................................................... ...102
2. Are the measures before the panel "subsidies" within the meaning of Article 1 of the SCMAgreement? ..................................................................................................................... ...........................103
3. Are the subsidies in question "contingent, in law or in fact" on export performance, within themeaning of Article 3.1(a) of the SCM Agreement? ................................................................................ ....104
(a) contingent in law ........................................................................................................... ................................104
(b) contingent in fact .......................................................................................................... .................................105
(c) analysis of the facts....................................................................................................... .................................107
(i) the payments under the grant contract ....................................................................................... ...............108
(ii) the loan contract.......................................................................................................... ..............................111
X. CONCLUSIONS AND RECOMMENDATION ...................................................................................112WT/DS126/R
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I. INTRODUCTION
1.1 On 4 May 1998, the United States requested consultations with Australia under Articles 1 and
4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU") and
Articles  4.1 and 30 (to the extent that it incorporates by reference Article XXIII:1 of the General
Agreement on Tariffs and Trade 1994) of the Agreement on Subsidies and Countervailing Measures
(the "SCM Agreement") regarding allegedly prohibited subsidies provided to an Australian producerand exporter of automotive leather, Howe and Company Proprietary Ltd. ("Howe"), or any of its
affiliated and/or parent companies (WT/DS126/1).
1.2 The United States and Australia met on 4 June 1998.
1
1.3 On 11 June 1998, pursuant to Article 4.4 of the SCM Agreement and Article 1.2 of the DSU,
the United States requested the immediate establishment of a panel to examine the consistency of the
subsidies provided to Howe with Australia's obligations under the Marrakesh Agreement Establishing
the World Trade Organization (the "WTO Agreement"), in particular those contained in the SCMAgreement (WT/DS126/2).
1.4 At the meeting of the Dispute Settlement Body ("DSB") on 22 June 1998, the DSB
established a panel in accordance with Article 4.4 of the SCM Agreement and Article 6 of the DSU
with standard terms of reference.  The terms of reference were:
To examine, in the light of the relevant provisions of the covered
agreements cited by the United States in document WT/DS126/2, the
matter referred to the DSB by the United States in that document and
to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those
agreements. (WT/DS126/4)
1.5 On 27 October 1998, the United States requested the Director-General to determine the
composition of the Panel, pursuant to paragraph 7 of Article 8 of the DSU.  On 2 November 1998, the
Director-General composed the Panel as follows:
Chairperson: H. E. Carmen Luz Guarda
Members: Mr. Jean-François Bellis
Mr. Wieslaw Karsz
1.6 The Panel met with the parties on 9-10 December 1998 and 13-14 January 1999.
1.7 The Panel submitted its interim report to the parties on 8 March 1999.  On 15 March 1999,
Australia and the United States submitted written requests for the Panel to review precise aspects of
the interim report.  The Panel submitted its final report to the parties on 23 March 1999.
II. FACTUAL ASPECTS
2.1 This dispute concerns certain assistance provided by the government of Australia to Howe, a
wholly-owned subsidiary of Australian Leather U pholstery Pty. Ltd., which is owned by Australian
Leather Holdings, Limited ("ALH"), part of which is owned by Schaffer Corporation, Ltd.  Howe is
the only dedicated producer and exporter of automotive leather in Australia.  Automotive leather is
                                                     
1 Australia does not consider that this meeting constituted "consultations" under the DSU.
See WT/DS126/3, 19 June 1998.WT/DS126/R
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primarily used for seat coverings and other interior components of automobiles, such as head and
armrests, centre consoles and door trim.
2.2 On 9 March 1997, the Australian government signed two contracts with ALH and Howe:  a
grant contract (the "grant contract") and a loan cont ract (the "loan contract") providing for funding for
an assistance package.  The Australian Department of State of Industry, Science and Resources2 is the
governmental authority responsible for administering the contracts and disbursing the paymentsthereunder.
2.3 The grant contract provides for a series of three grant payments totalling up to a maximum of
A$30 million.  The aggregate of payments under the grant contract was capped at A$30 million to
limit the overall level of ad valorem  subsidization of sales over the period to mid-2000 to
approximately 5 percent.
3  The payments were scheduled to occur in three instalments:  the first
payment of A$5 million was to paid upon conclusion  of the grant contract;  the second payment of up
to A$12.5 million was to be paid in July 1997 on the basis of Howe's performance against theperformance targets set out in the grant contract for the period 1 April 1997 to 30 June 1997, as well
as due diligence considerations such as whether the company was functioning properly;  the third
payment of up to A$12.5 million was to be paid in July 1998 on the basis of Howe's performance
against the performance targets set out in the grant contract for the period 1 July 1997 to 30 June
1998, as well as due diligence considerations such as whether the company was functioning properly.The performance targets consisted of sales targets and capital expenditure targets for certain specified
periods:  1 April – 30 June 1997; 1 July 1997 - 30 June 1998; 1 July 1998 – 30 June 1999; and 1 July
1999 – 30 June 2000.  Under the grant contract, Howe was required to use its best endeavours to
achieve the performance targets.  With regard to capital expenditure under the grant contract, the
aggregate target for approved capital expenditure was $22.8 million  over the four-year period in
question.
4   The maximum amount of A$30 million was essentially paid out in the three grant
payments, in accordance with the grant contract.5
2.4 The loan contract provides for a fifteen-year loan of $A25 million by the government of
Australia to ALH/Howe.  For the first five-year period of this loan, ALH/Howe is not required to pay
principal or interest.  After the expiration of this five-year period, interest on the loan is to be based onthe rate for Australian Commonwealth Bonds with a ten-year maturity, plus two percentage points.
The loan is secured by a second lien  over the assets and undertakings of ALH.
2.5 These arrangements were put in place by the Australian government in compensation
6 for the
excision, as of 1 April 1997, of automotive leather from the Australian Textiles, Clothing and
Footwear Import Credit Scheme7 (the "ICS") and the Export Facilitation Scheme for Automotive
                                                     
2 Before October 1998, this Department was known as the Department of Industry, Science and
Tourism.
3 See para. 123 of Australia's first written submission; infra , para 7.191.
4 Howe constructed a new tannery at Rosedale and a new finishing plant at Thomastown.  The latter
was commissioned during February/March 1998 and commen ced operating in April 1998.  It replaced the old
plant in Preston which was decommissioned during the same period and closed in May 1998.
5 A portion of the third payment of A$12.5 million was held back pending completion of the audit
process.
6 In response to questioning by the Panel, Australia stated that this was not "compensation" in the sense
of off-setting a legal obligation on the part of the government of Australia, nor in the sense of trying to achieve
an equivalent outcome, nor in the sense of it being an equivalent amount of assistance.  Australia stated,however, that there was a political commitment to help maintain the commercial viability of Howe in the lightof the settlement reached between Australia and the United States in November 1996.
7 The ICS has been in effect from 1 July 1991, and remains in effect through 30 June 2000.  Under this
programme, exporters of eligible textile, clothing and footwear products can earn import credits that may be
used to reduce the import duties payable on eligible textile, clothing and footwear items by an amount up to theWT/DS126/R
Page 3
Products8 (the "EFS") pursuant to a settlement agreement with the United States reached in November
1996.  This excision was enacted on 26 March 1997 by Australian Customs Notice No. 97/29.
Automotive leather will be part of the general textile, industry and clothing arrangements due to come
into force in Australia on 1 July 2000.
III. PREVIOUS WTO DISPUTE SETTLEMENT PROCEDURES BETWEEN THE
PARTIES WITH RESPECT TO THE SAME OR RELATED MATTERS
3.1 On 7 October 1996, the United States requested consultations with Australia concerning
subsidies available to leather under the ICS and any other subsidies to leather granted or maintained in
Australia which were prohibited under Article 3 of the SCM Agreement.9   Following one round of
consultations, the United States and Australia reached a settlement on 24 November 1996.  This
settlement was announced on 25 November 1996.  Under the terms of settlement, the government of
Australia would excise automotive leather from eligibility under the ICS, as well as under the EFS, by
1 April 1997.  On 26 March 1997, Australian Customs Notice No. 97/29 excised automotive leatherfrom the ICS and EFS, effective 1 April 1997.
3.2 On 10 November 1997, the United States requested consultations regarding "prohibited
subsidies provided to Australian producers and exporters of automotive leather, including subsidies
provided to Howe Leather" which the United States understood to "include the provision by the
government of Australia of an $A25 million loan on preferential and non-commercial terms andgrants amounting potentially to another $A30 million."
10  Consultations held between the United
States and Australia on 16 December 1997 failed to resolve the dispute.  At its meeting of 22 January
1998, the DSB established a panel in accordance with Article 4.4 of the SCM Agreement and Article
6 of the DSU pursuant to the request made by the United States on 9 January 1998.  That panel was
never composed.
IV. PROCEDURES ADOPTED BY THE PANEL GOVERNING "BUSINESS
CONFIDENTIAL INFORMATION"
4.1 Due to concern expressed by one of the parties concerning the submission to the Panel of
sensitive business information, the Panel adopted "Procedures Governing Business Confidential
Information" at its first meeting with the parties.   Pursuant to these procedures, only "approved
persons" – i.e. a Panel member, representative, Secretariat employee or a member of the Permanent
Group of Experts (the "PGE") -- having filed with the Chairperson of the Panel a Declaration of Non-
                                                                                                                                                                    
value of the credits held.  Exporters are not required to use their credits as offsets against import duties, but may
transfer them to another holder in exchange for a cash payment.  The value of import credits that can be earned
is calculated as the F.O.B. value of an eligible export sale, multiplied by the Australian value-added content ofthe export sale.  This total is multiplied by a specified “Export Phasing Rate".  TCF Import Credit Scheme:
Administrative Arrangements (March 1995), United States Exhibit 7.  The ICS is managed by the Australian
Customs Service on behalf of the Australian Textiles, Clothing and Footwear Authority.
8 The EFS has been in its current form since 1991, and remains in effect until 31 December 2000.  The
EFS allows Australian manufacturers to earn A$1 of export credit for every dollar of eligible exports of covered
automotive items.  The value of exports eligible to earn exports credits is equal to the Australian value-addedcontent of eligible exports, calculated as the F.O.B. sa les price less the value of any imported components and
raw materials.  Export credits earned under this programme can be used to obtain rebates on the duties payable
on eligible imports of automotive vehicles and automotive components or may be sold for cash to any importer
of eligible goods who may similarly seek such rebates.  The amount of import duty that can be rebated underthis programme is determined by a tariff reduction schedule that varies depending on the year in which theexport credit is used.  Australian Department of Industry, Science &Technology, Report on the State of the
Automotive Industry 1994 (June 1995), United States Exhibit 13.
9 WT/DS57/1, G/SCM/D7/1, 9 October 1996.
10 WT/DS106/1, G/SCM/D17/1, 17 November 1997.WT/DS126/R
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Disclosure were permitted to view or hear information designated by a party as business confidential
information in the course of the Panel proceedings.  Such approved persons were under an obligation
not to disclose that information, or allow it to be disclosed, to any other person other than another
approved person, except in accordance with the Procedures.  The Panel was under an obligation not to
disclose business confidential information in its interim and final reports, but could make statements
of conclusion drawn from such information.  Accordin gly, the Panel has taken steps to ensure that all
information designated by a party as business confidential information has been omitted from this
Panel Report.  Where the Panel deemed it necessary, a description of the type of information
concerned has been provided.
V. FINDINGS AND RECOMMENDATIONS REQUESTED BY THE PARTIES
5.1 The United States  asks the Panel to make the following preliminary requests and rulings:
(a) that Australia produce, by 30 November 1998, authentic copies of certain
documents11 for review by the Panel and the United States;
(b) "rejecting Australia's argument that any further proceedings before this Panel should
be terminated";
(c) "that the United States has met its obligations under Article 4.2 of the Subsidies
Agreement"; and
(d) "rejecting Australia's argument that the Panel should disregard those facts and
argument not explicitly set forth in the consultation request".
5.2 With respect to the merits of the case, the United States requests the Panel to find that
"Australia is in violation of its obligations unde r Article 3.1 of the SCM Agreement", and asks the
Panel to "recommend that Australia withdraw the subsidy to Howe without delay".
5.3 Australia  asks the Panel to make the following preliminary rulings:
(a) that " the establishment of the Panel was inconsistent with the DSU and that as a
consequence the Panel should terminate its work";
(b) that "in WT/DS126/1 the United States did not meet its disclosure obligations under
Article 4 of the Subsidies Agreement and that consequently the establishment of thePanel and the basis for the United States case before the Panel are irremediably
flawed.  Australia asks that, as a consequence, the Panel terminate the proceedings,
or rule immediately that the United States has not demonstrated its claims before thePanel"; and
(c) "If the Panel does not agree to the requests in subparagraphs [(a) and (b)] above,
then Australia asks that the Panel rule that, as a result of the failure of the UnitedStates to fulfil its disclosure obligations under Article 4 of the Subsidies Agreement,all facts and arguments not explicitly spelled out in the request for the Panel(WT/DS126/1) will be disregarded for the purpose of the proceedings of the Panel.Of this evidence, Australia asks in addition that information acquired in the contextof consultations under WT/DS106/1 be ruled to be confidential to that process
                                                     
11 These documents are listed infra, para. 6.1.WT/DS126/R
Page 5
[footnote omitted] and not admissible before this Panel, including Exhibit 2 of the
United States First Submission."
5.4   In the event that the Panel does not terminate the proceedings on the basis of Australia's
requests for preliminary rulings, Australia requests the Panel to find that:
(a) "the Loan does not fall under Article 3.1(a) of the Subsidies Agreement";
(b) "the two first payments under the Grant contract do not fall under Article 3.1(a) of the
Subsidies Agreement"; or
(c) "if the Panel decides to consider subsequent payments or the Grant contract itself,
none of the payments or the Grant contract itself falls under Article 3.1(a) of theSubsidies Agreement".
5.5   In addition, if the Panel finds that any measure before it is inconsistent with Article 3.1(a) of
the SCM Agreement, then Australia requests that:
(a) "consistent with Article 19.2 of the DSU, the Panel make no recommendation or
suggestion regarding the way in which Australia should bring itself into conformity";and
(b) "consistent with Article 4.12 of the Subsidies Agreement, recommend that Australia
have at least 7.5 months for implementation from the adoption of the Panel or
Appellate Body report, i.e. at least half of that provided as a benchmark period in
Article 21.3(c) of the DSU, but that this issue be addressed by the Panel and theparties after the circulation of the Interim Report setting out the Panel’s draft findings
on the nature of the measures before the Panel".
VI. PRELIMINARY ISSUES AND REQUESTS FOR PRELIMINARY RULINGS
A. 
REQUEST FOR DOCUMENTS BY THE UNITED STATES
6.1 In its first written submission to the Panel, the United States  asked the Panel to request that
Australia produce, by 30 November 1998, authentic copies of the following documents for review by
the Panel and the United States:
(a) "Any document which provides the grant from the Australian government to Howe,
and any related documents;
(b) The loan contract between the Australian government and Howe, and any documents
related to that contract;
(c) The report prepared by the accounting firm commissioned by the Australian
government and used in devising the replacement package;
(d) Financial statements of Howe (or related corporate entities) for the period 1989 to
present;
(e) Internal business plans or strategic plans of Howe (or related corporate entities) for
the period 1995 to present;WT/DS126/R
Page 6
(f) Any correspondence between the Australian government and Howe (or corporate
entities related to Howe), or vice versa, regarding the replacement subsidy package;
(g) Annual reports of Howe (or related corporate entities) for the period 1989 to present;
and
(h) Any analysis or forecast of the Australian automotive leather market in the custody or
control of the Australian government, Howe, or any entity related to Howe."
6.2 The United States indicated that it was prepared to agree to appropriate procedures necessary
to protect any business confidential information contained in the documents.  The United States
asserted that it had requested most of this information in consultations with Australia, but the
Australian government had to date been unwilling to provide it.  The United States recalled that the
Appellate Body Report in India - Patent Protection for Pharmaceutical and Agricultural Chemical
Products ("India – Patents ") stated:
All parties engaged in dispute settlement under the DSU must be fully
forthcoming from the very beginning both as to the claims involved in
a dispute and as to the facts relating to those claims.  Claims must be
stated clearly.  Facts must be disclosed freely.  This must be so in
consultations as well as in the more formal setting of panel
proceedings.  In fact, the demands of due process that are implicit inthe DSU make this especially necessary during consultations.  For the
claims that are made and the facts that are established during
consultations do much to shape the substance and the scope of
subsequent panel proceedings.  If, in the aftermath of consultations,
any party believes that all the pertin ent facts relating to a claim are, for
any reason, not before the panel, then that party should ask the panel
in that case to engage in additional fact-finding.
12
6.3 Australia  responded that the obligation is upon the complainant, the United States, to come
forward with the facts on which its case is based.  There is no obligation upon Australia to provide the
information sought by the United States.  The United States could at any time have used the
procedures of the SCM Agreement to seek information about the measures in question.  Specifically,
Australia pointed out, Article 25.8 of the SCM Agreement is the means by which a Member can seek
information about measures of another Member.  The United States chose not to use this procedural
provision under the relevant agreement and so cannot expect that the information will be provided at
its request in the Panel process.
6.4 The United States  indicated that it had requested information, including information
concerning notification of the subsidies as provided in Article 25.8 of the SCM Agreement, during
consultations.  According to the United States, at that time, Australia did not provide any of the
requested information.
6.5 In Australia ’s view, the United States was misrepresenting the situation in implying that it
was analogous to that before the Appellate Body in India – Patents .13  While the statement of the
Appellate Body may have wider application, it was made in respect of a particular situation where the
analogy for this case would be that there had been a substantial change affecting the measures before
the Panel.  Of course, it is within the scope of a Panel’s working procedures to seek additional
information from parties.  However, that is for the Panel to do in the light of whether the admissible
                                                     
12 WT/DS50/AB/R, adopted 16 January 1998, para. 94.
13 Ibid.WT/DS126/R
Page 7
evidence from the United States has made a case that warrants further investigation by the Panel.  It is
up to the complainant to make a case that there has been a breach of the rules.
6.6 Australia asserted that if the Panel were to rule against Australia’s requests to terminate the
Panel proceedings, then Australia wanted to coope rate with the Panel to enable it to reach its
conclusions.  Accordingly, if the Panel considered that the two contracts (i.e. the grant contract and
the loan contract) were necessary for its deliberati ons, Australia was willing to provide the Panel with
the two contracts, without the more sensitive co mmercial-in-confidence numbers that, in Australia's
view, are not pertinent to issues under Article 3 of the SCM Agreement.  However, Australia would
look for assurances that the contracts would be treated as confidential information by both the Panel
and the United States.  There is only one medium-sized Australian company involved in this dispute
and the mere fact of the United States' action has placed a great deal of commercial pressure anduncertainty on this company in the market place.  This is a situation where a single company isinvolved and any information about its business is potentially valuab le to its comp etitors.  It is
essential, therefore, that Howe’s competitors do not gain further advantage from the disclosure ofcommercially sensitive information.  Australia expressed its regret that statements by the UnitedStates to the Panel regarding Howe could only be understood as being driven by commercialconsiderations rather than legal argumentation for this Panel.  It would be inappropriate for thegovernment of Australia to provide further information on the contracts that would find its wayquickly into the commercial domain.
6.7 Australia submitted redacted versions of the grant contract and the loan contract at the first
substantive meeting of the Panel with the parties.
6.8 The United States  expressed its appreciation for Australia's willingness to provide redacted
copies of the grant contract and the loan contract and assured Australia that it would treat the
information as confidential.  At the first substantive meeting of the Panel with the parties, the United
States urged the Panel to request that Australia provide the remaining information it had requested, in
the belief that this information would better enable the Panel to make an objective assessment of the
facts and their applicability under the SCM Agreement.  The United States assured Australia that allinformation would be treated as confidential.
6.9 As noted below
14, on 10 December 1998, the Panel ruled as follows with respect to the United
States request that the Panel ask Australia to produce certain documents:
"… we note that Australia has already submitted redacted versions of
the loan and grant contracts.  In addition, among the questions fromthe Panel to the parties are certain requests for information and
documents which we have concluded are relevant to our consideration
of the issues in this dispute, and therefore have asked Australia to
submit."
6.10 On 10 December 1998, as part of the written questions posed to the parties by the Panel after
its first substantive meeting with the parties, the Panel  asked Australia to provide the following to the
Panel and the United States:
(a) "the report prepared by the accounting firm commissioned by the Australian
government and used in devising the compensation arrangements to Howe;
                                                     
14Infra , para. 9.9 and note 182.WT/DS126/R
Page 8
(b) any correspondence between the Australian government and Howe (or corporate
entities related to Howe) regarding the compensation arrangements to Howe and any
documents relating to payments made under the grant contract which would indicate
precisely what facts were taken into account in determining that Howe was in
compliance with the performance criteria of the grant contract in order to make the
grant payments to date, including the report for the year ending 30 June 1997showing performance against the performance targets and the report for the year
ending 30 June 1998 showing performance against the performance targets;
(c) in the schedule of the grant contract, the numbers relating to performance targets
(these could be indicated in indexed form, or as a range), the headings for categories
of capital expenditure and the numbers for capital expenditure (these could be
indicated in indexed form, or as a range);
(d) any documents indicating the legal basis for the grant(s) and the loan in Australian
law (for example, budget documentation); and
(e) any records or reports of discussions in the Australian Parliament relating to the
grant(s) and the loan."
6.11 On 17 December 1998, Australia  responded, with respect to the report by the accounting
firm commissioned by the Australian government and used in devising the compensation
arrangements to Howe  that:
"As part of the development of  this compensation arrangements, the
then Department of Industry Science and Tourism (DIST) engaged the
firm of KPMG, Chartered Accountants, to assess the financial
viability of Howe as a result of the removal of automotive leather
from the ICS and EFS schemes.  Under the terms of the engagement
KPMG was required to examine certain information provided byHowe Leather and report to the Government of Australia.  The report
was to be strictly confidential between the Government of Australia
and KPMG.  In fact, KPMG agreed to undertake the engagement on
the pre-understanding that "our report is solely ... for the information
of the Australian Government and is not to be used for any other
purpose or distributed to any other party ".  (emphasis supplied by
Australia)
The Government of Australia often engages firms to carry out such
reviews as part of its industry policy development.   It is critical that
these reports be completely candid and this means that confidentiality
must be absolute.  It is only to be expected in this case that theGovernment would require an independent assessment of the viability
of the company."
6.12 Australia submitted, as business confidential information, redacted versions of the letters from
ALH to the Department of Industry, Science and Tourism in July 1997 and July 1998 reporting on
Howe's actual performance against the interim performance targets for the periods 1 April–30 June1997 and 1 July 1997-30 June 1998, as well as a non-business-confidential attachment explaining the
domestic law on “best endeavours” as it applied in this case.  With respect to the Panel's request for
the numbers relating to performance targets, the headings for categories of capital expenditure andthe numbers for capital expenditure, Australia stated:  "A ny financial data provided either in indexed
form or as a range would be amenable to deductive manipulation which could unfairly breach theWT/DS126/R
Page 9
commercial confidentiality of any data so provided in good faith.  Similarly, provision of any further
details of the categories of capital investment undertaken by Howe could endow its competitors with
an unfair commercial advantage.  Accordingly, Aust ralia regrets that it is unable to respond to this
request by the panel."  Australia asserted that the fundamental legal basis for the grant and loan is in
the 1996/97 Portfolio Additional Estimates Statements for the Industry, Science and Tourism
Portfolio of the Australian Government, in particular in the section entitled “Explanation of additionalestimates 1996/97”.  Australia submitted a copy of this, as well as a digest of Appropriation Bill (No.
4) 1996/97 and extracts from the 1997-98 and 1998-99 Budget papers.  Australia further stated that
there had been no discussions in the Australian Parliament relating to the grant(s) and the loan .
6.13 On 12 January 1999, the Panel  reiterated its request to Australia to provide:
(a) "the report prepared by the accounting firm commissioned by the Australian
government and used in devising the compensation arrangements to Howe; and
(b) in the schedule of the grant contract, the numbers relating to performance targets
(these could be indicated in indexed form, or as a range), the headings for categoriesof capital expenditure and the numbers for capital expenditure (these could be
indicated in indexed form, or as a range)."
6.14 On 14 January 1999, Australia  submitted to the Panel the numbers relating to the
performance targets, the headings for categories of capital expenditure and the numbers for capitalexpenditure, as well as unredacted versions of the letters from ALH to the Department of Industry,Science and Tourism in July 1997 and July 1998 reporting on Howe's actual performance againstthe interim performance targets for the periods 1 April–30 June 1997 and 1 July 1997-30 June1998.
B. E
STABLISHMENT OF THE PANEL
6.15 Australia asks the Panel to make an immediate ruling that the Panel was established
inconsistently with the DSU and, therefore, the Panel should terminate these Panel proceedings.
According to Australia, the DSU does not provide for the Panel to be established in the circumstances
that prevailed.  In particular, Australia argues that:  the United States did not have the right to have asecond panel established at the DSB meeting on 22 June 1998;  the DSB did not have the right under
the DSU to establish such a panel against the wishes of Australia and this was inconsistent with the
DSU;  accordingly, the Panel was not properly established; and consequently, the Panel should
terminate its work immediately.
6.16 Australia notes that the United States asked the DSB to establish a panel on 9 January 1998
(WT/DS106/2), and that Australia did not oppose the right of the United States to have the DSB
establish a panel, and this was done on 22 January 1998.  That panel has never been composed, but it
was established.  That panel of the same title is in respect of the same matter, i.e. the claims that the
“grants and loan” to Howe: “appear to violate the obligations of the government  of Australia under
Article 3 of the SCM Agreement … may constitute subsidies 'contingent, ..., in fact, upon export
performance' within the meaning of Article 3.1(a) and footnote 4 of the SCM Agreement."  These arethe same in the first and second substantial paragraphs of WT/DS106/1 and the second substantial
paragraph of WT/DS126/1.  The matter in both WT/DS106/1 and WT/DS126/1  consisted of the same
specific measures (“grants and loan”) and the same claims about those measures.  Accordingly, each
of the requests was about the same matter to be eventually referred to the DSB.  The resulting requests
for establishment of a panel, WT/DS106/2 and WT/DS126/2, were again about exactly the same
matter.WT/DS126/R
Page 10
6.17 Australia states that, in WT/DS126/2, the United States also asked that its earlier request for a
panel in WT/DS106/2 be withdrawn.15  At the DSB meeting on 22 June 1998, the United States
representative said that it had terminated that panel.16  The request for the establishment of a panel in
WT/DS106/2 was not outstanding.  The panel had been established on 22 January 1998 and, while it
had not been composed, was still in existence.  Either party could have had that panel composed at
any time.  The United States did not state any provision of the DSU under which it was seeking toterminate that panel or have it terminated by the DSB.  The DSB did not terminate that Panel.
17  The
Chair at the meeting of the DSB of 22 June 1998 said that the arguments regarding the establishment
of the Panel could be raised before the Panel itself.18
6.18 According to Australia, there is no provision under the DSU that allows one party unilaterally
to terminate a panel once it has been established.  The DSU allows the process to be terminated by
mutual agreement by way of Article 12.7 of the DSU.  Article 12.12 of the DSU allows the
complaining party to ask a panel to suspend its work.   The panel is not obliged to do so, but if it does,then after the expiry of 12 months (arguably 6 months for cases under the expedited procedures of
Article 4 of the SCM Agreement) the authority for establishment of the panel would lapse.
19  The
complainant cannot demand the suspension, but it can seek it.
6.19 Australia asserts that if the complainant had the right under the DSU to terminate a panel
unilaterally, then it would be clear from the text of the DSU that it had that right.  However, the textof the DSU does not give it such a right.  Indeed, it does not even have the right to require the
suspension of the Panel's proceedings.  One obvious reason for this is that while the terms of reference
for the complaint and the timing of the complaint are very much in the hands of the complainant,
some balance is given to the proceedings once the panel has been established.  If the complainant
could unilaterally terminate or suspend, and hence terminate a panel after the designated period, thenit could, for example, do this if it did not like the Interim Report.  That would allow it to avoid an
adverse judgement and, if it desired, start again with a new panel virtually immediately.  This sort of
game-playing is not envisaged under the DSU.  A Member has the right to a panel but it must then
live with what it has sought and obtained from the DSB.
6.20 Accordingly, Australia contends, any attempt by the United States unilaterally to terminate
the panel established pursuant to WT/DS106/2 wa s inconsistent with the DSU.  A number of
Members raised questions about the process at the DSB on 22 June 1998.  Nonetheless, a panel was
purportedly established on the same matter despite the objections of Australia, without the United
States or any other participant providing any legal reasoning for having the rights of a Member
overridden in this way.  By way of clarification, Aust ralia points out that it is not arguing that it might
not be possible to have a second, or any number of, panels established on the same matter by mutual
consent of the parties.  However, the issue here is what right a complainant has under the DSU to have
more than one panel established on the same matter where there is no consensus.  There was no
consensus at the meeting when this Panel was established.
20  The process of negative consensus under
the DSU is a radical change in the way issues are handled under the WTO, when compared to the
GATT, and only applies to the strictly limited situations set out explicitly in the DSU.
6.21 With respect to the issue of whether the DSB must, or indeed has the authority to, terminate a
panel at the request of the complainant, Australia sees nothing in the DSU to allow the DSB to
terminate a panel, whether by consensus or no.  Certainly any action where negative consensus
                                                     
15 WT/DS126/2, 11 June 1998, last sentence.
16 WT/DSB/M/46, 6 August 1998, para. 1 on p. 8 and the last paragraph on p. 9.
17 Ibid., para. 5 on p. 9.
18 Ibid., para. 2 on p. 10.
19 DSU, Article 12.12.
20Australia refers also to WT/DSB/M/46, 6 August 1998, para. 2 on p. 10.WT/DS126/R
Page 11
applied would have to be explicit in the DSU: there is nothing in the DSU that provides for this.  It is
difficult to read even an implied authority to term inate a Panel even where consensus exists.  Indeed,
where there is consensus, the parties can terminate the panel proceedings by way of Article 12.7 of the
DSU at any time where all parties to the dispute wish to do so.  All that is required is agreement,
which is required for a consensus decision by the DSB in any case.
6.22 With respect to the issue of whether a Member has the right to have a second panel
established (in particular through a negative consensus decision) on the same matter, while the other
panel is still in existence, Australia asserts that th e DSU does not confer any such right.  All that the
DSU gives is the right to have one panel established on a matter provided that the correct procedures
are followed.  There is nothing to say that a Member can have any number of panels established on
the same matter, which it can use at any time that it wishes.
6.23 Australia observes that the DSU has explicit provisions covering multiple complaints by more
than one Member (Article 9 of the DSU) and the right of a third party to take a case of its own(Article 10.3 of the DSU), but that it does not provide for multiple panels by the same Member on the
same matter.  This was implicitly recognized by th e United States when it sought in WT/DS126/2 and
at the DSB meeting on 22 June 1998 unilaterally to terminate the existing panel (established pursuant
to WT/DS106/2).  Australia questions why, the United States sought to terminate the first panel in
WT/DS126/2 at the DSB meeting on 22 June 1998 if it considered that it had the right to a second
panel while the first one existed.  On the one hand, if the United States had simply decided that it did
not wish to pursue the panel established on 22 January 1998 (WT/DS106) and it considered that it
could unilaterally terminate that Panel, why did it not do so before seeking consultations under
WT/DS126/1 on 4 May 1998?  Indeed, the United States never sought even to get Australia's
agreement to terminate that Panel.
6.24 According to Australia, the object and purpose of the DSU, including relevant special or
additional rules and procedures such as Article 4 of the SCM Agreement, are to provide for the
settlement of disputes on a matter.  The DSU provides  for the right to the automatic establishment of a
panel to examine the matter subject to the required  procedures having been met.  The object and
purpose of the text are to provide for panel examination.  Once that has been provided for, there is nobasis for the establishment of further panels to examine precisely the same matter while the existing
panel still exists.  Under Article 8.7 of the DSU and Article 4.12 of the SCM Agreement, the United
States could at any time from 2 February 1998 have asked the Director-General to determine the
composition of the panel by 9 February 1998 or any later date.  This was 84 days before the United
States sought further consultations under WT/DS126/1 and 133 days before it asked the DSB toestablish a new panel on 22 June 1998.
6.25 Australia contends that the United States itself chose not to pursue the composition of the
panel established on 22 January 1998, and that the United States cannot now use the fact that the
panel had not been composed as the basis for seeking a new Panel.  To give a Member the automatic
right to have any number of panels on precisely the same matter, including under the expedited
procedures of Article 4 of the SCM Agreement, is nowhere provided for under the DSU and so the
establishment of a panel in such circumstances is inconsistent with the DSU.
6.26 Australia questions, in the alternative, what the situation would have been if the United States'
action in seeking to terminate the panel on 22 June 1998 were indeed consistent with the DSU.  While
Australia considers that this was not the case, even if it were true, the United States would still not
have had the right to the immediate establishment of a new panel.  The right to a panel depends
critically upon the correct procedures having been followed.  Given the continuing existence of thepanel established on 22 January 1998 (WT/DS106), the United States did not have the right under the
DSU to start the procedures leading to the automatic establishment of a new panel. It is clear from
Article 5.3 of the DSU that the purpose of the consultations is to reach a mutually satisfactoryWT/DS126/R
Page 12
solution.  Article 4.3 of the SCM Agreement says that "[t]he purpose of the consultations shall be to
clarify the facts of the situation and to arrive at a mutually agreed solution."  Where such
consultations are about precisely the same matter for which a panel exists, it would be absurd to have
separate consultations to seek a mutually satisfactory solution.  That would not be consistent with the
object and purpose of the text.  Articles 11 and 12 of the DSU make it clear that it is envisaged that
the panel process provides for obtaining a mutually satisfactory solution.  Given that, it would beincoherent for the DSU to provide at the same time for a Member to have a new round of
consultations under Article 4 of the DSU or Article 4 of the SCM Agreement in order to seek such a
solution.   Accordingly, the right to the consultation process under Article 4 of the DSU and Article 4
of the SCM Agreement does not exist while a panel on the same matter exists.  Therefore, the United
States would have been unable to satisfy the requirements under the DSU and Article 4 of the SCM
Agreement necessary to obtain the right to have a panel established.
6.27 The United States  asserts that the Panel should confirm that it was properly established and
that it can and will consider the merits of the case presented to it by the United States.  The DSU
contains no bar to a second consultation request concerning the same measures.  The DSU also
contains no bar to the establishment of a second panel concerning the same measures.  The Panel may
not invent a bar to these proceedings where the negotiators of the DSU provided none;  as provided in
Article 3.2 of the DSU, panel recommendations and rulings "cannot add to or diminish the rights andobligations provided in the covered agreements."
6.28 The United States maintains that the facts detailed in its complaint have shown the following.
The United States made a first request for consultations on this matter which did not include a
statement of available evidence as required by Article 4.2 of the SCM Agreement.  This request was
legally inadequate to satisfy the requirements of Arti cle 4.2.  After realizing that this was the case, the
United States then took the only action available to it to cure this essential defect; that is, the United
States submitted a second request for consultations which identified the nature and extent of the
available evidence establishing that the subsidies in  question were prohibited export subsidies.  The
second consultation request was submitted because there is no procedure for amending a prior
consultation request.  With this second request, the United States commenced pursuit of a new disputesettlement complaint.
6.29 According to the United States, the Appellate B ody recently endorsed that a complainant may
pursue a second dispute settlement complaint on the same matter in Guatemala – Antidumping
Investigation Regarding Portland Cement from Mexico
21 ("Guatemala – Cement ").  In that case, the
United States asserts, the Appellate Body found that the panel erred in considering the dispute
because Mexico had failed to identify a specific anti-dumping measure in its panel request.  In
reversing the panel, the Appellate Body noted that  nothing in its findings precluded Mexico from
pursuing another procedurally proper dispute settlement complaint on the same matter.  The United
States observes that the panel considering the complaint by the European Community in India –
Patents22 has also addressed the issue of multiple dispute proceedings.  In that dispute, India argued
that the EC complaint should be concluded because that complaint could have been brought at the
same time as the prior complaint by the United States on the same matter.  The United Statesmaintains that India argued, as Australia does here, for compulsory joinder of all claims in the first
panel proceeding initiated.  That panel rejected India's claim, as this Panel should reject Australia's.
That panel noted that the rights of Member include "the freedom to determine whether and when to
pursue a complaint under the DSU."
23
                                                     
21 WT/DS60/AB/R, adopted 25 November 1998.
22  WT/DS79/R, adopted 21 October 1998
23 Ibid., para. 7.15.WT/DS126/R
Page 13
6.30 The United States contends that, based upon Guatemala – Cement24, Australia cannot dispute
that the United States could have pursued another dispute settlement complaint on this matter if a
panel had been composed based upon the first request for consultations and had later found that the
proceedings should be terminated because the consultation request was inadequate.  The Appellate
Body made clear in Guatemala – Cement  that no matter what the procedural defect may be in a
Member's complaint, that Member does not thereby lose the right to bring a complaint.  The Panel
should reject any argument that the United States should lose any right to challenge the subsidies
provided by Australia.  Australia's objection to the convening of this Panel therefore only amounts to
an objection to the sequence in which the same events would take place.  The sequence argued by
Australia -- a ruling by the first panel, rejection of  the United States' complaint and a new complaint --
involves a considerable waste of time and resources of the WTO and of the parties.
6.31 In the view of the United States, the course of action taken by it did not in any way prejudice
Australia.  Furthermore, contrary to Australia's suggestion, this course of action does not invite game-playing.  The United States is not suggesting th at a complainant may unilaterally terminate panel
proceedings at any time.  In fact, this Panel need not address that question.  The only issue before this
Panel is whether a complainant may, before the panel has been composed, withdraw the panel request
and request consultations on the same matter in order to pursue a new dispute settlement complaint.
The United States asserts that the answer must be "yes". To find otherwise would lead to the absurdresult that a complainant wishing to amend its consultation request after the establishment of the panel
but before its composition must nonetheless proceed through the entire panel process, only to have to
start over.  To find otherwise would also force Members and a panel to proceed with a dispute that
they know in advance will be fruitless.
6.32 The United States notes that Australia has also argued that the United States should have been
forced to move forward with panel composition, ra ther than take action to cure the defects in its
earlier consultation request and move forward anew.  The United States notes that the panel
examining the complaint of the European Community in India – Patents
25 has counselled that  the
rights of parties include the freedom to move forward with panel composition at whatever pace the
parties desire.  There have been a number of instances in the GATT/WTO in which parties havereached mutually satisfactory solutions during the panel composition process.  One recent example is
the dispute brought by eight WTO Members, including both the United States and Australia, against
agricultural subsidies of Hungary, in which a mutually satisfactory solution was negotiated during the
panel composition process.  Had the parties been forced to compose the panel, or lose their right to
pursue the dispute, it is possible that there would have been no settlement in that dispute.
6.33 The United States further notes the Australian argument that the right to consultations under
Article 4 of the DSU does not exist while a panel on the same matter exists; that the right to
establishment of a panel under Article 6.2 is dependent on the proper procedural steps having been
completed; and that Australia's objection at the DSB meeting of 22 June 1998 therefore had the effect
of blocking the establishment of this Panel.  The United States rejects all of these propositions.
Nothing in the DSU limits the right of a Member to  request consultations at any time.  Indeed, the
provisions of Article 4.1 of the SCM Agreement provide that consultations may be requested"whenever  a Member has reason to believe that a prohibited subsidy is being granted or maintained by
another Member." (emphasis supplied by the United States)  Australia's argument would place the
Panel in the position of rewriting the DSU to insert new rights and obligations not provided by the
drafters.  Moreover, Australia's argument would open the door to procedural blockage in a wide range
of disputes.
                                                     
24 WT/DS60/AB/R, adopted 25 November 1998.
25 WT/DS79/R, adopted 21 October 1998.WT/DS126/R
Page 14
6.34 The United States appreciates the points that Australia makes concerning the supposed danger
of harassment.  However, this Panel is not an appropriate forum to address these issues.  An
alternative forum exists to address these systemic concerns -- the ongoing review of the DSU now
taking place in the DSB.  This Panel has the duty to make an objective assessment of the facts, and is
required to base its findings on the language of the DSU.  It cannot make a ruling divorced from the
explicit language of the DSU to address a systemic concern.26
6.35 Australia  points out that it did not object to the immediate establishment of the panel on
22 January 1998.  However, Australia considers that it has an obligation to pursue the issue of thestatus of this Panel partly because of the real systemic implications.  If panels were allowed to be
established in this way, it would set an unfortunate precedent for the future .  Australia deems that it
has a right to an immediate ruling on this issue.  It goes to the heart of fairness about whether thePanel should proceed or terminate the proceedings.
6.36 Australia maintains that negative consensus is an important step forward by the
GATT/WTO system in guaranteeing that a Member can have a matter subject to examination by apanel, and guaranteeing that the outcome of the Panel (subject to the Appellate Body Report) will beadopted.  It has proved itself to be a key to  a more rigorous method of dispute settlement.
However, Australia is strongly of the view that its use is strictly limited to those issues set out in theDSU.  This goes to the heart of the legitimacy of the new dispute settlement system.  It isfundamentally unfair not only to the other Member concerned but also to the Chair of the DSB, whoas the real decision-maker under negative consensus, can be placed in an invidious position.
6.37 Australia states that at the DSB meeting of 22 June 1998, the Chair of the DSB said that
Australia could raise this with the Panel.
27  That is what Australia has done.  It is clear from the
Minutes of that meeting that the Chair left this issue to be resolved in at least the first instance bythe Panel, rather than letting it run to the Appellate Body.  Australia argues that the claims andmeasures were the same in both WT/DS106/1 and WT/DS126/1, i.e. the same for both panels.Indeed, the United States admits as much when it refers to “the earlier panel request regarding thesame subsidies".
6.38 According to Australia, the purpose of Article 6 of the DSU is to ensure that a Member can
have a panel established to examine a matter, subject to the requirements of Article 4 of the DSU,and, in this case, Article 4 of the SCM Agreement.  There is nothing to suggest that this providesfor the use of negative consensus for the establishment of multiple panels by the same complainantagainst the same respondent.  Australia is not discussing here whether or not two panels might beable to be established by mutual consent.  Rather, Australia is focusing on the situation whereconsensus does not exist. Australia is arguing that the use of negative consensus must be jealouslyguarded.  It must only be used in the narrow circumstances where it is explicitly provided for underthe DSU.
6.39 Australia contends that the United States never asked Australia whether it was willing to
have the panel under WT/DS106 abandoned and to allow the United States to start again.  Australiawas never asked whether it would agree to a new panel. Australia's systemic concern is thatAustralia was overridden at the DSB meeting on 22 June 1998 by the use of negative consensuswhen, in its view, the United States was not entitled as a right to a second panel.  Regardless ofAustralia’s view, a number of Members had concerns about the legal basis of the approach of the
                                                     
26  In this regard, the United States refers to ibid., para. 7.23.
27 WT/DSB/M/46, 6 August 1998, p. 10.WT/DS126/R
Page 15
United States.  If the United States considered that it had the right to a panel, why then did it not
explain why it had that right at the meeting.
6.40 In Australia's view, the text needs to be read in the context of its object and purpose.  Where a
Member has a complaint about a matter, i.e. a claim about a measure, it has the right to ask for
consultations on that matter with the view to resolving it.  If those consultations are unsuccessful, that
Member has the right to have a panel established by the DSB to examine that matter.  This right can
be exercised through negative consensus.  It then has the right to have the matter examined by the
panel and either Member has the right to have the panel’s report (possibly modified by theAppellate Body) adopted.
6.41 Australia asserts that when a Member has a panel established on a matter, it has decided
that the consultation process had been unsuccessful. Australia queries why it would then be entitledto another round of consultations under Article 4 of the DSU on the same matter.  Clearly, while apanel is in existence there is no basis for calling for consultations under Article 4 of the DSU.There is no impediment to discussions while a panel is in existence.  Indeed, Article 12.7 of theDSU clearly envisages the prospect of a mutually satisfactory solution right up to the time of thesubmission of the final report of the panel.  This is consistent with Article 3.7 of the DSU that amutually acceptable solution is the preferred outcome of the process.  The United States had noneed to invoke Article 4 of the DSU again on 4 May 1998 in order to hold consultations withAustralia.  Australia considers that the United States did not have the right under Article 4 of theDSU to invoke consultations on a matter for which a panel was still in existence.
28
6.42 Australia observes that the United States could have asked the Director-General to compose
the panel established on 22 January 1998 at any time that it wanted to from 2 February 1998.  On4 May 1998 if it wished to have a panel composed, it could have had one by 8 May 1998.  Even onthe basis of a 120 day period, the panel would have been concluded by 7 September 1998.Australia notes that the United States claimed at the DSB meeting to have the right unilaterally toterminate the panel established on 22 January 1998.  The United States said: “we confirm that theUnited States has decided to terminate any action in pursuance of the DSB's decision following ourrequest to establish a panel.”
29   According to Australia, this was at odds with WT/DS126/2, where
it said in the final paragraph that: “[t]he United States also asks that, at the next meeting of theDispute Settlement Body, our earlier request for a panel, dated 9 January 1998, circulated asWT/DS106/2, regarding the same subsidies identified in the present request, be withdrawn.”There was no outstanding request for a panel.  The panel had been established nearly 5 monthsbefore.
6.43 Australia submits that it is unclear whether the United States considered that it wanted the
DSB to terminate the first panel or whether it considered that it could do it unilaterally.  Perhaps itthought both were true.  What is clear, Australia continues, is that the United States thought that itneeded to terminate the panel.  Otherwise, it would not have sought to do so.  The Chair of theDSB considered that the United States could not terminate the Panel unilaterally, since the minutesof that meeting of the DSB say: “The Chairman said that technically as from now two panelsexisted on this matter.”
30  Clearly in the context of establishing this Panel, the Chair agreed
implicitly that at least the first panel could not be terminated through negative consensus.  There is,of course, nothing in the DSU that suggests that negative consensus applies to termination of panels.Indeed, Australia questions, why should there be?  Negative consensus was introduced to ensure
                                                     
28 WT/DS126/3, 19 June 1998.
29 WT/DSB/M/46, 6 August 1998, p. 9.
30 Ibid.WT/DS126/R
Page 16
that a complainant could have its day in court and that neither party could block the adoption of a
panel report.  Negative consensus is to be used on only the rarest of occasions.  There would havebeen no reason to have negative consensus to terminate a panel.  The DSU already providesexplicitly for termination by agreement between the parties under Article 12.7.  In addition, there isnothing in the DSU that says that a panel, once established, has some lower status in terms of therespondent’s rights before it is composed.  To the contrary, both parties have the same rights, forexample, to ask the Director-General to compose the panel.
6.44 In relation to the statement by the United States that there is no bar in the DSU against a
second panel, Australia points out that this does not address the issue whether the United States hadthe right to use negative consensus for the establishment of this Panel.  Australia believes that theexamples provided by the United States are not relevant to this case.  This is a situation where theconsultations were with the same Member but under a different dispute proceeding.
6.45 With respect to the references by the United States to Guatemala - Cement
31, Australia
agrees that Mexico’s right to another panel in that dispute was endorsed by the Appellate Body.However, Australia points out, there are key differences in this case.  The first is that the measureand hence, the matter in Guatemala - Cement  was different from what was before that panel and
what might be before a second panel.  The other key difference was to do with the timing ofMexico’s right to start again.  Australia does not disagree with the right of a Member to a secondpanel.  The difference of opinion between the United States and Australia is over when the rightarises.  Guatemala - Cement  is now a completed panel.  The January 1998 panel on automotive
leather is not.
6.46 Responding to the United States ' position that the sequence argued by Australia -- a ruling
by the first panel, rejection of the United States' complaint, and the filing of a new complaint --involves a waste of time and resources, Australia submits that the issue is that a complaining partyhas an obligation to meet the requirements of the DSU and the SCM Agreement in order to avoidwasting time.  Australia does not accept that any Member who has not met those obligations can
start again during  a proceeding.  The DSU does not provide for this.  The discipline is on
complaining parties to get it right at the time of request.  Regarding the reference by the UnitedStates to the complaints by the European Community and the United States in India – Patents
32,
Australia submits that the issue in this case is fundamentally different.  The panels dealing withIndia’s measures were requested by different Members and not, as in this case, by the same
Member.
C. "D
ISCLOSURE " OBLIGATIONS UNDER ARTICLE 4 OF THE SCM A GREEMENT
6.47 Australia  asks the Panel to rule that, in its request for consultations (WT/DS126/1), the
United States failed to meet its disclosure obligations under Article 4 of the SCM Agreement and
therefore, the Panel should terminate the proceedings, or rule immediately that the United States has
not demonstrated its claims.  Australia views this as an important systemic issue, going beyond the
circumstances of this particular case.
6.48 Australia notes that Article 4.2 of the SCM Agreement requires that: “A request for
consultations under paragraph 1 shall include a statement of available evidence  with regard to the
existence and nature of the subsidy in question.” (emphasis supplied by Australia)  According toAustralia, the reference to “evidence with regard to the existence and nature of the subsidy” in
                                                     
31 WT/DS60/AB/R, adopted 25 November 1998.
32 WT/DS50/R, WT/DS50/AB/R, adopted 16 January 1998; WT/DS79/R, adopted 21 October 1998.WT/DS126/R
Page 17
Article 4.2 includes not only facts but also argumentation why such facts would lead the
complainant to consider that the measure in question was in breach of Article 3 of the SCMAgreement.  Australia cites the United States' request for consultations (WT/DS126/1)
33 and asserts
that the United States' request says little more than that the United States has evidence withoutsaying what it is.  It made no attempt to set out what facts it would use to support its case.  TheUnited States exhibits were only received by the Australian Mission in Geneva on 16 November1998.
6.49 According to Australia, the description of evidence given in WT/DS126/1 does not meet
any reasonable standard of disclosure as called for in Article 4 of the SCM Agreement, andaccordingly, WT/DS126/1 does not satisfy the requirements of Article 4.2 of the SCM Agreement.In Australia's view, the expedited procedures provided for under Article 4 of the SCM Agreementmean that, in a dispute under this Article, the complainant is limited by the evidence that it putsforward in the request for consultations.  This is clear from Article 4.2 of the SCM Agreement onconsultation and underlined by the draft Rules of Procedures for the PGE.
34   Rule 9 of those draft
procedures calls for simultaneous submissions.  Under the WTO dispute settlement system, theobligation is on the complainant to make its case, i.e. “the burden of proof rests upon the party,whether complaining or defending, who asserts the affirmative of a particular claim or defence”.
35
Accordingly, under expedited procedures such as those provided for in Article 4 of the SCMAgreement, it is necessary that the complainant set out all its facts and arguments prior to theestablishment of the panel.  Thus, Australia argues, the United States is limited to using thatevidence and those arguments explicitly set out in WT/DS126/1.
6.50 Australia also points out that the timing of some of the exhibits raises serious systemic
questions.  The complainant is required to provide a statement of available evidence at the time ofthe request for consultations.  An important systemic issue is how much of that evidence can bedeveloped after the request for consultations, or after the establishment, or even composition, of thePanel, under Article 4 of the SCM Agreement, but not provided to the respondent until the time ofthe first written submission to the Panel.  Some of the United States exhibits are dated well after therequest for consultations in WT/DS126/1.  For example, some are dated after the request for theestablishment of the Panel, while some are even dated after the composition of the Panel.  Otherexhibits are not even dated and some are essentially without provenance.
6.51 In the view of Australia, apart from the requirements of Article 4 of the SCM Agreement,
any expedited procedures make the receipt of new material virtually impossible to consider in atimely manner.  This problem can be compounded when new material is in non-electronic form.This emphasizes that any exhibits should have been provided at the time consultations wererequested, whereas not even a list of these exhibits was provided by the United States before theywere delivered in conjunction with its first written submission to the Panel.
                                                     
33 Australia cites the following paragraph from WT/DS126/1:
"This evidence consists of numerous statements and representations made by the GOA, Howe andHowe's affiliated and/or parent companies that have appeared in the media, official GOA publications
and GOA communications with the United States Government.  This evidence also consists of financial
statements of Howe and its affiliated and/or parent companies;  documents relating to the markets forautomotive leather and automobiles in Australia;  and other relevant information and materialsconcerning Howe, GOA export subsidy programs and the Australian market for automotive leather andautomobiles, including statements of experts on automotive leather and automobiles, and statements ofmembers of the automotive leather and automobiles industries."
34 G/SCM/W/365/Rev.1, 24 June 1996.
35 Appellate Body Report, United States - Measure Affecting Imports of Woven Wool Shirts and
Blouses from India ("United States-Shirts and Blouses "), WT/DS33/AB/R, adopted 23 May 1997, p. 14.WT/DS126/R
Page 18
6.52 Australia asserts that the United States' first submission had some 315 pages of non-
electronic exhibits, and that the paucity of information in WT/DS126/1 and the appearance ofalleged facts and arguments not covered in WT/DS126/1 raise a serious systemic issue.  The objectand purpose of expedited procedures are to deal with a measure that is causing such injury that itneeds to have a quick resolution under the DSU.  The aim of abbreviated procedures is not to placerespondents in a disadvantageous position or to allow extended manoeuvring by the complainant.This places the obligation on any Member having recourse to Article 4 of the SCM Agreement toprovide the respondent with the facts and arguments in advance, indeed at the time of requestingconsultations.  To allow a complainant to come forward with facts and arguments at the time of itsfirst submission is inconsistent with Article 4 of the SCM Agreement.  While, in this particularcase, the time frame was extended by mutual agreement to beyond 90 days, the dispute remainsunder Article 4 of the SCM Agreement and such an extension does not affect the rights andobligations of the parties.  Indeed, if the argument were to be made that this is some special casebecause of the extension of the time frame, the point would remain that the United States originallyasked for consultations on this matter on 10 November 1997 and the communication referred to inWT/DS126/1 was dated 4 May 1998.  If this was a genuine case for different procedures, thenpresumably the United States had made its case before then and could have provided Australia withthe information at that time.  Moreover, subsequently it was the United States that determined theprecise date for its first submission through calling for the Director-General to compose the Panel.Presumably, it did that only after it had finalized its first submission, though at least two of itsexhibits are dated later than that.  While it would not have met the requirements of Article 4 of theSCM Agreement, the United States could have, even at that time, provided Australia with at leastthe facts that it intended to put forward.
6.53 The United States contends that the Panel should reject Australia's request.  The plain
language of Article 4.2 does not require that the consultation request include "argumentation".  Nor
does the rule require that a list of exhibits be included.  Article 4.2 simply states that a statement of
available evidence with regard to the existence and nature of the subsidy shall be included.
6.54 The United States submits that, as is now well-established, the provisions of the WTO
Agreement must be interpreted in accordance with Article 31 of the Vienna Convention on the Law of
Treaties
36 ( the " Vienna Convention "), paragraph 1 of which provides:  "A treaty shall be interpreted
in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their
context and in the light of its object and purpose."  The ordinary meaning of the term "evidence" is as
follows:  "The available facts, circumstances, etc.  supporting or otherwise a belief, proposition, etc.,
or indicating whether or not a thing is true or valid."37
6.55 According to the United States, Australia has confused the requirements of the consultation
request with the parameters for the first submission by a complaining party.  The Working Procedures
in Appendix 3 of the DSU provide in paragraph 4 th at:  "Before the first substantive meeting of the
panel with the parties, the parties to the dispute shall transmit to the panel written submissions in
which they present the facts of the case and their arguments. " (emphasis supplied by the United
States)  There is no requirement in the DSU or the SCM Agreement that the complainant provide astatement of the facts and argument prior to the first submission.  To impose such a requirement
would render the first submission by the complainant pointless.
6.56 The United States maintains that the Panel must not lose sight of the facts that the provisions
of Article 4.2 of the SCM Agreement relate to a request for consultations, not a panel request and not
a panel submission.   A request for consultations necessarily takes place before the consultations are
                                                     
36 Done at Vienna, 23 May 1969, 1155 U.N.T.S. 221; 8 International Legal Materials 679 (1969).
37 The Concise Oxford Dictionary , 8th ed., Clarendon Press, p. 405.WT/DS126/R
Page 19
held, at a time when the complaining party cannot be expected to know everything about the measure
in question.  Indeed, Article 4.3 of the SCM Agreement provides that one purpose of consultations is
to "clarify the facts".  The United States recalls that the panel in United States – Imposition of Anti-
Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway  noted, "whereas the
greatest degree of precision could be expected in the definition of specific claims in a panel request,
the complaining Party could not be expected to define its specific claims with the same degree ofprecision at the time of its request for consultations."
 38    If the evidentiary requirements of Article 4.2
are construed to require a complaining Member to know all about a subsidy at the time of the
consultation request, this extreme burden will preclude  recourse to Article 3 except by those Members
with the largest resources for collection of informa tion.  According to the United States, this result
was never intended by the drafters.
6.57 The United States argues that, even with regard to a panel request, the Appellate Body has
found that it is sufficient "to list the provisions of the specific agreements alleged to have beenviolated without setting out detailed arguments as to which specific aspects of the measures at issue
relate to which specific provisions of those agreements."
39  The Appellate Body has further noted that
"there is a significant difference between the claims  identified in the request for the establishment of a
panel, which establish the panel's terms of reference under Article 7 of the DSU, and the arguments
supporting those claims, which are set out and progre ssively clarified in the first written submissions,
the rebuttal submissions and the first and second panel meetings with the parties."40   A fortiori , there
can be no requirement to present legal "arguments" in a consultation request that starts the process of
inquiry and dispute resolution under the dispute settlement provisions of the WTO Agreement.
6.58 The United States asserts that a review of its consultation request in WT/DS126/1 shows that
it included a detailed statement of the available evidence which supports the United States claim that
the subsidies in question contravene Article 3 of the SCM Agreement and which meets therequirements of Article 4.2 of the SCM Agreement.   The request for consultations in WT/DS126/1
specifically provided:
"The United States bases this request for consultations on evidence
indicating that the A $25 million loan and grants of up to A$30
million are in fact tied to Howe's actual or anticipated exportation orexport earnings.  In particular, this evidence indicates that:
- the grants and loan provide benefits to Howe, a company
with a troubled financial history that has received GOA exportsubsidies in the past and that has relied on these subsidies to expandthe exportation of its products;- the grants and loan were provided to compensate Howe forthe GOA's decision to excise automotive leather from two de jure
export subsidy programme - the Textiles, Clothing and FootwearImport Credit Scheme (TCF) and the Export Facilitation Scheme forAutomotive Products (EFS);- the grants and loan have the same purpose and effect as theTCF and EFS programme - that is, to allow Howe to continue toexpand the exportation of its products;
                                                     
38 ADP/87, adopted 27 April 1994, para. 334.
39 Appellate Body Report , European Communities – Regime for the Importation, Sale and Distribution
of Bananas  ("European Communities – Bananas "), WT/DS27/AB/R, adopted 25 September 1997, para. 141.
40 Ibid.WT/DS126/R
Page 20
- the vast majority of Howe Leather's sales are exports, and
this fact was well understood by the GOA when it agreed to provide
the grants and loan to Howe;- the Australian market is unable to absorb Howe's currentproduction of automotive leather and thus cannot absorb a significantincrease in that production - leaving exports as the only way Howecan utilize its increased production capacity and meet the aggressiveproduction requirements upon which the grants and/or loan areconditioned;  and- the grants and loan provided to Howe, Australia's onlyexporter of automotive leather, differ from other subsidies given bythe GOA and may well be unique.
This evidence consists of numerous statements and representations
made by the GOA, Howe and Howe's affiliated and/or parentcompanies that have appeared in the media, official GOApublications and GOA communications with the United StatesGovernment.  This evidence also consists of financial statements ofHowe and its affiliated and/or parent companies;  documents relatingto the markets for automotive leather and automobiles in Australia;and other relevant information and materials concerning Howe, GOAexport subsidy programs and the Australian market for automotiveleather and automobiles, including statements of experts onautomotive leather and automobiles, and statements of members ofthe automotive leather and automobiles industries."
6.59 Referring to Australia's implication that, given the expedited timetable of this dispute,
Australia has been put in a disadvantageous position because it did not receive the specific exhibits
relied upon by the United States until the time of the United States' first submission, the United States
points out that, first, the evidence in this case was extensively described in the consultation request.
This provided ample notice to Australia of the facts and evidence upon which the United States based
its belief that the subsidies in question violated Article 3 of the SCM Agreement.  Furthermore, the
vast majority, if not all, of the documents submitted with the United States' first submission fall withinthe description of the evidence provided in the consultation request, and the principal facts relied upon
in the first submission parallel the facts stated in the consultation request.  Given the description of the
evidence and the statement of the facts included in the consultation request, it seems disingenuous for
Australia to claim that it has been somehow blind-si ded or surprised by the facts and argument in the
United States' first submission.  Indeed, the United States asserts, Australia is more familiar than theUnited States with the nature and extent of the subsidies in question as well as the specific statements
by its own government, the media in Australia and Howe regarding the purpose of the replacement
subsidies, the Australian automotive leather industry and the financial condition of Howe in
particular.
6.60 The United States points out that Australia would prefer if the United States had been
required to present its first submission at the time of the panel request, and that Australia has proposed
exactly such a change in the rules in the current review of the DSU.  However, the DSU and the SCM
Agreement now provide only the requirements in Article 4.2 of the SCM Agreement and Articles 4.2
and 6.2 of the DSU, which the United States asserts that it has satisfied in this instance.
6.61 Australia  reiterates that, under Article 4.2 of the SCM Agreement, the complainant is
required to provide a “statement of available evidence”.  This is one of the conditions it must meet ifWT/DS126/R
Page 21
it wants a panel established under the expedited time frames of Article 4 of the SCM Agreement.
Australia asserts that the United States provided as a “statement of available evidence” in
WT/DS126/1 a list of unspecified documents.  It did not even provide citations of the documents it
was referring to, let alone provide copies of those documents.  Australia asks what use was that listing
to Australia in assessing the case brought by the United States?
6.62 Australia submits that, at the time the complainant makes its request under Article 4.1 of the
SCM Agreement, the ball is at its feet.  It has total control over the paper work and over much of the
timing of the process.  If it follows the rules, then  it can have a very quick outcome.  However, it must
follow the rules.  In Australia's view, there is something essentially unfair and biased where the
complainant can have expedited proceedings without the disclosure required under Article 4.2 of the
SCM Agreement.   If this practice were to be allowed, then a respondent could find itself in the future
even making its first submission to the PGE on the basis of a statement that the complainant has
evidence without specifying in any detail what it is.
6.63 In response to the statement of the United States on "disclosure" and on the meaning of
“statement of available evidence”, Australia states that the issue here is that under expedited
procedures of the SCM Agreement, the respondent has to know what the evidence is in order to
prepare its case.  This is different from usual DSU requirements.  The quid pro quo  of expedited
proceedings is that the complainant must show its  hand of the time of the request for consultations.
The purpose of expedited proceedings is not to disadvantage the respondent, but rather to obtain a
quick outcome.  According to Australia, Article 4.2 of the SCM Agreement is supposed to be a
guarantee that information necessary for a respondent to defend itself is provided.
D. ADMISSIBILITY OF EVIDENCE
6.64 Australia  asserts that, in the alternative, if the Panel does not agree to its requests for an
immediate  ruling that the Panel proceedings should be terminated or that the United States has failed
to establish its claims, the systemic issue of what evidence a panel (or the PGE) should accept still has
to be resolved.  If a statement in the request for consultations that amounts to little more in substance
than “we have evidence” is regarded as sufficient to meet the disclosure requirements of Article 4of the SCM Agreement, then that provision would be nullified.  This could lead to legalizing a catand mouse game between the complainant and the respondent, which would significantly alter thebalance of rights under the SCM Agreement and, indeed, affect in a substantial way the balance ofrights under the DSU.  In Australia’s view, the purpose of expedited proceedings is not todisadvantage the respondent.  Thus, as a systemic requirement, complainants have to follow cleardisclosure requirements.
6.65 In this context, Australia asks the Panel to rule that, as a result of the failure of the United
States to fulfil its "disclosure" obligations under Article 4 of the SCM Agreement, evidence submitted
by the United States that was not provided in  WT/DS126/1 should not be admissible in the
proceedings before the Panel.  In the alternative, Australia asks that the Panel rule that at least those
facts and arguments not explicitly set out in WT/DS126/1 but which would have been available tothe United States at the time it requested the consultations will be disregarded for the purposes ofthe proceedings of this Panel.  In support of this, Australia notes that Article 4.2 of the SCMAgreement says: “[a] request for consultations under paragraph 1 shall include a statement ofavailable evidence with regard to the existence and nature of the subsidy in question.”
6.66 In addition, Australia alleges that the United St ates has referred to answers provided in the
context of the consultations called for in WT/DS106/1 and urges the Panel to rule that any facts
derived by the United States from those consultations, including Exhibit 2, and arguments by the
United States based on them, are confidential to that process and not admissible before this Panel.WT/DS126/R
Page 22
According to Australia, this raises a different systemic issue.  This was part of the consultative
process that led to the establishment of a panel by the DSB on 22 January 1998.  That is not the same
panel as the current process.  Under Article 4.6 of the DSU, such consultations are confidential to that
panel process and so any material provided in that context is required to be treated as being
confidential to that panel process.  As a systemic matter, such evidence should not be admitted before
this Panel without Australia’s agreement (and there was no consultation on this), since it was providedunder a separate, confidential procedure.  As a systemic issue, if Members cannot have confidence
that the confidentiality provisions of the DSU will be respected, then these procedures will be
undermined.
6.67 The United States  asserts that it has satisfied the requirements of Article 4.2 of the SCM
Agreement, and so the Panel need not consider Australia's arguments.  If the Panel finds it necessary
to consider these arguments, the United States subm its that it would be inconsistent with the DSU and
the SCM Agreement to limit the Panel to consideratio n of only those facts explicitly set forth in the
consultation request.  Article 11 of the DSU directs a panel to "make an objective assessment of the
matter before it, including an objective assessment of the facts of the case and the applicability of and
conformity with the relevant covered agreements".  The Panel's task of "objective assessment" under
Article 11 is fundamentally incompatible with excluding from its examination relevant facts in thedispute before it.  Australia argues that a supposed violation of Article 4.2 should be punished, but
such a punishment is irrelevant and exceeds the authority given to the Panel under the DSU.  If the
consultation request in WT/DS126/1 has not satisf ied the requirements of Article 4.2 of the SCM
Agreement, the remedy would be for the complaining party to be required to start its case again.
6.68 According to the United States, no provision in the DSU or in the SCM Agreement provides a
legal basis for the Panel to exclude facts simply because they were "available" at the time of
consultations, but not explicitly stated in the consultation request.  Article 4.2 of the SCM Agreementdoes not state that "all" available evidence must be included in a consultation request, or even that
"the" available evidence must be included, thereby implying that the statement should be exhaustive.
It simply requires that the complainant include "a  statement of available evidence".  Moreover,
Australia does not suggest how the Panel should determine whether the evidence was "available" at
the time of consultations.  Just because a document may have been in existence at the time ofconsultations or a fact may have been ascertainable at that time, does not mean that the evidence was
necessarily "available" to the complainant at that time.  It would unduly prejudice a complainant if it
could not continue its investigation and development of the facts after the request for consultations.
6.69 The United States submits that the Panel should reject the arguments raised by Australia on
the issue of use in panel proceedings of material obtained during the consultations in WT/DS106/1.Article 4.6 of the DSU provides:  "Consultations shall be confidential, and without prejudice to the
rights of Members in any further proceedings" (emphasis supplied by the United States), without
making any distinction whether the proceedings are in the same case or in other cases.  There is no
basis for distinguishing between the treatment of facts from consultations in a dispute used in a later
phase of the same dispute, and the treatment of facts from consultations in one dispute used in anotherdispute.  Indeed, the reference to "further proceedin gs" would seem to lead to the conclusion that if a
panel excludes any evidence, it must start with evidence from earlier stages of the same  dispute.  Yet
panels can base their conclusions on material from consultations, and have done so on many
occasions.  According to the United States, Article 4.6 cannot be interpreted so as to bar this
widespread practice and frustrate the fact-finding ab ility of panels.  Article 4.3 of the SCM Agreement
provides that one purpose of consultations is to "clarify the facts".  Yet there is no point in clarifying
the facts if a complaining party cannot present the clar ified facts to a panel.  The logical implication of
Australia's argument is that a complaining party should be required to present erroneous facts to the
panel, even if the truth has been clarified in consultations.WT/DS126/R
Page 23
6.70 The United States maintains that, in India – Patents , the Appellate Body recognized the
widespread use in panel proceedings of facts from consultations:
All parties engaged in dispute settlement under the DSU must be fully
forthcoming from the very beginning both as to the claims involved in
a dispute and as to the facts relating to those claims.  Claims must be
stated clearly.  Facts must be disclosed freely.  This must be so inconsultations as well as in the more formal setting of panel
proceedings.  In fact, the demands of due process that are implicit in
the DSU make this especially necessary during consultations.  For the
claims that are made and the facts that are established during
consultations do much to shape the substance and the scope of
subsequent panel proceedings.
41
6.71 The United States points out that panels have also used material from other proceedings as a
basis for their conclusions, for example, in Argentina – Measures Affecting Imports of Textiles,
Apparel, Footwear and Other Items .42  As seen from the arguments at paragraphs 3.136-3.140, 3.153
and 3.164 and following in that panel report, the United States presented evidence based on a
document given by Argentina to the European Community during consultations with the European
Community in a related, but different, matter -- consultations which the United States had attendedunder Article 4.11 of the DSU.  As paragraphs 6.48- 6.50 of that panel report show, that panel relied
on that evidence and those arguments as a basis for its factual and legal findings, and ruled that "the
fact that the data was prepared by Argentina for other purposes is not relevant."
43   The Appellate Body
later found:  "We cannot find any error of law in the findings of the Panel based on the evidence
submitted by the United States on average calculations …"44 -- that is, the evidence from consultations
between Argentina and the European Community.
6.72 In the view of the United States, the real meaning and relevance of Article 4.6 can be seen in
the panel report in United States – Restrictions on Imports of Cotton and Man-made Fibre
Underwear45 ("United States – Underwear ").  In that dispute, Costa Rica used information on
settlement offers made by the United States to advance certain arguments to the panel.  The United
States recalls that the panel found that:
In our view, the wording of Article 4.6 of the DSU makes it clear that
offers made in the context of consultations are, in case a mutually
agreed solution is not reached, of no legal consequence to the later
stages of dispute settlement, as far as the rights of the parties to the
dispute are concerned.  Consequently, we will not base our findingson such information.
46
The United States argues that Article 4.6 of the DSU does not provide a basis for panels to mete outsanctions and exclude relevant factual evidence.  It simply calls for panels to disregard offers of
settlement, and not to treat such offers as admissions of guilt.
6.73 Australia  repeats that, pursuant to Article 4.6 of the DSU, the consultations under
WT/DS106/1 are supposed to be confidential and w ithout prejudice to the rights of any Member in
                                                     
41 WT/DS50/AB/R, adopted 16 January 1998 para. 94.
42 WT/DS56/R, adopted 22 April 1998.
43 Ibid., para. 6.51.
44 WT/DS56/AB/R, adopted 22 April 1998, para. 61.
45 WT/DS24/R, adopted 25 February 1997.
46  Ibid., para 7.27.WT/DS126/R
Page 24
further proceedings.  As a systemic issue, in Australia's view, the United States has no right to use this
information in the context of this Panel without obtaining leave from Australia.  Of course, if the
Panel rules in favour of Australia on any of its other requests for preliminary rulings, then this issue
becomes redundant.
VII. MAIN ARGUMENTS OF THE PARTIES
A. MEASURES
7.1 According to Australia , a key issue for any panel is what are the matters before it, in terms of
claims and measures.  Australia asserts that  the United States documentation (WT/DS126/1 and
WT/DS126/2) recognizes that there is more than one measure before the Panel.  WT/DS126/1 says in
its second substantial paragraph that: “these measures  appear to violate the obligations of the
[government  of Australia]”. (emphasis supplied by Australia)  Similarly, WT/DS126/2 says in its
second substantial paragraph that: “these measures  are inconsistent” (emphasis supplied by Australia).
In addition, throughout both documents, the United States consistently refers to “subsidies”.
Accordingly, Australia maintains, there are a number of different measures that the Panel will need toexamine.  Moreover, the Panel will need to examin e these measures separately in respect of their
consistency with Article 3.1(a) of the SCM Agreement.
7.2 Australia points out that the United States refers throughout WT/DS126/1 repeatedly to
“grants” and to “the grants and loan”.  The only measures specifically referred to in WT/DS126/1 are:
“a A$25 million loan, which was made on preferential and non-commercial terms, and grants of up to
another A$30 million”.
47   The United States goes on in the next sentence to refer to “ these measures
appear to violate …” (emphasis supplied by Australia).  In the third substantial paragraph of
WT/DS126/1, the United States says that it: “b ases this request for consultations on evidence
indicating that the A$25 million loan and grants of up to A$30 million … .”  In five of the six  tirets to
this paragraph, the United States refers to “the grants and loan”.  The fourth substantial paragraph of
WT/DS126/1 refers to “[t]his evidence”.  Australia argues that, in light of Article 4.2 of the SCMAgreement, since “evidence” is only referred to about “loan and grants” and “the grants and loan”,
these are the only measures covered by the claims of the United States.
7.3 Australia maintains that the “loan” is clearly the loan provided under the loan contract, and
this leaves to be determined what is meant by "the grants”.  According to Australia, the United States
has not proposed that the grant contract is a measure under the dispute.  Instead, it asked forconsultations about the actual payments, “the grants”.  There have been three payments made to date.
Two were made in 1997 and one was made in July 1998, i.e. after not just the request for
consultations but also after the establishment of the Panel.  Australia contends that the term "grants"
can only mean actual payments, since they have been distinguished from the actual grant contract, and
that since the United States has referred to thes e payments severally, each of the grants before the
Panel is a separate measure.  This leaves the question of which payments under the grant contract are
before the Panel.
7.4 Australia asserts that the second substantial paragraph of WT/DS126/1 says: “the
[government  of Australia] has provided subsidies to Howe that include … grants of up to another
A$30 million.”  The second tiret of the third substantial paragraph of WT/DS126/1 refers to “the
grants and loan were provided”.  Similarly, the first substantial paragraph of WT/DS126/2 says: “the
Government  of Australia has provided subsidies … [that] … include grants …."  These references can
only be to payments that had been made already.  The only payments under the grant contract that had
been made by the time of these documents, and indeed the date of the establishment of the Panel,were the first two payments in 1997 (of A$5 million and A$12.5 million).  Accordingly, the only
                                                     
47 WT/DS126/1,  first sentence of the second paragraph.WT/DS126/R
Page 25
grants referred to by the United States as measures in its request for consultations, and for the
establishment of a Panel, were these first two payments.  Thus, these, together with the loan, are the
only measures covered by the Panel’s terms of reference .
7.5 Australia states that the United States' claims are that each of the individual payments covered
by the terms of reference  of the Panel falls under Article 3.1(a) of the SCM Agreement.  The United
States' claims deal with each of the payments under the grant contract that are before the Panel as one
of the separate measures at issue.  No other explanation is consistent with the text and the normal
meaning of the terms “grant” and “grants”.  Australia asserts that, in the alternative, even if the Panel
decided to consider payments made subsequent to WT/DS126/1, or even to the establishment of the
Panel, it should consider each payment as a separate measure.
7.6 Again in the alternative, regardless of the view the Panel takes of the issue of what aspects of
the grant contract are before it, Australia argues that the United States has correctly recognized that
the loan is a quite separate measure from the grant contract or payments under the grant contract.  The
documentation consistently talks of “measures” rather than “measure” and the only consistent
interpretation of that is that the Panel is to examine each of the measures separately.  The Australian
government  entered into two separate, independent contracts with the company, the loan contract and
the grant contract.  These are legally different, unrelated instruments.  The United States has not made
any allegation to the contrary.  Australia contends that the Panel will need to assess the status under
Article 3.1(a) of the SCM Agreement of each of the measures before it (i.e. the loan and the first two
payments under the grant contract) on its own merits (or if the Panel takes the view that the grant
contract is a measure before it, then the loan contract and grant contract as separate measures).  Forthe sake of argument, even if the Panel finds that one of the measures was not consistent, it could find
that the others were consistent with Article 3.1(a) of the SCM Agreement.
7.7 According to Australia, the United States recogn ized that the grant contract was provided only
to cover the period through to 2000.  Indeed, it is a major theme to the United States' argument that
the grant contract was a “replacement” for automotive leather being excised from the ICS and theEFS.  The loan, on the other hand, was provided for 15 years regardless of the duration of the
previous or any future domestic support arrangements that might be subsequently introduced covering
automotive leather.
7.8 Australia submits that the terms of the loan contract and grant contract are different.  The
United States recognizes in its first submission in particular that there is no conditionality placed upon
the loan other than the natural due diligence ones to ensure that the government  gets its money back.
Moreover, Australia points out, the two contracts are independent.  Even if the company had received
only the first payment under the grant contract, the loan would have continued.  Thus, regardless ofwhat happens to production, the loan will continue, so long as the company meets the interest and
repayment conditions.
7.9 According to Australia, Articles 3.1(a) and 4 of the SCM Agreement are clear that
Article 3.1(a) of the SCM Agreement is about individual subsidies, not about an aggregation of
subsidies.  When examining whether a subsidy falls under Article 3.1(a) of the SCM Agreement, it is
necessary to look at each subsidy separately, measure by measure.  There is no issue of aggregation
such as can arise under Article 6.1(a) of the SCM Agreement.  Australia points out that:
(a) the chapeau of Article 3.1 of the SCM Agreement refers to: “the following
subsidies”;
(b) footnote 4 of the SCM Agreement refers to “the granting of a subsidy” and “[t]he
mere fact that a subsidy is granted”;WT/DS126/R
Page 26
(c) footnote 5 of the SCM Agreement refers to: “[m]easures referred to”; and
(d) Article 4 of the SCM Agreement continually refers to individual subsidy
programmes, e.g.: “a prohibited subsidy” in paragraphs 1, 5 and 7; “the subsidy” in
paragraphs 2, 3, and 7; and “the measure in question” in paragraph 5.
7.10 Accordingly, Australia argues, the Panel needs to consider the status of each measure quite
separately under Article 3.1(a) and footnote 4 of the SCM Agreement.  The fact that an enterprisereceives more than one subsidy does not mean that the status of one measure under Article 3.1(a) of
the SCM Agreement has any implication for other measures.  Again, there are other provisions underthe SCM Agreement where a Member can seek remedy if it considers that there is adverse effect from
the aggregation of a number of subsidies, i.e. unde r Parts III and V of the SCM Agreement.  However,
this case is limited to Article 3.1(a) of Part II of the SCM Agreement.  There is nothing in the text that
suggests, and the United States has made no argument, that the existence of a measure in breach of a
WTO obligation automatically determines the status under the WTO of any other measure benefitingthe same enterprise.  In particular, regardless of what finding the Panel makes about payments under
the grant contract (or the grant contract itself), the United States has made no allegation that the loan
is in any way contingent upon performance, let alone export performance.
7.11 The United States  submits that, in its request for the establishment of the Panel
(WT/DS126/2), the United States identified the specific measures at issue in this case:  "a A$25million preferential loan and grants of up to A$30 million."  There are two contracts between theAustralian government and Howe:  a loan contract and a grant contract.  The term "grants" includesany and all possible disbursements under the latter contract.  That is why the measure is phrased interms of "grants up to A$30 million."   According to the United States, the measures that have beentargeted in this case are therefore explicitly described in the panel request and Australia cannotclaim that it did not have adequate notice in this case of the claims.
7.12 The United States argues that, contrary to Australia's assumption, the term "grants" does
not serve to distinguish between actual payments and the grant contract.  Rather, the term "grants"includes all possible disbursements, whether past or future, and otherwise serves to distinguishwhether the funds were bestowed upon Howe pursuant to the loan contract or the grant contract.
Nowhere in the request for consultations or the panel request is the term "grants" limited to actual
payments.  In the view of the United States, it is nonsensical to assume that the United States wouldpursue a dispute settlement complaint on only past payments made under a single contract andignore any future payments that could be made under the same contract.
7.13 The United States  contends that the Panel should reject Australia's argument that the only
measures before the Panel are the A$25 million preferential loan and two payments made pursuant to
the grant contract.  In the view of the United States, Australia’s arguments are not supported by any
reasonable interpretation of the panel request.  The measures at issue include the loan contract and the
grant contract.  Under Article 7.1 of the DSU, the terms of reference of this Panel are to examine “the
matter refered to the DSB in WT/DS126/2.”  Pursuant to Article 6.2 of the DSU, in the request for the
establishment of a panel in this case (WT/DS126/2 ), the United States identified the “specific
measures at issue” as follows: “these subsidies in clude the provision by the Government of Australia
to Howe of grants worth as much as A$30 million and a A$25 million loan on preferential and
non-commercial terms.”  The United States underlines that the request states that the measures include
(1) the provision  by the government of grants worth as much as A$30 million; and (2) a loan.  The
ordinary meaning of the term “provision” is “the act or the instance of providing.
”48  The act or
                                                     
48 The Concise Oxford Dictionary , Clarendon Press, 8th ed., p. 962.WT/DS126/R
Page 27
instance of providing the grants in this case was the single grant contract.  Thus, the  measures at issue
in this case, as explicitly described in the panel request, include the loan contract and the grant
contract.  The United States emphasizes that the grant contract includes the government's
commitments to make payments and captures any and all possible disbursements under that contract.
7.14 Regarding the grant contract, Australia  asserts that it has a right under the DSU to be
informed by the complainant about the precise measure on which it is being challenged and the legalreason for it being considered to be a subsidy.  Australia maintains that it would appear from the
questioning to the United States by the Panel, that the Panel also is not clear about the issue.  It is
inappropriate that the United States should only be making the issue unequivocal at a late stage of the
Panel proceedings.
7.15 According to Australia, this issue is relativel y unimportant under Parts III and V of the SCM
Agreement, since the issue there is one of whether there is subsidization or not, and if so, how to
calculate it.  Under Part II of the SCM Agreement, the issue can be more fundamental to the process.In this case, Australia states, the complainant is re quired to prove that the granting of the particular
subsidy in question is in fact contingent upon export performance.  The elements of proof can be
different depending on the measure that is at issue.   For example, the facts and argument required to
demonstrate such proof regarding the grant contract would be different from the facts and argument
regarding the first A$5 million payment.
7.16 With respect to the United States' assertion that “it is nonsensical to assume that the United
States would pursue a dispute settlement complaint on only past payments”, Australia states that this
is not the issue.  The issue is, rather, what were the measure or measures that the United States
actually identified in its documentation.  In this rega rd, Australia asserts that it is worth noting that the
claims and measures are the same for the pane ls in both WT/DS106 and WT/DS126.  However, the
United States admitted that the request for consulta tions in WT/DS106/1 was inadequate in respect of
Article 4.2 of the SCM Agreement.  According to Aust ralia, since that error in the United States' view
was sufficient for it to force through the current Panel process, it would not be unreasonable to
assume that there could well be other flaws in the documentation, (i.e. apart from the issue of
disclosure under Article 4.2 of the SCM Agreement), including at least that the United States may nothave requested what it wanted.
7.17 Australia disagrees with the reference by the United States to the request for the
establishment of the Panel in WT/DS126/2.  While the request for a panel may limit the scope of
the Panel, it is not correct to argue that the request for the establishment of a panel can widen the
scope.  The original request for consultations (in this case WT/DS126/1) limits the scope.  A panelcannot be established with a scope wider than that envisaged under the original request forconsultations.   In any case, in asking for “the establishment of a panel to examine the matter”,paragraph 4 of WT/DS126/2 is referring to the matter covered by the consultations requested inWT/DS126/1 as set out in paragraph 3 of WT/DS126/2.  Australia states that the act or instance of
providing the grants is the provision of the tranches under the grant contract.
7.18 The United States  argues, in the alternative, that if the Panel finds that one of the measures,
i.e., the grant contract or the third payment thereunder, is not explicitly  described in the panel request,
the question becomes whether that measure is subsidiary, or so closely related, to a measure that is
specifically identified, that the responding party can reasonably be found to have received adequate
notice of the scope of the claims asserted by the complaining party.  The United States refers to thefollowing statement of the panel in  Japan - Measures Affecting Consumer Photographic Film and
Paper  ("Japan – Film "):WT/DS126/R
Page 28
To fall within the terms of Article 6.2, it seems clear that a ‘measure’ not
explicitly described in a panel request must have a clear relationship to a
‘measure’ that is specifically described therein, so that it can be said to be
“included” in the specified ‘measure.’49
7.19 According to the United States, in the instant case, there can be no question that the grant
contract itself and all payments made pursuant to the grant contract are subsidiary or so closely relatedto the measure described in the panel request that Australia received adequate notice that the United
States was challenging the grant contract, including any and all possible payments under that contract.
It is self-evident that the grant contract and the payments actually disbursed pursuant to the contract,
whether past or future at the time of the panel request, are subsidiary or closely related to the measure
described as “the provision by the Government of Australia to Howe of grants worth as much as A$30
million.”  Thus, even if the Panel does not agree that the panel request explicitly describes the
measures as the loan contract and the grant contract, it is clear that the measures as described can besaid to have “included” the grant contract itself and all payments made thereunder.
7.20 The United States asserts that Australia devo tes considerable time to arguing that the
measures described in the consultation  request limit the United States to challenging only the first two
payments under the grant contract.  Putting aside the fact that the language of the consultation requestcannot be reasonably construed to impose such a limitation, it is the panel request , not the
consultation request, that is relevant for determining the scope of the measures before this Panel.
50
The panel request specifically identifies the measures at issue in this case to include the loan contract
and the grant contract.
7.21 Australia  disagrees with the interpretation made by the United States of paragraphs 10.8 and
10.9 of Japan – Film .51  The issue in this current dispute is not about the inclusion of a subsidiary
measure.  Under the DSU, a claim must be specified, the specific measures at issue must be identified,
and there must be a brief summary of the legal basis of the complaint sufficient to present the problem
clearly.  This has not been done for this dispute.  Ultimately, it is up to the Panel to decide whether
the United States' request in WT/DS126/1 was sufficient to provide the basis for a “curing” of itsclaims in subsequent submissions.
7.22 The United States  submits that, in any event, contrary to Australia’s assumption, the term
“grants” as used in the consultation request does no t serve to distinguish between actual payments and
the grant contract.  Indeed, the Concise Oxford Dictionary  notes that the term “grant” means the
“process of granting or the thing granted."
52  Thus, the only reasonable interpretation is that the term
“grants” includes both the government’s co mmitment to make payments and the payments
themselves, including all possible disbursements, whether past or future.  Nowhere in the consultation
request, or the panel request for that matter, is the term “grants” limited to past payments.
7.23 In Australia's  view, the “definition” given by the United States of “grant”, i.e. “the process of
granting or the thing granted”, contains alternative meanings.  In WT/DS126/1 the United States talks
of “grants of up to A$30 million” (and in WT/DS126 /2 of “grants worth as much as A$30 million”).
The plural of “the process of granting” is “the processes of granting”.  Thus, on the basis of the first
meaning the United States is apparently talking about “the processes of granting [of] up to A$30
million”.  Each of these processes  must be in relation to an actual payment, since otherwise why not
say “grant of up to A$30 million” if that is the meaning attributed by the United States to “grant”?
This would suggest that the Panel should look at each of the payments separately.  The same
                                                     
49 WT/DS44/R, adopted 31 March 1998, para 10.8.
50 Ibid, para. 10.9.
51 WT/DS44/R, adopted 31 March 1998.
52 The Concise Oxford Dictionary , Clarendon Press, 8th ed.WT/DS126/R
Page 29
conclusion arises from using the second meaning “the thing granted”.  “Grants” then becomes “the
things granted”.  Accordingly, “grants of up to A $30 million” becomes “the things granted of up to
A$30 million.”
7.24 Australia  underlines that  the identification of what the complainant considers to be the
subsidy is critical to the argument of whether the granting of that subsidy meets the “in fact” standard
of Footnote 4 of the SCM Agreement.  This goes to the heart of what the measures are before the
Panel and the alleged “existence and nature of the subsidy in question”.  Under Article 4.2 of the
SCM Agreement, these were supposed to be identified in the complainant’s request for consultations.
7.25 In respect of the grant contract, Australia asserts that it remains unclear whether it is the grant
contract that is the subsidy at issue or the individual payments under the grant contracts  that are the
subsidies at issue.  This is central to what the United States must prove.
7.26 According to Australia, i f it is the grant contract, then the issue is whether the granting of the
grant contract was in fact tied to actual or anticipated exportation or export earnings.  Of course, the
two cases do overlap, since the way in which the actual grants are made go to the demonstration of the
nature of the grant contract itself.  The bases for the actual payments under the grant contract have
necessarily to be looked at to see what was in fact agreed between the Australian government  and the
company.  The record confirms conclusively that th e payments were not tied to actual or anticipated
exportation or export earnings.  This, in turn, proves that the granting of the grant contract was not in
fact tied to actual or anticipated exportation or export earnings.   Australia reasons that, i f, on the
other hand, it is the individual grants under the grant contract, the granting of each of them must beconsidered separately.  Trivially, the first tranche was only tied to the execution of the grantcontract and to nothing else.  Given the bases for the second and third tranches, there were clearlyno ties to export performance.
B. N
ATURE OF THE EVIDENCE PRESENTED
7.27 Australia  has serious systemic concerns about the nature of those United States exhibits
where the United States has chosen to use inter-governmental communications, without consultation
with Australia.  However, Australia recognizes that  this is not an issue for the Panel except where the
provenance has not been provided by the United States and the presentation may even be
misleading.53   On the other hand, it is important that the Panel address the issue of what cognizance it
should give to media reports and other comments by private parties, including the company, in
assessing governmental actions and decisions.  Australia submits that the Panel should place little or
no weight upon such exhibits, or at least take great care about assessing their probative value.
7.28 As an example of the risks of making misrepresentations of factual material, Australia points
to a specific paragraph in the United States' submissions to the Panel.54  In Australia’s view, these
numbers do not bear on the matter before the Panel.  However, the United States has chosen to
compare unlike situations here.  Until Howe was bought by ALH in 1994, it also produced furnitureleather.  A reorganization within the group of companies resulted in Howe dealing only with the
group’s automotive leather business.  Before the reorganization, Howe used to export more than
                                                     
53  Australia refers to a specific United States exhibit.  See its arguments  infra., para. 7.196.
54 This paragraph states:
"These subsidies have led Howe to dramatically change its sales patterns. In the late 1980s, exportsaccounted for less than 10% of its total sales; by 1997, exports comprised 90 percent of Howe’s sales.In addition, and as described in more detail below, the Australian government’s current replacementpackage for Howe is designed to subsidize the modernization and expansion of Howe’s productioncapacity, so that it can more effectively compete in international markets and continue its rapid
export-led growth."WT/DS126/R
Page 30
three-quarters of its automotive leather production.  Given the growth in the global market for
automotive leather both in Australia and in many othe r larger markets, it is not surprising that Howe’s
production has increased and that its sales to overseas markets have also increased.  Australia states
that business confidential information it provided to  the Panel regarding Howe's sales figures over the
period 1995/96 to 1997/98 showed that exports of automotive leather represented a significantly lower
share of Howe's total sales in this period than suggested by media and other reports cited by theUnited States.
7.29 The United States  asserts that it is worth noting that although Australia questions the
probative value of media articles, it has not specifically disputed any of the information the United
States has obtained from those articles.
7.30 The United States argues that Australia fails to counter any of the United States’ factual
evidence (such as Howe's current or anticipated exports or the small size of the Australian automotive
leather market) with facts that would undermine their credibility.  In fact, Australia does not evendeny their truthfulness.  Instead, Australia questions the probative value of relying upon newspaper
and other media articles.  However, it is entirely appropriate to rely on media articles in the absence of
other inconsistent information.  In fact, the evidence before the panel in Indonesia - Certain Measures
Affecting the Automobile Industry
55 included information from newspaper articles.  Although
Australia argues that the statements by Australian government  officials which appear in the press
should be considered in their proper domestic political context, Australia does not offer any evidencerebutting the statements quoted from the media releases and articles.
7.31 The United States asserts that the Panel should note the variety and volume of sources relied
upon by the United States in this case. The United States has not just cited one isolated newspaper
article; it has offered a range of articles from well-respected newspapers to industry magazines.  They
all have the same theme: Australia provided replacement subsidies to Howe to support its exportdrive.  Furthermore, the information obtained from the media articles was consistent with other
sources presented, including press releases from the Australian government .
7.32 Australia  does not accept this characterization of its position by the United States.   The fact
that Australia has not commented on each of the media articles and other such exhibits does not mean
that it accepts the conclusions that the United States has drawn from them.   In particular, Australia
does not accept that these media reports, with selective quotes and journalistic commentary, represent
any sort of evidence of the rationale for Australian government  decisions on trade and industry policy
issues.
7.33 Australia assumes that the media reports are accurate citations.
56   But all that they represent
are interpretations by the media.  In Australia, as in most, if not all, countries, being internationally
competitive and a successful exporter is seen as being admirable.  Comments attributed to ministers
and officials need to be taken in their proper domestic political context, where terms are not being
used with the same meaning and precision as in the context of the WTO.  It is commonplace for
comments to focus on success in selling in foreign ma rkets.  However, that is not the same as saying
that industry arrangements favour exports, or that in this case the comments represent evidence that
the recognized purpose of the measures in question were to favour exports, or are in any way “in fact
tied” to export performance.
7.34 Australia states that where quotations are cited they are necessarily selective (as are often the
United States excerpts) and were, no doubt, given in quite different contexts.  The ubiquitous “formersenior official” is often quoted in the media without any level of authority (or current knowledge).  It
                                                     
55 WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R, adopted 23 July 1998, para. 4.107.
56  Although Australia also refers to its arguments infra , para.  7.196 .WT/DS126/R
Page 31
would hardly be a productive exercise, and of no valu e to the Panel, for Australia to try to track down
the journalists and people interviewed and try to obtain from them what they had in mind at the time
and what they thought their comments would mean in terms of footnote 4 of the SCM Agreement.
Many of those interviewed presumably would be protected by journalistic confidence.  If such
exhibits are to be considered at all, they would need to be treated with great caution, since by their
very nature they do not represent the views of government  and are hardly in the realm of facts.  The
Panel’s obligation under Article 11 of the DSU is to “make an objective assessment of the matter
before it, including an objective assessment of the facts….”  In Australia’s view, relying on, and
drawing factual conclusions from, such sources in any way would not be consistent with this
obligation.
7.35 Against this background, Australia raises specific comment on some of the United States
exhibits.  For example, the United States purports to quote the Australian Deputy Prime Minister, Tim
Fischer, as saying: “by dint of effort, we [the Australian government ] have ensured that Howe Leather
has been able to continue its export activity over the last 18 months.”  This quote is from a newspaper
article of 29 September 1997 included in the United States exhibits.57  There are a couple points that
are worth making.  First, the references to “export activity” and “the last 18 months” are for the period
from the launching of the section 301 case in the United States and refer to preserving the right of
Howe to sell to its United States customers, where clearly the petitioners did not want the original
equipment manufacturers (OEM) market for automo tive leather to be contested by non-US firms.
This was about maintaining market access to the world’s largest market for automotive leather in theface of the dispute with the United States, not about export subsidization.  Secondly, the purported
quotation goes on to say that this was done “while honouring all of our WTO commitments.”  The
quote in the article also said that the new arrangem ents “fully complied with all the elements of the
agreement reached with the US last year.”  If the United States chooses to introduce selective
quotations as somehow representing “evidence” of the “recognized purpose” of the Australian
government , it should choose such quotations more carefully, as read in full they leave no doubt that
the government  had no intent of introducing prohibited export subsidy arrangements.
7.36 The United States points out that the 18-month period referred to by Trade Minister Fischer
included the six month period from April to September 1997.  This was after the replacement package
became operative.
7.37 Similarly, Australia continues , there is the media release by the Australian Minister for
Industry, Science and Tourism, John Moore, of 27 December 1996
58 where Mr Moore says that: “The
package safeguards the jobs of around 500 employees and will ensure that Howe and Co. can continue
to invest and grow as planned.”  This again underlines that the government ’s focus was not on some
sort of circumvention arrangement in respect of export subsidies, but the much more immediate
domestic task of maintaining jobs in disadvantaged regional areas, through WTO-consistent means.
7.38 In the same vein, Australia continues, Howe and its parent company did not make public
comments in the context of the WTO Agreement.   Presumably, when they commented in annual
reports, they simply sought to inform their shareholders about their current commercial prospects, as
they are required to do by domestic law.  However, again this has no bearing on issues concerningfootnote 4 of the SCM Agreement, and the legal issues involved in this case.  The views of companies
on trade policy or related legal issues that they would often find arcane are not relevant to the
consistency, or otherwise, of government measures.
                                                     
57 "Fischer vows to fight US trade challenge", The Australian, September 29, 1997, United States
Exhibit 45.
58  Commonwealth Government safeguards Howe jobs", Media Release, December 27, 1996, United
States Exhibit 2.WT/DS126/R
Page 32
7.39 As one final example, Australia considers the quote that ‘Howe’s then Managing Director
stated that he had been “assured” that Howe “would be compensated with an alternative arrangement
that would help it continue to expand exports”'.59  This needs to be put in context.  This is a company
that had been affected by a section 301 case in one of its major markets.  The Managing Director was
hardly going to send the wrong signal to potential customers.  In the reality of the market-place, he
had to confirm that the company was in business for the long haul in the United States market.  The
article implies that he did not know the details of the arrangements between Australia and the United
States and clearly he did not know what the new ar rangements would be.  Indeed, how could he since
they had not been designed, much less finalized, at that time.  The sense of the article is that the
Managing Director also recognized the need for any such assistance to be “within the WTO rules”.60
These are not the comments of someone being told th at a covert scheme would be crafted.  But rather
it is a story about a firm that the government  has said it would not abandon as a result of cutting
automotive leather out of two entitlement schemes.  That would be the plain reading interpretation of
that article.   As Australia has already stated, press articles are not government policy documents andare not always accurate in terms of facts, representation of individuals’ statements and the spin given
to a story by the author.  Nevertheless, Australia asserts, the full context of the quotes clearly
illustrates that WTO-consistency was an essential parameter for any new assistance arrangements for
the company.
C. A
RTICLE 1 OF THE SCM A GREEMENT
1. "financial contribution"
7.40 The United States  notes that, before addressing whether the measures in question constitute
subsidies "contingent … in fact upon export performance" within the meaning of Article 3.1(a) of the
SCM Agreement, the Panel must first consider wh ether the measures fall within the definition of
"subsidy" under Article 1 of the SCM Agreement.
7.41 The United States alleges that the assistance bestowed on Howe by the Australian government
constitutes subsidies under Article 1 of the SCM Agreement.  The Australian government directly
transferred two significant sums of money to Howe, one in the form of a grant and the other in the
form of a preferential loan.  The United States observes that Article 1.1(a)(1)(i) of the SCM
Agreement expressly states that both “grants” and “loans” qualify as “financial contributions” by agovernment.  Accordingly, the United States contends, the Australian government cannot dispute that
the A$30 million grant and the A$25 million preferential loan provided to Howe constitute financial
contributions within the meaning of the SCM Agreement.  ”
7.42 Australia  submits that the loan is a subsidy under Part I of the SCM Agreement, without
prejudice to issues such as calculation and its status under other parts of the SCM Agreement.
Australia also states that the payments under the gran t contract are subsidies within the meaning of the
SCM Agreement.  However, Australia submits that the United States has not demonstrated that thegrant contract is a subsidy, even though, on at least due process grounds, it should have been required
to do so in its first written submission to the Panel.  Australia underlines that it agrees with the United
States that the ‘“grants” … qualify as “financial contributions” by a government’.  However, the
United States then jumps to “the grant” conferring a benefit, which could be a reference to the grant
contract, or could possibly be a reference to each of  the individual grants referred to in the previous
paragraph.  Even assuming for the sake of argument that the reference is to the grant contract, the
                                                     
59 "Melbourne firm could lose in U.S. subsidies deal", The Age, November 25, 1996, p. 1, United States
Exhibit 15.
60 Ibid. Australia cites the following phrase:  “He said that he did not know what else the US
companies would have to complain about if an alte rnative arrangement was found that was within WTO
rules.”WT/DS126/R
Page 33
United States did not demonstrate the nature of the "financial contribution", as required for defining a
subsidy.
7.43 The United States  notes Australia's assertion that the United States has not demonstrated that
the grant contract itself is a subsidy.  This is a dubious distinction.  The grant contract is not a separate
measure from the payments made pursuant to the contract.  The grant measure at issue in this case is
the Australian government's commitment to make grant payments to Howe, which subsumes thedisbursements themselves.  A legally enforceable promise by the government to provide funds
constitutes an asset that Howe may rely upon in its business planning.  As such it is a "financial
contribution" that confers a "benefit" within the meaning of Article 1 of the SCM Agreement.
7.44 Furthermore, the United States asserts, if a party had to wait until the subsidy is paid out to
challenge it, such a requirement would have the effect of eviscerating the SCM Agreement's
disciplines for prohibited subsidies.
2. "benefit"
7.45 The United States  notes that to qualify as a “subsidy” within Article 1 of the SCM
Agreement, the financial contribution must have confer red a "benefit".  With respect to the grant, the
benefit is self-evident:  Howe has been given government money that it need not repay.  The
Australian government has provided Howe with a free source of capital that can be used to improve
its productivity, decrease its labour and material costs, improve the quality of its automotive leather,lower its prices and generally enhance its competitiveness.  Based upon an allocation of the benefits
received, the total benefits conferred on Howe in 1998 were A$31,977,692.71.
61
7.46 While the United States observes that a loan obviously differs from a grant in that it
eventually must be repaid with interest, the United States asserts that there are several indications that
the A$25 million loan at issue also conferred a “benefit” upon Howe.  These include:
(a) The Five Year Holiday on Principal and Interest Payments Confers a “Benefit”
7.47 The United States contends that, under the terms of the loan, Howe is not required to pay
principal or interest for the first five years, nor does interest accrue during this period.  According to
the United States, this is a valuable benefit to Howe.  First, there is a substantial savings to Howe of
the interest that it would have paid in the absence of the holiday.  Using the interest costs that  Howe’s
parent incurred for commercial borrowings as a benchmark, Howe saved approximately A$8,700,000
over the five-year period in interest payments..62  Howe also received the additional benefit of being
able to invest this money.  For example, if Ho we had invested the money in Australian government
long-term bonds (a conservative illustration), Howe would have earned a total of A$8,625,000 over
the five year period.63  Accordingly, the total benefit to Howe conferred by the five year holiday on
principal and interest payments based on a Australian government bond rate of 6.89% equals
A$17,325,000.64
(b) The Loan Provided Howe with Credit Terms More Favorable Than Those Howe
Could Have Obtained Commercially
7.48 The United States alleges that, in addition to supplying Howe with an interest-free loan for
five years, the Australian government also provided Howe with credit terms more favorable than
                                                     
61 United States Exhibit 50.  See infra , para. 7.55 for a description of this Exhibit.
62 United States Exhibit 51.  See infra , para. 7.56 for a description of this Exhibit.
63 Ibid.
64 Ibid.WT/DS126/R
Page 34
those it could have obtained commercially.  The loan given to Howe reflects a preferential interest
rate that, at the very least, the borrower would have to be creditworthy to receive. Yet, the United
States argues, for a significant part of the pa st decade, Howe’s financial condition has been
precarious.  In its fiscal year ending 30 June  1997, Howe’s parent company, Australian Leather
Upholstery Pty. Ltd., experienced a loss of A$6.9 million, which was attributable to Howe’s poor
financial performance.65  Howe’s parent also reported a A$2.6 million loss in the prior fiscal year,
1995/96.66  These financial difficulties are also reflected in the public statements of Schaffer, the
holding company for Howe’s parent corporation.  In its 1996 Annual Report, Schaffer reports that
1995-96 was a “difficult year for the automotive leather business” and that Howe’s “poor
manufacturing performance was a big disappointment” resulting “in a similarly substantial negative
turnaround."67  Such a track record was not unusual for Howe: in fiscal year 1993, it lost A$2.4
million68 and in fiscal year 1989, it lost A$3.7 million.69
7.49 According to the United States, Howe’s troubled financial history was well-known and
widely acknowledged.  For instance, the United States points out, a 1998 press report highlighted “the
need for management changes to improve Howe’s position and 'stop the red ink.'"70 Similarly, another
press article emphasized that Howe “would have dipped into losses in 1997 without the substantial
contribution it accrued from trading in import credits."71 Indeed, the Australian government has
publicly acknowledged that depriving Howe of export assistance could sound the company’s deathknell.  For instance, Minister John Moore characterized the replacement subsidies as “the minimum
required (and confirmed by independent international auditors) for Howe to remain viable."
72
7.50 In the view of the United States, these financial statements, press reports and government
releases confirm that Howe was in deep financial trouble at the time of the loan.  It thus appears
unlikely that Howe would have been able to secu re a 15-year loan amounting to approximately one-
fourth of its total sales volume from any commercial lender and most certainly not on terms that even
financially stable borrowers would find favorable.  If Howe had been able to get a 15-year loan in its
then-current state, the lender most likely would ha ve required substantial collateral and would have
charged an interest rate that was higher than the rate given to creditworthy companies.  Yet, despite
Howe’s unprofitability, the Australian government not only gave Howe a loan, it provided preferentialinterest rates.  The cut-rate financing is eviden t by comparing the interest charged Howe’s holding
company on its non-government loans and the rate the Australian government charged Howe in its
new aid package.  As of June 30, 1997, ALH repo rted A$31,373,000 in consolidated borrowings and
                                                     
65 Australian Leather Holdings Limited, Financial Statements, June 30, 1997, pp. 20-21, United States
Exhibit 26.  According to the United States, the financial statements reveal that Howe is likely the most
important company within the Australia Leather Upholstery Pty. Ltd. group.  Besides Howe, the group includesHowe & Co. (SA) (Pty.) Ltd. located in South Africa, Howe de Mexico SA de CV located in Mexico, and ALH
Staff Superannuation Pty. Ltd.  Ibid . at 20.  The footnotes to this list indicated that the ALH Staff
Superannuation Pty. Ltd. meets the definition of a small proprietary limited company as set out in theCorporations Law.  Ibid .  The financial statement also notes that the operations in South Africa and Mexico do
not have a material effect on the accounts.  Ibid. at 32.  Thus, the United States asserts, the financial results
identified for the Australian Leather Upholstery Pty. Ltd can reasonably be attributed to Howe’s operations inAustralia.
66 Ibid., pp 20-21.
67 Schaffer Corporation, Annual Report 1996, pp. 2-3, United States Exhibit 34.
68 Howe Leather, 1993 Annual Return, March 29, 1994, p. 2, United States Exhibit 35.
69 Howe Leather, 1990 Annual Return, May 21, 1991, p. 5, United States Exhibit 36.
70 “Australia: Leather Company’s Hide Wearing Thin,” Australian, February 2, 1998, United States
Exhibit 37.
71 “Sacred Cows vs. The Hide of Howe,” The Weekend Australian, September 20-21, 1997, p. 52,
United States Exhibit 22.
72 United States Exhibit 18.WT/DS126/R
Page 35
A$3,647,000 in consolidated interest and other finance charges.73  Based upon this information, the
company’s interest rate for its current borrowings was 11.62 per cent.  In contrast, the A$25 million
loan given to Howe was based on the government’s long-term bond rate, which averaged 6.89 per
cent for 1997, the year the loan was granted.74  Adding two percentage points to this rate, as required
by the terms of the loan, the interest on this loan  would only be 8.89 per cent, or approximately three
percentage points below the company’s rate based upon its then-current borrowings.  This results insaved interest payments, which clearly confer a benefit upon Howe.
(c) The Loan Is Not Adequately Secured
7.51 The United States alleges that a final indication of the beneficial nature of the A$25 million
loan is the fact that it is not adequately secured.  The loan appears to be secured by a second mortgage
over the assets and undertakings of Howe’s parent  corporation, ALH.
75  However, the United States
argues, a second mortgage of this nature would be inadequate for a commercial loan of this size and
duration.  For instance, Morgan Brooks Pty. Ltd. of Australia requires “[a] registered first mortgageover commercial, industrial, retail or residential investment real estate” for its commercial mortgages.
In this instance, however, neither ALH nor Howe could have provided a lender with a first mortgage,
since ALH’s other borrowings -- namely, its bank overdraft account, its commercial bills payable
account, and a bank loan -- appear to already have been encumbered by a first mortgage “over all the
assets and undertakings” of ALH.
76  Accordingly, the United States submits, the fact that the
government of Australia did not require Howe to pledge adequate security before extending the A$25
million loan constitutes yet another way in which the Australian government has conferred a “benefit”
on Howe.
7.52 Australia  submits that the loan is a subsidy under Part I of the SCM Agreement, without
prejudice to issues such as calculation and its status under other parts of the SCM Agreement.77
Australia also states that the payments under the gran t contract are subsidies within the meaning of the
SCM Agreement.  It is up to the United States, rather than Australia, to demonstrate that the grant
contract is a subsidy, and for Australia to respond to that.  The United States appears not to have made
such a demonstration, even though, on at least due process grounds, it should have been required to do
so in its first written submission to the Panel.
7.53 While it is not relevant to the issue in Australia’s view, Australia believes that it may be
worthwhile commenting on the United States point about Howe being in financial trouble.78  The
evidentiary value of the facts put forward by the United States is highly questionable, but in anycase they do not demonstrate this.  There are many highly creditworthy companies that have shortterm and even long term losses.  In Howe’s case, an assessment of its creditworthy position wouldinvolve an analysis of Howe itself, its parent co mpany and its ultimate controllers.  It would involve
an assessment of the creditworthiness of all of these entities.  If this was a genuine concern of theUnited States at the time, why did it insist that the grant contract money be devoted largely toinvestment?
                                                     
73 Australian Leather Holdings Ltd, June 30, 1997 Financial Statement, December 5, 1997, pp. 7, 9,
United States Exhibit 26.
74 United States Exhibit 53.
75 Australian Leather Holdings Ltd, June 30, 1997 Financial Statement, December 5, 1997, p. 24,
United States Exhibit 26.
76 Ibid. , p. 23.
77 Australia disputed the calculation issues raised in  this section.  See the arguments of Australia infra ,
paras. 7.57-7.59 and 7.62-7.72.
78 Supra , paras. 7.48-7.50.WT/DS126/R
Page 36
7.54 The United States  observes that Australia confirmed that it does not dispute that the loan and
the grant fall within the definition of “subsidy” in Article 1.  In addition, Australia concedes that the
loan was on concessional terms.  With respect to Australia's assertion that the United States has not
demonstrated that the grant contract itself is a subsidy, the United States maintains that the grant
measure at issue in this case is the Australian government's commitment to make grant payments to
Howe, which subsumes the disbursements themselves.  A legally enforceable promise by thegovernment to provide funds constitutes an asset that Howe may rely upon in its business planning.
As such it is a "financial contribution" that confer s a "benefit" within the meaning of Article 1 of the
SCM Agreement.
79
3. calculation and allocation of the "benefit"
7.55 As noted in paragraphs 7.45-7.51 above, the United States  made submissions relating to the
calculation and allocation of benefits conferred upon Howe under the grant contract and the loan
contract.  With respect to the grant contract, the United States referred to its Exhibit 50.  With respectto the loan contract, the United States referred to its Exhibit 51.  A brief description of these exhibits
follows.  United States Exhibit 50 is a table entitled "Allocation of Benefits from Grants Received by
Howe and Co. Pty. Ltd."  It has four main columns.  The first lists the years 1997-2010, based upon
an "estimated useful life of assets for Howe of 13 years".  The second main column is headed
"A$17,500,000 Grant Provided in 1997".  The third main column is headed "A$12,500,000 GrantProvided in 1998".  Both of the second and third co lumns are subdivided into two sub-columns:  (i)
"Unamortized Portion of Grant"; and (ii) "Interest Saved on Unamortized Portion".  According to the
United States, the latter is "calculated by multiplying unamortized amount of grant in given year by
11.6 per cent, which represents the interest rate Howe would have paid to finance the capital
investment absent the grant.  The interest rate was derived from information contained in the 1997financial statement of Australian Leather Holdings, Ltd. (ALH), Howe's parent company.  According
to the statement, ALH's consolidated borrowings (A$31,373,000) divided by consolidated interest and
other finance charges (A$3,647,000) yields an interest rate of 11.6 per cent for borrowings in 1997."
The fourth main column of the table is headed "Tot al of Grants Provided".  According to the United
States, "Total benefits equal total unamortized portion of grant plus total interest saved onunamortized portion in given year (i.e., in 1999, benefits equal A$26,346,154 + A$3,056,154 =
A$29,402,308)."
7.56 United States Exhibit 51 is a table entitled "Benefit to Howe Based Upon Repayment of $25
Million Loan After Five Years".  It has four columns.  The first column lists the years 1998-2002.
The second column is entitled "Interest Saved".  Accord ing to the United States, this refers to "Interest
saved because of five-year interest holiday".  The benefit is calculated as interest savings on
remaining principal (outstanding principal x 11.6 per cent).  The interest rate was derived from
information contained in the 1997 financial stat ement of Australian Leather Holdings, Ltd. (ALH),
Howe's parent company.  According to the statement, "ALH's consolidated borrowings
(A$31373,000) divided by consolidated interest an d other finance charges (A$3,647,000) yields an
interest rate of 11.6 per cent for borrowings in 1997."  The third column in the table is entitled
"Interest Earned".  The United States explains that this refers to "Interest earned on A$25 million.Annual interest equals A$25 million x 6.9% (average GOA bond rate in annual 1997)."  The fourth
column is entitled "Total", and lists the totals of columns 2 and 3 for the years 1997-2002.  It then
adds all of these totals, resulting in a sum of A$17,325,000.
7.57 Australia  points out that, with respect to the benefit conferred by the loan
80,, the United
States makes some sweeping assumptions about the way a subsidy might be calculated in the context
                                                     
79 Also see arguments of the United States, supra , paras. 7.43-7.44.
80  See the arguments of the United States supra , paras. 7.45-7.51.WT/DS126/R
Page 37
of Part II of the SCM Agreement, regarding benefit to the recipient and allocation over time.81
According to Australia, the issue of calculation and allocation of the measures is not before the Panel
(that is, beyond the question of whether each of the measures before the Panel is indeed a subsidy).
Accordingly, the Panel should not make any findings or suggestions on calculation and allocation
issues.
7.58 While Australia maintains that calculation issues are not relevant to the Panel, Australia
nevertheless asserts that the United States has grossly exaggerated the extent of subsidy provided by
the loan, including the benefits in the first five years.  This is not a case about United States
countervailing duty methodology.  For example, the United States82 uses a method of determining the
level of subsidy from a loan (which it describes as  a conservative illustration), which assumes that the
money is invested in government bonds.  Clearly, in that case, the benefit to the company would be
just the returns from the bonds.83   No company would borrow at a high interest rate to invest at a
lower one.  It makes no economic sense to add the second and third columns in the table in United
States Exhibit 51 to calculate the level of subsidy, since this is just double counting.
7.59 On the actual calculation of benefits under the grant contract, again as with the loan, this is
not a case about United States countervailing duty methodology.  Few, if any, other jurisdictionswould, in an allocation scenario, add the total unamortized portion to the interest saved and call thatthe annual benefit.  This leads to the calculated benefit from the potential maximum payments ofA$30 million over 1996/ 97-1998/99 (July/June) as being A$31, 977,692 in 1998 alone.  The sum of
the calculated annual benefits derived from the unamortized payments, excluding interest payments,comes to A$210 million in the table in United States Exhibit 50.  This is seven times greater thanthe A$30 million cap on payments.
7.60 The United States  notes that Australian government  contends that the calculations "grossly
exaggerate" and erroneously calculate the amount of benefit provided.  Australia has misconstrued the
United States' calculations for the benefits conferred by the grant and loan.   With respect to the grant,
the Australian government suggests that the United States is claiming that the total benefit provided
for the A$30 million grant is A$210 million.  That is not correct.  The total "value" of the benefit to
Howe in 1998  was A$31,977,692.  However, these benefits are not intended to be cumulative.  The
United States did not suggest that the annual benefit for each year would be added together to arrive at
a "total benefit", as the Australian government suggests.  Rather, these calculations represent the
"value" of the benefit in each particular year.   As the table in United States Exhibit 50 shows, the
value of the benefit declines gradually over time.
7.61 With respect to Australia's contention that the benefit conferred by the loan has been
miscalculated, the United States submits that, again, Australia has misconstrued the benefitcalculations.  These calculations reflect the fact that Howe received a double benefit when it received
a preferential loan with a five-year interest holiday.  First, column two in United States Exhibit 51
represents the interest that Howe would have had to pay if Howe could have secured a commercial
loan for A$25 million to finance its capital expenditures.  Because Howe was not required to repay
any interest for five years, it obviously received a benefit from this five-year holiday.  The higherinterest rate used in this column reflects the ra te at which Howe would have had to borrow funds,
based on the company's financial statement.  The Australian government has provided no evidence to
                                                     
81 Australia refers to supra ., paras. 7.46-7.51 and to United States Exhibit 51, which is described supra ,
para. 7.56.
82 Australia refers to the United States argument in supra , para. 7.47, and to United States Exhibit 51,
which is described supra , para. 7.56.
83 Australia refers to the third column in the table in United States Exhibit 51.  Australia states that
this accepts solely for the sake of commenting on this calculation the use of the zero interest rate rather thanallocating the 2% premium interest paid  over the last ten years of the loan.WT/DS126/R
Page 38
suggest that Howe's borrowing rate would be lower.  In fact, its actual rate could have been
considerably higher in light of its financial diffic ulties.  The third column reflects the interest that
Howe could have earned on A$25 million if it invested this money.  If, as Australia suggests, Howe’s
investment yielded a higher return than the gove rnment bond rate, then the benefit to the company
was even larger.  In other words, the United States’ use of the bond rate was a conservative estimate
of Howe’s return.  Combining these two columns does not "double count" the same benefit becauseHowe was in fact receiving a double benefit.  First, unlike a regular commercial loan, Howe is not
required to pay back any interest for the first five years, as it would have had to do if it had borrowed
money at a commercial rate.  Thus, it is receiving the benefit of a five-year interest-free period.  The
benefit from the interest-free period is reflected in the second column.  Moreover, Howe was given
the money to use, and thus received a benefit from this receipt of funds.  The benefit received from
having access to these funds is reflected in the third column.  Thus, the United States properly
cumulated these two benefits to derive the full measure of the benefit from the loan for the first five
years of the loan.
7.62 Australia  continues to disagree with the United States calculations in United States Exhibits
50 and 51 even for countervail or other purposes.  The United States clearly misunderstood the points
that Australia made.  The fact that Australia makes these comments should not be taken to imply that
Australia accepts any aspect of the United States' approach in respect of the grant or loan contracts.
7.63 In respect of the grant contract, Australia observes that the United States confirms that the last
column of its Exhibit 50 is supposed to set out the computed benefit in each year of the total possible
payments under the grant contract.  It is unclear what the United States means when it says that “thesebenefits are not intended to be cumulative.”  Benefits of allocation of subsidies must be in some sense
cumulative, subject to present value considerations, otherwise the concept is meaningless.   Australia
contends that t he figures of A$19,530,000 and A$31,977,692 for the benefits in 1997 and 1998,
respectively, far exceed the total potential payments.  However, Australia does agree with theimplication of the first two rows that the potential payments have been totally expensed in theperiods for which they would be received.
7.64 In respect of the loan contract, Australia asserts that the concept of benefit is based on the
idea that enterprises borrow money to do something with it.  The benefit for countervail purposes ofa government loan is based on the difference between what the government charges and thecomparable commercial rate (alternatively the borrowing cost of the government for a cost togovernment calculation). The benefit from the subsidy has nothing to do with what the enterprisedoes with the money so long as it is free to do what it wants with it.  An enterprise that borrowscommercially has exactly the same capacity as an enterprise benefiting from a government loan touse borrowed money to generate income.
7.65 Australia submits that the calculations in United States Exhibits 50 and 51 and the related
arguments, while irrelevant to the current case, we re wrong.  According to Australia, the United States
has not disputed this.  Nor has it explained the disconnect between its approach to the allocation of the
grants over time and its claim that they are tied to export performance.  The specific period of the
grant contract is to mid-2000 -- no longer.  The payments under the grant contract were based onreports for the period to mid-1998.  If they were  tied to export performance, then they became
exhausted after the time period for those exports.  Alternatively, under the logic of the United States'
case about replacement measures, subsidies should be allocated across the period for the schemes they
are supposedly replacing, i.e. through to mid-2000 or  at most end-2000.  Although irrelevant to this
case, the allocation across lengthy periods on the basis of investment underlines that the United Statesin reality does not see any linkage between the measures and export performance.WT/DS126/R
Page 39
7.66 In addition, Australia asserts that the United States' position on the issues of calculation and
allocation inherently contradicts aspects of its argument on the issue of "contingent … in fact" under
Article 3.1(a) of the SCM Agreement.  In the case of the loan, the United States first looks at the value
of the loan over the period to 2002 and also at the rest of the loan period when referring to more
favourable credit terms.84 The United States has argued that the measure is a replacement for a
programmes that ran until 2000 (30 June 2000 for ICS and 31 December 2000 for EFS) and that thisin some way taints the replacement measures.  It is arguing here about the benefits this measure
allegedly provides the company over a fifteen year period, with even the first five years extending
beyond 2000.  An export subsidy must be tied, attached in some way, (“in law or in fact”) to exports.
Exports in turn must have, or be going, to occur in some particular period for the discipline to have
any meaning.  Australia argues that the United States has not produced any facts that demonstrate
that the loan should be considered to fall under Article 3.1(a) of the SCM Agreement.  Its argumentseems to be based solely on an association between the loan contract and the grant contract.
7.67 Australia also notes that the United States has allocated payments under the grant contract
across the period to 2009 for the first two payments (i.e. those measures before the Panel) and 2010
for the total potential payment in 1998/99.
85  As in the case of the loan, this gives rise to
inconsistencies in the United States' arguments.  The facts presented by the United States state that theperformance targets, investment and sales, are lim ited to the period to 2000, i.e. the grant contract
only covers the period to 2000.  Indeed, the United States' arguments about the grant contract’s
relationship with ICS and EFS turn on it being for the same period as the company would have
attracted entitlements under those plans, i.e. mid-2000 and end-2000, respectively.  However, United
States Exhibit 50 seeks to allocate the first two payments and the residual potential payment over athirteen-year investment period to 2010.  The United States has not even made an allegation, let alone
produced any facts, that there is any connection made by the Australian government  to any form of
performance after 30 June 2000.  By allocating the entire A$30 million over an investment period, the
United States appears to be arguing that none of the money paid out should be attributed to sales.  On
that basis, presumably no weight should be pu t on any of its arguments regarding linkages between
payments and sales requirements.
7.68 Australia maintains that the United States is seeking to have it both ways through making an
allocation across time as if for countervailing or possibly consideration of investment subsidies for thepurposes of Article 6.1(a) of the SCM Agreement.  Whatever relationship the second and third grant
payments bore to any sales, those sales would have essentially gone.  The United States argues that
the grant contract is a substitute for ICS and EFS, over the remainder of their duration, but they both
terminate in 2000, not in 2010.  According to Australia, the reality is that the United States is focusing
on a serious prejudice case, not a case under Article 3.1(a) of the SCM Agreement.
7.69 Australia asserts that the “in fact” condition in Article 3.1(a) of the SCM Agreement is there
to deal with circumvention cases where a government provides money contingent on exportperformance but does so in a manner other than through legislation or legal contract.  It is not there as
a trade effects test, which would have to be assessed on a case-by-case basis.  The United States hasnot produced or alleged that the contract involves circumvention.  Rather, it relies on economic tests
and arguments.
7.70 Australia asserts that t he work under Annex IV of the SCM Agreement to elaborate
calculation issues for Article 6.1(a) of the SCM Agreement involves a merger of the cultures of themultilateral remedy and countervail.  A number of Members have some problems with aspects of
                                                     
84 Australia refers to supra , para 7.47 and to United States Exhibit 51, which is described supra ,
para. 7.56.
85 Australia refers to supra , para. 7.45, and to United States Exhibit 50, which is described supra ,
para. 7.55.WT/DS126/R
Page 40
this.  However, regardless of the merits of that work on allocation, there is nothing under
Article 3.1(a) of the SCM Agreement that would allow such an allocation across time for thepurposes of this rule.  Article 3.1(a) is about actual exports. If a Member provided export subsidies,for the sake of example, assume that these were straightforward export subsidies contingent in lawupon the export of 100 widgets.  The measure would no longer be in place once those 100 widgetshad been exported.  The condition would no longer have any force.  It would be absurd to suggestthat somehow future activities of a company were tainted because past performance had beensubsidized.   This is not an issue for Part II of the SCM Agreement.  It may be an issue for Part III,i.e. serious prejudice, but that would depend on the circumstances.
7.71 Australia argues that the United States, by presenting the measures as being allocated across
time, is accepting that there is no linkage between the granting of the measures and exportperformance.  Thus, the United Stat es is implicitly accepting that th e measures do not meet the “in
fact” standard of Article 3.1(a) of the SCM Agreement and are consistent with that Article.
7.72 Of course, Australia continues, in many instances, there may be no remedy at all for a past
measure, certainly not under Part II of the SCM Agreement.  This is in keeping with GATT/WTO
practice.  It is important that there not be some confusion between the retrospectivity of seriousprejudice cases and countervailing duty action, and normal rules under the WTO.  If a tariff is found
to be in breach of a binding, then the remedy is to  bring it into conformity.  It is not to go back and
find all the importers of record who may have paid too much over whatever period the tariff was in
force.  In Australia's view, the job of the dispute settlement system is to obtain consistency, not
retrospective compensation or penalty.
7.73 The United States  asserts that it provided the subsidy calculations to demonstrate, as a
preliminary matter, that the grant and loan did confer a benefit upon Howe.  However, the Australiangovernment has misinterpreted the United States' argument with respect to the calculation of the
benefit.  Australia suggests that the method used by the United States to value the benefit is
inconsistent with the United States' position that these benefits were tied to exports.  The method used
to calculate the value of the benefit is not directly related to the question of whether a subsidy is, or is
not, an export subsidy.  The calculation methodology and the legal and factual criteria for "in fact"subsidies are not interchangeable.  Rather, the calculation methodology simply reflects the common
sense inference that a benefit received from a grant or a preferential loan will extend well beyond the
precise moment that the grant or loan is given.  Thus, Howe continues to benefit now from the past
receipt of the replacement subsidies.
7.74 The United States submits that, in addition to demonstrating that a benefit was conferred, the
benefit calculations are useful for determining an appropriate prospective remedy should the United
States prevail in this case.  Article 4.7 of the SCM Agreement provides that “[i]f the measure in
question is found to be a prohibited subsidy, th e panel shall recommend that the subsidizing Member
withdraw the subsidy without delay.”  Although th e subsidies in this case are non-recurring, the
United States asserts that, given the substantial size of the subsidies involved, it is appropriate toallocate the amount of the subsidies over time in order to fashion an appropriate prospective remedy.
This is because the subsidies continues to exist -- and therefore may be “withdrawn” -- for as long as
they continue to benefit the recipient.
7.75 Australia  submits that the United States did not ask the Panel to reach a finding on remedy
beyond Article 4.7 of the SCM Agreement.  Australia requests the Panel not to make a
recommendation or suggestion on remedy consistent with Article 19.2 of the DSU.  Were the Panel to
find that some measure was inconsistent with Article 3.1(a) of the SCM Agreement, the way in whichAustralia chose to bring itself into compliance, if it were necessary to take any action at all, wouldWT/DS126/R
Page 41
depend on the actual findings of the Panel.  Aust ralia’s obligations would be to bring itself into
consistency regarding the nature of any outstanding measures.
7.76 The point Australia has made is that the argument that the benefit of the subsidies should be
allocated across time means that the complainant would have to demonstrate that the tie to exports
stretches across the same time period.  By arguing about allocation across time, the United States
has created an inconsistency in its approach.  On the one hand, it implies that there is a tie toexports over a lengthy period.  On the other hand, it argued about exports over 1997-2000 underthe grant contract.
D. A
RTICLE 3.1( A) OF THE SCM AGREEMENT
1. Text of Article 3.1(a)
7.77 Article 3.1(a) of the SCM Agreement states:
3.1 Except as provided in the Agreement on Agriculture, the
following subsidies, within the meaning of Article 1, shall beprohibited:
(a) subsidies contingent, in law or in fact
4, whether solely or as
one of several other conditions, upon export performance,including those illustrated in Annex I
5;
_____________________________________________________________
4This standard is met when the facts demonstrate that the granting of a
subsidy, without having been made legally contingent upon export
performance, is in fact tied to actual or anticipated exportation or export
earnings.  The mere fact that a subsidy is granted to enterprises which exportshall not for that reason alone be considered to be an export subsidy withinthe meaning of this provision.
5Measures referred to in Annex I as not constituting export subsidies shall not
be prohibited under this or any other provision of this Agreement.
2. Principles of treaty interpretation
7.78 The United States  recalls that Article 3.2 of the DSU provides that the covered agreements
shall be interpreted in accordance with “customary ru les of interpretation of public international law”,
and that the Vienna Convention  sets forth the customary rules of treaty interpretation.86  Accordingly,
the rights and obligations of the parties under the SCM Agreement must be interpreted in accordance
with the Vienna Convention .  Article 31 of the Vienna Convention  provides that “a treaty shall be
interpreted in good faith in accordance with the or dinary meaning to be given to the terms of the
treaty in their context and in light of its object and purpose.”  According to Article 32, recourse to
supplementary means of interpretation including preparatory work, inter alia , may be had “in order to
confirm the meaning resulting from the application of Article 31.”
                                                     
86  The United States asserts that the basic rules of treaty interpretation have been repeatedly relied on
by the Appellate Body and WTO panels in interpreting the WTO Agreements, and refers to, e.g., United States -
Standards for Reformulated and Conventional Gasoline  ("United States – Gasoline "), WT/DS2/AB/R, 29 April
1996, p. 16 (“[Article 31] forms part of the ‘customary rules of interpretation of public international law’ whichthe Appellate Body has been directed, by Article 3(2) of the DSU, to apply in seeking to clarify the provisions
of the GATT 1994 and the other ‘covered agreements’").WT/DS126/R
Page 42
3. Interpretation of the phrase "contingent in law or in fact upon export performance"
(a) application of the customary rules of interpretation of public international law
7.79 The United States  notes that, in this case, the ordinary meaning of the text of Article 3.1 of
the SCM Agreement prohibits the replacement subsid y package provided to Howe by the Australian
government.  Article 3.1(a) of the SCM Agreem ent prohibits “subsidies contingent in law or in fact ,
whether solely or as one of several other conditions, upon export performance.” (emphasis suppliedby the United States).  Thus, the prohibition in Article 3.1(a) extends not only to subsidies expressly
based on export performance ( de jure  export subsidies), but also to subsidies that are in fact  based
upon export performance ( de facto  export subsidies).  The term “subsidy” is defined in Article 1 of
the SCM Agreement as a “financial contribution” by a government, such as a loan or a grant, that
confers a “benefit.”  The ordinary meaning of the term “benefit” is captured by its dictionary
definition:  a benefit is “a favourable or helpful factor or circumstance; advantage, profit."
87
7.80 According to the United States, the dimensions and purpose of the prohibition on de
facto export subsidies are illuminated by the drafting history of this provision.  The Agreement on
Interpretation and Application of Articles VI, XVI and XXIII of the GATT (the "Tokyo Round
Subsidies Agreement”) provided generally in Article 9 that “Signatories shall not grant export
subsidies on products other than certain primary products”, and this prohibition included all export
subsidies – both de jure and de facto.  During the Uruguay Round negotiations in
Negotiating Group 10 on subsidies and countervailing measures, the European Community proposed
that the application of the prohibition to de facto export subsidies be clarified:
The prohibition of export subsidies in Article 9 of the Subsidies Code
should be reformulated in order to define clearly its scope.  This
prohibition must apply to all export subsidies, that is, all governmentinterventions which confer, through a charge on the public account (in
the form of direct financial outlays or revenue foregone, such as tax
relief and debt forgiveness), a benefit on a firm or an industry
contingent upon export performance.
In addition, since experience has shown that government practices
may be easily manipulated or modified in order to avoid this
prohibition, it is apparent that a prohibition only of those subsidies
which are de jure  (that is, expressly) made contingent upon export
performance is open to circumvention.
The prohibition, in the present discipline also applies to subsidies de
facto contingent upon export.  This, however, makes it necessary to
provide for clearer guidance in identifying de facto export subsidies
… De facto export subsidies are those where facts which were known
-- or should clearly have been known -- to the government when
granting the subsidy demonstrate that the subsidy, without havingbeen made expressly contingent upon export performance, was indeed
intended to increase exports.
88
7.81 The United States submits that footnote 4 in the text of Article 3.1 of the SCM Agreement
clarifies that the “in fact” standard “is met when the facts demonstrate that the granting of the subsidy,
                                                     
87 The Concise Oxford Dictionary,  8th ed., p. 102.
88 MTN.GNG/NG10/W/31, 27 November 1989, Elements of the Negotiating Framework -- Submission
by the European Community .WT/DS126/R
Page 43
without having been made legally contingent upon export performance, is in fact tied to actual or
anticipated exportation or export earnings.”  While the note also cautions against finding a de facto
subsidy on “the mere fact that a subsidy is accorded to enterprises which export”, this admonition is
premised on finding an export subsidy based on “that reason alone”, that is, where the fact that the
recipients happen to export is the only factor indicating that a subsidy is a de facto export subsidy.
7.82 In addition, the United States contends, the Uruguay Round negotiations expanded the scope
of a prohibited subsidy.  Rather than requiring that export performance be the “only” or the “most
important” element, Article 3.1(a) provides that export performance may be either the sole
contingency for the subsidy or merely “one of several other conditions”.  The export requirement
therefore does not need to carry preponderant weight in the approval of benefits to qualify as an
export subsidy.  Rather, an export subsidy will exist when actual or anticipated exportation is merely
one of several potential criteria influencing the bestowal of benefits.  This expansion of the definition
in the SCM Agreement recognizes the serious and harmful consequences flowing from export
subsidies.  Thus, even in circumstances where export performance is only one of several criteria for
award of the subsidy, a finding that the subsidy is a prohibited subsidy would be warranted and,
indeed, compelled.  Moreover, by explicitly including a footnote emphasizing that subsidies are
prohibited without having been made expressly contingent upon export performance, the SCM
Agreement recognizes that Members may well attempt to mask the export-orientation of particularbenefits by claiming that they are bestowed without explicit contingencies.  Yet, if the totality of the
circumstances reveals that these benefits are designed to promote exports, then such benefits fall
within the broad definition of Article 3.1(a).
7.83 Australia  submits that the Panel is being asked to address a number of issues that have far-
reaching implications for the interpretation of Article 3.1(a) of the SCM Agreement. Australia assertsthat the Panel is being asked by the United States to widen the application of the “in fact” condition in
Article 3.1(a) of the SCM Agreement to include the nature of any prior measure and to interpret it as a
trade effects test on the basis of a subjective, case-by-case assessment of the level of exports by an
enterprise.  This movement away from the hard rules-based approach of Article 3 of the SCM
Agreement was rejected by Australia.
7.84 Australia contends that the issue whether the subsidies are contingent “in fact” upon export
performance has to be analysed in the context of footnote 4 to Article 3.1(a) of the SCM Agreement,
which defines, and thereby limits the scope of, “in fact”.  
 Australia asserts that the onus is on the
United States to demonstrate that the conditions are met.  Inter alia , the United States has to:
(a) present the relevant “facts” to the Panel; and  (b) prove that these facts demonstrate that thegranting of the subsidy is in fact tied to actual or  anticipated exportation or export earnings.  This is
not a question of analyzing the incidence of a subsidy as distributed between domestic and export
sales.  This is a matter of proving that the act of granting the subsidy is tied to export sales.
According to Australia, the United States does not do that.
7.85 Australia argues that this means that the required proof is not one of economic inference but
rather that the actual or anticipated exportation or export earnings are actually tied to the granting of
the subsidy.  The second sentence in footnote 4 means that it is not sufficient to look at a company’sexports to demonstrate the “in fact” standard.  Rather, the complainant must produce facts that show
the granting is actually tied to export performance.   The fact that an enterprise has a high level of
exports, or the fact that its exports are increasing, do not demonstrate that the standard of footnote 4
has been met.  The wording of the text is to dist inguish between the situation where something is set
out explicitly in legislation or regulation and where there is some non-legislative, administrativearrangement whereby the granting of the subsidy is actually tied to export performance.  Australia
states that neither is true in this case.WT/DS126/R
Page 44
7.86 Australia asserts that the rules are more rigorous for export than domestic subsidies because
export subsidies allow companies to sell more cheaply on export markets while benefiting from
higher domestic prices.  Hence, the original bi-lev el price test in Article XVI:4 of GATT 1947.  This
was obviously too simple to prevent circumvention and the rules were elaborated leading to the
Illustrative List annexed to the Tokyo Round Subsidies Agreement.  Again, these were all measures
that targeted, that favoured, exports.  There was never any suggestion that some high level of exportstest would apply.
7.87 According to Australia, the SCM Agreement maintains the Illustrative List (with some
changes and interpretations in Annexes II and III ) and the concept of “export performance”.  For a
subsidy to fall under Article 3.1(a) of the SCM Agreem ent, whether in law or in fact, its granting must
be conditioned on “export performance”.  This is not about it being an exporting firm or being export
ready.  It is about favouring concrete, tangible exports.
7.88 Australia maintains that the SCM Agreement is permissive of subsidies that do not fall
under Article 3.1.  Such subsidies are not prohibited by the SCM Agreement.  For example,traditional subsidies paid on the basis of production are clearly permitted under the SCMAgreement.  This is reflected in the structure of the SCM Agreement, where Part II of the SCMAgreement does not apply to such subsidies, but instead Part III of the SCM Agreement providesfor multilateral remedies for such measures where adverse effect can be demonstrated.  Whereadverse effects are alleged to be caused by subsidies in the sense of Article 5 of the SCMAgreement, a Member has a multilateral remedy under Article 7 of the SCM Agreement.  Inparticular, for a case of serious prejudice, Article 6.3 of the SCM Agreement sets out criteria forthe establishment of a case of serious prejudice.  This is the basis for pursuing allegations ofadverse effect for subsidies whose granting is not explicitly tied to export performance.
7.89 According to Australia, the essential difference is between a hard rules-based test and a
trade effects test.  Article 3.1(a) of the SCM Agreement sets out rules for a breach of the SCMAgreement and they are to be treated as strict criteria and not an effects-based set of tests.  Theycall for facts to be established, rather than for a Panel to look at trade outcomes.  Australia submitsthat the United States' position turns on the argument that some undefined level of exports by anenterprise is indicative of its status under Article 3.1(a) of the SCM Agreement.
7.90 Australia argues that the United States' approach, if accepted, would lead to results at clear
variance with the object and purpose of the SCM Agreement, and indeed could lead to absurdities.In the case of an enterprise that exports, what would be the outcome if a panel were to judge that ahigh level of exports in itself met the “in fact” test of Article 3.1(a) of the SCM Agreement?  Nonumber, no bright line has been established under the SCM Agreement.  How would a Memberknow whether a measure was to fall under Article 3.1(a) of the SCM Agreement?  Would thethreshold be 50%, 75%, or 90%?  Would an increase in exports by a recipient potentially make ameasure inconsistent after the decision to grant?  In the view of Australia, it would be inappropriatefor panels to make case by case judgments on these sorts of issues when it came to questions ofviolation of a rule such as Article 3.1(a) of the SCM Agreement.  Provisions on rules need toprovide clear guidance to Members without introducing a large element of subjectivity, whichwould be the case if the level of exports or other such concepts were to be introduced into anyassessment under Article 3.1(a) of the SCM Agreement.
7.91 Australia asserts that, depending on the circumstances, a Member that considers that it is
being adversely affected in some way by such a subsidy has a number of remedies open to it,including multilateral remedies under Article 7 of the SCM Agreement and Article 26 of the DSU,or countervailing duty provisions.  Thus, under the SCM Agreement itself there are alreadyWT/DS126/R
Page 45
remedies to be pursued in Parts III and V, rather than Part II.  Australia notes that Article 27.4
(including footnote 55) of the SCM Agreement clearly envisages that the level of export subsidiescan be quantified.  This would be inconsistent with an approach that said that only a panel candetermine what falls under the “in fact” provision of Article 3.1(a) of the SCM Agreement on asubjective, case-by-case basis.  This would be further complicated if the performance of anenterprise could somehow change the status of a measure, which could arise under a level ofexports approach.
7.92 As a further example, Australia notes that some unquantified level of exports test would
cause a potential conflict with the purpose and operation of Article 13(c) of the Agreement onAgriculture (“Due Restraint”).  The obligations on export subsidies under the AgreementAgriculture are quantitative and so need to be clear cut.  If the definition of “export subsidy” underthe Agreement on Agriculture includes measures meeting such an “in fact” test, then it would bevirtually impossible for many Members to conform with quantitative disciplines of the Agreementon Agriculture.  On the other hand if the definition of “export subsidy” under the Agreement onAgriculture does not include measures meeting such an “in fact” test, then they would not be givencover by the Due Restraint article and so be subject to the disciplines of the SCM Agreement.  Thisis clearly not what was envisaged when the agreements were negotiated.
7.93 Australia asserts that the United States seeks to reinterpret the meaning of “in law or in
fact” and footnote 4 in Article 3.1(a).  The concepts of “ de jure ” and “ de facto ” do not appear in
the SCM Agreement, or indeed in the Tokyo Round Subsidies Agreement.  The assertion by theUnited States that Article 9 of the Tokyo Round Subsidies Agreement “included all export subsidies-- both de jure  and de facto ” is simply an assertion and without any actual, concrete meaning.
Article 9 of the Tokyo Round Subsidies Agreement did prohibit export subsidies, but this was notdefined beyond the Illustrative List.  There was no such division between de jure  and de facto  or
any definition of what de facto  might mean.  Australia is not aware of any panel decision on this
issue under the Tokyo Round Subsidies Agreement.  If it had been the accepted jurisprudence thatthe notion extended to the much wider scope being argued here by the United States, it is surprisingthat it was never utilized by the United States or other signatories.  In any case, the actual situationunder the Tokyo Round Subsidies Agreement is irrelevant to the current case, which is under theWTO Agreement.  This is not even a successor agreement.
7.94 Australia contends that the current SCM Agreement does not refer to “ de jure ” and “ de
facto” but to “in law” and “in fact” and the latter is defined and limited through footnote 4.  While
some broader definition might or might not have been in the mind of the European Communitywhen it submitted MTN.GNG/NG/W/31 of 27 November 1989,
, the final text only emerged much
later from the negotiations.  Australia notes that a plain reading of the relevant section in the ECpaper shows that it was concerned that the Tokyo Round Subsidies Agreement already coveredsubsidies “de facto contingent upon export” and that: “[t]his, however, makes it necessary to
provide for clearer guidance in identifying de facto export subsidies, in order to avoid undue
extensions  of the category of export subsidies.” (emphasis supplied by Australia)  Australia suggests
that this could be read as the European Community seeking to limit the scope of any new agreementin this area.  The third paragraph of the same section makes it clear that the European Communityis looking at a situation where: “subsidies aim at distorting trade by favouring exports.  A mere
reference to the effect if [sic] a subsidy on exports, as observed ex post facto , would be inconsistent
with this rationale.  If it cannot be shown that, on the basis of the facts which the government knew– or should clearly have known – when granting the subsidy, the intention of the government was infact to favour exports, and therefore it cannot be said that the subsidy aims, de jure or de facto
, at
distorting trade, this subsidy should not be prohibited; it should rather be subject to remedial actionif and when it produces demonstrable negative effects on trade.”WT/DS126/R
Page 46
7.95 Australia points out that, at that stage of the Uruguay Round negotiations, there were a
number of proposals concerning the ambit of the provision in question.  The United States, in
MTN.GNG/NG10/W/29 of 22 November 1989, argued for the prohibition of: “[a]ny subsidies to a
firm and/or firms [footnote omitted] predominantly engaged in export trade,  i.e. whose exports
exceed [X] per cent of total sales.”89   That was not accepted.  Indeed, Australia submits, the argument
of the United States before the Panel appears to be an attempt to achieve what it sought unsuccessfully
in the Uruguay Round.
7.96 Australia notes that, in MTN.GNG/NG10/W/29, the United States did not call such subsidies
export subsidies, but rather distinguished them from export subsidies by calling them “trade-relatedsubsidies”, but nonetheless prohibited.  As with Article 3.1(b) of the SCM Agreement, such subsidies
would have been prohibited but were not “export subsidies”.
7.97 Australia states that, in MTN.GNG/NG10/W/38, this concept was listed as one of the reasons
for the presumption of serious prejudice (Article 6.1(c)) with a footnote to the effect that it mightappear instead under the prohibition article (then Article 1) with a different threshold percentage.
This was a provision additional to, and separate from, the “in law or in fact” rule on export subsidies
It was included under the deeming of serious pr ejudice provision (Article 6.1) in the Chair’s
consultation draft for MTN.GNG/NG10/W/38/Rev.2 with a square bracketed figure of 95% but
without the footnote referencing the prohibition article (Article 3).  Australia, at least, was opposed tothe provision and presumably many other participants shared this view, because it was dropped
completely from the actual version of MTN.GNG/NG10/W/38/Rev.2, which emerged from the
consultations.
7.98 Australia asserts that this goes to demonstrate that Uruguay Round participants were not
prepared to accept that a high level of exports should lead to a deeming of serious prejudice let alone
prohibition.  In addition, the draft provisions on prohibition for a high level of exports would havebeen separate from the “in fact or in law”, which was already in the draft.  Thus, the drafters of the
text saw the high level of exports, while potentially creating a prohibited category under the
agreement, as a category separate from the export subsidy (in law or in fact) category.  Moreover,
even the United States did not consider during the Uruguay Round that a high level of exports would
satisfy an “in fact” test, since it did not characterize such situations as export subsidies but instead partof a separate category of trade-related subsidies.
7.99 According to Australia, this goes to underline that countries have always been careful not to
confuse the categories for which disciplines are being negotiated, and not to overreach themselveson what it was sensible to seek disciplines from a practical point of view.  The disciplines on exportsubsidies are in respect of subsidies that discriminate, that target, that favour, exports againstdomestic sales.  Any other construction would lead to a potentially unworkable discipline and leadto uncertainty about its application by governments.  That sort of uncertainty is what the new DSUis supposed to reduce because an automatic system without a high degree of certainty in its futureapplication would undermine its legitimacy.
7.100  In the context of the negotiating history, Australia states, MTN.GNG/NG10/23
90 dated 7
November 1990 was circulated by the Chairperson of Negotiating Group 10  prior to the Ministerial
                                                     
89 See section I.1.b of MTN.GNG/NG10/W/29, 22 November 1989: Elements of the Framework for
Negotiations -- Submission by the United States.
90 Australia states that this was originally circulated as MTN.GNG.NG10/W/38/Rev.3.WT/DS126/R
Page 47
meeting at Heysel in December 1990.  The footnote to “in fact” (then numbered Footnote 3) read in
its entirety91:
This standard is met when ever the facts demonstrate that the granting
of a subsidy, without having been made legally contingent uponexport performance, is in practice  tied to actual or anticipated
exportation or export earnings.  (emphasis supplied by Australia)
7.101  Thus, Australia states, the unagreed text that the Chairperson sent to Heysel in December
1990 had two very different aspects to that which is in the SCM Agreement, that is:  (a)  what the
facts had to demonstrate was the standard of “in practice” rather than the much higher standard of “infact”; and (b)  the important, limiting qualifier of the second sentence had not been added.  For
Australia, the change in the drafting makes it clear that some participants were not prepared to accept
a nebulous “in practice” standard.  The current text appeared in the Draft Final Act,
MTN.TNC/W/FA, of 20 December 1991, except that the change from “whenever” to “when”, came
later from the Legal Drafting Group.
7.102  Australia submits that the “in fact” standard in Article 3.1(a) of the SCM Agreement is not
some undefined de facto  standard.  The “in fact” standard is defined in footnote 4.  In order to
establish that that standard is met, footnote 4 must be satisfied.  This sets a high threshold for the
complainant.  The construction that the United States puts on Article 3.1(a) and footnote 4 of the SCM
Agreement is not borne out by the drafting.  The text of Article 3.1(a) says: “subsidies contingent, …in fact, whether solely or as one of several other conditions, upon export performance …[footnote 4
omitted]”.  In order to prove that any particular measure before the Panel satisfies this, the United
States must prove that the measure is a subsidy contingent in fact, whether solely or as one of several
other conditions, upon export performance, where the "in fact" standard is defined in footnote 4 of the
SCM Agreement.  The text is clear that “contingent in fact” is a condition that must be proven to
exist.
7.103  Australia observes that the United States seeks to argue that: "the mere fact that a subsidy is
accorded [ sic] to enterprises which export" means “the fact that the recipients happen to export is the
only factor indicating that a subsidy is a de facto  export subsidy.”
92  According to Australia, this
misrepresents the limitation inherent in the second sentence of footnote 4 of the SCM Agreement.
This sentence means that the complainant cannot just  look to an enterprise’s exports as the grounds
for proving the standard in the first sentence.  Of course, it can be assumed that a case would onlyarise where there was exportation.  Accordingly, the interpretation that the United States seeks to put
on the limitation inherent in the second sentence of footnote 4 of the SCM Agreement would trivialize
it.  This additional sentence underlines that the level of exports by an enterprise cannot be the basis for
proof of “in fact tied”, i.e. the extent of exportation by the enterprise is not relevant for the required
demonstration.  Rather, the complainant must show that the granting of the subsidy is in fact tied in itsapplication to export performance and so favours export over domestic sales.
7.104  Australia notes that the United States argues that: “[r]ather, an export subsidy will exist when
actual or anticipated exportation is merely one of several potential criteria influencing  the bestowal of
benefits.”
93  (emphasis supplied by Australia)  Australia asserts that this is not what the text says,
which is that the granting of the subsidy has to be in fact tied to actual or anticipated exportation orexport earnings.  This not only confuses what the United States might have wanted out of the Uruguay
Round and what is in the SCM Agreement, but even seems to go well beyond it.  The idea that
“potential criteria” might determine whether a measure was in breach of a treaty obligation would
                                                     
91  Australia noted that this formulation was first presented in MTN.GNG/NG10/W/38/Rev.2.
92 See supra, para. 7.81.
93 See supra , para. 7.82.WT/DS126/R
Page 48
make a nonsense of a binding treaty.  Australia queries:  Who would decide what are “potential
criteria”?  Presumably, either the complainant or the panel.  There is no way in advance that a
Member could decide what might be regarded as “potential criteria” by others when seeking to
formulate its commercial policy in keeping with its treaty obligations.  The recognition by a
government that an enterprise exports and that in ternationally competitive industries are desirable
does not somehow convert a subsidy that does not favour exports into a prohibited measure.
7.105  According to Australia, a logical conclusion of the United States' argument is that if a
government gives an enterprise a subsidy in the k nowledge that it exports, and does not expressly say
that exportation is a bad thing, then the subsidy is prohibited.  The government of virtually every
Member provides subsidies that knowingly go to so me enterprises that export and these governments
are normally on the record that they consider exports a good thing, and indeed are on the record
praising successful export industries.  To suggest that suddenly all those measures fall within the
scope of Article 3.1(a) of the SCM Agreement would be to radically upset the balance of obligations
under the WTO Agreement and risk making the SCM Agreement, in particular, completely
unworkable.
7.106  Australia maintains that the United States again seeks to widen the obvious meaning of the
text through its argument that, by explicitly including a footnote emphasizing that subsidies are
prohibited without having been made expressly contingent on export performance, the SCMAgreement recognizes that Members may well attempt to mask the export-orientation of particular
benefits by claiming they are bestowed without explicit contingencies.  This is not a rule about
“expressly contingent” or “explicit contingencies”.  The “in law” standard is about the requirement of
export performance being just that, in law, e.g. in legislation.  The “in fact” standard is about “in fact
tied” by some means such as an administrative instrument.  Indeed, in both cases, the tie must beexplicit, either in law or in fact.  With respect to the United States' request that the Panel make a
determination on the basis of the “facts and circumstances”, Australia asserts that the findings by the
Panel on each measure before it will need to be made on “the facts”, not the “circumstances”, and
whether “the facts” demonstrate unequivocally that the standard in footnote 4 of the SCM Agreement
is met.
7.107  Australia submits that, in accordance with the principles of treaty interpretation, the Panel
needs to look at the wording in the treaty in its own context.  The final text of the SCM Agreement is
part of the balance of rights and obligations under the WTO.  This includes the strict limitation under
footnote 4 of the SCM Agreement to the scope of “in fact”.  Negotiating countries did not sign on to,
and would not have signed on to, the sort of open ended interpretation that the United States is nowseeking to read into the text.  This provision must also be read in the context of Parts III and V of the
SCM Agreement, where there is provision for multilateral and unilateral remedy from adverse effects
allegedly being caused by subsidies.  Quite apart from this case, a widening of the scope of the
meaning of “in fact” would have a potentially far-reaching impact on the balance of Members’ rights
and obligations under the WTO.
7.108  Australia contends that the United States' arguments in this case regarding several measures in
respect of a single enterprise can tend to obscure the substantial issues being dealt with.  Rulesregarding prohibition must relate to the type of measure involved, rather than leaving discretion to a
panel to decide on the situation.  Without that clarity, it would not be possible for Members to have
any surety that they are complying with their treaty  obligations.  This is quite different from a trade
effects test where there is no breach of treaty obligation but rather a subsequent obligation to remove
the non-violation nullification or impairment (inc luding serious prejudice under the SCM Agreement),
if demonstrated.
7.109  In Australia's view, if there were to be some undefined concept such as a high level of exports
or the possibility that an enterprise would increase  its level of exports, which would render a measureWT/DS126/R
Page 49
prohibited according to a Panel ruling, then the treaty would be unworkable and Members would be
able to challenge measures capriciously.  Moreover, if an adverse interpretation were to rely upon
there being only one enterprise in an industry, then  this would be biased against smaller Members and
would even potentially open the door to a future finding that the receipt by a sole domestic seller
(which also exported) of any subsidy would be a prohi bited measure.  Australia states that this would
clearly not be the object and purpose of the discipline under Article 3.1(a) of the SCM Agreement.
7.110  On the other hand, Australia asserts, consider the case where there were, say, two enterprises
in an industry, one of which was domestically-orien ted and one of which was export-oriented.  The
creation of a rule that meant that a subsidy programme was a prohibited measure when received by
one company, but not when received by the other,  would be a substantial move away from a sensible
rules-based discipline.  It would be a bias against smaller Members and would upset the balance of
rights and obligations negotiated under the WTO.  It would make the day-to-day provision of advice
to governments on complying with their treaty obliga tions almost impossible to do with any certainty.
At the end of the day, this would be a degeneration into the situation of a large Member being able to
threaten a dispute with any smaller Member that did not fully comply with its demands, since there
would no longer be a framework of objective rule s against which Members could act to obtain the
safe haven of compliance.
7.111  Australia submits that once the Rubicon has been crossed of using a subjective level of
exports test as being the determinant for “in fact”, the logical consequences become increasingly
difficult to reconcile with a sensible regime.  As one example, Australia considers the situation of any
non-specific subsidy programme, i.e. non-specific in the sense of Articles 2.1, 2, and 4 of the SCM
Agreement.  Invariably, that subsidy will be being received by some enterprise that exports much of
its product and indeed may even be wholly devoted to exports of some product.  Australia queries
whether that would mean that that measure is, in the hands of that enterprise, a prohibited measureunder Article 3.1(a) of the SCM Agreement and so specific under Article 2.3 of the SCM Agreement?
Would this then mean that the entire programme suddenly becomes specific?  Australia maintains that
these types of consequences would make the Agreement incoherent and potentially unworkable.
Australia points out that, to put this in perspective, this is not an issue such as countervail, where there
is a degree of discretion placed in the hands of th e investigating authorities (at least in the first
instance) to take decisions on such matters as the st atus of a measure.  This case is dealing with the
issue of the conditions under which the granting or maintenance of a measure is inconsistent with
treaty obligations.
7.112  Australia stresses that the concepts of “in law” and “in fact” should not be confused with  de
jure and de facto , especially de facto .  The text of the SCM Agreement could always have simply said
“de jure  or de facto ” and left those terms undefined.  Indeed, the United States said that these were in
the Tokyo Round Subsidies Agreement implicitly.
7.113  Australia notes that what the text actually does is to introduce a new term, “in fact”, and then
it goes on to define it.  While people will often use the expression “in fact” as being simply the
translation of “ de facto ”, this is not the case here.  Thus, the use of expressions such as de jure and de
facto in this context has the potential for semantic confusion.  The expression “in fact” in
Article 3.1(a) of the SCM Agreement is a special term defined in the agreement through
Article 3.1(a), including, in particular, footnote 4.  The application of the term is restricted through
that definition.
7.114  Australia maintains that a key to the interpretation of “in law or in fact” is to ensure certainty
to governments, to avoid harassment and the possibility of being at some stage found to be in breach
of Article 3.1(a) of the SCM Agreement.  The problems here would be compounded by any views
about allocation of measures across time into th e future, which would be impossible to bring intoWT/DS126/R
Page 50
conformity ex post facto.   Industries and governme nts would have great diffic ulty in living with that
sort of uncertainty, which would undermine the legitimacy of the WTO with domestic constituents.
7.115  The United States  argues that the inclusion of an “in fact” standard in Article 3.1(a) of the
SCM Agreement inherently requires the Panel to conduct a case-by-case analysis of the relevant facts
to determine whether the subsidy in question contravenes Article 3 of the SCM Agreement.  However,
that does not mean that the Panel must engage in an abstract or hypothetical analysis of when thestandard in Article 3.1 may be satisfied.  The Panel need only decide based upon the totality of facts
before it whether the subsidies in question are "in fact tied to actual or anticipated exportation or
export earnings."  The Panel should look to the assumptions underlying the government's decision to
grant the subsidy in order to determine whether the "in fact" standard has been met.  The drafters of
this provision recognized that an “in fact” export subsidy would depend on the particular facts
surrounding the grant of the assistance.  As footnote 4 to Article 3.1(a) states, the “in fact” standard is
met “when the facts demonstrate” that the granting of the aid is tied to actual or anticipated
exportation or export earnings.
7.116  For the United States, it is clear that the Panel is expected to review all of the facts
surrounding the granting of the subsidy, whatever those facts may be.  The drafters of the Agreement
could have listed exactly which facts or factors are to be considered -- as they did in other places in
the Agreement.  However, no such limitation was prov ided in this instance.  The Panel must therefore
take into consideration all the information relevant to making an “objective assessment of the facts of
the case and the applicability of and conformity with the relevant agreement” as required under
Article 11 of the DSU.
7.117  The United States declares that a case-by-case approach is entirely consistent with the
requirements of Article 11 of the DSU.  Indeed, in this respect, the Panel can draw on the experienceof other panels and the Appellate Body in interp reting and applying Article III of GATT 1994 in cases
of de facto discrimination.  In its Report in Japan - Taxes on Alcoholic Beverages  ("Japan – Alcoholic
Beverages "), the Appellate Body explicitly endorsed a case-by-case approach to such disputes:
We agree with the practice under the GATT 1947 of determining
whether imported and domestic products are "like" on a case-by-casebasis….
… In applying the criteria cited in Border Tax Adjustments to the
facts of any particular case, and in considering other criteria thatmay also be relevant in certain cases, panels can only apply theirbest judgement in determining whether in fact products are "like".This will always involve an unavoidable element of individual,discretionary judgement
.94
7.118  The United States asserts that drawing the line between de facto  discrimination and legitimate
domestic tax measures or regulations is a task which, in a sense, mirrors the task this Panel faces -- yet
past panels have showed themselves equal to the ta sk of gathering and evaluating facts, and coming to
legal conclusions on the basis of their best judgement of those facts.
7.119  The United States submits that the Panel’s inquiry concerning de facto export subsidies can
also be analogized to past panels’ examination of the issue of whether discriminatory taxation isprotective in nature.  As the Appellate Body stated in Japan – Alcoholic Beverages:
                                                     
94 WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, pp. 20-21.WT/DS126/R
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… we believe that an examination in any case of whether dissimilar
taxation has been applied so as to afford protection requires a
comprehensive and objective analysis of the structure and application
of the measure in question on domestic as compared to imported
products.  We believe it is possible to examine objectively the
underlying criteria used in a particular tax measure, its structure, andits overall application to ascertain whether it is applied in a way that
affords protection to domestic products.
Although it is true that the aim of a measure may not be easily
ascertained, nevertheless its protective application can most often be
discerned from the design, the architecture, and the revealing structure
of a measure.  The very magnitude of the dissimilar taxation in a
particular case may be evidence of such a protective application, asthe Panel rightly concluded in this case.  Most often, there will be
other factors to be considered as well.  In conducting this inquiry,
panels should give full consideration to all the relevant facts and all
the relevant circumstances in any given case.
95
7.120  The United States submits that the Panel should determine whether these  subsidies are in fact
“tied to” export performance by examining the totality of facts and circumstances in this case.Whether a tie exists may be objectively discerned from the history, design, architecture and the
structure of the subsidies, corroborated by public st atements by government officials, statements by
the industry benefiting from the subsidies, the level of the recipient's exports and other relevant
evidence.  As stated above, footnote 4 to Article 3 directs the Panel to examine the facts by stating
that the “in fact” standard is met “when the facts demonstrate” that the granting of the aid is tied to
actual or anticipated exportation or export earnings.  The United States asserts that even Australia
agrees that establishing a violation of Article 3 involves a “matter of proving that the act of granting
the subsidy is tied to export sales.”
7.121  The United States observes that this approach is also consistent with the European
Community’s suggestion during the Uruguay Round negotiations that the “in fact” standard is metwhere the “facts which were known - or should cl early have been known - to the government when
granting the subsidy demonstrate that the subsidy,  without having been made expressly contingent
upon export performance, was indeed intended to increase exports."
96
7.122  The United States asserts that Australia's view that the “in fact” standard is met only when the
subsidy is explicitly  tied to exportation or export earnings through some means such as an
administrative arrangement should be rejected as it would merge the categories of subsidies
“contingent in law” and subsidies “contingent in fact.”  To the United States, Australia's proposed
interpretation would effectively write the "in fact" language out of the SCM Agreement therebypartially defeating the purpose of the prohibition in Article 3.  The distinction between the "in law"
and "in fact" standard is that "in law" subsidies are explicitly contingent and "in fact" subsidies are
implicitly contingent.  The United States posits that these standards are not defined, as Australia
suggests, by whether the contingency appears in legislation versus some type of administrative
instrument.
                                                     
95 Ibid., at p. 29; the United States asserts that this passage was also cited with approval in Appellate
Body Report, Canada - Certain Measures Concerning Periodicals , WT/DS31/AB/R, adopted 30 July 1997,
p. 30.
96MTN.GNG/NG10/W/31, 27 November 1989 , Elements of the Negotiating Framework -- Submission
by the European Community , United States Exhibit 57.WT/DS126/R
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7.123  The United States also argues that Australia's position is not supported by the negotiating
history of the provision.  The negotiating history of this provision demonstrates that the distinction
between an "in fact" and an "in law" export subsid y is that an "in fact" subsidy does not make the
conferring of the benefit expressly  contingent on export performance, in any form.  The “in fact”
standard was included because the countries negotiating the WTO Agreement were concerned that
limiting their prohibition to subsidies with express  export contingencies would permit governments to
escape the sanctions of Article 3.1(a) by merely omitting an explicit reference to export performance
from the characterization of the benefit.  As the European Community warned: "experience has shown
that government practices may be easily manipulated or modified in order to avoid [a de jure]
prohibition...."97   A prohibition of subsidies "which are de jure  (that is, expressly) made contingent
upon export performance is open to circumvention."98  As a result of these concerns, both "in law"
export subsidies -- where government aid is "expressly contingent" upon export performance -- and
"in fact" export subsidies -- where the exportation requirement is not explicit -- were included as
prohibited subsidies.
7.124  Furthermore, the United States asserts, imposing the requirement that prohibited export
subsidies are only those that are explicitly contingent upon exports would defeat the purpose of
prohibiting "in fact" export subsidies.  If express statements of export contingency were required for
both "in law" and "in fact" subsidies, governments could easily circumvent the prohibition in Article 3
by merely deleting explicit references to the export-contingency requirement.  This was just the kind
of "manipulation" that the "in fact" provision was designed to prevent.  Since export subsidies areconsidered so egregious by the SCM Agreement that they are prohibited (rather than merely
actionable), it seems unlikely that negotiators would have allowed countries to avoid their obligations
by clever draftsmanship.  Australia’s proposed interpretation should therefore be rejected because it is
at odds with the history and purpose of the provision.
7.125  The United States maintains that because Australia argues that both "in law" and "in fact"
subsidies must have express statements of export contingency, it is forced to find another difference
between these two forms of prohibited subsidies.  Australia therefore suggests that "in law" export
subsidies are those created by legislation or regulations, whereas "in fact" export subsidies are those
set forth in non-legislative administrative instruments.  Australia proposes that an "in fact" export
subsidy may only be found if (1) the document creating the government aid is in the form of anadministrative instrument, and (2) that instrument contains an express statement that the aid is
export-contingent.  To the United States, it is obvious that Australia has designed this test so that the
instruments bestowing the subsidies upon Howe would fall outside of the definition of a prohibited
export subsidy.  However, Australia’s attempt to distinguish "in law" and "in fact" subsidies based on
the type of document  announcing the government aid must fail.
7.126  The United States declares that Australia's theory does not have a rational basis.  There is no
difference in effect  between a government provision included in a law, a regulation or a document
issued by a duly authorized government official in the form of an administrative instrument or
executive order.  All are issued by a government entity or official with the necessary legal authority to
require adherence to its terms.  All have the force and effect of law and must be honoured by the
nation's public entities and private citizens.  The distinguishing feature of "in law" and "in fact"
subsidies cannot therefore be the type of document creating the subsidy -- but whether or not thegranting of the benefit is expressly or in fact tied to export performance.
7.127  Finally, the United States maintains, contrary to Australia’s argument, the United States is not
suggesting an expansion of the definition of prohibited export subsidies through the creation of an
“unidentified level of exports” test or “trade effects” test.  Australia bases this claim on its view that
                                                     
97 Ibid.
98 Ibid.WT/DS126/R
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the United States’ case turns on the argument that some undefined level of exports by an enterprise is
indicative of its status as a prohibited subsidy.  Examining a recipient's level of exports does not
transform an "in fact" export subsidy case into a "trade effects" case.  The level of an enterprise’s
exports is just one factor to be considered in determining whether that enterprise received a prohibited
export subsidy.  Footnote 4 to Article 3 does not preclude consideration of the level of exports, it
simply proscribes finding a prohibited export subsidy based solely  upon the level of exports.  In fact,
the explicit reference to level of exports in Article 3 seems to indicate that the drafters specifically
contemplated that the level of exports would be taken into account in determining whether an “in
fact” subsidy exists.
7.128  According to the United States, there is a significant difference between examining whether a
subsidy was tied to exportation at the time it was granted (as is necessary in an "in fact" subsidy case)
and what happens after a subsidy is conferred (as is required in an actionable subsidy case).
Actionable subsidy cases examine the adverse effects of a subsidy evidenced by injury to a Member'sdomestic industry, nullification or impairment of a Member's benefits, or serious prejudice to a
Member's interests.
99   The definition of "serious prejudice" also looks to the consequences of a
subsidy, such as whether subsidized goods displaced a member's goods in the subsidizing country or
in a third country market, whether  significant price undercutting occurred, or whether a subsidized
primary product was able to increase its world market share..100   Regardless of the particular standard,
all of these inquiries examine the subsidy's effect after  it has been granted.  They do not address the
facts as they existed at the time of the granting of the subsidy.
7.129  The United States asserts that nothing in the arguments it has presented suggests that a
subsidy would necessarily be considered an “export subsidy” simply because exports increased after a
subsidy was granted.  In this case, the Panel must consider the facts underlying the decision to grant
the aid which existed at the time the government made the decision and whether that decision was tied
to actual or anticipated exportation or export earnings.  The United States has not suggested that, inthis case or any future case, an increase in exports after a subsidy has been provided could
retroactively alter the nature of the subsidy.  The United States has, therefore, not used a "trade
effects" test for an "in fact" export subsidies case.  Instead, the U.S. government has presented
evidence of Howe's export performance at the time the decision to grant the subsidies was made, and
Howe’s expected export performance as anticipated at that time.  This evidence meets the standard fordetermining an "in fact" subsidy set forth in footnote 4 to Article 3.1(a) of the SCM Agreement,
which, as explained above, permits the consideration of an enterprise’s level of exports.
7.130  Australia  states that Article 3.1(a) of the SCM Agreement only prohibits subsidies that are
contingent upon export performance, i.e. that favour exports over domestic sales.   Australia notes that
the United States has continued to quote selectively from the EC Uruguay Round negotiating paper,
MTN/GNG/NG10/W/31, and to omit EC comments that underline that the issue in that paper for both
de jure  and de facto  export subsidies was in respect of subsidies that favour exports.
7.131  Australia also asserts that the United States mischaracterizes the points made by Australia
regarding “in fact” in saying that it would effectively write the “in fact” language out of the SCM
Agreement.   The United States appears to consid er that “in law” is synonymous with “expressly”.  Of
course, Australia states, “in law” means that it would be set out expressly in a legal instrument.
However, it is quite possible for the granting of a subsidy to be expressly contingent upon export
performance through administrative actions without it being expressly set out in law.  Australia assertsthat the Panel needs to address the meaning of “in law” and “in fact” under the SCM Agreement and
not how the United States might consider that de jure  and de facto  should be used outside the WTO
context.  Under the Vienna Convention , the Panel needs to look at the ordinary meaning given to the
                                                     
99 SCM Agreement, Article 5.
100 SCM Agreement, Article 6.3.WT/DS126/R
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words “in law”.  If, under the treaty, this were supposed to mean “expressly”, as the United States
seemed to be proposing, then it would have said so.
7.132  In the view of Australia, the purpose of the “in fact” provision is to provide a way of dealing
with the situation where the administration of a subsidy programme allows the disbursement of funds
to favour exports, i.e. to provide subsidies to fi rms tied to export performance.  Interpreting the
provision in this way is not to write the “in fact” standard out of the SCM Agreement, as suggested bythe United States.  Instead, according to Australia, what it achieves is: (a) to make it consistent with
the language of the agreement: (b) to make it consistent with the language in Article 11 of the DSU by
which panel cases have to be assessed; and (c) to make it consistent with a workable and balanced
view of the object and purpose of Article 3.1(a) of the SCM Agreement.  To allow a violation case to
be won on weak inferential grounds would be at odds with a rules-based system. An “in fact” case
may often be difficult to prove.  However, the SCM Agreement provides fast, effective means of
relief from adverse effect on a multilateral and unilateral level through Parts III and V.  In the absenceof a case under Parts III or V, it is highly questionable that a weak case, missing the facts to
demonstrate that the granting of the measure was in fact tied to export performance, should be able to
be addressed through Part II of the SCM Agreement.
7.133  Australia suggests that it may be useful to consider just a couple of possible examples of
where the “in fact” provision would apply, i.e. where the administration of a subsidy programme
allows the disbursement of subsidies to favour exports.  Any number of hypothetical constructions of
this sort can be created, for example:
(a) the administrators of a scheme have the authority to determine the amount of subsidy
being provided to an individual firm and do so on the basis of exports rather than
some other criteria such as investment or production; or
(b) the administrators of a scheme have the authority to discriminate amongst firms in the
same industry by not paying the subsidy unless concrete export targets are met.
7.134  Australia submits that the term “in law” needs to be taken as meaning just that: in law.  The
text of Article 3.1(a) of the SCM Agreement makes the distinction between “in law” and “in fact”.  If
the intent was to make the distinction between ex plicit and implicit, i.e. between expressly and some
trade effects test, as seems to be being suggested by the United States, the text would have said so.
For example, it could have read: “subsidies contingent, explicitly or implicitly, upon export
performance” with a similar footnote as footnote 4 on “implicitly”.  However, that is not the text.  The
distinction is between “in law” and “in fact” where, in both cases, there must be an actual tie with
export performance.
7.135  According to Australia, WTO rules on violation are not supposed to be about subjective
judgments by panels on trade effects or mind-read ing what ministers may have been thinking two
years ago.  Article 3.1(a) and footnote 4 of the SCM Agreement are about a panel reaching the
conclusion, demonstrated through an objective assessment of facts, that the granting of a subsidy is
contingent upon export performance, even though it may not be required in law.
7.136  Australia submits that, in a trivial sense, every panel must undertake a case-by-case
examination and analysis of the dispute before it.  However, the issue here is whether the outcome is
to be an arbitrary one that could well vary from panel to panel, or whether there is to be the normal
consistency and certainty required of a rules-based system with respect for a Member’s sovereignty to
be allowed to adopt measures that are not explic itly inconsistent with the WTO Agreement.  The
important principle at stake here is the necessity under a rules-based system for governments acting in
good faith to be able to determine WTO consistency of proposals in advance of their implementation,and in the absence of a dispute and a panel decision.   Unless a government can know in advance whatWT/DS126/R
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its obligations are, it would be placed in a situation that would only risk bringing the rules into
disrepute.   Indeed, Article 3.2 of the DSU sets out that: “[t]he dispute settlement system of the WTO
is a central element in providing security and predictability  to the multilateral trading system.”
(emphasis supplied by Australia)
7.137  Australia reasserts that Article 3.1(a) of the SCM Agreement uses the phrases of “in law” and
“in fact” with “in fact” limited through footnote 4 of the SCM Agreement.  There is nothing in theordinary meaning of the phrases or in the drafting history to suggest that these expressions should not
be taken as meaning other than through either a legislative instrument or, alternatively, through
administrative action of some sort.  Indeed, the text requires a complainant to prove that “the facts
demonstrate … is in fact tied”.  This is not a call for arbitrary judgement, but rather expresses the
necessity for the complainant to prove its case th at the granting of the subsidy is actually tied to
exportation or export earnings.
7.138  According to Australia, the SCM Agreement does not list which facts are to be considered
because the issue is one of demonstration of an actual tie and so what needed to be listed was what thegranting of the subsidy was to be “tied to”, i.e. “ac tual or anticipated exportation or export earnings”.
These are the points that had to be listed and listed exhaustively.  The text does not talk of some high
proportion of benefits going to exports or the incidence of the subsidy in relation to exports.  It could
have, and the United States argued in the Urugua y Round negotiations that it should, but it did not.
Instead, the final text requires a factual demonstration, i.e. an objective demonstration that thegranting of the subsidy be tied to exportation or export earnings.
7.139  Australia takes note of the United States' citation from the Appellate Body Report in Japan
– Alcoholic Beverages  that “the examination requires a comprehensive and objective analysis” and
that “it is possible to examine objectively the underlying criteria … to ascertain whether it is applied
in a way that affords protection to domestic products.”
101  Australia states that this is an objective
assessment of the impact of the tax measure.  The first sentence of the second paragraph of the United
States' citation from the Appellate Body Report102 underlines that it is the actual measure and not
some subjective assessment of the aim of the measure that is at issue.  Moreover, Australia asserts, in
that case, the Appellate Body goes on to emphasize that “[t]he dissimilar taxation must be more than
de minimis .”103  This is quite different from this current dispute, which is not about affording
protection in excess of de minimis  levels, but rather whether the standard of Footnote 4 of the SCM
Agreement is satisfied.  A government can be expected to understand the impact of different taxation
arrangements on products.  However, it cannot be expected to foresee what view a panel might have
on the incidence of a domestic subsidy.
7.140  Australia observes that the United States goes on to say that the Panel should, among other
things, focus on “the design, architecture and the structure of the subsidies”, picking up the phrase
used by the Appellate Body in Japan – Alcoholic Beverages .104  Read in context, the Appellate Body
did not mean by “design” the “process of designing” , since that would go back to fathoming the aim
of the government concerned.  The “design, architecture and the structure of the subsidies” can onlyrefer to the legal structure of the subsidy arrangem ents and their administration, rather than the issue
of intent or prior measures.  Australia agrees that the Panel needs to look at the contracts, what they
actually say, and how they were administered.
                                                     
101 WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, p. 29.
102 Ibid.   This sentence reads:  " Although it is true that the aim of a measure may not be easily
ascertained, nevertheless its protective application can most often be discerned from the design, thearchitecture, and the revealing structure of a measure."
103 Ibid., p. 30, final paragraph.
104 WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996.WT/DS126/R
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7.141  Australia alleges that t he United States mischaracterizes the Australian position in respect of
the difference between “in law” and “in fact".  They are not the same.  Australia considers that for the“in law” standard to be met it has to be just that – the contingency on export performance must be set
out in law.  This is clear from footnote 4 of the SCM Agreement, which refers to “legally contingent”.
By contrast, “in fact” would arise through explicit administrative action rather than being set out in
law.  The complainant has the obligation to prove that this is being done.  The way in which a
complainant would demonstrate that there is such administrative action will depend on the particular
case.
7.142  Australia argues that it is clear from the United States' argument that it misunderstands the
point being made by Australia by interpreting the Australian position to mean that an “in fact” export
subsidy may only be found if (1) the document creating the government aid is in the form of an
administrative instrument, and (2) that instrument contains an express statement that the aid is export-
contingent.  Australia did not say that there had to be a document creating the government aid and isnot sure what the United States means when it s says the “document … is in the form of an
administrative instrument.”  There may be a language problem here.   Moreover, Australia certainly
did not say that “that instrument” [whatever it might mean] “contains an express statement … .”
7.143  Australia contends that the distribution of any subsidy will have a legal basis and have to be
administered to some degree, even if it is only to check the paper work and write out the cheques.  Forthe “in law” standard to be met, the granting of the subsidy has to be “legally contingent” upon export
performance.  By contrast, the “in fact” standard is met when that distribution is still contingent upon
export performance but when it is done administratively without it being legally contingent.  For
example, the administrative instrument might be Ministerial discretion in giving money to companies
on the basis of their export earnings in the previous period.  Conceptually, there are many ways in
which this could be done.  However, the payments must be actually tied to exportation or export
earnings, either future or past, and this tie must be direct and not the result of some theoreticalapportionment by the complainant between domestic and export sales because the company
concerned exports.
7.144  Australia insists that it did not say that the complainant needs to find a piece of paper with an
explicit tie in it, since that would be too high a threshold and defeat the purpose of preventing
circumvention.  However, the complainant must prove that the administration of the granting of the
subsidy involved has some form of explicit tie.
7.145  With respect to the United States' argument that it proffered evidence of Howe's high level of
exports to show what the Australian government  considered at the time  the aid was given, Australia
argues that the United States clarifies that its legal argument relates only to what might have been
considered as future export trends at the time the contracts were executed.  Australia thus assumes that
“at the time  the aid was given” means the time of execution of the contract s rather than the actual time
the decisions were taken to make payments after the first payment under the grant contract.  The
United States appears to be unconcerned here with what happens afterwards.  To Australia, thisappears to still mean that the United States' argument is no more than a level of exports test as the key
criterion, rather than a demonstration that the gran ting of the subsidy is actually tied to exportation or
export earnings.  If actual export performance subsequent to the establishment of a programme is
irrelevant, including to future payments, then there is no tie.  The United States is not even arguing
about the actual impact on exports let alone the legal issue of whether the granting is tied to exportperformance.
7.146  Australia maintains that t he United States is saying that it is not making a case about what
actually happens to exports subsequent to the execution of the contracts.  This would mean that if the
Panel considered that the issue was not the granting of the grant contract, but rather the granting of theWT/DS126/R
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grants under the grant contract, then the United States would consider that its arguments would not
apply.
7.147  Regarding the United States comments that there is a significant difference between
examining whether a subsidy was tied to exportation at the time it was granted and what happens
after a subsidy is conferred, Australia states that the issue of prohibition under Article 3.1(a) of the
SCM Agreement must be strictly construed.  There is multilateral remedy for adverse effect underPart III of the SCM Agreement, including adverse effect caused by exports.  The SCM Agreementmakes provision for remedy under both Parts III and V where exports are causing adverse effect, inparticular where there is an increase in exports that causes serious prejudice.  In suchcircumstances, especially where Article 6.1(a) of the SCM Agreement applies, increased exportswould usually make a case of serious prejudice difficult to rebut.  A principle of interpretation isthat:
[o]ne of the corollaries of the “general rule of interpretation” in the
Vienna Convention  is that interpretation must give meaning and
effect to all the terms of the treaty.   An interpreter is not free toadopt a reading that would result in reducing whole clauses orparagraphs of a treaty to redundancy or inutility.
105
Australia submits that the “in fact” test in Article 3.1(a) of the SCM Agreement is not there to deal
with all cases where exports are causing injury.  Rather it is there to deal with the situation of “in law
or in fact” as Australia has described it.  Members have Part III of the SCM Agreement to seekmultilateral remedy in other cases.
(b) operational considerations
7.148  Australia  adds that, apart from the issue of maintaining the balance of rights and obligations
about what was negotiated in the Uruguay Round, a key issue here is to ensure that the interpretationof the disciplines under Article 3.1(a) is workable.  This is not a situation where WTO rules are being
implemented through domestic legislation, such as for countervailing.  In that case, domestic law-
makers and the courts will converge to a practical arrangement, which is in conformity with WTO
obligations.  The obligations of officials are domestic: to implement the domestic law subject to
judicial review.  The situation is quite different where officials have to give advice to theirgovernment, and ministers have to make decisions on that advice, about conformity of proposed new
programmes with WTO rules.  Of course, countervailing duty legislation has to go through this once,
i.e. when changes are put in place, but not on a day-to-day basis when being implemented
domestically.  However, with industry policies in goods, services and intellectual property, officials
have to give advice every day on the WTO-consistency of new policy proposals.
7.149  Australia underlines that it is critical that officials be able to give advice on clear-cut rules.
Australia can accept that, in early stages, there may be some differences in view over rules, without
being absolutely certain that that envelope for manoe uvre will be maintained after a dispute.  But that
is quite different from a situation where some form of de facto  test would make it virtually impossible
to give clear advice.
7.150  Australia states that it is a long-standing integral part of the GATT, and now the WTO, that
there is always a small risk of a non-violation case.  Australia states that government officials giveadvice on this where required, for example on subsidies in respect of bindings.  However, that does
not involve a treaty commitment.  Ministers have to know whether an action would breach a treaty.
                                                     
105 Appellate Body Report, United States –Gasoline , WT/DS2/AB/R, adopted 20 May 1996, p. 23.WT/DS126/R
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They can accept that there might be complaints of the non-violation type, but that is absolutely
different from a case of violation of a treaty commitment.  If this dispute led to an outcome where a
Member’s government can never be certain about whether it is consistent with its WTO obligations,
except by not having a policy at all, that will serve to bring the system into disrepute.  Governments
will not accept an edict that subsidies or some other policy instrument are going to be somehow
banned by the back door.  Indeed, one potential outcome is that governments will take less care ratherthan more.
7.151  Australia asserts that the structure of the SCM Agreement was to give greater certainty to
governments in the provision of subsidies.  The aim of defining a subsidy was to give greater certainty
about what sort of measures might be subject to multilateral action and to countervailing duty action.
The aim of the "red/amber/green" distinction was also to give safe harbour for green subsidies and to
provide a more effective remedy for adverse effects case.  In reality, there was little change to the
categories of prohibited subsidies.  Subsidies falling under Article 3.1(b) of the SCM Agreement werealready covered (apart from GATT exceptions) by Article III of GATT (or indeed also under the
WTO by paragraph 1 of the Annex to the Agreemen t on Trade-Related Investment Measures).  Any
interpretation that pushed back the boundaries of Article 3.1(a) of the SCM Agreement would lead to
governments and industry being once again placed in the situation of great uncertainty about future
action under the WTO.
7.152  Australia states that governments and industry can accept rules that apply to all Members
provided that they know the ground rules, and provided  that the status of proposed measures is clear.
Members would all have difficulties dealing with  a situation where no one would know until there
was a WTO challenge.  The situation would become absurd if, in addition, the success or otherwise of
a challenge depended on economic developments or newspaper articles.  The problems would be
further compounded if the rules were seen to be different for small and large Members in theirapplication.  It would be a retrograde step for the WTO if Members with large domestic markets and
numerous firms were implicitly subject to differen t rules than smaller Members with smaller domestic
markets, and possibly single sellers, but a reliance on other markets for growth due to economic
factors such as returns to scale.
7.153  Australia underlines that the Panel needs to bear in mind that whatever comes out of this
Panel must result in an operational and workable system for governments acting in good faith if the
WTO subsidies regime is not to be brought into disrepute.  A government knows well when it
provides greater protection for individual products such as in the GATT 1994 Article III:2 casecited by the United States.  However, by contrast, it could not know in advance what view a panelwould take if the grounds put forward by the United States were to be adopted by the Panel and theAppellate Body.
7.154  Similarly, Australia continues, if a govern ment was paying money on the basis of export
performance through administrative action, it would know that that was the case and it would know
that it was in breach of its WTO obligations.  The situation would be clear to the government
concerned.  However, by contrast, the United States' position is that even if a government knows that
its decisions have absolutely nothing to do with exports, it might still be found to be in breach of itsWTO obligations.  A government would be faced with the situation where if a company, or some of
the companies in an industry, are export-oriented or even just export, a panel might find that its WTO
obligations had been inadvertently breached.  That is not a viable situation, and underlines that the
United States' approach to treaty interp retation would lead to absurd results.
7.155  Australia states that, in a rules-based system, officials must be able to give clear advice to
governments whether proposals are consistent or inconsistent with WTO obligations, i.e. whether
treaty obligations would be breached.  This cannot be done on the basis that, for example, some firmsWT/DS126/R
Page 59
in an industry depend on exports for their viability.  In any small country many industries export and,
regardless of the proportion of their product that they export, depend on other markets for achieving
profitability and some economies of scale. The United States' position is that potentially a subsidy to a
firm that does not export at all, and has no intention of exporting, can be a prohibited export subsidy
under Article 3.1(a) of the SCM Agreement.   This sort of scenario underlines that the United States'
logic can lead to any number of absurd situations.
7.156  Australia reiterates that a rules-based system must provide clear guidance to governments
about the nature of their WTO obligations.  Governments can accept that where market developments
lead to allegations of adverse effects by other Members, then there may be non-violation cases
brought, including cases under Part III of the SCM Agreement, or alternatively exports can be subject
to countervailing duty action.  There is nothing new about that.  What governments would find hard to
accept is a situation where they would have no guidance and where they would breach treaty
obligations quite inadvertently without prior warning.
7.157  Australia submits that t he United States' position on the “in fact” standard would provide no
guidance to Members about what might constitute a prohibited subsidy.  It would provide carte
blanche  for trying to close markets through Part II of the SCM Agreement.  Where a Member is
suffering adverse effects it has other remedies, including countervailing action, which is subject to
detailed rules.  Indeed, virtually any case where subsidized imports are such as to cause material
injury in an importing Member’s market would provide sufficient evidence to be an “in fact” exportsubsidy in the eyes of the United States.  This would serve to make much of Part III of the SCM
Agreement redundant, inconsistent with the normal rules of treaty interpretation.
7.158  In addition, Australia continues, the way in which the United States has pursued the issue of
the ICS and EFS gives rise to concerns about due process.  These schemes do not apply toautomotive leather.  The view of the United States that the nature of a prior scheme affects the legalnature of a subsequent scheme has no basis.  It would make the task of governments ensuringcompliance with their international obligations all that much more difficult and conceptually couldresult in the absurd situation where two Members could have exactly the same scheme but theirlegal nature would be different because of differences in their prior arrangements.  This justhighlights the unreasonable basis of the position of the United States.  For the Panel to reach someconclusion about the legal status of a measure that no longer exists and has never been subject to adispute panel under the GATT system or the WTO, would be inconsistent with the central principlethat Members’ measures are presumed to be in conformity unless successfully challenged under theappropriate dispute settlement procedures.
7.159  The United States responds that it is the nature of legal rules that they are drafted in
general terms and cannot be expected to provide bright-line tests for specifically resolving alhypothetical scenarios.  That is why there are rules of treaty interpretation to help resolveinterpretative issues and dispute settlement panels to apply general legal rules to particular factualsituations.  The drafters of the SCM Agreement chose to include an "in fact" standard, which by itsnature requires a fact-based, case-by-case approach in its application.  If the "in fact" provision ofArticle 3.1(a) is to fulfill the purpose for which it was intended -- to prevent circumvention in factof the prohibition in law against export subsidies -- a case-by-case approach is necessary.  If thedrafters had regarded a case-by-case approach as undermining the stability of the WTO system, theyobviously would not have included an "in fact" standard in the prohibition.
7.160  The United States maintains that some uncertainty is inevitable in a case-by-case approach.
This uncertainty is diminished to a certain extent as the application of this provision is clarified bypanel decisions.  In conducting a case-by-case analysis, a panel must use its best judgment inobjectively assessing the facts of the case.  Likewise, in attempting to conform its conduct to theWT/DS126/R
Page 60
requirements of the SCM Agreement, a Member must use its best judgment in deciding whether a
subsidy would fall within the prohibition in Article 3.  Furthermore, exactly the same line ofargument could be made concerning determinations of de facto discrimination under Article III of
GATT 1994.  Yet, the Appellate Body has recognized that such an approach does not undermine thestability and predictability of the WTO system, particularly in light of the benefit of this approach,namely preventing the circumvention of the prohibition at issue.
4. Application of Article 3.1(a) of the SCM Agreement in this dispute
(a) "contingent, in law … upon export performance"
7.161  The United States  submits that, because Howe was granted the new aid package as a specific
replacement for the de jure  subsidies of the ICS and EFS export schemes from which it was excluded
pursuant to the November 1996 settlement, the new subsidies are also de jure  export subsidies.  In its
first written submission to the Panel, the United States said that it had been unable to document fully
that the new subsidies are legally contingent upon Howe’s export performance because, despite
previous requests, the Australian government  had refused to provide the United States with copies of
Howe’s proposal to the Australian government  (and other documents relating thereto) which
generated the additional aid or the resulting agreement between the Australian government and Howesetting forth the terms of the benefits and the criteria for their receipt.
106
7.162  The United States believes that the replacement subsidy package accorded to Howe by the
Australian government  is a prohibited export subsidy within the meaning of Article 3 of the SCM
Agreement; for this reason it requested that the Panel ask Australia to produce certain documents
which would demonstrate, inter alia , whether the package is de jure  or de facto an export subsidy.
7.163  Australia  submits that the United States has put forward no evidence that any of the measures
is contingent “in law” upon export performance.  Indeed, in Australia's view, the issue of “in law” is
not before the Panel, since in WT/DS126/1, while “in law or in fact” is part of a quote in the secondparagraph, the terms of reference depend on the third paragraph which only discusses the “in fact”
case.  Australia observes that the United States does raise the issue of “in law” (or rather it refers to
“de jure ” by which it presumably means “in law”) in its first written submission to the Panel.
However, it presents no evidence and its argument appears to be the same as for its “in fact” case, i.e.
that the measures were put in place following the excision of automotive leather from the ICS andEFS.  This does not demonstrate the “in law” condition.  Indeed, Australia asserts, it demonstrates that
is not germane even to the demonstration of the “in fact” condition.  Similarly, the United States
chose not to avail itself of the proper procedures under the SCM Agreement (Article 25.8) to seekinformation and so it can hardly argue on the basis of the lack of information.
(b) "contingent … in fact … upon export performance"
(i) General
7.164  The United States asserts that, even if the grant and loan contracts presented by Australia do
not demonstrate that the replacement package is a de jure  export subsidy, the Panel should find that
the prohibition on export subsidies applies in situations like the one presented here: where a subsidy
exists; and where that subsidy is de facto contingent on export performance.  The Panel should
determine that the grants and loan provided to Howe by the Australian government  constitute de
facto export subsidies on the basis of the totality of the facts and circumstances in this case.
                                                     
106 These documents were provided to the Panel and the United States at the first substantive meeting
of the Panel with the parties, subject to procedures adopted by the Panel governing the handling of business
confidential information.WT/DS126/R
Page 61
7.165  According to the United States, the new financial aid package was specifically designed to
compensate Howe for the export subsidies it forfei ted under the settlement agreement with the United
States.  In addition, the Australian government intended that the new package would support Howe’s
current and future exports.  When it provided thes e subsidies, the Australian government was fully
aware that Howe was first and foremost an exporter and that the Australian market for automotive
leather goods was minimal in comparison to the existing and potential export market for these goods.
The Australian government was aware that, by 1997, exports constituted 90 per cent of Howe’s sales.There can be no doubt that Howe’s increased production will be destined for exportation, since
Australia’s small automotive leather market cannot absorb Howe’s current production, much less any
increase in sales or production.  Finally, the structure of the aid package itself reveals that the new
subsidies are in fact tied to Howe’s anticipated export earnings.   In light of the totality of the
circumstances surrounding the provision by the government of Australia of these replacementsubsidies to Howe, the United States considers that Australia has unquestionably bestowed a
prohibited export subsidy upon Howe.
7.166  Australia  submits that there is a clear distinction between “law” and “fact” in ordinary
language.  The terms “in law” and “in fact” are clearly used to distinguish between the ways in which
the granting of a subsidy is made contingent upon export performance.  “In law” means just that,“legally contingent” as used in Footnote 4 of the SCM Agreement.  “In fact” is where the
implementation is such as to tie the granting of the subsidy to actual or anticipated exportation or
earnings.  In particular, this occurs where a scheme is administered in such a way as to favour exports
without being legally contingent on export performance.  The loan contract and the grant contract
prove that in neither case was there any legal contingency.  In addition, there was no legal
contingency for the payments under the grant contract.  The contracts also show that there was no way
in which they could be administered to tie the granting of subsidies to actual or anticipatedexportation or earnings.  There is no way in which they could be administered to favour exports over
domestic sales.
7.167  According to Australia, the loan and grant contra cts are separate legal instruments.   The loan
contract and other measures need to be considered separately on their merits in respect of consistency
with Article 3.1(a) of the SCM Agreement.  Australia asserts that it has shown that the granting of theloan contract clearly had no linkage to export performance, and that this is evident from the loan
contract itself.  Australia states that it has shown that the loan contract does not meet the “in fact”
standard of Article 3.1(a) of the SCM Agreement.
7.168  Australia observes that there is a difference of views over the terms of reference of the Panel
in respect to the grant contract.  If the Panel accepts  that it is the conditions of the granting of the
individual payments that is at issue, then the United States has not even sought to show that the “in
fact” standard was met.  In addition, only the granting of the first payment and the granting of the
second payment are before the Panel.  Assuming, in the alternative, that the Panel concludes that the
issue before it is the granting of the grant contract, then the granting of the grant contract clearly has
no linkage to export performance.  Australia maintains that it has shown this and that this is, in anycase, evident from the grant contract itself.  The functioning of the grant contract is shown by the way
in which the actual payments were made where the record
107 shows that there was no tie to export
performance.   Australia states that it has shown that the grant contract does not meet the “in fact”
standard under Article 3.1(a) of the SCM Agreement.
7.169  Australia asserts that the issue of the nature of the ICS and the EFS as they applied to
automotive leather is not before the Panel and should not be addressed by the Panel.  In Australia'sview, under the WTO Agreement, there is a presumption that measures taken by Members are in
                                                     
107 Australia refers in this regard to business confiden tial information  it provided to the Panel.  Also see
infra , para. 7.298.WT/DS126/R
Page 62
conformity unless successfully challenged under the appropriate dispute settlement procedures of the
DSU and the appropriate covered agreements.
(ii) Prior measures and the designing of alternative assistance to Howe
7.170  The United States  argues that the A$30 million grant and the A$25 million preferential loan
were provided to Howe solely because automotive leather was removed from the ICS and EFS export
schemes.  Since these industry programmes were clearly export subsidies and since the new financial
aid was expressly designed to replace these benefits, the new assistance qualifies as a prohibited
export subsidy.
7.171  In the view of the United States, there can be little doubt that the ICS and EFS export schemes
are de jure  export subsidies.  The explicit purpose of both the ICS and the EFS programmes is export
promotion.  In order to achieve this goal, subsidies available under these programmes were made
legally contingent upon export performance.  The greater the value of a company’s exports, the
greater the value of subsidies it was eligible to receive.  Between 1992 and 1997, Howe received at
least A$29 million under the ICS programme and more than A$5 million under the EFS programme.
By making subsidies under these programmes legally contingent upon exportation, both the ICS andEFS programmes clearly fell within the Articl e 3.1(a) of the SCM Agreement, which prohibits
“subsidies contingent, in law . . . upon export performance.”
7.172  The United States described the ICS and EFS as follows
108:
"Enacted in 1988, the Textiles, Clothing and Footwear Development
Authority Act established the Australian Textiles, Clothing andFootwear Development Authority, the stated object of which is "to
promote the restructuring and revitalization of the [textile, clothing
and footwear] industries so as to improve their efficiency and
international competitiveness."
109  To this end, the functions of the
Authority are, inter alia , to “encourage and facilitate the development
of plans aimed at increasing the international competitiveness of
[Australian textile, clothing and footwear] producers by providing
financial assistance to them for that purpose” and to develop
“measures calculated to . . . increase the exports of TCF products
produced in Australia . . . ."110
Pursuant to this mandate, in 1991, the Australian government
announced the creation of the [ICS] program, to be in effect from July
1, 1991, through June 30, 2000.111  Under the [ICS] program, exporters
of eligible textile, clothing and footwear products can earn import
credits that may be used to reduce the import duties payable on
eligible textile, clothing and footwear items by an amount up to the
value of the credits held.112 However, exporters are not required to use
their credits as offsets against import duties.  These credits may be
                                                     
108 Note that notes 109  - 123 are as they appeared in the United States submission.
109 TCF Development Authority Act 1998, Part II, §6(a), Exhibit 6.
110 Id. at Part II, § 7.
111 Australian Customs Service, TCF Import Credit Scheme: Administrative Arrangements (March
1995), paras. 1.1 and 1.2. Exhibit 7.  The TCF Import Credit Scheme is administered by the Australian Customs
Service on behalf of the TCF Development Authority.  Id. at para. 1.1.
112 Id.WT/DS126/R
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transferred from one holder to another in exchange for a cash
payment.113
Under the ICS program, the level of import credits that may be earnedis explicitly conditioned upon export performance.  Specifically, the
value of import credits that can be earned is calculated as the F.O.B.
value of an eligible export sale, multiplied by the Australian value-added content of the export sale (expressed as a percentage of sales
volume).
114  This total, in turn, is multiplied by a specified “Export
Phasing Rate.”115   Between 1991 and 1997, the Export Phasing Rate
stood at .30 ( ie, 30% of the F.O.B. value of the Australian value-added
content of eligible textile, clothing and footwear exports).  The Export
Phasing Rate was recently reduced to .20.116   Expressed as a formula:
Import credit = Export sale (FOB A$) x Australian value-
added expressed as a percentage of sales volume x Export phasing
rate117  …
The Australian government designed the EFS program to encourage
the export of passenger motor vehicles ("PMV") and PMVcomponents from Australia.
118  In its current form since 1991,119 the
EFS program allows Australian manufacturers to earn A$1 of export
credit for every dollar of eligible exports of covered automotive
items.120   The value of exports eligible to earn exports credits is equal
to the Australian value-added content of eligible exports, calculated asthe F.O.B. sales price less the value of any imported components and
raw materials.
121
Export credits earned under this program can be used to obtain rebateson the duties payable on eligible imports of automotive vehicles and
automotive components,
122 or may be sold for cash to any importer of
                                                     
113 Id. at para. 8.3.
114 Id. at para. 5.1.  The Textiles, Clothing & Footwear Development Authority has established value
added  rates across a range of categories and sub-categorie s for textile, clothing and footwear products, set out in
Table 3 of the TCF Import Credit Scheme: Administrative Arrangements (March 1995).  Id., para. 5.4.
115 Id. at para. 5.1.
116 Id. at para. 6.9.  Under the TCF, the Export Phasing Rate stood at 30% of the Australian value added
of eligible textile, clothing and footwear exports from July 1, 1991 thro ugh June 30, 1996.  It was subsequently
phased down to 25%, and is scheduled to decrease to 20% on July 1, 1998 and 15% on July 1, 1999.
117 Id. at 7 (Part 5.1).
118 See Statement of Minister of Industry, Science & Technology John Moore, “Government
Announcement on Automotive Industry Policy to the Year 2000,” p. 40 (March 1991) (remarking that theAustralian Government’s new policies are designed to make “the Export Facilitation Scheme more flexible andrewarding to those firms prepared to make the invest ments needed to considerab ly expand their exports.”),
Exhibit 12
119 See Id . (discussing how the EFS program replaced and built upon previous assistance programs
provided by the GOA to the Australian automotive sector).
120 Australian Dept. Of Industry, Science & Technology, Report on the State of the Automotive
Industry 1994, (June 1995), para. C:1.3.2, Exhibit 13.
121 Id. at para. C:1.3.  As expressed in C:1.3.6: F.O.B. selling price less imported components equals
F.O.B. Australian content.  F.O.B. Australian content less raw materials equals value-added.
122 Id. at para. C:3.1.1 and C:3.2.WT/DS126/R
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eligible goods who may similarly seek such rebates.123  The amount of
import duty that can be rebated under this program is determined by a
tariff reduction schedule that varies depending on the year in which
the export credit is used.  From a high of 37.5% of the tariff rate for
export credits used in 1991, the schedule slowly scales back the
amount of rebatable duty to 15% in the year 2000, the last scheduledyear of the program.
124  For instance, in 1996 a company could receive
a rebate equal to 25% of the export credit earned.  Thus, if an exporter
received A$1,000,000 of export credits, he or his transferee could
obtain a rebate of $250,000 for import duties paid during that year."
7.173  The United States maintains that even Australia’s Industry Commission recognized that the
programmes are inconsistent with the Australia’s WTO obligations:
The Commission finds the [automotive] export facilitation scheme has
been valuable to the industry.  It has served its main purpose of
introducing Australian products to world markets and will expire in
2000.  The Commission will not recommend its continuation because
its strategic value has been undermined by its vulnerability to
challenge under the rules of the World Trade Organization.125
7.174  The United States observes that a similar assessment was made about the ICS programme:
Recent actions by the US have highlighted the vulnerability of the
[ICS] Scheme to challenge under the World Trade Organization
(WTO) rules…126
7.175  The United States notes that one senior Australian government official even went so far as to
state that “[t]here is no doubt the [ICS and EFS] schemes are illegal under the WTO."127
7.176  The United States recalls that, on 25 November 1996, the United States reached an agreement
with the Australian government that removed au tomotive leather from eligibility under these two
programmes.  After the settlement, the Australian government could no longer provide Howe
subsidies through the ICS and EFS programmes.  Ho wever, the Australian government clearly wanted
to continue to underwrite Howe’s export drive.  As a result, at the same time that it was negotiating
the November 1996 settlement with the United States, the Australian government was also
considering replacement measures for the very subsidies it was pledging to eliminate.
                                                     
123 Id. at para. C:2.1.4.
124 Id. at para.C:3.1.2 and C:3.1.3
125 Industry Commission, Rep. No. 58, The Automotive Industry: The Report 351, May 26, 1997,
United States Exhibit 39.
126 Industry Commission, Rep. No. 59, The Textile, Clothing and Footwear Industries: Report 293,
September 9, 1997, United States Exhibit 40.
127 “Government may have to dismantle help schemes,” The Australian Financial Review, October 3,
1996, United States Exhibit 4.  According to the United States, the Australian media also recognized the
“prohibited” nature of these programmes’ subsidies.  For instance, The Australian Financial Review (“US threat
to car, ICS industries”) noted on June 20, 1996 that “it had been known for some time that the export facilitationarrangements which operate under the TCF and car plans would not survive a WTO challenge.”  United StatesExhibit 42.  This same article also quoted a former senior official in Australia’s Department of Foreign Affairsand Trade as stating, in regard to a possible U.S. challenge, that “[i]n simple terms, they [the ICS and EFSprograms] are in trouble.”  The United States also refers to “A firm hand on reform,” The Australian Financial
Review, October 3, 1996 (editorial) (“All indications are that the schemes are indeed illegal and will be declared
so in the WTO”), United States Exhibit 43.WT/DS126/R
Page 65
7.177  The United States argues that, anticipating its exclusion from the ICS and EFS programmes,
Howe embarked on an extensive lobbying campaign to persuade the Australian government that its
export prospects -- which it forecast to be A$600 million through 2000 -- were jeopardized without a
substitute form of assistance. The United States cites a report in The Weekend Australian:
Coincidentally, the company’s lobbying effort climaxed on the dayAir Force One with Clinton and his entourage on board touched
down in Sydney.
On the same day, [Howe’s Managing Director] Heysen and a
colleague flew to Canberra for a round of meetings with senior
ministers and bureaucrats, beginning with officials of the
Department of Industry, Science and Tourism.
A meeting followed with staff from the offices of [DIST Minister
John] Moore and the Prime Minister attended by then DISTsecretary Greg Taylor.
Then, to ensure all bases were covered, the opposition rooms were
visited.  Heysen met Simon Crean and Martin Ferguson, Industry
and employment spokesmen respectively, and later in the day had an
audience with [Deputy Prime Minister] Fischer.
128
7.178  According to the United States, these lobbying efforts were amply rewarded.  Even before the
final agreement was reached with the United States, Howe’s Managing Director, Chris Heysen,
remarked that he had been “assured’ that Howe “would be compensated with an alternative
arrangement that would help it continue to expand exports."129  Similarly, the Sydney Morning Herald
reported that “it is understood that Howe Leather will be given a multi-million dollar payment for
being excluded from the Import Credit Scheme [ICS] and the Export Facilitation Scheme [EFS]."130
7.179  In the view of the United States, that is precisely what happened.  Just one month after
agreeing with the United States to excise automotive leather from the ICS and EFS programmes, the
Australian government formally announced that “[t]he Government has provided the package toHowe and Co. following the decision to excise au tomotive leather from the Import Credit and Export
Facilitation Schemes from 1 April 1997, as part of the settlement of a recent trade dispute involving
the United States."
131  Thus, with planned coincidence, the new aid package -- characterized by the
Australian government as “alternative assistance” -- was provided to Howe just as automotive leather
was being excised from two programmes that had the explicit purpose of export promotion.
7.180  The United States asserts that, against this backdrop, the link between the replacement
package and Howe’s export performance is quite obvious.  The fact that the replacement packagecompensated Howe for its exclusion from receipt of ICS and EFS subsidies, as well as the sequence
of events surrounding the announcement of the re placement package, indicate that the replacement
package is no more than a thinly disguised attempt by the Australian government to continue to
support Howe’s export growth by modifying only the form, but not the substance, of its exportsubsidies.
                                                     
128 “Sacred Cows vs The Hide of Howe,” The Weekend Australian, Sept. 20-21, 1997, at 54, col. 6,
United States Exhibit 22.
129 “Melbourne firm could lose in US subsidies deal,”  The Age, November 25, 1996, at 1, United States
Exhibit 15.
130 “Backdown on Howe Subsidy,” The Sydney Morning Herald, November 25, 1996, United States
Exhibit 17.
131 United States Exhibit 18.WT/DS126/R
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7.181  Australia  submits that the nature of prior measures is irrelevant to the establishment of the
facts about the legal status of existing measures.  These measures no longer apply to automotiveleather and so are not relevant to the current Panel proceedings.  The United States appears to beseeking to establish that the legal status of a previous measure determines in some way the legalstatus of a subsequent measure.
132  There is no basis for this in a rules-based regime such as the
WTO.  The status of each of the measures before the Panel needs to be judged on its merits.  TheUnited States is proposing a trade outcome or trade effects test.  This may be appropriate in somecases of non-violation, but it is not appropriate under Part II of the SCM Agreement, where theissue is whether one or more of the measures before the Panel fall under Article 3.1(a) of the SCMAgreement.  If the United States wanted to pursue the issue on the basis of trade effects, then itshould have sought remedy under Part III of the SCM Agreement, i.e., under Article 7 rather thanArticle 4.
7.182  Australia argues that to accept that the legal status or nature of a previous measure in some
way determines the status of an existing measure under the WTO, would be to inject a level ofuncertainty and subjectivity into the WTO that would be quite inappropriate for a rules-based treaty.This would mean, amongst other things, that if there were two cases, one where an enterprise hadbeen in receipt of, say, a subsidy and another enterprise had not been, a new measure could beprohibited when given to the first enterprise but not when given to the other.  This would make afarce of a rules-based system.  Article 3.1(a) of the SCM Agreement deals with a situation of law orfact where the type of the measure must determine its status.
7.183  According to Australia, the company concerned does not receive benefits under these
programmes (ICS and EFS), since automotive leather was removed from their scope on 1 April1997, and the United States recognizes this.  The claim of the United States is limited to themeasures before the Panel.  The United States has not made a claim in respect of these programmesand that matter is not before this Panel.  Rather, the United States has made an assertion about theirstatus.  It did not even provide any argumentation in WT/DS126/1 for that assertion.
7.184  Australia states that the United States has made a claim that the measures provided to Howe
are inconsistent with Article 3.1(a) and so Article 3.2 of the SCM Agreement.  This is not an issueof a trade effects test, but a matter regarding WTO rules.  The United States has to establish that theconditions of footnote 4 of Article 3.1(a) are met.  This is not a matter of whether or not when onemeasure is replaced by another there should be a markedly different production or trade outcome.
7.185  For the sake of argument, Australia asks the Panel to assume that a Member has a measure
that has been found by a Panel to be inconsistent with the WTO Agreement.  Its obligations are toremove the inconsistency.  It does not have any obligation to ensure a particular trade outcome tosatisfy the complainant.  That is a political problem for the complainant, not the respondent.  In thecase of a subsidy, nothing in the WTO Agreement asserts that a subsidy inconsistent withArticle 3.1(a) of the SCM Agreement cannot be replaced by a subsidy consistent with the SCMAgreement, or that any new subsidy or other measure must have a particular trade impact.  This isin contrast to non-violation cases, including cases under Article 7 of the SCM Agreement, wherethe impact of an aggregation of measures may need to be dealt with.
                                                     
132 In the course of the Panel proceedings, the Un ited States acknowledged that a prohibited export
subsidy could be replaced by another form of assistance that is not tied to export performance and a Membercould thus bring itself into conformity with the SCM Agreement.   However, it maintains that Australia has not
done so in this case.WT/DS126/R
Page 67
7.186  Australia declares that Article 3.1(a) and footnote 4 of the SCM Agreement do not talk
about replacement measures, but require that the United States establish certain facts.  These mustbe facts in relation to the actual measures before the Panel and not the relationship to programmeswhich are no longer in effect for the product and company in question.
7.187  In the alternative, Australia continues, if the Panel decides to look at the trade impact of
previous measures, it would still be unnecessary and outside of the Panel’s terms of reference for itto make any finding on what the status of ICS and EFS were under the SCM Agreement when theyapplied to automotive leather.  These programmes do not apply to the product and company inquestion and so are not before the Panel.  It would be inappropriate and an abuse of process toallow the Panel proceedings to be used to reach findings on programmes that are not before thePanel as measures and on which no claims are being made.  For the Panel to reach any views on thenature of these programmes as they apply to any products other than automotive leather would alsobe outside its terms of reference.
7.188  According to Australia, any argument based on previous measures and their trade effect for
a particular company when compared to that of an existing measure has no place in the WTO rulesenvironment.  The idea that somehow a government would have to disrupt a firm’s commerciallinkages in order to ensure WTO compliance has no basis under the WTO Agreement and is notconsistent with the WTO’s focus on rules.  Indeed, it might even be inconsistent with Article XI ofGATT 1994 or the prohibition on grey area measures under Article 11 of the Agreement onSafeguards.
7.189  Nevertheless, since the United States has put forward, as exhibits, information provided
under confidential, inter-governmental  consultations, Australia states that it is worthw hile setting the
record straight about the process leading to the current arrangements.  The United Statesgovernment was never in any doubt, and accepted, that there would be new assistance arrangementsfor Howe following the excision of automotive leather from ICS and EFS.  Indeed, there were alarge number of bilateral discussions on this issue between the Australian and United StatesGovernments both before and after the public announcement of the proposed arrangements in lateDecember 1996.
7.190  Indeed, Australia states, it was at the repeated request of the United States that Howe was
obliged by the Australian government to devote such a major proportion of payments under thegrant contract to investment, with the United States even objecting to having research anddevelopment counted against payments under the grant contract.  One side effect of this was thenew production premises at Thomastown and Rosedale.  It was the United States that demanded thisinvestment be made where it could well have asked for the money to be paid as a simple bounty onproduction.
7.191  At the same time, Australia continues, the United States wanted assurances that serious
prejudice would not be caused by the new arrangements.  According to Australia, the United Statessaid that it would judge the new arrangements on that basis.  To comply with this, Australia soughtto ensure that the impact on the United States was minimized through limiting the level of per unitsubsidy on sales.  Australia understood that the United States government wanted Australia toensure that the 5 per cent level in Article 6.1(a) of the SCM Agreement was not exceeded.  Theissue was how to meet the twin objectives of putting the money into investment, which basicallymeant paying the money at an early stage (unlike a traditional bounty, which could have been paidafter production), and of keeping the level of subsidy below 5 per cent.  The approach adopted wasto cap the aggregate of payments under the grant contract at A$30 million to limit the overall levelof ad valorem  subsidization of sales over the period to mid-2000 while imposing investment targets,WT/DS126/R
Page 68
and of course the normal due diligence considerations associated with checking on the continued
viability of the company before payments were made.
7.192  According to Australia, the intent was to meet the twin requests from the United States.
This was the actual basis of the nature of the grant contract (and loan).  The payments were not tiedto exports.  Indeed the first payment was simply made following the signing of the grant contract.Subsequent payments were related to best endeavours by the company on investment levels andsales.  According to Australia, the United States recognizes this.  This emphasis by the UnitedStates on the link to investment, while correct, underlines that the payments were not linked toexport performance.  If even investment subsidies were to be taken as measures falling underArticle 3.1(a) of the SCM Agreement, then it is difficult to see what limitations would exist to suchan open ended interpretation of “in fact” in Article 3.1(a) of the SCM Agreement.
7.193  The ultimate dispute with the United States, as Australia understands it, is in reality about
the size of the subsidies, about the aggregation of the subsidization provided.  In retrospect, itturned out that the discussions between Australian and United States officials had not resulted in ameeting of minds on this issue of size.  On the other hand, the United States never came forwardwith any claims of serious prejudice to the United States industry, which Australia had undertakento address if it arose.  Moreover, the level of aggregate subsidization is irrelevant for the purposesof Article 3.1(a) of the SCM Agreement.  If the United States had a problem with that, it couldhave taken the matter up under, for example, Part III of the SCM Agreement.
7.194  Australia submits that the “facts” adduced by the United States in the form of newspaper
articles and Ministerial statements have to be taken in their political context.  In any event, it would bedifficult to accept that such articles, sometimes involving stories without attribution, should be
considered to provide acceptable evidence.  The co mpany involved is competitive and innovative.  It
is not surprising in a small trading nation that comments on successful companies include references
to export markets.  That, however, does not mean that there was an attempt to circumvent Australia’sWTO obligations and the United States has not produced any facts to show this.
7.195  Australia contends that the United States has tried to make much of some comment in the
press.  This hardly passes as proof.  Indeed, the use by the United States of newspaper stories to
demonstrate facts is questionable in the extreme.  Newspaper comment in Australia cannot be taken asan accurate record of, or even to reflect, the view s of government.  It would be highly inappropriate
for a Panel to take newspaper comment as the basis for determining that a Member was in breach of
its treaty commitments.
7.196  In this regard, Australia comments on one United States exhibit by way of example.  This
purports to be a Media Release by the Minister for Industry, Science and Tourism on 27 December
1996, together with an attachment.  The first page is a copy of a Media Release, which was provided
to the United States in its Exhibit 2.  According to Australia, this exhibit shows that the government
was concerned about jobs, not about exports.  The second page of this exhibit, which is portrayed as
being part of the Media Release, was not that at all.  It was a set of confidential talking points for
discussions between the Australian Embassy and the United States government  (USTR).  What they
demonstrate is no more than that the loan contract and grant contract were designed with the
objectives of the United States government  in mind and in consultation (though not ultimately
agreement) with the United States, and not in isolation by Australia.
7.197  In Australia's view, when the United States seeks to argue that the company was in some way
obliged to export to obtain the maximum amount of money
 it is unclear what it is suggesting.  The
SCM Agreement does not prohibit bounty, i.e. payments per unit of production by enterprises, or
subsidies on investment by enterprises.  Any enterprise receiving bounty or subsidies linked toWT/DS126/R
Page 69
investment would get more for more production or investment.  What the United States is noting is
that in this case there is a cap, a maximum of A$30 million, on what the company could receive in
total regardless of how much it sold.  There is no basis for arguing that to limit subsidization in this
way should suddenly make a measure prohibited.  The United States has not argued that the allocation
of the limited quantum of money available in any way favours exports.  Thus, there is no basis for this
argument by the United States that any of the payments (or the grant contract) falls underArticle 3.1(a) of the SCM Agreement.
7.198  The United States repeats that the grant and loan contracts at issue in this case were
specifically and explicitly designed to compensate Howe for the prohibited export subsidies that it
would have received under the ICS and EFS.  The fact that the ICS and EFS programmes were export
subsidies is highly relevant in determining the na ture of the grant and loan contracts.  Despite
Australia’s demand that each measure be judged on its own merits, the replacement subsidies that
Howe received were not provided in a vacuum.  The Australian government  itself linked the ICS and
EFS programmes with the grant/loan package by proudly announcing that "[t]he Government hasprovided the [grant and loan] package to Howe a nd Co. following the decision to excise automotive
leather from the Import Credit and Export Facilitation Schemes.
"133  Since footnote 4 to Article 3.1(a)
directs the Panel to examine all "facts demonstrat[ing] that the granting of a subsidy … is in fact tied
to actual or anticipated exportation or export earnings," the Panel is obligated to consider these
facts.134
7.199  Accordingly, the United States urges the Panel to consider the nature of the ICS and EFS
programmes in determining whether the replacement subsidies constitute “in fact” export subsidies.
The United States is not seeking a remedy with regard to these programmes (i.e., is not asking that the
Panel request Australia to bring them into compliance with its obligations under the SCM
Agreement).  However, as the United States considers that the new subsidies are expressly linked tothe old programmes, the nature of the prior programmes provides useful and important information in
evaluating the nature of the subsequent measures.
7.200  The United States argues that, beginning in 1991, and continuing through April 1997, the
Australian government  gave Howe a series of overt, de jure  export subsidies through the ICS and
EFS.  The United States avers that it has demonstrated that the explicit purpose of both the ICS and
EFS programmes is export promotion.  Under these programmes, Howe received import credits basedon the domestic value-added content of its exports.  Receipt of these import credits was directly
contingent upon export performance.  The more Howe exported, the more benefits it received and so
the ICS and EFS programmes are plainly inconsistent with Article 3 of the SCM Agreement.
According to the United States, when the new package is considered in this context, the link between
it and Howe’s export performance is obvious.  The fact that the replacement package was specifically
designed to compensate Howe for its exclusion from receipt of ICS and EFS export subsidies
indicates that the replacement package is no more than a thinly disguised attempt by the Australian
government  to continue to promote exportation by Howe by modifying only the form, but not the
substance, of its export subsidies.
7.201  The United States declares that Australia does not dispute and, indeed, cannot dispute that the
ICS and EFS programmes are prohibited export subsidies.  Rather, Australia contends that the Panel
may not consider the nature of these programmes in determining whether the alternative assistance
provided to Howe were export subsidies.  However, the United States is not asking the Panel to findthat Australia must withdraw the ICS and EFS programmes because they are prohibited export
subsidies.  Rather, the United States is simply asking that the Panel consider the nature of these prior
                                                     
133 United States Exhibit 18.
134 The United States also referred to certain business confidential information in making this
argument.WT/DS126/R
Page 70
measures in determining whether the replacement subsidies are in fact tied to export performance.
The fact that the new subsidies were explicitly designed to compensate Howe for its exclusion from
these two programmes means that the prior measures were factors in Australia's decision to grant
Howe the new subsidies.  This renders the nature of those measures highly relevant to the Panel's
determination in this case regarding the nature of the current measures.
7.202  The United States submits, in the alternative, that even if the Panel were to decide not to
consider the nature of the ICS and EFS programmes, the other evidence presented by the United
States -- which Australia did not in any way refute -- leads to the inevitable conclusion that the grant
and the preferential loan were tied to actual as well as anticipated exports and export earnings within
the meaning of footnote 4 to Article 3.1(a).  That evidence includes, among other supporting facts: the
Australian government’s statements at time of the new subsidies; the Australian government’s
knowledge at the time it conferred these benefits that Howe's exports constituted 90 per cent of its
sales and the company had aggressive export plans; the grant and loan required Howe to increase itsproduction even though the Australian leather market is too small to absorb any increased sales; and
the benefits were provided only to Howe, which exports virtually all of its production, and not to any
leather manufacturer that supplies the domestic market.
7.203  With respect to Australia's suggestion that the United States has somehow waived its claim
that the new subsidies are prohibited export subsidies because it was consulted during the period thatAustralia was designing the replacement package, the United States asserts that, although it was
consulted, it never agreed that a new subsidy package would necessarily comply with the
requirements of Article 3 of the SCM Agreement.  Australia, in fact, acknowledges this.  The fact that
the United States was consulted cannot change the nature of the replacement subsidies.
7.204  The United States adds that the consultations during the time that the replacement measures
were being designed were in the context of settlement negotiations which ultimately proved
unsuccessful.  There was no agreement or endorsement by the United States with regard to the various
settlement proposals.
7.205  In any event, the United States continues, statements or offers made during the course of
settlement discussion in this case are of no legal consequence to this proceedings.  Article 4.6 of theDSU provides that:  "Consultations shall be confidential, and without prejudice to the rights of
Members in any further proceedings."  The question of whether statements made during settlement
negotiations are relevant was address in the panel report in United States – Underwear .
135  In that
dispute, Costa Rica improperly used information on settlement offers made by the United States to
advance certain arguments to the panel.  That panel found:
In our view, the wording of Article 4.6 of the DSU makes it clear that
offers made in the context of consultations  are, in case a mutually
agreed solution is not reached, of no legal consequence to the later
stages of dispute settlement, as far as the rights of the parties to the
dispute are concerned.  Consequently, we will not base our findings
on such information.136 (emphasis supplied by the United States)
7.206  The United States insists that Article 4.6 of the DSU calls for panels to disregard offers of
settlement, and not to treat such offers as a waiver or admission.  Accordingly, this Panel should
disregard all references by Australia to any purported statements made by the United States in the
context of efforts to settle this case.
                                                     
135 WT/DS24/R, adopted 25 February 1997.
136 Ibid., para. 7.27.WT/DS126/R
Page 71
7.207  Australia emphasiz es that the proposition by the United States that somehow the status or
nature of a prior measure can determine the WTO status of a new measure, (or in this case measures)has no basis in the WTO and is without legal argument from the United States.  GATT contracting
parties, and now WTO Members, bring themselves in to conformity with new rules, or after having
lost disputes, by imposing new, consistent measures.  There is nothing to suggest that losing a dispute
means that suddenly a Member has less rights than  before in maintaining a WTO-consistent regime.
The idea of a penal regime where a Member was on parole in some sense after losing a case has no
legal basis.  It would be up to the United States to make a case.  The United States has lost a number
of disputes in the WTO, and in none of them has it said that that means it has to remove all measuresbearing any relationship to the inconsistent ones.  Nor has it said that its replacement measures were
potentially inconsistent because they were measures aimed at replacing those found to be inconsistent.
There is nothing in the WTO Agreement that sugge sts that existing measures can only be replaced
with no policy at all.  Australia makes the following additional points by way of rebuttal:
(a) EFS and ICS do not apply to automotive leather.
(b) Automotive leather was excised from EFS and ICS from 1 April 1997, before the
request for consultations for this Panel.
(c) The nature and WTO status of EFS and ICS for automotive leather prior to 1 April
1997 are beyond the Panel’s terms of reference.
(d) The nature and WTO status of EFS and ICS for products other than automotive
leather are beyond the Panel’s terms of reference.
(e) No GATT or WTO panel has found against EFS or ICS.
(f) Indeed, no GATT contracting party, no signatory to the Tokyo Round Subsidies
Agreement, and no WTO Member has taken Australia to a Panel on EFS and ICS.
(g) In the absence of a panel report finding against these schemes, it would be highly
inappropriate for this Panel to go outside its terms of reference to examine measures
that are not before the Panel and indeed do not even apply to automotive leather.   If
the United States wants a ruling on the WTO status of the two schemes, then it is
always open to it to take such a Panel.  It is not for this Panel to do the United States
work outside the Panel’s terms of reference.
7.208  Australia observes that arguments about the EFS and ICS form the major part of the United
States' case, and that it is the United States' allegations over these schemes that represent the United
States' evidence that the new assistance also qualifies as a prohibited export subsidy.  According to
Australia, the concentration on the EFS and ICS, in circumstances where the United States has not
sought to have its allegations about these schemes addressed by a panel under the DSU, is one more
example of the United States seeking to override proper procedures in this Panel process.  For the
United States to be allowed to conduct these fishing expeditions would be another diminution of thelegitimacy of the nature of WTO dispute settlement where panels have been tightly constrained in
what they look at and on what they make findings.
7.209  Australia recalls that Article 11 of the DSU requires that the “panel should make an objective
assessment of the matter before it, including an objective assessment of the facts of the case….”  The
Panel needs to limit itself to the facts in relation to subsidies provided to producers and exporters ofautomotive leather that are covered in its terms of reference.  These do not include EFS and ICS.
Australia fails to understand the logic behind the United States' assertions.  Members are permitted to
change their industry settings with the obligatio n being that the new measures comply with theirWT/DS126/R
Page 72
obligations.  There is nothing in the WTO that su ggests that existing measures can only be replaced
with no policy at all.  Australia avers that clearly, the new arrangements were part of the outcome
from the bilateral settlement between Australia and th e United States that also led to the excision of
automotive leather from the EFS and ICS.  Australia acknowledges that it is unlikely that the grant
contract and the loan contract would have been provided in a circumstance other than the removal of
automotive leather from the EFS and ICS.  However, it is too simplistic to argue that that was the sole
reason for providing them.  In particular, they were provided because of the government 's concern
about regional job retention in the absence of any support for the company in the shorter term.  To
Australia, the argument by the United States that " since the EFS and ICS were clearly export
subsidies and since the new financial aid was expressly designed to replace these benefits, the newassistance qualifies as a prohibited export subsidy"
 is a simple fallacy along the lines of: if a man has
A and replaces it with B, then B is A.
7.210  In response to the assertion by the United States that the "benefits were provided only to
Howe"137, Australia states that since only one firm was involved, the arrangements were necessarily
for only one firm.  This is to state the obvious.  It does not, however, have any significance in relation
to the legal status of the measures involved.
7.211  Australia points out that the argument of the United States would make it very difficult for a
Member to ever bring itself into  conformity without simply removing all subsidization.  For example,
if a Member provided export subsidies in law and it wished to bring itself into conformity, under
normal logic it could simply remove the provision that favoured exports over domestic sales and not
discriminate.  The United States would, in those circumstances, seem to start from the position that
the new scheme was prohibited because of the nature of the previous arrangements.  On the other
hand, had that new arrangement been introduced in a case where there had been no subsidization, itwould be consistent.  This severance between the nature of a measure and its status is inconsistent
with the rules-based  regime of the WTO governing violation of treaty commitments.
7.212  Relying on business confidential information, the United States argues that there was clearly a
link -- which had been recognized by the Austra lian government -- between the elimination of
automotive leather from eligibility under the ICS and EFS and the granting of new assistance to
Howe.
7.213  Furthermore, Australia  argues, the disciplines on export subsidies are in respect of certain
types of measures.  This is not a matter of how much money is provided by way of subsidy.  Where ameasure is replaced by another, all that matters is whether the new measure is consistent.  Whether the
level of subsidy is lower or higher is irrelevant.
7.214  Australia submits that, while the United States said
 that it was not proposing a trade effects
test, it is proposing that the Panel in reality base its findings on the following: (a) the nature and status
of prior measures; and (b) the level of exports of Howe of automotive leather.
7.215  According to Australia, the United States exhibits purporting to show what was in Australian
Ministers’ minds at the time the new assistance arrangements were designed do not demonstrate that
what they had in mind was an export subsidy.  Indeed, to the contrary, if the covert scenario originally
implied by the United States had any semblance of truth in it, and if Ministers thought that there was
any linkage with exports in the way suggested, it wo uld not be credible that they would make any
statements about exports at all.  Australia provided business confidential information to the Panel
concerning 1997-1998 audited sales data which, it asserts, underlines the lack of probative value of
evidence submitted by the United States regarding, for example, Howe's high export levels.
                                                     
137 See supra , para.7.202.WT/DS126/R
Page 73
7.216  In Australia's view, it is not credible that the United States and Australia would have been
discussing a settlement that the United States considered to have been WTO-inconsistent.
Discussions between the United States and Australia always envisaged that it was possible to provide
WTO-consistent subsidies to Howe, but it was recognized that there was a risk of adverse effect, in
particular, serious prejudice.  The United States has not denied this.  But its arguments about prior
measures and the high level of exports of automotive leather by Howe were just as true then as now.Australia is not saying that the United States has given Australia a “waiver”
 in regard to the new
assistance arrangements.  Australia would agree that in the circumstances, the United States should
not have brought this case, but Australia is not arguing here that the United States is estopped from
doing so.  However, the fact that the United States was involved in discussions with Australia over the
details of the assistance package, until at least July 1997, demonstrates that the United States basic
problem was about either the size of the loan and grants or some other aspect of the specific
arrangements.  Australia believes it is the former.  If this is the case, then instead of taking and doingthe work for a serious prejudice case, the United States is seeking to push out the boundaries of the
SCM Agreement to obtain an export level test under Part II of the SCM Agreement.  At the same
time, the United States also appears to be attempting to push out the boundary of the DSU to obtain a
prior measure test, which would have general application.
7.217  Australia asserts that, in respect of the specific arrangements, nothing could be more anodyne
than the loan, with the United States making no substantial argument on its status.  Similarly, once the
trade effects test is taken away, the allegations about the grant contract and the payments under it also
collapse.
7.218  Australia observes that the United States argues that although the United States was indeed
consulted about the new subsidies, the United States never agreed that a new package wouldnecessarily comply with the requirements of the Article 3 of the SCM Agreement.  As the United
States recognizes, Australia never said that the United States accepted any particular assistance
arrangements.  However, the United States clearly accepted that some arrangements would be
acceptable, i.e. including being WTO consistent.  Otherwise, it would have been being duplicitous
during discussions where it sought and obtained in particular the devotion of much of the moneyprovided under the grant contract to investment.  Now, of course, the United States seeks to draw
adverse inferences from the allocation of money to investment.
7.219  The United States  responds that throughout Australia’s submission and in response to written
questions of the Panel, Australia states that the United States “understood and accepted” that an
alternative assistance arrangement would be provided to producers of automotive leather.  Althoughthe United States notes that statements or offers made during the course of settlement discussions in a
case are of no legal consequence to the proceeding
138 the United States asserts that it is necessary to
correct this misstatement.  According to the United States, it never “accepted” that alternative
assistance would be provided to Howe.  Australia never sought permission or acceptance from the
United States to provide this assistance.  Rather, Australia simply informed the United States that
further assistance would be supplied.  Although the United States was consulted in order to avoid
further dispute settlement proceedings; as Australia acknowledges, the United States asserts that itnever “agreed to or endorsed the assistance arrangement eventually implemented.”
7.220  Australia  states that the bilateral discussions between Australia and the United States, of
course, did not reach the point of the United States signing off on the WTO status of the new
assistance arrangements.  Australia was prepared to engage in a lengthy consultative process to try
and reach a mutually satisfactory solution to this issue.  However, Australia contends, it should benoted that the pace of this case, and the long delays involved in it, were determined by the United
                                                     
138 The United States refers in this regard to Article 4.6 of the DSU and to Panel Report, United States
– Underwear , WT/DS24/R, adopted 25 February 1997, para. 7.27.WT/DS126/R
Page 74
States and throughout this period commercial uncer tainty has hung over Howe.  Nevertheless, the
lengthy process of bilateral consultations also underlines the commitment of the Australian
government  to implement WTO-consistent arrangements.  It demonstrates that the intent of the
government  was not to implement an export subsidy arrangement but, quite the contrary, to
implement measures that would be not only completely WTO-consistent but also not cause adverse
effects to the United States, while recognizing that the United States could always bring a case of
serious prejudice to Australia and then, if necessary, to the WTO.
7.221  Australia recalls that there were a large number of bilateral discussions between the
Australian and United States government  both before and after the public announcement of the new
assistance arrangements in late December 1996.  These consultations included exchanges between
officials from the Australian Embassy in Washington and USTR officials as well as direct contactbetween policy officers in Canberra involved in the development of the new assistance arrangements
and officials in USTR.
7.222  According to Australia, in discussions prior to the 27 December 1996 announcement of the
new assistance arrangements, USTR officials were advised of the broad framework proposed for the
alternative assistance arrangements, including the fact that the arrangements would contain a one-offup-front grant payment.  Australia asserts that the United States was concerned over the size of the
alternative arrangements (originally A$80 million was proposed) and the likely impact the
arrangements would have on the United States industry.  This reflected the nature of the bilateral
settlement.  USTR officials made it clear immediately following the bilateral settlement between
Ambassador Barshefsky and Mr. Fischer that they would judge the WTO-consistency or otherwise ofthe new scheme on whether it caused problems or serious prejudice to the United States industry.  In
response to the concerns expressed by the United States over the level of the arrangements, the
amount originally proposed was reduced markedly and the loan element introduced.
7.223  Australia observes that, in the pre-announcement discussions on the alternative assistance
arrangements, the United States also expressed particular concern over the proposed "up-front"payment and suggested that the arrangements may be more acceptable if the size of this up-front
payment could be reduced and that the remainder could be paid conditionally (based mainly on
investment activity) over the next couple of years or paid as a production warrant over the period
1 April 1997 to 31 December 2000.  It was this broad payment structure that emerged in relation to
the grant contract.
7.224  Australia notes that, after the 27 December 1996 announcement of the assistance
arrangements, the bulk of the discussion between Au stralia and the United States was about how to
adjust the arrangements to address the concerns of US industry.  As a result of these discussions, a
number of changes were made to the details of the arrangements.  The adjustments were made
continually until the grant and loan contracts were signed on 9 March 1997.  Moreover, further
discussions, at both Ministerial and senior official s levels, continued between Australia and the United
States concerning the provisions on investment and other details of the assistance arrangements ofconcern to the United States until July 1997.
7.225  Australia underlines that the consultations on the new assistance arrangements were
extensive.  They were, of course, without prejudice to either Australia's or the United States' WTO
rights, but they do reflect that at least throughout this period the United States accepted that
alternative assistance arrangements, consistent with Article 3.1(a) of the SCM Agreement, could beprovided to Howe.  Australia acknowledges that, despite these efforts, no final agreement could be
reached with the United States government  which met the concerns of the United States companies
that initiated this complaint.  Australia has not claimed that the United States ever agreed to or
endorsed the assistance arrangements eventually implemented.WT/DS126/R
Page 75
7.226  According to Australia, t he panel report cited by the United States , United States -
Underwear139, is not applicable to this case.  The United States - Underwear  case was in the context
of consultations under the DSU leading to the establishment of that particular panel and the allegedly
compromising offer by the respondent.  This case is the opposite, where Australia, in good faith,
discussed with the United States what the new arrangements might be and how Australia might
modify them to meet concerns of the United States.
7.227  Australia asserts that the record shows that the two governments were involved in discussions
about the new support arrangements, where the prime issue was the extent of support.  In Australia's
mind there is and was no question about the acceptance by the United States that subsidies would be
provided.  There was no agreement on the new arrangements, but the discussions that took place on
how the subsidies should be delivered, in particular the United States requests that the bulk of the
money under the grant contract be on capital expenditure, had only one reasonable interpretation, i.e.
that the United States accepted that subsidies were to be provided in one form or another.
7.228  Australia contends that the issue between the two countries was one of serious prejudice.  If
there had been any suggestion that the United States considered that there might potentially be a
breach of Article 3.1(a) of the SCM Agreement, or indeed any other provision of the WTO, then the
Australian government  would have addressed it.  Instead, there was the opposite scenario of the
United States only raising the “in fact” provision of  Article 3.1(a) of the SCM Agreement six months
after binding legal domestic arrangements had been entered into by the Australian government  and
after the loan had been provided and the first two tranches of the grant contract paid out.
7.229  In Australia's view, the record shows that Australia was concerned to ensure WTO-
consistency and, in particular, to ensure that there was no linkage with exports.  Any government thatwas intent on doing something underhanded would have handled the issue quite differently.  The
reported comments on exports would, to the extent th at they are accurate, simply demonstrate that the
Australian government  did not have anything in mind about linkages with export performance.  This
is also borne out by the nature of the grant contract and the basis on which actual payments were
made under it.  Clearly, there was no tie to export performance.
(iii) Intent
7.230  The United States  submits that the Australian government  intended the replacement package
to support Howe's current and future exports.
7.231  The United States contends that the fact that the replacement package is meant to compensate
Howe for its exclusion from the ICS and EFS export programmes is strong evidence that the true
purpose of the replacement package -- like the subsidy programmes that preceded it -- is export
promotion.  Any doubts as to this fact are resolved by the numerous statements by Australiangovernment and Howe officials that confirm that the replacement package is in fact tied to Howe’s
actual or anticipated exportation or export earnings.  For instance, Australian Trade Minister Tim
Fischer made it clear that the purpose of the replacement package is continued export promotion, in
stating:
by dint of effort we [the Australian government] have ensured that
Howe Leather has been able to continue its export activity over the
last 18 months.
140
                                                     
139 WT/DS24/R, adopted 25 February 1997.
140 “Fischer vows to fight US trade challenge,” The Australian, September 29, 1997, United States
Exhibit 45.WT/DS126/R
Page 76
7.232  Similarly, Australia’s Minister for Industry, Science and Tourism, John Moore, announced
during negotiation of the replacement package that:
We are working constructively with Howe Leather to ensure that they
receive fair compensation.  I am determined that this strongly
performing export company should not be unfairly disadvantaged bythe agreement reached at Manila.
141
7.233  According to the United States, the Australian government was aware that, at the time the
new subsidies were granted in 1997, exports constituted 90 per cent of Howe’s sales.  The fact that
exports play the overwhelmingly dominant role in Howe’s overall sales mix is not coincidental.  As
part of a nearly decade-long effort, the Australian government has financed Howe’s transformation
into a world-class exporter of automotive leather.  As the Australian government has itself admitted,
since at least 1991, Howe has received in excess of A$30 million worth of subsidies through twoexport-contingent subsidy programmes: the ICS and E FS.  Because these subsidies were so lucrative,
Howe was able to dramatically increase its exports.  From less then 10 per cent of its total sales in
1988, exports increased to 90 per cent of Howe’s total sales for the nine months through March
1997.
142
7.234  The United States alleges that, because the value of prior subsidies was legally tied to the
value of Howe’s exports, the Australian government necessarily had detailed information concerning
Howe’s export sales and their exponential increase throughout the 1990s.  Beyond simply being aware
of Howe’s general level of exports, however, the Au stralian government was also aware that of the
relative importance of exports in Howe’s overall sales mix.  For instance, even before the replacement
package was announced, opposition employment spokesman Martin Ferguson is reported to haveboasted that “[t]he company was a shining light with 90 per cent of Howe’s production being for
exports . . . .
”143
7.235  In addition to being aware of Howe’s past and current export performance, the Australian
government was also aware of Howe’s aggressive  export plans.  In Howe’s November 1996 proposal
to the Australian government seeking new subsidies, Howe reportedly predicted that its annual saleswould roughly double -- to $214 million -- by 2000, “wit h the lion’s share of the growth coming from
exports.
”144 In fact, not only was the Australian governme nt aware of Howe’s export ambitions, but it
actually designed the replacement package to further facilitate and encourage Howe’s ambitious
export goals.
7.236  According to the United States, the fact that the replacement package is being provided to
promote Howe’s exports was also recognized, and we lcomed, by Howe itself.  During negotiation of
the replacement package in late 1996, Howe’s Managing Director, Chris Heysen, stated that he had
been “assured” that Howe “would be compensated wi th an alternative arrangement that would help it
                                                     
141 Statement of Minister for Industry, Science & Tourism John Moore, “Resolution Removes
Uncertainty for Industry,” Nov. 25, 1996, United States Exhibit 16.
142 “Major Headache for the Howard Government,” A$ Adding Value, July 5, 1996 (“Howe’s exports
have risen from less than ten percent of sales in 1988, to nearly ninety percent of sales.”), United States Exhibit
5; “Howe Leather Wins Wheels Award,” World Leather, February/March 1997 (“The company has increased its
exports from 7% to 90% of sales over the last  eight years . . . . “), United States Exhibit 4.
143 “Trade Showdown,” Herald Sun, November 20, 1996, United States Exhibit 30.
144 “Sacred Cows vs The Hide of Howe,” The Weekend Australian, September 20-21, 1997, United
States Exhibit 22.WT/DS126/R
Page 77
continue to expand exports."145  Similarly, in a 1997 interview with World Leather Magazine, Mr.
Heysen noted that “[w]e have been strongly support ed by the Australian Government and we are very
confident now that our investment and export growth can continue as planned."146
7.237  And, the United States alleges, Howe has begun to achieve its export goals.  In June 1998,
Howe secured new orders totalling $300 million from major U.S. automobile companies.147  There is
no question that Howe’s ability to secure these orders was directly attributable to the replacementsubsidy package.  The chairman of Howe’s ultimate parent company, Schaffer Corp. Ltd., proudly
declared that its new $300 million contracts “have been aided by the Commonwealth Government’s
support package to Howe in which over $30 million has been expended on the establishment of two
world class operations for the manufacture of leather” at Rosedale and Thomastown.
148  Present at the
opening of Howe’s new state-of-the-art processing plant in Thomastown, the Australian Minister for
Industry, Science & Tourism John Moore attributed Howe’s success in “cracking” the U.S. car market
to the government’s “industry policy,” which is based on innovation, investment and exports.149
7.238  The United States argues that, significantly, the replacement subsidies were not offered to
other Australian tanners who supply leather for domestic consumption.  The subsidies were thereforenot meant simply to stimulate the production of leather for sale to Australian customers.  Nor were
they provided to other tanners who were eligible for export credits under the ICS and EFS exportsubsidy schemes since they had no need of further export aid.  Rather, the financial package was only
made available to the sole leather tanner who was denied access to the government’s export schemes
and whose exports account for virtually all of its production.
7.239  Australia  asserts that the United States' arguments are of the nature of trying to establish
intent by way of press comment.
150  In this connection, panels are not supposed to be mind readers
about what governments, or individual ministers, might or might not have had in mind at the time of
making decisions.  As any official will know, the factors that influence decision-makers are many
faceted.  They usually relate to things such as jobs and employment, as in this case.  Of course, such
decisions may often have implications for imports and exports.  There is nothing surprising about that
from an economics point of view.  However, to arrive at a conclusion, as does the United States, that
this should mean that a measure is inconsistent with a treaty obligation is a large leap into the dark.
7.240  According to Australia, an assessment of the imputed objectives of governments is not the
basis on which a rules-based  system such as the WTO is supposed to operate.  Rules about violation
are not supposed to be based on guesses at the objectives of governments.  They need to be based on
facts and soundly based arguments.  In Australia’s view, neither of these is present in the case
presented by the United States.
7.241  The United States  insists that, in addition to the fact that the new subsidies were explicitly
designed to replace the forfeited de jure  export subsidies, there is strong evidence that the Australian
                                                     
145 “Melbourne firm could lose in US subsidy deal,” The Age, November 25, 1996, at 1, United States
Exhibit 15.
146 “Howe Leather wins wheels award,” World Leather, February/March 1997, United States Exhibit 4.
147 J. Schaffer, Chairman & Managing Director, Schaffer Corp. Ltd., “Howe Leather Announces
$300M in New US Contracts,” June 18, 1998, United States Exhibit 47.
148 Ibid. See also “Australia: Melbourne Firm in Push to Lift Exports by 15%” Australian Business
Intelligence Daily Commercial News (Abstracts), June 15, 1998 (new government-funded high-technology
tanning facility in Rosedale was “part of [Howe’s] efforts to lift its exports above A$100 million a year”),
United States Exhibit 48.
149 Media Release, Statement of John Moore, Minister of Industry, Science & Tourism, “Australian
Company Cracks US Car market With $300M Deal,”  June 18, 1998, United States Exhibit 49.
150 See also Australia's arguments in this regard supra  paras. 7.35, 7.194 and 7.195.  With respect to the
assertions of the United States, supra , para.7.238, see also Australia's arguments supra , para.7.210.WT/DS126/R
Page 78
government intended the replacement subsidies to support Howe’s current and future exports.  There
are numerous statements by both Howe and the Australian government which confirm that the
replacement package is, in fact, tied to Howe’s actual or anticipated exportation or export earnings.
7.242  Furthermore, the United States argues, when providing the new assistance package to Howe,
the government of Australia knew that the vast majority of Howe’s operations were export-oriented
and that additional subsidies would serve to increase Howe’s exports.  This is clear from Howe’slong-standing participation in the ICS and EFS programmes, the information that  Howe was
obligated to provide to the government in order to obtain benefits under those programmes and
information Australia relied upon in crafting the terms of the assistance package.  Australian
government officials have acknowledged that Howe’s business is essentially an exporting business,
and the Australian media has acclaimed Howe as an Australian exporting success story.  Thus,
according to the United States, there can be no doubt that the Australian government knew at the time
it agreed to the assistance package that benefits conferred would finance the continuation of Howe’sexports.  The fact that the replacement package was provided to promote Howe’s exports was also
recognized and welcomed by Howe itself.
7.243  Australia argues that the facts of the situation are straightforward.  In its view, automotive
leather was removed from two entitlement programmes at the request of the United States.  However,
for the Australian government, politically and socially, there was a requirement to provide some newarrangements for Howe.  Australia questions whether anyone would seriously think that Australia
would intentionally engage in a dispute with the United States in order just to export more automotive
leather.  Australia notes that it had hoped that, with the new arrangements, the matter would have
been resolved.  Australia asserts that it is the legal structure and administration of the subsidy
arrangements that should be assessed, rather than the issue of intent or the nature of any priormeasures.  Australia submits that the Panel should look at the contracts, to evaluate what they actually
say and how they are administered.  Referring to business confidential information it provided to the
Panel, Australia argues that the payments under the grant contract were not based on Howe's export
performance.
(iv) Conditions of the assistance and the size of the domestic market
Factors including level of exports
7.244  The United States  submits that the conditions of the replacement package and the limited
size of the domestic market demonstrate that it is in fact tied to Howe’s export earnings.  According to
the United States, to ensure that Howe would use these funds to increase its exports, the Australian
government conditioned the grant on Howe dramatically increasing its sales, which, given the size ofthe domestic market, in turn meant dramatically increasing its exports.  Howe had no choice but to
continue to expand its exports in order to obtain the full benefits offered.  The Australian government
also conditioned receipt of the grant mone y upon Howe undertaking A$22.8 million in approved
capital investment before the year 2000.  In fact, according to the United States, Howe’s ultimate
parent, Schaffer Corp., Ltd. has admitted that the conditions of the subsidy were tied to future exports.
In its half yearly report, Schaffer stated that the A$30 million grant was “based on projected exports
and paid on performance criteria … ” and stated that the loan was given “to assist with the capitalprogramme.”
7.245  The United States observes that the terms of the grant provide that Howe will receive grant
monies equal to 5 per cent of its estimated sales from April 1997 through December 2000, with a cap
of A$30 million.  Thus, in order for Howe to receive the full A$30 million grant for which it is
eligible, it must generate A$600 million in sales ov er the life of the replacement programme.  This
means that Howe must dramatically increase its annual sales.  In 1996/97, Howe’s sales totaledWT/DS126/R
Page 79
approximately A$114.4 million.151  Accordingly, Howe must increase its annual sales by an average of
A$45.6 million a year qualify for the entire A$30 million grant.152 Given that Howe tanned
approximately 10,000 hides per week during the 1996/97 fiscal year, it would need to tan
approximately 4,000 additional hides per week for it to achieve such a sales goal.153
7.246  According to the United States, the Australian government also conditioned receipt of the
grant upon Howe undertaking A$22.8 million in approved capital investment before the year 2000.Howe fulfilled this requirement by constructing a new state-of-the-art finishing plant and a new
processing facility.
154   Howe now has a production capacity of approximately 22,000 hides per week;
almost double its 1996 capacity of 11,500 hides per week.155
7.247  However, the United States maintains, the, Australian leather market is now -- and will
remain in the future -- too small to absorb Howe ’s increased production.  At the time the replacement
package was provided in 1997, the total weekly demand for automotive leather in Australia was
approximately 1,400 hides per week.156  This figure is unlikely to grow significantly in the near future.
The Federation of Automotive Products Manufacturers projects that annual automobile production in
Australia will increase by 15 per cent between 1997 and 2000.157  Assuming a corresponding (15 per
cent) increase in the demand for automotive leather, by 2000 the Australian market for automotive
leather will require approximately 1,600 hides per week.158 Needless to say, the United States asserts,
the 200 additional hides that the Australian automotive leather market will demand by 2000 is far lessthan the 4,000 additional hides per week that Howe must sell in order for it to earn the full A$30
million grant, or the 22,000 hides per week that  Howe is now capable of producing.  The United
States believes that the information it presents is sufficient to raise a presumption that the alleged facts
are correct.  Because Australia has not presented any evidence refuting this affirmative showing, the
Panel should accept the evidence presented by the United States as reasonable estimates of the currentand future demand in Australia for automobiles and automotive leather.
7.248  In response to questioning by the Panel  about whether Australia agreed with the estimates
submitted by the United States concerning the projected production of motor vehicles in Australia and
the projected demand for cattle hides through 2000, Australia  responded that it considered "that the
                                                     
151 The United States calculated the A$114.4 figure by annualizing Howe production based on its sales
for the first three-quarters of the year (A$85.8 million).  The United States refers to Memorandum from
Embassy of Australia to the Office of the United States Trade Representative, May 7, 1997, United StatesExhibit 11.
152 The United States asserts that, if Howe’s sales were to remain at their 1996/97 levels, Howe would
generate A$429 million in sales over the life of the grant program, entitling it to A$21.5 million in grantassistance.  Howe would need to generate an extra A$171 million over the 3 3/4 year life of the grant program
(bringing its total sales over the period to A$600 million total) for it to earn the full A$30 million; an average
annual increase of A$45.6 million (A$171 / 3 3/4 years).
153 According to the United States, given that Howe would need to increase its sales by A$45.6 million
a year to qualify for the entire amount of the grant (assuming A$114 million in annual sales), Howe would haveto also increase weekly production of 10,000 hides by 40 per cent or an additional 4000 hides per week to reach
that sales goal.
154 J. Schaffer, Chairman & Managing Director, Schaffer Corp. Ltd., “Howe Leather Announces
$300M in New US Contracts,” June 18, 1998, United States Exhibit 47.
155 Howe Leather, Dec. 1994, United States Exhibit 31; “Picking Winners,” Business Review 1997,
Oct. 13, 1997, United States Exhibit 32.
156 Affidavit of Robert F. White, Senior Vice President, Eagle Ottawa Leather Company, United States
Exhibit 27.
157 Federation of Automotive Products Manufacturers, Vehicle Production Forecasts, March 1998,
United States Exhibit 28.
158 Affidavit of Robert F. White, Senior Vice President, Eagle Ottawa Leather Company, United
States Exhibit 27.WT/DS126/R
Page 80
question is not relevant to the issues before the Panel, since projected demand figures are quite
unrelated to the issue of whether any of the measures is contingent upon export performance."
Australia also considers that the Federation of Automotive Products Manufacturers projections are
conservative.  According to Australia, the me dium-term outlook for the automobile market in
Australia is buoyed by strong economic conditions but is also currently subject to another of other
factors, including prevailing economic conditions in Asian markets, which potentially affect bothexports and imports to Australia, as well as the transitional arrangements for the introduction of a
goods and services tax.  The current outlook is for stronger growth in domestically produced vehicles
than was the outlook when the Federation of Automotive Products Manufacturers conducted its
survey.  However, Australia did not have "any other or more up-to-date public forecasts to provide to
the Panel."  Furthermore, Australia states that the evidence submitted by the United States relating to
the projected demand in cattle hides rests "on several contestable assertions and assumptions."
According to Australia, the current proportion of new vehicles ordered and/or sold containing leatherseating and interior trimming could well be in excess of the 10 per cent penetration first estimated by
the United States, and could perhaps even exceed the 15 per cent level later canvassed.  Given that
leather interiors as an option have grown from negligible levels over the past decade, there is scope
for such growth to continue into th e foreseeable future.  Similarly, Australia asserts, there is scope for
growth in the after-market for automotive leather,  which is not well developed when compared with
the United States market.  However, Australia did not provide the Panel with any forecasts based on
these different assumptions.
7.249  The United States  notes that, although Australia states that the projected demand for
automobiles in Australia as calculated by the Federation of Automotive Products Manufacturers is
conservative, Australia states that it “does not have any more up to date public forecasts to provide tothe Panel.”  According to the United States, the factual information concerning the projected demand
for automobiles in Australia presented by the United States is therefore unrebutted.
7.250  Similarly, the United States observes that, although Australia questions the figures supplied
with regard to the projected demand for automotiv e leather in Australia, it does not provide any
alternative figures.  The United States notes that a panel must accept a fact submitted to establish aprima facie  case that is based upon evidence (1) which is sufficient to raise a presumption that the
alleged fact or claim is correct; and (2) that has not been sufficiently rebutted by the opposing party.
159
In this case, the United States argues that the affidavit and the quotes from the Australian Federationof Automotive Product Manufacturers are sufficient to raise a presumption that the alleged facts are
correct and because Australia has not presented any evidence to refute the United States’ affirmativeshowing, the Panel must accept the evidence presented by the United States estimating the future
demand in Australia for automobiles and automotive leather.
7.251  The United States submits that, given the large disparity between  Howe’s increased capacity
and the domestic demand for its product, Howe’s increased sales and production capacity will
necessarily be targeted towards, and tied to, fore ign markets.  Even if the Australian market for
automotive leather were to double between 1997 and 2000 (to almost 3,000 hides per week), this
increased demand would take up less than 15 per cent of Howe’s new production capacity.  Clearly,the United States argues, for Howe to reach its sales goals and use its expanded capacity, it must
increase its exports dramatically.
7.252  According to the United States, the anticipated increases in sales and production are
consistent with promises Howe made in its bid for the replacement package.  It has been reported that
Howe “promis[ed] untold export riches ($600 million over the four years to the 2000)” to the
                                                     
159 The United States refers to Japan - Measures Affecting Agricultural Products ("Japan –
Agricultural Products "), WT/DS76/R, circulated to Members on 27 October 1998, para. 7.10.WT/DS126/R
Page 81
Australian government in order to secure the new subsidies.160  Specifically, Howe projected that its
automotive leather sales would mushroom from $88.6 million in 1997 to $214 million by 2000, with
the lion’s share of the growth coming from exports.
7.253  Australia  submits that the loa n contract plainly has no possible connection with any sort of
performance, let alone a tie to exports.  Indeed, the United States has not even seriously tried tomake a connection beyond questioning how the loan contract will be serviced.  The loan contractitself provides the conditions under which the actual money was lent, including the assets of theparent company, ALH, being security for the loan and the terms under which payments are to bemade by the parent company and Howe.  Virtually all companies have loans as a matter of normalbusiness practice, loans which have to be serviced and turned over as part of the normal cash flowof a company’s operations.  There is nothing particularly different about this loan.  T he loan
contract was made on 9 March 1997.  While it does extend to 1 February 2012, the government has no
call on the money so long as the company makes repayments according to schedule.  The level of
sales is irrelevant so long as the company pays the government any monies owing, and the United
States has not made any allegations or produced any facts to the contrary.  How much the company
produces and to whom it sells is irrelevant.  The money is simply not recoverable except according tothe loan contract, i.e. the repayments of principa l and interest owing.  There is no connection with
sales, let alone exports, under the contractual relations between the company and the government.
7.254  With respect to the grant contract, Australia ma intains that only the first two payments under
the grant contract are measures before the Panel.  These were both made by July 1997.  The monies
are not recoverable regardless of the actual level of sales by the company and so cannot be consideredto be in some way in fact tied to exports.  Accordin g to Australia, there is no way in which they could
be linked in even the most tenuous way to future exports, let alone satisfy the stringent requirements
for the “in fact” condition in Article 3.1(a) of the SCM Agreement.  The first payment of A$5 million
was made following the signing of the grant contract.  This was an automatic payment.  It was not tied
to anything, let alone export performance.  The second payment of A$12.5 million (the other measure
before the Panel) was the maximum allowed.  It was made on the basis that the company had satisfied
its investment and sales targets on a best endeavours basis.  There is no way that the company couldhave obtained more money regardless of how much it invested or sold.
7.255  In Australia’s view, subsequent payments are not measures before the Panel.  However, the
maximum amount under the grant contract has been all but paid out, with the company exceeding its
investment targets. The third payment was made on the basis of an assessment in July 1998 that the
company had on balance performed satisfactorily on a best endeavours basis in respect of acombination of investment and production in 1997/98, as well as normal due diligence considerations
such as whether the company was functioning properly.  The government cannot take back that
money provided that the company continues in business.  The money has been paid out lawfully.  The
company could expand or reduce sales and the status of the payments under the grant contract would
be unchanged.  The money is gone and there is no connection  with future sales, including sales for
export.
7.256  The United States  underlines that the terms of the assistance package and the limited size of
the Australian market for automotive leather make clear that the subsidies are in fact tied to  Howe'sexport performance.  The fact that Australia thus far has paid out the maximum amounts in grants
allowed under the assistance package -- coupled with the fact that Howe's business is almost
exclusively dedicated to exporting -- indicate that Australia, in effect, has provided Howe with
substantial financial benefits based on its export performance.
                                                     
160 "Sacred Cows vs. The Hide of Howe,” The Weekend Australian, Sept. 20-21, 1997, p. 52, United
States Exhibit 22.WT/DS126/R
Page 82
7.257  In respect of Australia's claim that the grants in the assistance package are calculated based on
Howe's total production, not on exports, and therefore are not tied to export performance, the United
States asserts that, given the large disparity between Howe's increased capacity and the domestic
demand for its product, its increased production capacity resulting from the assistance package will
necessarily be targeted towards, and tied to, foreign markets.
7.258  In respect of Australia's argument that the loan had no conditions for disbursement and
therefore is not tied in any way to exports, the United States asserts that, first, although the loan
contract is a separate measure, it is inextricably linked to the grant contract.  Both these measures,
which were announced at the same time, were provided to Howe to compensate for its exclusion from
the export subsidies under the ICS and EFS programmes.  In addition, the United States points out,
Australia states with regard to the loan that "the level of sales is irrelevant so long as the company
pays the government any monies owing…."  The Aust ralian government has stated publicly that the
new subsidies were the minimum amount necessary to ensure the viability of the company and that
"any amount less than provided by the assistance package would in all likelihood have seen the
company fold."  In the view of the United States, given the fact the company has no choice but to
increase its exports in order to increase its sales given the limited size of the domestic market, the fact
that the company exports over 90 per cent of its production, and the acknowledgement by theAustralian government that the company's survival depended upon the new subsidies, the viability of
the loan is necessarily contingent upon  Howe's export earnings.  If Howe does not export, the
Australian government will not be repaid.  Consequently, the loan is "in fact tied to Howe's actual or
anticipated exportation or export earnings" as provided in Article 3.1 of the SCM Agreement.
7.259  According to the United States, it is also sign ificant that the replacement subsidies provided to
Howe have not been provided to other Australian producers of automotive leather for the Australian
market.  This reinforces the notion that the replacement package is not part of a general domesticsubsidy programme intended to benefit the leather industry, but instead is more narrowly focused on a
unique Australian business that overwhelmingly exports its products.
7.260  Australia  responds by stating that it is unclear what is meant by the statement of the United
States that the loan contract is "inextricably linked to" the grant contract, given that the time periods
and conditions are quite different.  Moreover, this does not explain how under Article 3.1(a) of theSCM Agreement, there is any justification for looking at a number of measures simultaneously to
determine their WTO status.  For a violation case, each measure before the Panel needs to be looked
at separately, and the United States has not sought to rebut that through argument.  Australia
maintains that the loan is a separate measure that needs to be assessed separately in its own right.
7.261  With respect to the loan, Australia submits that there is no basis for the United States'
assertions that ‘if Howe does not export, the Australian government will not be repaid and that,
consequently, the loan is “in fact tied to Howe’s actual or anticipated exportation or export
earnings. ”’, and no argument is presented by the United States to support them.  In fact, there is no
commercial or legal basis on which the loan contract could be interpreted in this way.  The loan is to
ALH and Howe.  The loan is secured by ALH.  The servicing of the loan contract will not commence
before 2003.  Precisely how the borrowers finally acquit the loan is a matter solely for the borrowers
themselves, and there is nothing to support a claim that the loan can only be serviced through income
generated from export sales, in particular export sales of automotive leather.  The ability of ALH torepay does not rely solely on the domestic or export markets for automotive leather.  These are
currently important elements of the Group’s operations, but it is impossible to say what the markets or
the product mix will be when the major repayments are due.  The loan contract determines the interest
rate payable and the schedule for repayments of principal.  It does not prescribe how ALH will fund
the repayments or from where it will source these funds.  There is no tie to sales or export
performance or to the product or products concerned.WT/DS126/R
Page 83
7.262  Australia asserts that the continued commercial viability of the ALH Group, as with all firms,
depends on sales in all markets and not just export markets.  In Howe’s case specifically the company
has two main facilities: the tannery at Rosedale; and the finishing plant at Thomastown.  The tannery
produces wet blue hides and crust leather.  These can go to many types of leather, both on domestic
and export markets.  While at the moment the production of Rosedale is going in the main to
Thomastown, technically there is nothing fixed about this.  In the longer term if the market changed,hides could go for other than automotive leather at Thomastown.  Similarly, while some of the
finishing and cutting machinery is adapted to the production of automotive leather, this is by no
means fixed.  The works can, and currently do, produce leather other than automotive leather.   If the
market for automotive leather changed, then the output from both Rosedale and Thomastown would
change.  This is the way all businesses work and adapt.  Australia observes that the loan contract does
not prevent Howe from producing and selling other pr oducts.  It is impossible to say what the nature
of the fashion and global market for automotive leather and other leathers will be by the end of the
loan contract’s repayment period.  Certainly, there is nothing to suggest that it has to be paid back
through production, let alone exports, of automotive leather.
7.263  Australia asserts that, regarding the first two pa yments under the grant contract (the only ones
that Australia considers are before the Panel), the first payment was simply A$5 million, while the
second payment was capped at A$12.5 million and this was paid in full.  The first payment was made
in March 1997 following the completion of the grant contract in March 1997.  This was simply a flat
payment and not subject to any assessment of investment or sales.  It was not contingent on thecompany doing anything and so could not be linked in any way to export performance.  The second
payment was made in July 1997 against investment as well as sales.  The maximum amount was paid
of A$12.5 million because the government assessed that the company had used its best endeavours
regarding investment and production in 1996/97.  There was no way in which more could have been
paid regardless of the actual amount of investment or sales.  Australia argues that further payments arenot before the Panel.  However, the third payment was again made on the basis of an assessment in
July 1998 that the company had on balance performed satisfactorily on a best endeavours basis in
respect of a combination of investment and production in 1997/98, as well as normal due diligence
considerations such as whether the company was functioning properly.  Australia asserts that business
confidential information it provided to the Panel supports its position that the payments to Howeunder the grant contract were not based on Howe's export performance.
7.264  The United States  considers that Australia's arguments regarding the "automatic" nature of
the first grant payment and the fact that it preceded performance under the grant contract is flawed for
two reasons.  First, this payment, like the other payments, was made pursuant to the single grant
contract which is tied to Howe's export performance.  The facts in this case -- including the prior "in
law" automotive and textile export subsidies, Howe's exceptional export performance, the small size
of the Australian market, the statements by high level Australian government officials and Howe --prove that the grant contract, which subsumes the grant payments, was provided in anticipation of
exportation and export earnings.  Furthermore, it is immaterial that this initial payment was
automatically made prior to Howe's performance under the grant contract.  Footnote 4 encompasses
subsidies "tied to … anticipated  exportation or export earnings" (emphasis supplied by the United
States);  thus, exportation can follow the granting of the benefit.  To be actionable as a prohibitedsubsidy, the facts need only demonstrate that, like in this case, the subsidy was provided because of
foreseeable or probable export conduct.
7.265  Further, the United States contends, Australia asserts that the second and third grant payments
are not "in fact" export subsidies because the grant contract does not require Howe actually to achieve
any sales targets;  instead, Howe only has to use its "best endeavours" to do so.   The strict prohibitionagainst export subsidies cannot, however, be so ea sily circumvented.  Clearly, Australia conferred
these payments in the expectation that Howe would attempt substantially to increase its exports.  That
Australia would provide grant payments even if Howe did not fulfill its ambitious promises onlyWT/DS126/R
Page 84
underscores the extent of Australia's commitment to this export-oriented company.  In other words,
regardless of whether it actually met its performance commitments, Howe would receive additional
grant payments because any increased production would – given the small size of the Australian
automotive market – necessarily be shipped abroad.
7.266  With respect to the grant contract, Australia  asserts that Article 3.1(a) and footnote 4 of the
SCM Agreement are about a panel reaching the conclusion demonstrated through an objective
assessment of facts that the granting of a subsidy is contingent upon export performance, even though
it may not be required in law.  This contrasts shar ply with the situation under the grant contract, where
the official responsible for administering the Australian government’s obligations under the contractis required in law to consider total sales and so does not discriminate between domestic and export
sales.  Indeed, Australia states, the United States has not even made an allegation that the
administration of the grant contract, i.e. the actual disbursement of the grants, is in any way
contingent on export performance.
7.267  Australia notes that the United States seems to consider that providing assistance to only one
producer of automotive leather in Australia is significant. 
 The fact is that Howe is the automotive
leather industry in Australia.  There is nothing in the WTO Agreement that says that Members cannot
provide assistance to such firms, and the United States has not made any legal argument about this.
This is a natural occurrence in a small country.  Similarly, Australia points out, the United States
seems to consider that it is significant that this  company is the only firm to be benefiting from the
arrangement.  Again the history of this is clear, i.e. the arrangements cover just automotive leather
with Howe being the only significant producer in Australia.
7.268  The United States  repeats that the terms of the assistance package and the limited size of the
Australian market for automotive leather make clear that subsidies are in fact tied to Howe’s exportperformance.  The Australian government conditioned receipt of the grant monies upon Howe
dramatically increasing its sales and meeting certain capital investment requirements.
7.269  Australia  responds that the United States has not demonstrated its assertion that the
Australian government conditioned receipt of the grant money upon Howe dramatically increasing its
sales.  Indeed, the record shows that Howe simply received the first payment ($A5 million) on
execution of the grant contract.  The second payment of $A12.5 million was on the basis of the next
three months, which was hardly time for a dramatic increase in exports.  The third payment was onthe basis of 1997/98, and again the record shows that this was not on the basis of increased sales of
automotive leather.  Australia bases these assertions  on business confidential information it provided
to the Panel.
7.270  Australia states that, in referring to “conditioned receipt of the grant money”, the United
States again appears to have moved from its position that the issue is the information available at the
time of granting the grant contract to the issue of  the basis for granting the individual payments.
Otherwise it must be saying that the Australian Government did not care what the actual outcomes
would be – if so, the standard of footnote 4 of the SCM Agreement can hardly have been met.
7.271  In addition, Australia submits, “conditioned receipt” is an interesting phrase.
“Conditioned” means “subjected to conditions or limitations.
161  Thus, this phrase can only refer to
the granting of the payments after the first payment and not to anything else.  Clearly, the grantingof the loan contract, the money under the loan contract, and the grant contract were not subject toany requirements.  Moreover, the first payment under the grant contract was not subject to anyconditions.  In addition, the record shows that there was no such “conditioned receipt” related toexports.  The United States asserts that the capital expenditure implies an enormous increase in
                                                     
161 Shorter Oxford English Dictionary , third ed.WT/DS126/R
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production.  The capital expenditure was on a new finishing plant and on a tannery.  A tannery does
not increase Howe’s capacity to produce automotive leather.  It aims to improve Howe’s efficiencyas an integrated operation.  However, Howe sourced hides from other companies before the plantwas established and still does.  Some semi-processed hides are even imported.  The capacity forproducing automotive leather depends on the finishing plant.  This was a replacement for an oldplant.  It was not an additional plant.  Its purpose was to increase efficiency not to increasecapacity.  The efficiency dividend has had the effect of increasing practical capacity by about aquarter, but capacity does not reflect production levels.  In the real world, plants rarely run atanything like the full theoretical capacity for extended periods of time.  Indeed, a maximum weeklycapacity figure cannot be directly translated into annual figures.  The United States has simply takenan old press figure on production levels, derived a capacity figure, and come to the conclusion thatproduction has doubled.
162
7.272  The United States  contends that, at the time the Australian government agreed to provide the
assistance package, the Australian domestic automobile market could not absorb all of Howe’sproduction, let alone any increased production.  To the United States, the fact that Australia thus far
has paid out the maximum amounts in grants allowed under the assistance package -- coupled with thefact that Howe’s business is almost exclusivel y dedicated to exporting -- strongly indicates that
Australia provided Howe with substantial financial benefits based on its export performance .
7.273  Australia  responds that these arguments do not demonstrate that the granting of a subsidy
was contingent upon export performance.  Indeed, the record shows quite the contrary.  The grants
paid to Howe were not based on Howe's export performance .  The final sentence of the United
States' arguments in the previous paragraph -- “[t]he fact that Australia has thus far paid out themaximum amounts in grants …” – underscores that the United States is moving between its twostools of whether it is talking about the payments or the grant contract.
7.274  The United States  insists that, because of the large disparity between Howe’s increased
capacity and the domestic demand for its product, Howe's increased production capacity resultingfrom the assistance package will necessarily be target ed towards, and tied to, foreign markets.  The
Australian government realized that Howe could not meet its "sales target" -- that is, its expanded"export" goals -- unless it substantially expanded its capacity.  Thus, the capital investment made by
Howe was needed before it could achieve the anticipated export levels.  Simply saying that this
money was tied to production and spent on Howe's investments is therefore not sufficient to break the
link between the export-nature of these substantial benefits.
7.275  Australia  responds that, clearly, if a firm exports, then in a trivial sense, some of its sales go
to foreign markets.  However, this is not the same as being “tied to, foreign markets” as stated by the
United States.  The grant contract shows that that was not the case.   On the issue of investment,
Australia has informed the Panel, and the United States has not denied, that it was at the insistence of
the United States that the company was obliged to  implement an investment programme amounting to
much of the A$30 million of the grant contract.   This was done to meet the wishes of the United
States not with any idea of linkage to exports in mind.
7.276  The United States  asserts that the fact that export promotion is merely one of several
objectives for a programme does not mean that a programme is not an export subsidy.  Article 3.1(a)
of the SCM Agreement specifically notes that export subsidies are prohibited when the subsidies are
contingent upon export "whether solely or as one of several other conditions."  Clearly, the United
States argues, other conditions may be imposed on the recipient, but so long as the benefit is tied to
                                                     
162 Australia disputes the United States argument on this point, referring for support to business
confidential information  that it provided to the Panel regarding Howe's sales.WT/DS126/R
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exports, an export subsidy still exists.  Indeed, in many instances, a subsidy may have more than one
objective.  As Australia has admitted in this case, the subsidy programme was given for two reasons:
(1) to allow Howe to increase its investment; and (2) to ensure that Howe would reach its "sales" (or
export) targets.163  Thus, nothing in the SCM Agreement indicates or suggests that subsidy
programmes must only have a single goal of pr omoting exports.  The express language of the
Agreement makes this clear.  Rather, if one component of the subsidy programme is that the aid istied to actual or anticipated exports, then the programme is an export subsidy.
7.277  The United States repeats that, although the loan contract is a separate measure, it is
inextricably linked to the grant contract.  Both these measures, which were announced at the same
time, were provided to Howe to compensate for its exclusion from the export subsidies under the ICS
and EFS programmes.
164  Finally, the Australian government stated publicly that the total replacement
package was the minimum amount necessary to ensure the viability of the company and that “anyamount less than provided by the assistance package would in all likelihood have seen the company
fold.'
165  Clearly, the Australian government considers that the loan and the grant were always part of a
single benefit package given to Howe.
7.278  Australia  notes that the United States recognizes that the loan contract is a separate measure
and does not deny that the two contracts (i.e. grant and loan) are legally separate instruments.  Under
Article 3.1(a) of the SCM Agreement, a panel is required to look at each subsidy separately to
determine whether it meets the standards set out in that article.  There is no provision for cumulatingsubsidies as there is under Parts III and V of the SCM Agreement.  The Panel’s terms of reference are
clear that the loan contract is a separate measure and so needs to be looked at separately on its own
merits.
7.279  According to Australia, the language of the cont racts is simply the standard legal terminology
used in contracts by the Australian Department of Industry, Science and Resources (previouslyIndustry, Science and Tourism) and does not represent any legal relationship between them that would
result in a nexus under Article 3.1(a) of the SCM Agreement.  To the extent that the United States
argues on the basis that the two contracts replaced the application of the ICS and EFS to automotive
leather, then it is not logical to consider the two contracts together.  The loan contract runs until 2012.
The grant contract runs until 2000 for auditing purposes but its payments are on the basis of the periodto mid-1998.  On the other hand, the ICS and EFS terminate in 2000.  Following the termination of
the ICS in mid-2000, automotive leather is to be covered by the new general textile, clothing and
footwear industry arrangements.
7.280  According to the United States , it is also significant that the replacement subsidies were
designed and structured specifically for Howe after an accounting firm was commissioned to study
the issue
166 and that no similar subsidies have been provided to other Australian producers of
automotive leather for the Australian market.  This reinforces the notion that the replacement package
is not part of a general domestic subsidy programme intended to benefit the leather industry, but
instead is more narrowly focused on supporting a unique Australian business that overwhelmingly
exports its products.
7.281  In response, Australia  states that t he arrangements were designed and structured to try to
meet the requests of the United States government.  The circumstances of why these applied to
                                                     
163 The United States cites certain paragraphs of Australia's first written submission in this regard.
Australia states that it did not say this and that the United States has misunderstood its arguments.
164 The United States also referred to certain business confidential information in making this
argument.
165  United States Exhibit 18.
166 Ibid.WT/DS126/R
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automotive leather alone are clear and there are no other substantial, dedicated producers of
automotive leather in Australia.  In particular, there are no other producers of automotive leatherfor the original equipment manufacturers (OEM) market.
7.282  The United States  asserts that Australia's argument that the United States has failed to
demonstrate an "in fact" export subsidy is wit hout merit.  The argument of the Australian government
that the grant and the loan are not "tied" to exports because Howe would not be required to returneither the grant or loan if the company ceased exporti ng is both factually and legally incorrect.  First,
Howe was principally an exporter when the initial funds were given and it continues to export in
significant volumes.  As the Australian government  indicated, Howe met its "sales target" as
established by the grant contract, and the second and third payment of the grant were in fact
dependent on Howe having met these goals.  Thus, any export goals the Australian government  may
have expected from Howe were being met.
7.283  Australia  states that these comments must arise from a misunderstanding by the United
States.  The relevant paragraphs to which the United States refers are in respect of the loan contract.
The loan contract has nothing about sales, let alone exports.  Moreover, there is nothing that sayswhere the money has to come from to service the obligations of ALH (including Howe) under the
loan contract.  There is nothing that ties the servicing of the loan contract to automotive leather, let
alone to exports of automotive leather.  The other provisions cited by the United States are about the
grant contract and are about the past rather than the future, i.e. about 1996/97 and 1997/98.  These
payments were not based on Howe meeting any “export goals”.  The success or otherwise of Howe inmaking sales of automotive leather in the future, including to overseas markets, is not relevant.  If
Howe is unable to sell more automotive leather, or indeed if sales happened even to fall, there would
be no recovery of the monies.  The future performance of the company is not an issue.  In addition,
the grant contract was about investment and sales by the company and not just sales of automotive
leather, i.e. it was not limited to automotive leather.  There is clearly no connection  to future sales of
automotive leather, let alone any aspect of the grant contract being contingent upon exportperformance.
7.284  The United States  argues that whether the grant or loan is recoverable if the recipient ceases
to export is not dispositive of whether the programme is an "export subsidy" in law or in fact.  Rather,
the dispositive question is whether, at the time  the subsidies were granted, they were tied to the actual
or anticipated  exportation or export earnings.  In this case, the answer to this question is manifestly
"yes."  These funds were not given to just any company with the potential to increase its investment
and sales.  The funds were given to a company who was well known for its aggressive export plans
and its past performance of exporting 90 per cent of its sales.  Moreover, these funds were given to
compensate Howe for losing two "in law" export subsidies, with the publicly stated purpose of
promoting exports, and were given to Howe to increase its capacity even though the Australian
market could in no way absorb Howe's expanded capacity to produce automotive leather.  The UnitedStates maintains that thus, the overwhelming evidence -- evidence that was never rebutted by
Australia -- demonstrates that the grant and loan were tied to anticipated exports and that the
Australian government's expectations in this respect were not disappointed.
7.285  Australia  contends that the United States appears to be arguing here about the conditions of
the granting of the loan contract and the conditions of the granting of the grant contract.  The UnitedStates is arguing that the fact that an enterprise exports and is anticipated to continue to export is
equivalent to the granting of a subsidy being tied to exports or the anticipation of exports.  The two
concepts are not the same, apart from this linkage being ruled out by footnote 4 of the SCM
Agreement.  The acceptance of such a linkage would mean that giving a subsidy to any enterprise that
is dependent on export markets would be prohibited.  Conceptually, a company might export less thanWT/DS126/R
Page 88
50% of its production and still be financially dependent on exports.  Indeed, this would often be the
case.
7.286  Australia submits that, in the case of the grant contract, the United States appears to be
arguing that the conditions under which the actual payments were made is irrelevant.  This can only
mean that the United States is saying that it does not matter on what basis decisions were taken to pay
the money to the company.  As a result, the United States is falling back on a level of exports test.
This is not the standard set out in footnote 4 of the SCM Agreement.  It does not demonstrate the tie
required to conclude that the granting of the grant contract was contingent upon export performance.
7.287  According to the United States , the Australian government 's suggestion that subsidies can
only be "tied" to exports if the monies are refundable if export goals are not met would effectively
negate the explicit language of the SCM Agreement. Footnote 4 to Article 3.1(a) of the SCM
Agreement states that an export subsidy in fact exists "when the facts demonstrate that the granting of
a subsidy, without having been made legally cont ingent upon export performance, is in fact tied to
actual or anticipated  exportation or export earnings"(emphasis supplied by the United States).  The
ordinary meaning of the term “anticipate” is “expect, foresee, or regard as probable."167  The ordinary
meaning of the term is incompatible with Australi a’s argument that a subsidy would only be conferred
upon actual exportation or lost if the recipient is unable to demonstrate that the goods were exported.
7.288  Australia  responds that the standard of footnote 4 of the SCM Agreement requires that the tie
to actual or anticipated exportation or export earnings must be demonstrated.  Australia has not saidthat this meant that there had to be a requirement for monies to be repaid if anticipated exports were
not achieved.  Presumably, if there was a legal requirement in respect of anticipated exports, then the
subsidy would be in law contingent on export perfor mance.  There are many ways in which this could
be handled administratively.  For example, the administration might want to see delivery contracts for
exports before paying money out or might penalize a company by reducing future payments.  Thisgoes to the crux of what is meant by “in fact” in Article 3.1(a) of the SCM Agreement.  This is
supposed to be about administration of schemes whereby payments are contingent on export
performance while not being legally contingent upon export performance.  In this particular case, the
legal nature of the contracts specify the terms under which the monies are paid out and so remove the
scope for such administrative action.
7.289  In response to questioning from the Panel, Australia asserted that the phrase “anticipated
exportation or export earnings” has to be read not only in the context of the full phrase “actual or
anticipated exportation or export earnings”, but also in the context of the whole of Article 3.1(a) and
footnote 4 of the SCM Agreement.  The phrases “actual exportation or export earnings” and
“anticipated exportation or export earnings” relate to the timing of the payments contingent upon
export performance.  The two phrases cover concrete exports that have been made or will be made,
respectively.  The distinction between exportation and earnings relates to product volumes andearnings to cover all variations.  For Australia, this underlines that the discipline is in respect of real
export performance, and not some more far-reaching rule based on level of exports as proposed by the
United States.
7.290  The United States  asserts that, in making its assertion that the benefits were not "tied" to
exports, the Australian government  has misinterpreted a portion of the United States' argument.
Australia suggests that the United States is arguing that "the cap" on the grant of A$30 million
subsidy makes the measure prohibited.  The United States is not arguing that the cap on the amount of
the grant somehow affected the nature of the subsidy.  Rather, as the Australian government  itself
indicates, the continued payment of the grant was ti ed to the volume of "sales."  Given that the
overwhelming majority of these "sales" could only be exports because of the small domestic market
                                                     
167 The Concise Oxford Dictionary,  Clarendon Press, 8th ed.WT/DS126/R
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for automotive leather, the Australian government 's own admission reveals that in fact, the grant was
"tied" to exports.
7.291  Australia  counters that the statement on which the United States comments in the above
paragraph simply pointed out the false logic in the United States' argument about the company
needing to increase its sales to A$600 million in or der to obtain the full A$30 million and so this cap
apparently meant that it was an export subsidy.  The hypothetical point was made that Article 3.1(a)
of the SCM Agreement is not supposed to prohibit bounty payments (i.e. payments based on the
amount of production or sales).  Many bounty schemes are uncapped and the more that is produced,
the more the monies paid out.  That does not make them prohibited.  It would be absurd to have thesituation where a cap on the amount of money sudde nly made a bounty prohibited, which seemed to
be the logic of the United States' position.  This pa rticular case is not about a bounty and the company
did not have to achieve the levels of sales being talked about by the United States.
7.292  The United States  contends that the Australian government 's attempt to distort the facts and
arguments raised in this case and apply them to some potential future situation should not dissuade the
Panel from carefully analyzing the facts in this case.  Despite Australia’s claim, there would be nobias against smaller WTO Members if the Panel rules in favour of the United States in this
proceeding.  This case does not turn on the fact that Australia only has one exporter of automotive
leather.  If 100 companies had been excluded from Australia’s textile and automotive leather
programmes; and if those companies had high export levels; and if each then received the same grant
and preferential loan bestowed on Howe; and if high-level government officials stated that thereplacement subsidies were being given to ensure  the continuation of their exports; and if the
Australian automotive leather market could not absorb additional production; then an "in fact" export
subsidy would still have been conferred – even though 100 companies were involved.   In other words,
this case does not turn on the fact that only one exporter received this benefit.  Rather, the relevant
fact highlighted by the United States was that only the exporter of leather received this benefit, notother Australian leather tanners that were not exporting.  If the Australian government was interested
simply in expanding its leather industry in Australi a, presumably it would have provided benefits to
all leather tanners, not just the one exporter.  Thus , the Australian government's attempt to apply the
facts of this case to a situation involving smaller WTO Members is not valid.  As this demonstrates,
smaller WTO Members will not be disadvantaged by an affirmative finding in this proceeding .
7.293  Australia  maintains that the small country issue is about the relative size of domestic
markets and the economies of scale in manufacturing processes.  In a small country such asAustralia, there would be a limited range of manufactured products where there would be 100companies producing that product let alone with each having a high level of exports.  On the otherhand, in a country the size of the United States, it might be more likely for there to be 100manufacturers of a particular product line, though it would be limited by the nature of the industry.For example, the automotive leather industry is highly concentrated in the United States.
7.294  Australia states that the United States' argument about other leather companies not receiving
the same arrangements is irrelevant, given the background to this case.  Automotive leather will bepart of the new general textile, footwear and clothing industry arrangements due to come into forceon 1 July 2000.
7.295  The United States  argues that Australia’s concern about the same subsidy being treated as a
domestic and export subsidy is unwarranted. In determining the existence of an "in fact" export
subsidy, a panel must consider all of the facts surr ounding the provision of the aid.  It should look at
whether and to what extent an industry is curren tly engaged in exporting and whether the proposed
aid is provided in order to encourage increased exports.  The fact that some entities in an industryexport while others do not is just one of many facts that the Panel should consider in making itsWT/DS126/R
Page 90
decision.  If, on the basis of all of the facts surrounding the granting of the aid, the Panel makes an
affirmative decision, the aid will be treated as an "in fact" export subsidy – regardless of whether it is
provided to an exporting or non-exporting entity.  In other words, all recipients will be treated the
same once the decision on the nature of the subsidy is rendered.
7.296  To Australia , the previous paragraph highlights the inconsistency of the United States'
position with the SCM Agreement and underlines th e risk of moving away from normal rules of
treaty interpretation in examining the meaning of Article 3.1(a) of the SCM Agreement.  TheUnited States says that ‘the aid will be treated as an “in fact” export subsidy -- regardless ofwhether it is provided to an exporting or non-exporting entity.’  Thus, the United States admits thatthe logic of its argument is that the provision of a subsidy to an enterprise that does not even exportanything at all could be prohibited as an export subsidy.  There is no way in which a normalreading of the text could reach the conclusion that the granting of a subsidy to a non-exportingenterprise is contingent upon export performance.  That sort of conclusion would be inconsistentwith Article 3.2 of the DSU that sets out that: “[t]he dispute settlement system of the WTO is acentral element in providing security and predictability  to the multilateral trading system.”
(emphasis supplied by Australia)
7.297  Australia submitted information to the Panel concerning the specific percentage of Howe's
total sales attributed to exports in 1997/98.  Australia designated this information as "business
confidential".  The United States  questions the specific percentage of Howe's total sales attributed
to exports in 1997/98 that were submitted to the Panel, and points out that Australia refuses toprovide the sales figures for Howe and does not otherwise explain how the numbers presented werecalculated or provide any supporting documentation.  As a result, the Panel is left without anymeans for assessing the probative value of Australia's statement.  Furthermore, Australia cannotpick and choose which confidential information the Panel should rely on.  Unless Australiaproduces all of the information requested, the Panel should disregard any assertions based onconfidential information strategically selected by Australia for presentation to the Panel.   In anyevent, Australia's belated assertion regarding Howe's level of exports seems questionable given theevidence the United States has submitted.  These sources
168 indicate that, in 1996, when Australia
was developing the compensation package, Howe's exports accounted for 90 per cent of its sales.Australia has provided no evidence to refute that fact.  Instead, Australia has providedunsubstantiated information regarding Howe's export levels for the year 1997/98, which began on1 July 1997, months after the replacement package was provided.  However, the relevant number isthe level of exports at the time the government made the decision to grant the subsidies.  In thiscase, the undisputed evidence shows that Howe exported over 90 per cent of its production at thattime.
7.298  Australia provided, as business confidential information, a breakdown of sales and exports
over the three years 1995/96, 1996/97 and 1997/98.  Australia asserts that this information shows
                                                     
168 The United States refers to the following:  "…and the Hide of One Australian Tanner", Australian
Financial Review, November 18, 1996, p. 18 ("'In 1988, we exported 7 per cent of our production; now we are
exporting 90 per cent worth over £80 million a year' says the firm's managing director, Chris Heysen), United
States Exhibit 3;  "Howe leather wins wheels award", World Leather, February/March 1997 ("The company
[Howe] has increased its exports from 7% to 90% over th e last eight years"), United States Exhibit 4;  "Major
Headache for the Howard Government" A$ Adding Value, July 5, 1996 ("Howe's exports have risen from less
than 10 percent of sales in 1988, to nearly ninety percent of sales"), United States Exhibit 5; "TradeShowdown", Herald Sun, November 20, 1996 ("The company was a shining light with 90 percent of Howe's
production being for exports"), United States Exhibit 30; "Picking Winners", Business Review, October 13,
1997 ("Howe Leather exports in 1996/97, up from $55 million to $80 million, represent 90 percent of
turnover"), United States Exhibit 32.WT/DS126/R
Page 91
the trend of sales and underlines the basis on which the payments were made.  Australia asserts that
this information shows that the percentage of Howe's total sales for exports were significantly lowerthan asserted by the United States and demonstrates that the sources of United States data and thetype of procedures of imputation used by the United States are fundamentally unreliable.  InAustralia's view, it also demonstrates that the "best endeavours" clauses of the grant contract arenot tied in any way to achieving specific sales, let alone export levels.  For Australia, this data alsounderlines the misunderstanding by the United States of the nature of the sales figures under thegrant contract -- in particular, that they are not limited to automotive leather.
Factors other than level of exports
7.299  Australia  observes that the United States says that: footnote 4 to Article 3 of the SCM
Agreement "does not preclude consideration of the level of exports, it simply proscribes finding aprohibited export subsidy based solely on the level of exports ”
169 (emphasis supplied by Australia).
Australia argues that this can only mean that the United States agrees that it has to produce facts other
than Howe’s level of exports to demonstrate that the granting of each of the measures before the Panel
is in fact tied to export performance.  However, Australia asserts, the United States has not produced
such facts.  Its argument (which Australia rejects)  rests on information regarding quite different prior
measures (EFS/ICS) and media reports about a company that exports.  This underlines the problem
behind interpreting this provision to allow some conceptual examination of the level of exports at all.
The level of exports of a company or industry depend on a wide range of factors often specific to the
industry or the country that have nothing to do with any particular commercial policy of the
government.  The availability of export markets and the most profitable product mix can also changequickly as a result of factors quite divorced from any particular governmental assistance measure.  If
the facts other than the level of exports are sufficient to demonstrate that the granting of a subsidy is
in fact tied to export performance, then there is no need to look to the level of exports.   If they are not
sufficient, then the measure should be found to be in conformity.
7.300  In the view of Australia, a panel’s job is not to make subjective judgements about the factors
that may influence a company’s decisions to export or its success as an exporter.  Rather, a panel has
to make objective rulings on the basis of facts as to whether the granting of a particular subsidyprovided to a company is contingent upon that company’s export performance.  Footnote 4 of the
SCM Agreement requires that the facts demonstrate that the granting of the subsidy is in fact tied to
export performance.  It does not call for the Panel to make a judgement about the weight of
circumstantial evidence regarding the trade effects of a measure.  Whether the granting of a subsidy is
contingent upon export performance is not a function of the level of exports of a company but of thefacts about the granting of the subsidy.
7.301  The United States  maintains that, in this case, the level of Howe's exports is just one fact
among many that, when considered together, demonstrate that the replacement subsidies, like the
subsidies Howe enjoyed under the prior de jure  export subsidy programmes, are prohibited export
subsidies.  In the view of the United States, its pr offering of Howe's current high level of exports and
its aggressive export plans goes to the heart of an "in fact" subsidy determination.  The United States
is not attempting to demonstrate the adverse "trade effects" of a subsidy that has already been granted,
i.e., what happened after  the assistance was bestowed.  Rather, the United States proffered evidence
of Howe's high level of exports to show what Australian government considered at the time  the aid
was given.  Australia's knowledge of Howe's depende nce upon exports and Howe’s future plans at the
time the aid was given is strong evidence that the assistance was tied to export performance within the
meaning of footnote 4.
                                                     
169 Supra , para. 7.127.WT/DS126/R
Page 92
7.302  The United States submits that it has presented substantial evidence demonstrating that the
"granting" of the subsidies at issue was in fact tied to Howe's actual or anticipated exportation of
export earnings.  The United States asserts that, in an effort to avoid the prohibition in Article 3 of the
SCM Agreement and distract the Panel from the facts, Australia mischaracterizes the extent of the
United States’ evidence by focusing entirely on Howe's level of exports.  The United States' case
clearly does not hinge entirely on the fact that Howe was exporting 90 per cent of its sales at the timeAustralia conferred the grant and preferential loan.  While this high level of exports is an important
fact for the Panel's consideration, it was only one of many significant facts demonstrating that the aid
was tied to Howe’s actual or anticipated exportati on or export earnings within the meaning of Article
3.1(a), footnote 4 of the SCM Agreement.   Such facts included the following:
(a) The replacement package was specifically and explicitly designed to compensate
Howe for its exclusion from two "in law" export subsidy programmes that had helped
transform Howe into a major exporter;
(b) The Australian government knew of, and in fact created, Howe’s reliance on exports;
(c) The recognized purpose of the replacement package by both the Australian
government and Howe – like the "in law" export subsidy programmes that preceded it
– was export promotion;
(d) Howe had aggressive export plans;
(e) Howe must significantly increase its sales to receive the full A$30 million grant for
which it is eligible; however, the Australian leather market is too small to absorb
Howe's current -- much less, its increased -- production;
(f) The only way that Howe could increase its sales and utilize the expanded production
capacity that it has acquired as a result of the replacement package is to significantlyincrease its exports; and
(g) The replacement package was provided only to Howe, who exports virtually all of its
production, and not to any leather manufacturer that supplies the domestic market
.
7.303  The United States argues that Australia fails to counter any of the United States' factual
assertions with facts that would undermine their credibility and asserts that the Panel should note thevariety and volume of sources relied upon by the United States in this case.
170
7.304  The United States recalls that, as noted by the recent panel in Japan - Agricultural Products , a
panel must accept a fact submitted to establish a  prima facie  case that is based on "evidence (1) which
is sufficient to raise a presumption that the alleged fact or claim is correct and (2) that has not been
sufficiently rebutted by the opposing party."171  Once a  prima facie  case has been made, the burden of
proof shifts to the responding party.172  As the Appellate Body stated:
…it is a generally-accepted canon of evidence in civil law, common
law and, in fact, most jurisdictions, that the burden of proof rests upon
the party, whether complaining or defending, who asserts the
affirmative of a particular claim or defense.  If that party adduces
                                                     
170 Also see the United States arguments in this regard, supra , paras. 7.30-7.31.
171 WT/DS76/R, circulated to Members on 27 October 1998, para. 7.10.
172 Panel Report, EC Measures Concerning Meat and Meat Products (Hormones),  WT/DS26/R,
WT/DS48/R, adopted 13 February 1998, para. 8.51.WT/DS126/R
Page 93
evidence sufficient to raise a presumption that what is claimed is true,
the burden then shifts to the other party, who will fail unless it
adduces sufficient evidence to rebut the presumption.173
7.305  The United States submits that the evidence presented by it, none of which has been refuted
by Australia on the merits, establishes a prima facie  violation of Article 3 of the SCM Agreement.
Accordingly, the burden has shifted to Australia to demonstrate that the replacement subsidies werenot in fact tied to Howe’s export performance.  Australia has presented no evidence and has failed to
rebut the United States' affirmative showing.  Instead, Australia relies on the argument that the
Australian government  did not intend to violate the SCM Agreement and that, for various unsound
reasons, the Panel should simply ignore almost all of the relevant facts in this case.  Australia insists
that the compensation package is WTO-consistent because Australia claims it is.  In the view of the
United States, a review of the relevant evidence demonstrates to the contrary.
E. 
REMEDY
7.306  Australia  submits that, in the event that the Panel finds that a measure was or is inconsistent
with Article 3.1(a) of the SCM Agreement, it consid ers that the Panel should not make any suggestion
on how the Australian government  should bring itself into conformity with Article 3.1(a) of the SCM
Agreement.
F. TIME PERIOD FOR IMPLEMENTATION
7.307  Australia  asserts that, in the event that the Panel finds that a measure was, or is, inconsistent
with Article 3.1(a) of the SCM Agreement, th en the Panel would need to include in its
recommendations the time period which Australia has to bring itself into conformity withArticle 3.1(a).
7.308  According to Australia, the central problem is that Australia does not know whether the Panel
will find that any measure was inconsistent, whether any measure is inconsistent, what measure might
be involved, and critically why it might be considered to be inconsistent.  In the absence of the
Panel’s views, it is impossible to make an informed submission in this regard.
7.309  Australia states that the drafting of this provision was done against the background that the
PGE would have come to its conclusions and reporte d to the panel.  The panel would then make a
recommendation on the time period.  This would have involved the parties making submissions on the
basis of knowing the precise findings and reasoning that would appear in the panel’s Report.  That at
least made some sense.  The draft Rules of Procedure for the PGE
174 envisaged that it would report to
a panel 46 days after it had been asked for assistance.  This would allow the panel to address the issue
in the context of submission from the parties.
7.310  Accordingly, Australia argues this Panel should give the parties, in particular Australia, the
right to present arguments about what would be the appropriate time period once the Panel’s views
are known.  The most appropriate time would be after the receipt of the Interim Report.  Failing that,Australia submits that the Panel should provide for a period for implementation of 7.5 months.
                                                     
173 Panel Report, Japan - Film , WT/DS44/R, adopted 22 April 1998, para. 10.29, citing Appellate Body
Report, United States - Shirts and Blouses , WT/DS33/AB/R, adopted 23 May 1997, p. 14.
174 G/SCM/W/365/Rev.1, 24 June 1996, Rule 12.2.WT/DS126/R
Page 94
VIII.  INTERIM REVIEW
8.1 On 15 March 1999, Australia and the United States requested the Panel to review, in
accordance with Article 15.2 of the DSU, precise aspects of the interim report issued to the parties on
8 March 1999.  Neither party requested a meeting with the Panel.
8.2 Australia requested a clarifying change to footnote 1, paragraph 1 of the Report.  The Panel
made this change.  Australia also questioned the accuracy of a sentence in paragraph 2.3 of the PanelReport concerning the calculation of the maximum amount of the payments under the grant contract.
In light of Australia's comments, we revised the sentence in question to reflect Australia's initial
explanation in this regard.  In addition, Australia asserted that a phrase in paragraph 9.69 of the Panel
Report could be misleading.  In light of Australia's comments, we revised the phrase in question.
8.3 The United States requested that the Panel reconsider its finding that the loan was not a
subsidy that was "contingent … in fact…upon export performance" within the meaning of Article
3.1(a) of the SCM Agreement.  The United States re-emphasized certain factors, including factorsbased upon confidential business information submitted to the Panel, which, in its view, lead to the
conclusion that the loan is "in fact" contingent upon export performance.  The Panel did not make any
change to its Report in light of the United States comments.
8.4 In its letter of 8 March 1999 transmitting the interim report to the parties, the Panel had
indicated that it was "willing to consider brief arguments with respect to the issue of the time periodwithin which the measures found to be prohibited subsidies must be withdrawn under Article 4.7 of
the Agreement on Subsidies and Countervailing Measures".  Australia made no comments in this
regard.  The United States endorsed the Panel's recommendation that prohibited subsidies provided to
Howe be withdrawn within 90 days.
IX. FINDINGS
9.1 This dispute concerns certain financial assistance provided by the government of Australia to
Howe and Company Proprietary Ltd. ("Howe"), the only dedicated producer and exporter of
automotive leather in Australia.  Automotive leathe r is primarily used for seat coverings and other
interior components of automobiles, such as head and armrests, centre consoles and door trim.
9.2 On 7 October 1996, the United States requested consultations with Australia concerning
subsidies available to leather under the Australian Textiles, Clothing and Footwear Import Credit
Scheme
175 (the "ICS") and any other subsidies to leather granted or maintained in Australia prohibited
under Article 3 of the SCM Agreement.176   Following consultations, the United States and Australia
reached a settlement on 24 November 1996.  This settlement was announced on 25 November
1996.177   Under the terms of settlement, the gove rnment of Australia would remove automotive
leather from eligibility for benefits under the ICS, as well as under the Export Facilitation Scheme for
                                                     
175 The ICS has been in effect from 1 July 1991, and remains in effect through 30 June 2000.  Under
this programme, exporters of eligible textile, clothing and footwear products can earn import credits that may beused to reduce the import duties payable on eligible textile, clothing and footwear items by an amount up to thevalue of the credits held.  Exporters are not required to use their credits as offsets against import duties, but maytransfer them to another holder in exchange for a cash payment.  The value of import credits that can be earned
is calculated as the F.O.B. value of an eligible export sale, multiplied by the Australian value-added content of
the export sale.  This total is multiplied by a specified “Export Phasing Rate".  TCF Import Credit Scheme:
Administrative Arrangements (March 1995), United States Exhibit 7.  The ICS is managed by the Australian
Customs Service on behalf of the Australian Textiles, Clothing and Footwear Authority.
176 WT/DS57/1, G/SCM/D7/1, 9 October 1996.
177 We note that this mutually agreed solution was not notified to the DSB and the relevant Committee,
as is required by Article 3.6 of the DSU.WT/DS126/R
Page 95
Automotive Products178 (the "EFS"), by 1 April 1997.  On 26 March 1997, Australian Customs Notice
No. 97/29 excised automotive leather from the ICS and EFS, effective 1 April 1997.
9.3 At the time of the settlement, the government of Australia announced a commitment to
provide financial assistance to Howe, to help ma intain its commercial viability in light of the
settlement between Australia and the United States, which resulted in the removal of automotive
leather from eligibility under the ICS and EFS programmes.179  The government of Australia entered
into two separate agreements, a grant contract and a loan contract, with Howe and its parent company,
Australian Leather Holdings, Limited ("ALH") in March 1997.
9.4 The grant contract provides for three payments totalling up to a maximum of A$30 million, an
amount estimated to equal approximately 5 per cent of Howe's expected sales for the period 1 April
1997-31 December 2000.  The first payment of A$5 million was to be paid upon conclusion of the
contract. The second and third payments, of up to A$12.5 million each, were to be paid in July 1997
and 1998 respectively, on the basis of Howe's performance against the targets set out in the contract.The performance targets consist of sales targets and cap ital expenditure targets.  With regard to sales,
an overall target for Howe's aggregate sales over the entire term of the contract is established, broken
down into interim targets.  With respect to capita l expenditure, the contract established an aggregate
target of A$22.8 million over the four-year period in question, to be spent on approved investments
directly tied to the production of automotive leather, also broken down into interim targets.  Howewas required, under the contract, to use "best endeavours" to meet these targets, and to provide the
Australian government with  reports indicating its sales and capital expenditures.
9.5 The loan contract provides for a fifteen-year loan of $A25 million by the government of
Australia to Howe and its parent company, ALH.  For the first five-year period of this loan,
Howe/ALH is not required to pay principal or interest.  After the expiration of this five-year period,interest on the loan is to be based on the rate  for Australian Commonwealth Bonds with a ten-year
maturity, plus two percentage points.  The loan is secured by a second lien over the assets and
undertakings of ALH.
9.6 On 10 November 1997, the United States requested consultations regarding allegedly
prohibited subsidies provided to Australian producers and exporters of automotive leather, includingsubsidies provided to Howe.
180  Consultations held between the United States and Australia on 16
December 1997 failed to resolve the dispute.  At its meeting of 22 January 1998, the DSB established
a panel in accordance with Article 4.4 of the SCM Agreement and Article 6 of the DSU pursuant to
the request made by the United States on 9 January 1998.  That panel was never composed.
                                                     
178 The EFS has existed in its current form since 1991, and remains in effect until 31 December 2000.
The EFS allows Australian manufacturers to earn A$1 of export credit for every dollar of eligible exports ofcovered automotive items.  The value of exports eligible to earn export credits is equal to the Australian value-
added content of eligible exports, calculated as the F.O.B. sales price less the value of any imported components
and raw materials.  Export credits earned under this programme can be used to obtain rebates on the dutiespayable on eligible imports of automotive vehicles an d automotive components or may be sold for cash to any
importer of eligible goods who may similarly seek such rebates.  The amount of import duty that can be rebatedunder this programme is determined by a tariff reduction schedule that varies depending on the year in which
the export credit is used.  Australian Department of Industry, Science &Technology, Report on the State of the
Automotive Industry 1994 (June 1995), United States Exhibit 13.
179 See Media Release from the Hon. John Moore, MP, Minister for Industry, Science and Tourism, 25
November 1996, United States Exhibit 16.  See also United States Exhibit 18.  Australia has indicated thatautomotive leather will be included in new general textile, industry and clothing arrangements due to come intoforce in Australia on 1 July 2000.
180 WT/DS106/1, G/SCM/D17/1, 17 November 1997.WT/DS126/R
Page 96
9.7 On 4 May 1998, the United States again requested consultations with Australia regarding
allegedly prohibited subsidies provided to Howe, alleging that "the [Government of Australia] has
provided subsidies to Howe that include a A$25 mi llion loan, which was made on preferential and non-
commercial terms, and grants of up to another A$30 million.  The United States believes that these
measures appear to violate the obligations of the [Government of Australia] under Article 3 of the SCM
Agreement”. 181  On 11 June 1998, the United States requested the immediate establishment of a panel,
and this Panel was established on 22 June 1998, with standard terms of reference.
A. PRELIMINARY ISSUES AND REQUESTS FOR PRELIMINARY RULINGS
9.8 The United States and Australia each made requests for preliminary rulings in their first
submissions.  Specifically, the United States asked the Panel to order Australia to produce certain
documents.  Australia asked the Panel to terminate its work, based on the argument that its
establishment was inconsistent with the DSU, or in the alternative, because the United States had
failed to meet its disclosure obligations under Article 4 of the SCM Agreement.  Assuming the Paneldenied the request to terminate, Australia asked the Panel to limit the United States to certain
information and arguments in the presentation of its case, based on the argument that the United
States failed to meet its disclosure obligations under Article 4 of the SCM Agreement.
9.9 Because these requests involved issues which had important implications for the conduct,
indeed, the continuation, of this panel proceeding, we ruled on them at the end of the first meetingwith the parties, without detailing our analysis and conclusions.
182  The following sets forth the
reasoning underlying our oral rulings of 10 December 1998.
1. Australia's request for termination based on the existence of multiple panels
regarding the same matter
9.10 Australia requests that this Panel terminate its work and, in effect, disestablish itself, on the
grounds that the DSU does not permit the establishment of a panel when another panel between the
same parties with respect to the same matter is in existence.
9.11 Australia's request addresses two different and not necessarily related questions.  The first is
whether the United States had a right or was entitled under the DSU to unilaterally terminate the first
panel, and the second is whether this Panel was properly established.  The answer to the first questiondoes not, in our view, control the answer to the second.  Even assuming that Australia is correct in
                                                     
181 WT/DS126/1, G/SCM/D20/1, 8 May 1998.
182 The Chairperson read the Panel's rulings of 10 December 1998, as follows:
"With respect to the United States request that we ask Australia to produce certain
documents, we note that Australia has already submitted redacted versions of the loan and
grant contracts.  In addition, among the questions from the Panel to the parties are certainrequests for information and documents which we have concluded are relevant to ourconsideration of the issues in this dispute, and therefore have asked Australia to submit.
With respect to Australia's various requests for preliminary rulings, we have carefully
considered the arguments of the parties, incl uding the statements made yesterday and the
responses to questions put to Australia.  We have decided to deny  Australia's request that we
terminate these proceedings.  We have also decided to deny  Australia's request that we order
the United States to limit itself to the information set forth in the request for consultationsunderlying this dispute".
The specific information requested by the Panel, as well as the information provided by Australia in response,
are identified in paras. 6.10-6.14 supra .WT/DS126/R
Page 97
asserting that a panel may not be unilaterally terminated by the complainant after it is established -- an
issue we need not and do not decide -- we conclude that this Panel must complete its consideration of
the matter referred to it.
9.12 The establishment of a panel is the task of the DSB.  It is by no means clear that, once the
DSB has established a panel, as it did in this case at its meeting of 22 June 1998, the panel so
established has the authority to rule on the propriety of its own establishment.  Nothing in our terms ofreference expressly authorizes us to consider wh ether the DSB acted correctly in establishing this
Panel.  Further, the issues raised by Australia's request are of a systemic nature, concerning questions
of policy regarding the operation of the WTO dispute settlement system and an evaluation of the
actions taken by the DSB, and thus might be more appropriately taken up in other fora.
9.13  Assuming this Panel does have the authority to  rule on the propriety of its own establishment,
the DSU does not explicitly address the issue of mu ltiple panels between the same parties regarding
the same matter, and thus does not expressly prohibit the establishment of such multiple panels.  The
DSU does, on the other hand, set forth the conditions and procedures which, if complied with, give
the complainant a right to have a panel established.  Article 4 governs requests for consultations and
Article 6 addresses requests for panel establishment.  In a dispute such as this one, concerning
allegedly prohibited subsidies, the special or additional procedures in Articles 4.2 through 4.12 of the
Agreement on Subsidies and Countervailing Measur es ("SCM Agreement") are also applicable.
Article 4.2 of the SCM Agreement deals with requests for consultations and Article 4.4 deals with
requests for panel establishment.  In order for a panel to be established in respect of a complaint
concerning an allegedly prohibited subsidy, a Member must respect the applicable procedures for
consultations and panel establishment set out in these provisions of the DSU and the SCM
Agreement.  If these procedures are followed, the DSU does not impose any further constraints uponthe establishment of a panel.
9.14 In our view, Australia is asking this Panel to read into the DSU an implicit prohibition on
multiple panels between the same parties regarding the same matter that does not exist in the text of
the DSU.  Australia's arguments in support of its position arise out of policy considerations and
address the object and purpose of the DSU.  In light of the fundamental importance in the WTOdispute settlement system of the right to have a panel established to examine a matter, in the absence
of a consensus not to do so, we do not consider it appropriate in this dispute to read such an implicit
prohibition into the DSU.  This is particularly true given that the policy concerns expressed by
Australia are purely theoretical and do not arise in this case.  Specifically, this is not a case where a
complainant is actively pursuing two proceedings wi th respect to the same matter -- the United States
has made it very clear that it is not pursuing the first dispute.  To the contrary, the United States has
sought to terminate the first dispute, and it is Australia which has sought to prevent that result.  Nor is
this a case where a complainant has sought a second panel before a first panel has completed its work
with respect to the same matter because it was di ssatisfied with developments in the first panel.
Although the first panel in this case was established, it was never composed and thus never began its
work.
9.15 For the foregoing reasons, we deny Australia's request to terminate this Panel, and will
continue our work in accordance with our terms of reference.WT/DS126/R
Page 98
2. Compliance with Article 4.2 of the SCM Agreement
9.16 Australia also asks us to terminate this Panel, or in the alternative, to disregard during the
course of this proceeding all facts and arguments not explicitly set out in the request for consultations
(WT/DS126/1), based on its assertion that the United States request for consultations does not comply
with the requirements of Article 4.2 of the SCM Agreement.
9.17 Article 4.2 of the SCM Agreement provides:
"A request for consultations under paragraph 1 [of Article 4] shall include a statement
of available evidence with regard to th e existence and nature of the subsidy in
question".
Focusing on the term "available evidence" in Article 4.2, Australia argues that the quid pro quo  for
the accelerated dispute settlement procedure available under Article 4 of the SCM Agreement is that
the complainant must "show its hand" at the outset of the proceedings in order to guarantee that
information necessary for the respondent to defend itself is provided.  In Australia's view, Article 4.2imposes an obligation on the complainant to disclose, in its request for consultations,  not only facts,
but also the argumentation why such facts lead the complainant to believe there is a violation of
Article 3.1.
9.18 The ordinary meaning of the phrase "include a statement of available evidence" does not, on
its face, require disclosure of arguments in the request for consultations.  Nothing in the context orobject and purpose of Article 4.2, discussed below, suggests a different conclusion.
9.19 Turning to the question of what is required as a "statement of available evidence", we note
that Australia reads this to require disclosure of all facts and evidence on which the complaining
Member will rely in the course of the dispute.  Indeed, Australia asserts that any exhibits should have
been provided at the time consultations were requested.
183  The ordinary meaning of the phrase
"statement of available evidence" does not support Australia's position.  The word "evidence" is
defined as "available facts, circumstances, etc., supporting or otherwise a belief, proposition, etc.".184
"Available" is defined as "at one's disposal", and "statement" is defined as "expression in words".185
Thus, based on the ordinary meaning of the terms, Article 4.2 requires a complaining Member to
include in the request for consultations an expression in words of the facts at its disposal at the time it
requests consultations in support of the conclusion that it has, in the words of Article 4.1, "reason to
believe that a prohibited subsidy is being granted or  maintained".  This is, in our view, considerably
less than Australia would have Article 4.2 require.
9.20 Moreover, nothing in the context or object and purpose of Article 4.2 suggests to us that the
statement of available evidence must be as comprehensive as Australia would require.  The mere factthat proceedings under Article 4 of the SCM Agreement are accelerated by comparison to dispute
settlement proceedings under the DSU does not, in our view, require us to read into Article 4.2 a
requirement that the complainant disclose all facts and arguments in its request for consultations.  In
dispute settlement proceedings conducted pursuant to a normal schedule, a complaining Member is
not even required to include a statement of the facts and arguments in a request for establishment of a
panel – which comes considerably later in the dispute settlement process, after a consultation request
has been made and after the parties have consulted.  The complaining party is required only toidentify the claims concerning the matter at issue; the facts and arguments on which it relies to
establish its case must be submitted only in the first and subsequent submissions of the party to a
                                                     
183  Australia's first submission at para. 41, supra , para. 6.51.
184 Concise Oxford Dictionary , ninth ed., 1995.
185 Id.WT/DS126/R
Page 99
panel.186  To the extent that the additional requirement of Article 4.2 can be linked to the expedited
nature of the proceedings, the additional requirement of a statement of available evidence satisfies the
need adequately to apprise the responding Memb er of the information upon which the complaining
Member bases its request for consultations, and serves in addition to inform the resulting
consultations.
9.21 Looking at the United States request for consulta tions, we note that the statement of available
evidence sets forth both the nature of the evidence at the United States' disposal being relied upon,
and summarizes the facts the United States derived from that evidence which support a reason to
believe Australia was granting or maintaining a prohibited subsidy.187  This statement of available
evidence was adequate to apprise Australia of the information on which the United States was basing
its request for consultations and to inform the resu lting consultations.  Accordingly, we conclude that
the United States request for consultations in this case is in compliance with the requirements of
Article 4.2 in that it contains a sufficient statement of available evidence.
9.22 Based on the foregoing, we deny Australia's request to terminate this proceeding188, and we
further deny Australia's request that we disregard any facts and arguments not explicitly set out in the
request for consultations.
3. Limitation on evidence and arguments
9.23 Australia also appears to be asking us to rule that, even assuming the United States statement
of available evidence complied with the requirements of Article 4.2, the United States is limited to
relying on the facts and arguments explicitly set out in its request for consultations in presenting its
case to the Panel.
9.24 Australia reads the requirement of Article 4.2, that a request for consultations "include a
statement of available evidence", in conjunction with the expedited nature of the proceedings, asrequiring a panel to limit the complaining Member to using the evidence and arguments set forth in
the request for consultations, and asserts that to a llow a complainant to come forward with additional
facts and arguments in its first submission is inconsistent with Article 4 of the SCM Agreement.
189
9.25 A panel is obligated by Article 11 of the DSU to conduct "an objective assessment of the
matter before it".  Any evidentiary rulings we make must, therefore, be consistent with this obligation.In our view, a decision to limit the facts and arguments that the United States may present during the
course of this proceeding to those set forth in the request for consultations would make it difficult, if
not impossible, for us to fulfill our obligation to conduct an "objective assessment" of the matter
before us.
                                                     
186 In European Communities – Bananas , WT/DS27/AB/R, adopted 25 September 1997, para. 141, the
Appellate Body stated:
… there is a significant difference between the claims  identified in the request for the
establishment of a panel, which establish the panel's terms of reference under Article 7 of theDSU, and the arguments supporting those claims, which are set out and progressively clarified
in the first written submissions, the rebuttal submissions and the first and second panel
meetings with the parties.
187 See WT/DS126/1, excerpted supra , para. 6.58.
188 We note that, having determined that the United States statement of available evidence is adequate,
we need not and do not reach any conclusions as to what action would be appropriate if that statement were not
adequate.
189 Australia's first submission at para. 42, supra , para. 6.52.WT/DS126/R
Page 100
9.26 As discussed above, Article 4.2 does not require a complaining Member to disclose
arguments in the request for consultations.  Thus, there is no basis for limiting the scope of arguments
in this proceeding.
9.27 Article 4.2 does contain a requirement, not present in the DSU, that a complainant include a
"statement of available evidence" in its request for consultations.  However, we do not consider that
the scope of the evidence that a panel may consider is limited in any way by such a statement ofavailable evidence.  In this respect, we note Article 4.3 of the SCM Agreement, which explicitly states
that one of the purposes of consultations "shall be to clarify the facts of the situation…" .  (emphasis
added)  This provision implies that additional facts or evidence will be developed during
consultations.  Moreover, the Appellate Body has recognized that consultations play a significant role
in developing the facts in a dispute settlement proceeding.  For example, in India - Patents
190, the
Appellate Body observed that "the claims that are made and the facts that are established during
consultations  do much to shape the substance and the scope of subsequent panel proceedings".
(emphasis added)  This is consistent with the view that a central purpose of consultations in general,
and of consultations under Article 4 of the SCM Agreement in particular, is to clarify and develop the
facts of the situation.
9.28 Moreover, we note that panels have, under Article 13.2 of the DSU, a general right to seek
information "from any relevant source".  Indeed, it is a common feature of panel proceedings forpanelists to question parties about the facts and arguments underlying their positions.  There is
nothing in Article 4 of the SCM Agreement to su ggest that this right is somehow limited by the
expedited nature of dispute settlement proceedings conducted under that provision.  If Australia's
position were correct, a panel might be constrained from seeking out relevant information from the
party, in this case the United States, that was limited to reliance on the facts set forth in its request forconsultations.  Similarly, under Australia's view, the defending party might introduce information
during the panel proceedings, which the complaining party, in this case the United States, would not
be able to rebut, as it would be limited to reliance on the facts set forth in its request for consultations.
We do not believe Article 4.2 requires this result.
9.29 Finally, as noted above, in the usual case, a complaining Member is not even required to
include its facts and arguments in a request for establishment of a panel – which comes considerably
later in the dispute settlement process than the consultation request.  This implies that the scope of  the
facts and evidence that may be considered in a dispute settlement proceeding should not be limited to
those set out in the request for consultations, merely because a proceeding under Article 4 of the SCM
Agreement is conducted on an accelerated time schedule.  Article 4.2 does require a complainingMember to include more information about its case in  its request for consultations than is otherwise
required under the DSU.  This serves to provide a responding Member with a better understanding of
the matter in dispute, and serves as the basis for consultations.  Specifically, the statement of available
evidence informs the responding Member of the fact s at the disposal of the complaining Member at
the time it requests consultations that support the complaining Member's conclusion that it has "reason
to believe" that a prohibited subsidy is being granted or maintained by the responding Member.  The
statement of available evidence thus informs the beginning of the dispute settlement process – it doesnot limit the scope of evidence and argument for the entire proceeding that may ensue to only what is
in the request for consultations.
                                                     
190 Appellate Body Report, India – Patents , WT/DS50/AB/R, adopted 16 January 1998, para. 94.WT/DS126/R
Page 101
9.30 We therefore deny Australia's request that we limit the evidence and arguments on which the
United States may rely in this proceeding to those set forth in the request for consultations,
WT/DS126/1.191
4. Information acquired in the context of co nsultations held pursuant to the first
request (WT/DS106/1) and Exhibit 2 to the United States first submission
9.31 Australia also requests that we rule that information acquired in the context of consultations
held pursuant to the first request by the United States, in document WT/DS106/1, including Exhibit 2
to the United States first submission, is not admissible before this Panel.  Australia argues that those
consultations, and any facts derived by the United States from those consultations, including
Exhibit 2, and arguments based on those facts, are confidential to that panel process, and should
therefore not be permitted in this panel process without Australia's agreement.
9.32 As Australia rightly notes, Article 4.6 of th e DSU provides that "Consultations shall be
confidential, and without prejudice to the rights of any Member in any further proceedings".However, in our view, this does not mean that facts and information developed in the course of
consultations held pursuant to one request cannot be used in a panel proceeding concerning, as it does
in this case, the same dispute, between the same parties, conducted pursuant to another, different
request.
9.33 We recall that Article 11 of the DSU obliges a panel to conduct "an objective assessment of
the matter before it".  As discussed earlier, any ev identiary rulings we make must be consistent with
this obligation.  The panel in Korea – Taxes on Alcoholic Beverages  recently confirmed the right of a
party to a WTO dispute to use information learned in consultations in panel proceedings.  After noting
the requirement of confidentiality in Article 4.6 of  the DSU, which the panel viewed as "essential if
the parties are to be free to engage in meaningful consultations", the panel continued:
"However, it is our view that this confidentiality extends only as far as requiring the
parties to the consultations not to disclose any information obtained in the
consultations to any parties that were not involved in those consultations.  We are
mindful of the fact that the panel proceedings between the parties remain confidential,
and parties do not thereby breach any confidentiality by disclosing in thoseproceedings information acquired during the consultations.  Indeed, in our view, the
very essence of consultations is to enable the parties [to] gather correct and relevant
information, for purposes of assisting them in arriving at a mutually agreed solution,
or failing which, to assist them in presen ting accurate information to the panel.  It
would seriously hamper the dispute settlement process if the information acquiredduring consultations could not be subsequently used by any party in the ensuing
proceedings".
192
9.34 Given that, in this case, the parties and the dispute are the same, no panel was actually
composed or considered the dispute in the first-requested proceeding, and there are no third parties
involved in either proceeding who might have learned information in the course of consultations, we
cannot see any reason to exclude the United States Exhibit 2 from our consideration, merely because
                                                     
191 In this regard we note that, as a matter of fact, almost all of the evidence presented by the United
States as exhibits to its first submission falls with in the scope of what is described in the request for
consultations.
192 WT/DS75/R, WT/DS84/R, WT/DS75/AB/R, WT/DS84/AB/R, adopted 17 February 1999,
para. 10.23.  The referenced aspect of the Panel's ruling was not at issue before the Appellate Body.WT/DS126/R
Page 102
it was developed in the course of the consultations held pursuant to the first request.193  Australia has
failed to specify what other, if any, facts might have been derived by the United States from the
earlier consultations, and so there is no basis for us to exclude any such facts.
9.35 We therefore deny Australia's request that we rule that information acquired in the context of
consultations held pursuant to the first reques t by the United States, in document WT/DS106/1,
including Exhibit 2 to the United States first submission, is not admissible before this Panel.
B. ARE THE MEASURES BEFORE THE PANEL EX PORT SUBSIDIES WITHIN THE MEANING OF
ARTICLE  3.1( A) OF THE SCM A GREEMENT ?
1. What are the measures before the Panel?
9.36 Australia argues that the measures before us are the A$25 million preferential loan to Howe
and the first two payments made to Howe pursuant to the grant contract.  Thus, in Australia's view,
neither the third payment to Howe, made in June 1998, nor the grant contract itself are "measures"encompassed by the request for establishment, and are consequently not before us.   The United
States, on the other hand, asserts that its request for establishment in this dispute explicitly identifies
the measures before the Panel as being the loan contract and the grant contract, including any andall possible disbursements under the latter contract.  In the alternative, citing  Japan – Film
194, the
United States asserts that if the Panel were to conclude that either the grant contract or the thirdpayment thereunder was not explicitly described in the request for establishment, these were clearlyincluded in the request for establishment, as subsidiary or closely related to the specificallyidentified measures.
9.37 Australia attempts to draw a distinction, in particular, between the grant contract and the three
payments made thereunder.
195  The issue is significant because the final payment under the grant
contract was not made until after the Panel was established, and thus, in Australia's view, falls outside
the Panel's terms of reference and cannot be considered by the Panel.  Australia maintains that the
Panel will have to consider the consistency with the SCM Agreement of each of the grant payments,and of the loan, separately, and could find that one or more were consistent, and the other(s) were not.
9.38 In our view, the distinction that Australia invites us to draw between the grant contract and
the grant payments is artificial as regards the determination of what measures are before the Panel.
The document setting out the "matter" before the Panel, and therefore governing the Panel's terms of
reference, is the United States' request for establishment of a panel. In this document, the UnitedStates states:
"The Government of Australia has provided subsidies [to Howe].  The United States
understands that these subsidies include the provision by the Government of Australia
                                                     
193 There is nothing to indicate that there woul d have been any different answers had the same
questions been asked by the United States during consultations held pursuant to the second request.  We noteAustralia's view that there were no consultations held pursuant to the second request, although there was ameeting between the parties.  Presumably, this view is based on Australia's position that the second request for
consultations, and the second request for establishment, like this Panel which flowed from those requests, were
inconsistent with the DSU.
194 WT/DS44/R, adopted 22 April 1998.
195 Australia makes no distinction between the loan contract and the disbursement of the loan funds,
and thus seems to accept that loan cont ract is a "measure" that is before the Panel.  See Australia's first
submission at para. 58 ("the 'loan' [referred to in the United States' panel request] is clearly the loan provided
under the Loan contract").  Supra , para. 7.3.WT/DS126/R
Page 103
to Howe of grants worth as much as A$30 million and a A$25 million loan on
preferential and non-commercial terms”. 196
9.39 The ordinary meaning of the term “provision” is “the act or an instance of providing".197  The
act or instance of providing the grant payments in this case was the grant contract, which established
the conditions for the disbursement of the grant funds.  Thus, the language of the request for
establishment specifically includes the grant contract.  Moreover, the ordinary meaning of the term"grant" means "the process of granting or a thing granted",
198 and therefore includes both the
government’s commitment to make payments (that is, the grant contract), and the grant payments
themselves, including all possible disbursements, whether past or future.
9.40 Thus, we conclude that the specific words of the request for establishment, which sets the
terms of reference for this panel, cover the loan contract (which encompasses the single disbursement
of the loan funds), the grant contract, and the individual payments made under the latter contract.199
9.41 Apart from the specific language used in the panel request itself, other considerations also
support our conclusion that the measures before the Panel are not limited to the specific payments
made under the grant contract prior to the request for establishment of this Panel, but include the
contract itself and any payments thereunder.  The gr ant contract is the specif ic legal instrument that
lays out the terms and conditions for the individual payments to be made thereunder, and whichtherefore governs and defines the nature of those payments.   The grant contract commits the
government of Australia to make certain payments to Howe, provided the conditions established in
the contract are satisfied.  In our view, we have before us all the necessary information to rule on all
the payments provided for in the grant contract.
9.42 Based on the foregoing, we do not consider it necessary to draw the distinction that Australia
proposes between the grant contract and the grant payments for the purpose of defining the measures
that are before the Panel, and conclude that the measures before us are the loan contract, the grant
contract and the individual payments under the latter contract.
2. Are the measures before the panel "subsidies"  within the meaning of Article 1 of the
SCM Agreement?
9.43 The parties are in agreement that the loan is a subsidy within the meaning of Article 1 of the
SCM Agreement.  The parties are also in agreemen t that each of the three payments under the grant
contract is also a subsidy within the meaning of Article 1 of the SCM Agreement.  However, the
parties are not in agreement whether the grant contract itself is a subsidy within the meaning of
Article 1 of the SCM Agreement.  Therefore, we turn now to that question.
9.44 The United States argues that the grant contract  is a "financial contribution" that confers a
"benefit" and is, therefore, a subsidy under Article 1 of the SCM Agreement.  The United States
asserts that Howe has been given a benefit in the form of government funds that it need not repay.
Australia, on the other hand, asserts that the United States has not demonstrated that the grant contract
is a subsidy, although, as noted above, it acknowledges that the payments authorized by that contract
are subsidies, i.e. "financial contributions" that confer a "benefit".
                                                     
196 WT/DS126/2, 11 June 1998.
197 Concise Oxford Dictionary , ninth ed., 1995.
198 Concise Oxford Dictionary , ninth ed., 1995.
199 In light of our decision, we did not consider, and draw no conclusions regarding, the United States
argument regarding subsidiary or closely related measures.WT/DS126/R
Page 104
9.45 This issue is closely linked to our discussion above concerning what are the "measures" that
are before the Panel. Australia does not dispute that the grant payments are, themselves, subsidies.
The terms and conditions for the disbursement of th e payments are provided for in the grant contract.
In our view, each payment can be evaluated individually to determine whether it is a prohibited export
subsidy, but only by reference to the criteria for disbursement set out in the grant contract.  Thus, we
need not decide whether or not the grant contract is a subsidy in order to evaluate the individualpayments. We have determined above that, based on the specific language of the request for
establishment, the grant contract is a measure that is before us in this case.  The evaluation of the
consistency of challenged elements of the grant contract must take into account what actually occurs,
particularly in a case where the allegation is that the subsidies are contingent in fact on export
performance.  Therefore, we need not determine whet her the grant contract is itself a subsidy in order
to determine whether the payments made pursuant to that contract, which Australia acknowledges are
subsidies, are prohibited export subsidies.
3. Are the subsidies in question "contingent, in law or in fact" on export performance,
within the meaning of Article 3.1(a) of the SCM Agreement?
9.46 Article 3.1 of the SCM Agreement provides:
"3.1 Except as provided in the Agreement on Agriculture, the following
subsidies, within the meaning of Article 1, shall be prohibited:
(a) subsidies contingent, in law or in fact4 whether solely or as one of
several other conditions, upon export performance, including those
illustrated in Annex I[…];
______________________________________________________________
4This standard is met when the facts demonstrate that the granting of a subsidy,
without having been made legally contingent upon export performance, is in facttied to actual or anticipated exportation or export earnings.  The mere fact that asubsidy is granted to enterprises which ex port shall not for that reason alone be
considered to be an export subsidy within the meaning of this provision".
Article 3.2 of the SCM Agreement reinforces this prohibition, providing:
"3.2 A Member shall neither grant nor maintain subsidies referred to in
paragraph 1".
(a) contingent in law
9.47 The United States argued, in its first written submission to the Panel, that, because Howe was
granted the new aid package as a specific replacement for the de jure  subsidies of the ICS and EFS
export schemes, the new subsidies are also de jure  export subsidies.  However, the United States did
not pursue this line of argument in subsequent submissions, after it had received copies of the grant
and loan contracts.  Australia asserts that the United States put forward no evidence that any of the
measures is contingent “in law” upon export performance, and moreover that this issue is not properly
before the Panel as there is no claim regarding the question of "contingent in law" in the request for
establishment.
9.48 In our view, the Panel's terms of reference include the issue of whether the subsidies in
question are contingent "in law" on export performance.  The United States panel request cites both
the "in law" and "in fact" aspects of Article 3.1(a) of the SCM Agreement, and the United States claim
is that the subsidies are inconsistent with Article 3.1(a).  How those subsidies are inconsistent,WT/DS126/R
Page 105
whether because they are contingent in law or in fact upon export performance, is an aspect of the
arguments put forward by the United States in support of its claim.
9.49 However, as the United States has not pressed its arguments in this regard, we consider that it
has abandoned them.  We therefore do not reach any conclusions on this issue, and, turn now to the
question whether the subsidies in question are contingent in fact upon export performance.
(b) contingent in fact
9.50 The United States argues that the measures are subsidies contingent in fact on Howe's export
performance, as they are tied to actual or anticipated exportation or export earnings.  The United
States favours a broad approach to the "contingent … in fact" standard in Article 3.1(a), and
emphasizes that this standard must be approached on a case-by-case basis, taking into account the
structure and design of the measure at stake and the specific facts involved.  In the United States view,
the distinction between the "in law" and "in fact" standard is that "in law" subsidies are explicitly
contingent, and "in fact" subsidies are implicitly contingent, upon export performance.  Moreover,footnote 4 of the SCM Agreement does not preclude consideration of the fact of exportation or the
level of exports; it simply proscribes finding a prohibited export subsidy based solely  upon the level
of exports.  In fact, the explicit reference to level of exports in Article 3, in the United States view,
indicates that the drafters specifically contemplated that the level of exports would be taken into
account in determining whether a “contingent in fact” export subsidy exists.  The United States arguesthat a contingent-in-fact export subsidy will exist when actual or anticipated exportation is merely one
of several potential criteria influencing the bestowal of benefits.  Thus, if the totality of the
circumstances reveal that these benefits are designed to promote exports, then such benefits fall within
the broad definition of Article 3.1(a).  The United States urges us to look to the assumptions
underlying the government's decision to grant the subsidy in order to determine whether the "in fact"standard has been met.
9.51 Australia favours a narrow approach to the "contingent … in fact" test in Article 3.1(a).
200  In
Australia's view, the contingent in fact standard is defined and limited by footnote 4 of the SCM
Agreement.  The distinction between "contingent in  law" and "contingent in fact" is intended to
distinguish between the situation where something is set out explicitly in legislation or regulation ("inlaw") and where there is some non-legislative, administrative arrangement whereby the granting of
the subsidy is actually tied to export performance ("in fact").  The purpose of the “in fact” provision is
to provide a way of dealing with the situation where the administration of a subsidy programme
allows the disbursement of funds to favour exports, i.e.  to provide subsidies to firms tied to export
performance.  Australia urges us to reject a test based on some "undefined level of exports" for
determining whether a subsidy is a prohibited export subsidy.  The facts must demonstrate that the
granting of the subsidy is in fact tied to actual or anticipated exportation or export earnings.  In other
words, "the complainant must show that the granting of  the subsidy is in fact tied in its application to
export performance and so favours export over domestic sales".
201  In this regard, Australia argues
that WTO rules need to provide clear guidance to Members, and the United States position would
leave Member unable to plan domestic support policies in a way that would avoid running afoul ofthe prohibitions of Article 3.1(a).
                                                     
200 Referring to the United States references to " de jure " and de facto " prohibited subsidies, Australia
asserts that the United States arguments are misdirect ed, contending that the SCM Agreement does not refer to
“de jure ” and “ de facto ” export subsidies, but to contingent “in law” and contingent “in fact” export subsidies.
In our view, the United States uses the phrase " de facto " interchangeably with the phrase "in fact".  We thus
conclude that the United States arguments clearly relate to the prohibition set forth in Article 3.1(a), regardless
of the occasional use of the phrase de facto .
201 Australia's first submission, para. 101, supra , para.7.103.WT/DS126/R
Page 106
9.52 The United States asserts that a subsidy must be found to be "in fact" contingent when actual
or anticipated exportation is merely one of several criteria influencing the bestowal of benefits.202
Thus, the United States asserts that if the totality of the circumstances reveals that the subsidy inquestion is designed to promote exports, then that  subsidy comes within the ambit of Article 3.1(a),
and is prohibited.
203  Australia argues, on the other hand, that in order to demonstrate that the granting
of the subsidy is in fact tied in its application to export performance, it must be determined that the
grant (or maintenance) of the subsidy favours export over domestic sales.204
9.53 The essential difference between the parties relates to the nature and scope of the relationship
or connection that must exist between a subsidy and export performance in order for the subsidy to be
"in fact" contingent upon export performance and, thus, a prohibited export subsidy within the
meaning of Article 3.1(a) of the SCM Agreement.  The resolution of this issue hinges upon the
interpretation and application of the term "contingent … in fact … upon export performance" in
Article 3.1(a) of the SCM Agreement.
9.54 Pursuant to Article 3.2 of the DSU, we must interpret Article 3.1(a) of the SCM Agreement
"in accordance with customary rules of interpretati on of public international law".  According to
established WTO practice, these rules are found in Article 31 of the  Vienna Convention .  Paragraph 1
of this Article states:
"A treaty shall be interpreted in good faith and in accordance with the
ordinary meaning to be given to the terms of the treaty in their context
and in the light of its object and purpose".
9.55 An inquiry into the meaning of the term "contingent … in fact" in Article 3.1(a) of the SCM
Agreement must, therefore, begin with an examination of the ordinary meaning of the word"contingent".  The ordinary meaning of "continge nt" is "dependent for its existence on something
else", "conditional; dependent on, upon".
205  The text of Article 3.1(a) also includes footnote 4, which
states that the standard of "in fact" contingency is met if the facts demonstrate that the subsidy is "in
fact tied to actual or anticipated exportation or export earnings".  The ordinary meaning of "tied to"
is "restrain or constrain to or from an action; limit or restrict as to behaviour, location, conditions,etc.".
206  Both of the terms used  -- "contingent … in fact" and "in fact tied to" – suggest an
interpretation that requires a close connection between the grant or maintenance of a subsidy andexport performance.
9.56 In our view, the concept of "contingent … in fact … upon export performance", and the
language of footnote 4 of the SCM Agreement, require us to examine all of the facts that actually
surround the granting or maintenance of the subsidy in question, including the terms and structure of
the subsidy, and the circumstances under which it was granted or maintained. A determinationwhether a subsidy is in fact contingent upon export  performance cannot, in our view, be limited to an
examination of the terms of the legal instruments or the administrative arrangements providing for the
granting or maintenance of the subsidy in question.  Such a determination would leave wide open the
possibility of evasion of the prohibition of Article 3.1(a), and render meaningless the distinction
between "in fact" and "in law" contingency.  Moreover, while the second sentence of footnote 4makes clear that the mere fact that a subsidy is granted to enterprises which export cannot be the sole
basis for concluding that a subsidy is "in fact" contingent upon export performance, it does not
preclude the consideration of that fact in a panel's analysis.  Nor does it preclude consideration of the
                                                     
202 United States first submission, para. 37, supra , para. 7.82
203 United States first submission , para. 38, supra , para. 7.82.
204 Australia's first submission, para. 101, supra , para. 7.103.
205 The New Shorter Oxford English Dictionary , Vol.  1, 1993.
206 Ibid.WT/DS126/R
Page 107
level of a particular company's exports.  This suggests to us that factors other than the specific legal or
administrative arrangements governing the granting or maintenance of the subsidy in question must be
considered in determining whether a subsidy is "in fact" contingent upon export performance.
9.57 Based on the explicit language of Article 3.1(a)  and footnote 4 of the SCM Agreement, in our
view the determination of whether a subsidy is "contingent … in fact" upon export performance
requires us to examine all the facts concerning th e grant or maintenance of the challenged subsidy,
including the nature of the subsidy, its structure and operation, and the circumstances in which it was
provided.  In this context, Article 11 of the DSU requires a panel to make an objective assessment of
the facts of the case.  Obviously, the facts to be considered will depend on the specific circumstances
of the subsidy in question, and will vary from case to case.  In our view, all facts surrounding the
grant and/or maintenance of the subsidy in question may be taken into consideration in the analysis.
However, taken together, the facts considered must demonstrate that the grant or maintenance of the
subsidy is conditioned upon actual or anticipated exportation or export earnings.  The outcome of thisanalysis will obviously turn on the specific  facts relating to each subsidy examined.
(c) analysis of the facts
9.58 The United States asserts that the status of the loan contract, the grant contract, and the grant
payments is inextricably linked, and that the factual circumstances demonstrate that each of them is a
subsidy contingent in fact upon export performance.  In the United States view, the following facts
demonstrate that the subsidies in question are prohibited export subsidies: the Australian government
was aware that Howe was exporting 90 per cent of its sales at the time the government of Australia
entered into the grant and loan contracts;  the replacement package was specifically and explicitly
designed to compensate Howe for its exclusion from two "in law" export subsidy programmes (the
ICS and EFS programmes) that had helped transform Howe into a major exporter;  the recognizedpurpose of the replacement package by both the Australian government and Howe was export
promotion;  Howe had aggressive export plans;  Howe must significantly increase its sales to receive
the full A$30 million grant for which it is eligible; however, the Australian leather market is too small
to absorb Howe's current -- much less, its increased -- production; the only way that Howe could
increase its sales and utilise the expanded production capacity that it has acquired as a result of thesubsidies in question is to significantly increase its exports; and the subsidies in question were
provided only to Howe, which exports virtually all of its production, and not to any leather
manufacturer that supplies the domestic market.
9.59 Australia emphasizes that the measures before the Panel are individual measures, and each
must be individually considered in determining whether it is consistent with the requirements of the
SCM Agreement.  With regard to the facts relied on by the United States, Australia asserts that the
nature of prior measures (the ICS and EFS programmes) is not relevant and, in any case, these
measures are outside the Panel's terms of reference; an assessment of the imputed objectives ofgovernments is not the basis on which a rules-based system such as the WTO is supposed to operate;
and the structure of the loan and the grant demonstrate that they are not linked in any way to Howe's
export performance.  With respect to the loan, Australia argues that the level of Howe's production
and sales is irrelevant so long as the company pays the Government any monies owing.  Precisely
how Howe and ALH finally repay the loan is a matter solely for the borrowers themselves.  The loancontract determines the interest rate payable and the schedule for repayments of principal.  It does not
prescribe how Howe and ALH will fund the repayments or from where it will source these funds.
Australia notes that the ability of Howe/ALH to repay does not rely solely on the domestic or export
markets for automotive leather.  These are currently important elements of Howe/ALH's operations,
but it is impossible to say what the markets or the product mix will be when the major repayments aredue.WT/DS126/R
Page 108
9.60 With respect to the grant payments, Australia argues that only the first two payments made
under the grant contract are before the Panel.  Because these monies are not recoverable regardless of
the actual level of sales by Howe, they cannot be considered to be in fact tied to exports.  In
Australia's view, they are not linked to future e xports, let alone satisfying what it considers the
stringent requirements for the “in fact” condition in Article 3.1(a).  Australia asserts that, in any event,
the first payment of A$5 million was an automatic payment made following the signing of the grant
contract, and was not tied to anything, let alone export performance.  The second payment of A$12.5
million was made on the basis that the company had satisfied its investment and sales targets on a best
endeavours basis, as well as normal due diligence considerations.  There is no way in which the
company could have obtained more money regardless of how much it invested or sold.  Assuming the
Panel considers the third grant payment, Australia asserts that it was made on the basis of an
assessment that the company had performed satisfactorily on a best endeavours basis in respect of a
combination of investment and production in 1997/98, as well as normal due diligence considerations.Again, Australia states that the government cannot take back that money, provided that Howe
continues in business.  The company could expand or reduce sales and the status of the payments
under the grant contract would be unchanged.  The money is gone and there is no connection with
future sales, including sales for export.
9.61 We agree with Australia that we must consider the challenged measures individually to
determine their consistency with the SCM Agreement.   Merely because all the challenged subsidies
form part of a single "package" of assistance to Howe does not mean that all of them are perforce
either prohibited export subsidies or not.  In this regard, we note that, in our view, it is perfectly
possible for a Member to construct a package of subsidies to aid domestic industry, of which some are
consistent with the SCM Agreement, and others are not.  It is, therefore, necessary that each subsidybe evaluated on its own terms in deciding whether it is consistent with the SCM Agreement.
(i) the payments under the grant contract
9.62 The grant contract provides for three subsidy payments up to a maximum of A$30 million.
The contract is between the government of Australia and Howe and its parent company, ALH.
However, the terms of the grant contract are specifically directed at Howe, and more particularly atHowe's automotive leather operations.  The contract provides for an aggregate sales performance
target for the period 1 April 1997 – 31 December 2000, broken down into four interim sales targets.
207
The contract provides for the funds to be disbursed in three payments during the first two years of the
contract term.208  The first payment of A$5 million was made upon the signing of the contract
between Howe/ALH and the Australian government .  The second and third payments of up to A$12.5
million each were to be made on specific dates in 1997 and 1998 upon receipt of a report from Howe
showing performance against the sales performance and investment targets for the years ending 30
June 1997 and 30 June 1998, respectively, satisfactory to the Department of Industry, Science and
Tourism.  Howe is obliged by the contract to use its "best endeavours" to satisfy the performance
targets set forth in the contract.
9.63 Australia has acknowledged that it is unlikely that the grant contract would have been entered
into in a circumstance other than the removal of automotive leather from the EFS and ICSprogrammes. In this regard, we note Australia's argument that it is "simplistic" to conclude that this
was the sole reason for providing the challenged assistance to Howe, pointing to, inter alia , the
government's concern for job retention in the region in the absence of support for the company.
                                                     
207 Howe is obligated to submit reports of its performance against the interim performance targets for
each of the periods ending 30 June 1997, 1998, 1999 an d 2000, as well as final report in September 2000.
208 With the exception of a small portion of the third payment held back pending final assessment that
Howe has satisfied the requirements of the contract, the maximum amount provided for in the grant contract,
A$30 million, has already been paid to Howe.WT/DS126/R
Page 109
However, we recall that Article 3.1(a) recognizes that there may be multiple conditions for the grant
or maintenance of a subsidy, and explicitly prohibits a subsidy if one of the conditions is that the
subsidy is contingent in fact upon export performance.  In taking into consideration the fact that the
government of Australia was providing assistance to Howe directly following the removal of
automotive leather from eligibility for benefits under the EFS and ICS programmes, we do not make
any legal conclusions about those programmes. The ICS and EFS themselves are not measures thatfall within our terms of reference, and we need not draw any conclusions about whether they are
prohibited export subsidies under the provisions of Article 3 of the SCM Agreement.
9.64 Australia argues that the nature of the ICS and EFS programmes cannot be considered in
analysing the consistency with the SCM Agreement of  the challenged subsidies, including the grant
payments, asserting that it must be possible for a government to provide subsidies to domestic firms
without such assistance being automatically deemed  a prohibited export subsidy even assuming the
programme those firms previously benefitted from was a prohibited subsidy.  WTO Members cannotbe prevented from replacing purported prohibited export subsidies with other measures that are not
prohibited, thereby bringing themselves into compliance with their multilateral obligations under the
SCM Agreement.  We agree that, even assuming the ICS and EFS were prohibited export subsidies (a
question on which we draw no conclusions), this would not, ipso facto , mean that any subsequent
subsidy granted to a company that had previously  benefited from those programmes would be a
prohibited export subsidy.
9.65 Nevertheless, in this case, based upon evidence concerning those programmes submitted by
the United States, the facts of which are undisputed by Australia, we observe that both the ICS and
EFS programmes give incentives to Australian companies to export certain products.  Howe earned
significant benefits from its exports of automotive leather pursuant to those programmes.  Automotiveleather was removed from eligibility under those programmes, and the government of Australia
entered into the loan contract and the grant contract providing financial assistance at least in part to
tide Howe over after it had lost eligibility for benefits related to automotive leather under these
programmes.
209  Public reports at the time indicated that the amount of the assistance provided for was
that deemed necessary to ensure that Howe continued in business.210
                                                     
209 Australia has stated that automotive leather will be among the products eligible under the new
programme it is developing to replace the ICS and EFS pr ogrammes, anticipated to be put into effect in 2000.
210 In this regard, we note that Australia argues that the statements of government officials reported in
the press cannot be consider ed evidence of the intent of the Australian government in providing assistance to
Howe.  We are not drawing any specific conclusions concerning the intent of the Australian government – werecognize that there may have been a number of purposes, a variety of "intent", involved in the decision to assistHowe subsequent to the removal of automotive leather from eligibility under the ICS and EFS programmes.Nonetheless, we consider the reports, both press and company, submitted by the United States as relevant to ouranalysis of the facts and circumstances surrounding the design and grant of that assistance.  Moreover, to the
extent that Australia has not specifically challenged the truth of the facts (or statements by individuals) reported,
we conclude that we may consider these articles, and make our own judgment as to their appropriate weight andprobative value.  A commentator on the International Court of Justice's consideration of evidence and proof offacts has stated:
"It appears to be the case that press reports, when significant but not denied by the responsible
state, or when reporting other events such as official statements by responsible officials andagencies of that state, are accepted; [footnote omitted] but when they are uncorroborated or do
not otherwise contain material with an independent title of credibility and persuasiveness, thetendency of the Court is to discount them almost entirely".
Highet, Evidence and Proof of Facts , in Damrosch, The International Court of Justice at a Crossroads, 1987.
Similarly, we take into account the circumstances in which the reported remarks were made, the source, andWT/DS126/R
Page 110
9.66 At the time the grant contract was concluded, Howe exported a significant portion of its
production, and the Australian government was aware of this.  The parties dispute the level of Howe's
exports in relation to domestic sales.  However, it is undisputed that Howe's exports had increased
significantly during the period it benefitted from the ICS and EFS programmes, and that at the time
automotive leather was removed from eligibility under those programmes, the overwhelming majority
of Howe's sales were for export. The government of Australia was concerned that Howe remain inbusiness, and determined to give it a financial assi stance package in order to ensure that it did so.
 211
In these circumstances, it is clear to us that continued exports, that is, anticipated exportation, was an
important condition in the provision of that assistance.  We note, as discussed above, that footnote 4
of the SCM Agreement does not preclude considerati on of the fact that a company exports, or of the
level of its exports, in a prohibited subsidy examination.  Rather, it merely proscribes finding a
prohibited export subsidy based solely  upon the fact that a subsidy is granted to a company which
exports.  While the fact of exportation cannot be the sole determinative fact in the evaluation, in ourview, it is clearly a relevant factor in this case, as is the level of exports.
9.67 Moreover, it is clear that the Australian market for automotive leather is too small to absorb
Howe's production, much less any expanded production that might result from the financial benefits
accruing from the grant payments, and the required capital investments, which were to be specifically
for automotive leather operations.
212  Therefore, we conclude that, in order to expand its sales in a
manner that would enable it to reach the sales performance targets (interim targets and the aggregate
target) set out in the grant contract, Howe would, of necessity, have to continue and probably increase
exports.  At the time the contract was entered into, the government of Australia was aware of this
necessity, and thus anticipated continued and possibly increased exports by Howe.  In our view, these
facts effectively transform the sales performance targets into export performance targets.  We thusconsider that Howe's anticipated export performance was one of the conditions for the grant of the
subsidies.  Australia argues that this consideration would lead to a result that would penalize small
economies, where firms are often dependent on exports in order to achieve rational economic levels of
production. Nevertheless, in the specific circumstances of this case, we find this consideration
compelling evidence of the close tie between anticipated exportation and the grant of the subsidies.
9.68 We note that confidential business information provided by Australia indicates that, in fact,
the proportion of Howe's sales going to export has not increased.  However, we must make our
determination on the facts that existed at the time th e contract establishing the conditions for the grant
payments was entered into.  Thus, the fact that the anticipated exports may not have come to pass in
the volumes anticipated does not affect our conclusion.  Moreover, we note that confidential businessinformation provided by Australia strongly suggests to us that the expectation of continued and
increasing exports was an element in the assessment of Howe's compliance with the terms of the grant
contract.
                                                                                                                                                                    
whether the information is corroborated elsewhere or contrary evidence is offered, in assessing the value of
these exhibits as evidence.
211 In this regard, we note that Australia commissioned a report from an independent accounting firm
concerning Howe's business, apparently in an effort to determine the nature and amount of financial assistancenecessary to maintain Howe's commercial viability.  However, although requested, this report was unfortunatelynot provided to the Panel, which considered that it would provide useful information on the circumstances
surrounding the design of the financial assistance package to Howe.  See, in particular, supra , paras. 6.10(a)-
6.11.
212 In this regard, we note that while Australia did not agree with the United States estimates
concerning the size of the domestic market for automotive leather, calling it conservative, Australia did notprovide any contrary or different forecasts upon which we might rely.  See supra , para. 7.248.  In these
circumstances, we conclude that Australia has entirely failed to rebut the United States assertion on a question
of fact, and we accept the United States estimates.WT/DS126/R
Page 111
9.69 Australia insists that the fact that the grant contract was provided only to Howe, which
exports a large proportion of its production, and not to any leather manufacturer that supplies the
domestic market is irrelevant, since Howe was the only company affected by the removal of
automotive leather from eligibility under the ICS a nd EFS programmes.  Australia has confirmed that
Howe is the only dedicated producer and exporter of automotive leather in Australia.213  A u s t r a l i a
specifically stated, in response to the Panel's question, that aside from the grant and loan to Howe,Australia does not have any subsidy specific to the Australian leather industry.
214  In our view, the fact
that the government of Australia provided the subsidies in question  only to Howe, the only exporter  of
automotive leather, is relevant, and supports the conclusion that one of the conditions for the subsidy
was anticipated exportation and/or export earnings.
9.70 Australia argues that, because the grant funds cannot be taken back by the government once
the payments are made, and because a change in Howe's level of exports would not affect the
disbursement of the funds, the grant payments are not "in fact" contingent upon export performance.However, as noted above, in our view the pertinent consideration is the facts at the time the conditions
for the grant payments were established, and not possible subsequent developments.
9.71 All of the facts, weighed together, lead us to  conclude that the three subsidy payments under
the grant contract are in fact tied to Howe's actual or anticipated exportation or export earnings.
215
These payments are conditioned on Howe's agreement to satisfy, on the basis of best endeavours, the
aggregate performance targets.  The second and third grant payments are, in addition, explicitly
conditioned on satisfaction, on a best endeavours basis, of interim sales performance targets.  Given
the export-dependent nature of Howe's business, and the size of the Australian market, these sales
performance targets are, in our view, effectively, export performance targets.  The sales performance
targets set out in the grant contract, in conjunction with the other facts enumerated above, thereforelead us to the conclusion that the grant of the subsidies was conditioned on anticipated exportation.
9.72 We therefore conclude that the payments under the grant contract are subsidies "contingent …
in fact" on export performance in violation of Article 3.1(a) of the SCM Agreement.
(ii) the loan contract
9.73 The loan contract provides for a fifteen-year loan of $A25 million by the Government of
Australia to Howe/ALH.  For the first five-year period of this loan, Howe/ALH is not required to pay
principal or interest.  After the expiration of this five-year period, interest on the loan is to be based on
the rate for Australian Commonwealth Bonds with a ten-year maturity, plus two percentage points.
The loan is secured by a second lien over the assets and undertakings of ALH.
9.74 There is nothing in the loan contract that ex plicitly links the loan to Howe's production or
sales, and therefore nothing in its terms, the design  of the loan payment, or the repayment provisions
that would tie the loan directly to export performa nce, or even sales performance.  Australia argues
that under the loan contract, the level of production and sales is irrelevant so long as the company
pays the government any monies owing.
216  The United States responds that the "viability of the loan
is necessarily contingent upon Howe's export earnings"217 given that the Australian government has
                                                     
213 Response by Australia to Question 13 of the Panel, 17 December 1998.
214 Response by Australia to Question 14 of the Panel, 17 December 1998.
215 We note that our conclusion matches the understanding of the recipient of the subsidy payments.  In
March 1997, Schaffer Corporation, the parent of Howe and ALH, reported that the Australian government had"finalised a compensation packag e" for Howe/ALH, consisting, inter alia  of "A grant of [A]$30 million based
on projected exports and paid on performance criteria". Schaffer Corporation Limited Half Yearly Results toDecember 1996,  Exhibit 1 to United States first submission, at page 2.
216 Australia's first submission, para.  133, supra , para. 7.253.
217 United States second submission, para. 41, supra , para. 7.258.WT/DS126/R
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acknowledged that the financial assistance provided  for in the loan and grant contracts is the
minimum amount necessary to ensure the viability of Howe, and that Howe has no choice but to
export in order to maintain its production and sales levels in order to remain in business and pay off
the loan.  The United States asserts that, "[i]f Howe does not export, the Australian government will
not be repaid".218
9.75 While it may be true that some of the money to repay the loan is likely to be generated
through export sales, we agree with Australia that it is ultimately up to Howe and ALH to decide upon
the source of funds that will be used to repay the loan.  The source of funding will not necessarily be
export sales, and there is nothing in the facts before  us to suggest that it was expected at the time the
loan was entered into that export sales would generate the funds to repay the loan.  In our view, the
mere fact that one possible source of funds to pay off the loan is potential export earnings is
insufficient to conclude that the loan was contingent in fact upon anticipated exportation or export
earnings.  In this regard, we note that Howe is a subsidiary of ALH and that ALH has other businessesand produces other products from which it could generate the funds to repay the loan.  We recognize
that other facts are relevant to our consideration of the nature of the loan contract.  Included among
these is the significance of  exports in Howe's business, and the fact that loan was part of the overall
"assistance package" given to Howe, which Australia acknowledged would probably not have
occurred if Howe had not been removed from eligibility under the ICS and EFS programmes.However, the loan is secured by a lien on the assets and undertakings of ALH, which is itself
responsible for repayment of the loan, and not merely on the assets and undertakings of Howe.
Moreover, there is nothing in the terms of the loan contract itself which suggests a specific link to
actual or anticipated exportation or export earnings, as there is in the terms of the grant contract.
These factors persuade us that there is not a sufficiently close tie between the loan and anticipatedexportation or export earnings.
9.76 Therefore, we conclude that the loan contract is not "contingent … in fact … upon export
performance" within the meaning of Article 3.1(a) of the SCM Agreement.
X. CONCLUSIONS AND RECOMMENDATION
10.1 In conclusion, we find that:
(a) The loan from the Australian government to Howe/ALH is not a subsidy which is
contingent upon export performance within the meaning of Article 3.1(a) of the SCM Agreement;
(b)  The payments under the grant contract are subsidies within the meaning of Article 1 of
the SCM Agreement which are contingent upon export performance within the meaning of
Article 3.1(a) of that Agreement.
10.2 Pursuant to Article 3.8 of the DSU, the finding in paragraph 10.1(b) also constitutes a case of
prima facie  nullification or impairment of benefits accruing to the United States under the SCM
Agreement, which Australia has not rebutted.
10.3 Accordingly, pursuant to Article 4.7 of the SCM Agreement, we recommend that Australia
withdraw the subsidies identified in paragraph 10.1(b) above without delay.
10.4 Article 4.7 further provides that "the panel shall specify in its recommendation the time-
period within which the measure [ i.e., the measure found to be a prohibited subsidy] must be
withdrawn".  This is one of the first cases  involv ing export subsidies to have been brought before the
WTO, and there is consequently no experience or prior practice as to what factors should be
                                                     
218 Ibid.WT/DS126/R
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considered in establishing the time-period within which the measure must be withdrawn.  Presumably,
the nature of the measures and issues regarding implementation might be relevant.
10.5 Australia has argued that, since the "normal" period of time for implementation of panel
decisions under the DSU is fifteen months, and time periods in export subsidy disputes are halved
pursuant to Article 4.12, a period of seven and one-half months would be appropriate.
10.6 Even assuming Australia is correct in its consideration of fifteen months as the "normal"
period of time for implementation of panel decisions, a question we do not reach, we do not agree that
one-half of that period is appropriate in a dispute involving export subsidies.  In the first place,
Article 4.12 specifically provides that "except for time periods specifically prescribed in this Article"
the time periods otherwise provided for in the DSU should be halved in export subsidy disputes.
Article 4.7, which provides that the subsidy shall be withdrawn "without delay", and that the panel
shall specify the time-period for withdrawal of the measure in its recommendation, in our view
establishes that the time-period for withdrawal is "specifically prescribed in this Article", that is, inArticle 4 of the SCM Agreement itself.  Moreover, we do not, as a factual matter, believe that a period
of seven and one-half months can reasonably be described as corresponding to the requirement that
the measure must be withdrawn "without delay".
10.7 In light of the nature of the measures, we consider that a 90-day period would be appropriate
for the withdrawal of the measures.  We therefore recommend that the measures be withdrawn within90 days.
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