WORLD TRADE  
ORGANIZATION  WT/DS234/ARB/MEX 
31 August 2004 
 (04-3551) 
 Original:   English 
  
 
     
 
UNITED STATES – CO NTINUED DUMPING 
AND SUBSIDY OFFSET ACT OF 2000 
 
(ORIGINAL COMPLAINT BY MEXICO) 
 
 
Recourse to Arbitratio n by the United States 
under Article 22.6 of the DSU 
 
 
DECISION BY THE ARBITRATOR  
 
 
     
 
   The Decision by the Arbitrator on United States – Continued Dumping and Subsidy Offset Act of 2000  
(Original Complaint by Mexico) – Recourse to Arb itration by the United States under Article 22.6 of 
the DSU  is being circulated to all Members, pursuant to the DSU.  The Decision is being circulated as 
an unrestricted document from 31 August 2004 pursuan t to the Procedures for the Circulation and 
Derestriction of WTO Documents (WT/L/452).   WT/DS234/ARB/MEX 
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 TABLE OF CONTENTS 
Page  
I. INTRODUCTION ................................................................................................................... .1 
A. INITIAL PROCEEDINGS .................................................................................................................1  
B. REQUEST FOR ARBITRATION AND SELECTION OF THE ARBITRATOR ..........................................2  
C. ORDER FOLLOWED BY THE ARBITRATOR IN ITS ANALYSIS .........................................................3  
II. PRELIMINARY ISSUES.........................................................................................................4  
A. REQUEST OF THE UNITED STATES FOR A PRELIMINARY RULING ................................................4  
1. Summary of the United States' request...................................................................................4  
2. Analysis of th e Arbitrator ..................................................................................................... ...4 
B. SUFFICIENT SPECIFICITY OF MEXICO 'S REQUEST UNDER ARTICLE  22.2  OF THE DSU................5  
1. Preliminar y remarks ............................................................................................................ ....5 
2. Main arguments of the parties.................................................................................................6  
(a) United States .................................................................................................................. .............6  
(b) Mexico ......................................................................................................................... ...............6  
3. Does Mexico's request fail to meet the mi nimum specificity standard applicable 
in an Article 22.6 arbitration? ................................................................................................ .7 
C. BURDEN OF PROOF ......................................................................................................................8  
1. Main arguments of the parties.................................................................................................8  
2. Position of the Arbitrator..................................................................................................... ....8 
III. DETERMINATION OF THE LEVEL OF NULLIFICATION OR 
IMPAIRMENT ..................................................................................................................... ....9 
A. MAIN ARGUMENTS OF THE PARTIES ............................................................................................9  
1. United States.................................................................................................................. ............9  
2. Mexico......................................................................................................................... .............10  
B. ANALYSIS OF THE ARBITRATOR ................................................................................................12  
1. Introduction................................................................................................................... ..........12  
2. Review of the approach proposed by Mexico.......................................................................13  
(a) Article XXIII of GATT 1994 and the DSU ..............................................................................13  
(b) Previous arbitrations .......................................................................................................... .......15  
(i) Introduction ................................................................................................................... ...........15  
(ii) Interpretation of the provisions relating to nullification or im pairment by previous 
arbitrators.................................................................................................................... .............16  
(iii) Consideration of benefits nullified or impaired in terms of economic or trade effect ..............16  
(c) Conclusion ..................................................................................................................... ...........19  
3. Reliance on specific instances of disb ursements to assess nullification or 
impairment ..................................................................................................................... .........20  
(a) Main arguments of the parties.................................................................................................. .20 WT/DS234/ARB/MEX 
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 (b)
 Analysis of the Arbitrator ..................................................................................................... ....21  
4. Approach to be followed by the Arbitrator in this case ......................................................22  
C. CALCULATION OF THE LEVEL OF NULLIFICATION OR IMPAIRMENT THROUGH AN 
ECONOMIC MODEL .....................................................................................................................24  
1. Introduction................................................................................................................... ..........24  
2. Review of the approaches of the parties regarding economic models................................24  
(a) United States .................................................................................................................. ...........24  
(b) Requesting Parties............................................................................................................. ........27  
3. Analysis of th e Arbitrator ..................................................................................................... .30 
(a) Comparison of the models ....................................................................................................... .30 
(b) Choosing an appropr iate model ................................................................................................32  
4. Data issues .................................................................................................................... ...........35  
(a) Introduction................................................................................................................... ............35  
(b) Value of payments .............................................................................................................. ......35  
(c) Elasticity of substitution ..................................................................................................... ......37  
(d) Pass-through................................................................................................................... ...........37  
5. Application of the model ....................................................................................................... .38 
D. CONCLUSION : LEVEL OF NULLIFICATION OR IMPAIRMENT .......................................................39  
IV. EQUIVALENCE OF THE LEVEL OF SUSPENSION OF CONCESSIONS OR 
OTHER OBLIGATIONS WITH THE LEVEL OF NULLIFICATION OR IMPAIRMENT ..................................................................................................................... ..40
 
A. ISSUES RAISED BY THE UNITED STATES IN RELATION TO THE LEVEL OF SUSPENSION 
OF CONCESSIONS OR OTHER OBLIGATIONS PROPOSED BY MEXICO ..........................................40  
B. THE LEVEL OF SUSPENSION OF CONCESSIONS OR OTHER OBLIGATIONS DETERMINED 
BY THE ARBITRATOR TO BE EQUIVALEN T TO THE LEVEL OF NULLIFICATION OR 
IMPAIRMENT ..............................................................................................................................4 1 
1. Suspension of concessions or other ob ligations expressed as a duty on an 
undetermined quantity of trade rather than as a suspension of concessions on a determined value of trade ...................................................................................................... 41
 
(a) Arguments of the parties....................................................................................................... ....41  
(i) United States.................................................................................................................. ...........41  
(ii) Mexico......................................................................................................................... ..............41  
(b) Analysis of the Arbitrator ..................................................................................................... ....42  
2. Suspension of concessions or other obligat ions by Mexico and other Requesting 
Parties so as to cover the total amount of disbursements made under the CDSOA .........43  
(a) Main arguments of the parties.................................................................................................. .43 
(i) United States.................................................................................................................. ...........43  
(ii) Mexico......................................................................................................................... ..............43  
(b) Position of the Arbitrator ..................................................................................................... .....44   WT/DS234/ARB/MEX 
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 3. Determination of a variable level of suspension of concessions or other 
obligations.................................................................................................................... ............44  
(a) Main arguments of the parties.................................................................................................. .44 
(i) United States.................................................................................................................. ...........44  
(ii) Mexico......................................................................................................................... ..............45  
(b) Analysis of the Arbitrator ..................................................................................................... ....45  
V. AWARD OF THE ARBITRATOR.......................................................................................47  
VI. CONCLUDING REMARKS .................................................................................................47  
Annex A Working Procedures of the Arbitrator ....................................................................49 
Annex B Methodology for Calculating the Trade Effect of CDSOA Disbursements ..........51 
 WT/DS234/ARB/MEX 
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 TABLE OF CASES CITED IN THIS REPORT  
 
SHORT TITLE  FULL TITLE  
Brazil – Aircraft 
(Article 22.6 – Brazil) Decision by the Arbitrators, Brazil – Export Financing Programme for Aircraft 
– Recourse to Arbitration by Brazil under Article 22.6 of the DSU and 
Article 4.11 of the SCM Agreement , WT/DS46/ARB, 28 August 2000. 
Canada – Aircraft Credits and 
Guarantees  
(Article 22.6 – Canada) Decision by the Arbitrator, Canada – Export Credits and Loan Guarantees for 
Regional Aircraft – Recourse to Arbitration by Canada under Article 22.6 of 
the DSU and Article 411 of the SCM Agreement , WT/DS222/ARB, 
17 February 2003 
EC – Bananas III (Ecuador) 
(Article 22.6 – EC)  Decision by the Arbitrators, European Communities – Regime for the 
Importation, Sale and Distribution of Bananas  – Recourse to Arbitration by the 
European Communities under Article 22.6 of the DSU , WT/DS27/ARB/ECU, 
24 March 2000, DSR 2000:V, 2243 
EC – Bananas III (US) 
(Article 22.6 – EC) Decision by the Arbitrators, European Communities – Regime for the 
Importation, Sale and Distribution of Bananas  – Recourse to Arbitration by the 
European Communities under Article 22.6 of the DSU , WT/DS27/ARB, 
9 April 1999, DSR 1999:II, 725. 
EC – Hormones (Canada) 
(Article 22.6 – EC) Decision by the Arbitrators, European Communities – Measures Concerning 
Meat and Meat Products (Hormones) – Original Complaint by Canada – Recourse to Arbitration by the Eur opean Communities under Article 22.6 of the 
DSU , WT/DS48/ARB, 12 July 1999, DSR 1999:III, 1105. 
EC – Hormones (US) 
(Article 22.6 – EC) Decision by the Arbitrators, European Communities – Measures Concerning 
Meat and Meat Products (Hormones) – Original Complaint by the United States– Recourse to Arbitrati on by the European Communities under 
Article 22.6 of the DSU , WT/DS26/ARB, 12 July 1999, DSR 1999:III, 1135. 
Korea –Dairy  Appellate Body Report, Korea – Definitive Safeguard Measure on Imports of 
Certain Dairy Products , WT/DS98/AB/R, adopted 12 January 2000, 
DSR 2000:I, 3 
US – 1916 Act (EC) 
(Article 22.6 – US) Decision by the Arbitrators, United States – Anti-Dumping Act of 1916, Original 
Complaint by the European Communities – Recourse to Arbitration by the United States under Article 22.6 of the DSU , WT/DS136/ARB, 
24 February 2004 
US – Certain EC Products  Panel Report, United States – Import Measures on Certain Products from the 
European Communities , WT/DS165/R and Add.1, adopted 10 January 2001, as 
modified by the Appellate Body Report, WT/DS165/AB/R, DSR 2001:II, 413 
US – Certain EC Products  Appellate Body Report, United States – Import Measures on Certain Products 
from the European Communities , WT/DS165/AB/R, adopted 10 January 2001, 
DSR 2001:I, 373 
US – FSC (Article 22.6 – US) Decision by the Arbitrator, United States – Tax Treatment for "Foreign Sales 
Corporations" – Recourse to Arbitrati on by the United States under Article 22.6 
of the DSU and Article 4.11 of the SCM Agreement , WT/DS108/ARB, 
30 August 2002 
US – Section 110(5) Copyright Act (Article 25.3) Award of the Arbitrators, United States – Section 110(5) of the US Copyright 
Act – Recourse to Arbitration under Article 25 of the DSU , 
WT/DS160/ARB25/1, 9 November 2001, DSR 2001:II, 667 
 
  WT/DS234/ARB/MEX 
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 I. INTRODUCTION 
A. INITIAL PROCEEDINGS  
1.1 On 27 January 2003, the Dispute Settlement B ody (DSB) adopted the report of the Panel in 
this dispute, as modified by the report of the Appellate Body.1  
1.2 The findings adopted by the DSB were that the measure at issue in this case – the Continued 
Dumping and Subsidies Offset Act of 2000 (hereafter "CDSOA"):2 
(a) is a non-permissible specific action agai nst dumping or a subsidy, contrary to 
Articles VI:2 and VI:3 of the GATT 1994, Article 18.1 of the Agreement on Implementation of Article VI of the Ge neral Agreement on Tariffs and Trade 1994 
(hereafter the "Anti-Dumping Agreement" ) and Article 32.1 of the Agreement on 
Subsidies and Countervailing Measures (hereafter the "SCM Agreement"); 
(b) is inconsistent with certain provision s of the Anti-Dumping Agreement and SCM 
Agreement, so that the United States has fa iled to comply with Article 18.4 of the 
Anti-Dumping Agreement, Article 32.5 of the SCM Agreement and Article XVI:4 of 
the Marrakesh Agreement Establishing the World Trade Organization (hereafter the 
"WTO Agreement"); 
(c) pursuant to Article 3.8 of the DSU, to the exte nt that it is inconsistent with provisions 
of the Anti-Dumping Agreement and the SCM Agreement, nullifies or impairs benefits accruing to the complaining parties
3 under those Agreements; 
1.3 On 13 June 2003, an arbitrator established under Article 21.3(c) of the DSU ruled that the 
"reasonable period of time" for the United States to  implement the recommendations and rulings of 
the DSB in this case was 11 months from the da te of adoption of the Panel and Appellate Body 
Reports by the DSB.  The United States was con sequently awarded until 27 December 2003 to bring 
the CDSOA into conformity with its obligati ons under GATT 1994, the Anti-Dumping Agreement, 
the SCM Agreement and the WTO Agreement.4 
1.4 On 16 January 2004, Mexico requested authorization from the DSB5, under Article 22.2 of 
the DSU, to suspend the application to the United St ates of obligations in the trade in goods sector.  
1.5 The amount of the suspension will be determ ined each year according to the following 
calculation, based on the offset payments made to the affected United States producers under the 
CDSOA during the immediately preceding year: 
                                                      
1 Report of the Appellate Body on United States – Continued Dumping and Subsidy Offset Act of 2000 
(WT/DS217; WT/DS234/AB/R), (hereafter the "Appellate Body Report") and Report of the Panel on United 
States – Continued Dumping and Subsidy Offset Act of 2000  (WT/DS217; WT/DS234/R) (hereafter the "Panel 
Report".  Throughout this Decision, the original pane l in this case will be referred to as the "Panel".   
2 Enacted as part of the Agriculture, Rural Development, Food and Drug Administration and Related 
Agencies appropriations Act, 2001,  Public Law 106-387, 114 Stat. 1549, 28 October 2000, sections 1001-1003. 
For a description of the CDSOA, see Panel Report, para. 2.1 to 2.7. 
3 The Complaining Parties in the original procee dings were: Australia, Brazil, Chile, the European 
Communities, India, Indonesia, Japan, Korea, Tha iland (WT/DS217), as well as Canada and Mexico 
(WT/DS234). 
4 WT/DS217/14, WT/DS234/22. 
5 WT/DS234/26 and WT/DS234/26/Corr.1*. WT/DS234/ARB/MEX 
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 (a) the offset payments attributed to anti-du mping or countervailing duties collected and 
assessed on products from Mexico, plus 
(b) a proportionate amount of the balance of the total offset payments minus the offset 
payments on products from other Members that are authorized by the DSB to suspend concessions or other obligations in this dispute. 
1.6 Each year, as soon as the amount of the offset payments that have been made is known, 
Mexico will notify to the DSB the details concerni ng the corresponding suspension of obligations.   
B. R
EQUEST FOR ARBITRATION AND SELECTION OF THE ARBITRATOR  
1.7 On 26 January 2004, the United Stat es submitted a communication to the DSB6 objecting to 
the level of suspension of tariff concessions a nd related obligations under GATT 1994 proposed by 
Mexico, on the grounds, inter alia , that Mexico's request failed to specify the level of suspension it 
proposed to implement, and was therefore an inad equate basis for an arbitrator to make the 
determinations provided for in  Article 22.7 of the DSU.  
1.8 At the DSB meeting of 26 January 2004, Mexico 's request under Article 22.2 of the DSU and 
the United States objection were referred to arbitr ation in accordance with Article 22.6 of the DSU.7 
1.9 The arbitration was undertaken by the original panel, namely: 
 Chairman: Mr Luzius Wasescha 
  Members: Mr M. Maamoun Abdel-Fattah    Mr William Falconer  
1.10 On 13 February 2004, the Arbitrator held a joint organization meeting with the United States 
and all the parties who requested authorization to su spend concessions or other obligations pursuant to 
Article 22.2 of the DSU
8, and in respect of which the United States had also requested arbitration. 
During this meeting, the parties expressed their views on the draft timetable and working procedures 
prepared by the Arbitrator covering all the arbitra tions requested.  The Arbitrator adopted its working 
procedures on 18 February 2004 and it s timetable on 23 February 2004.9 
1.11 On 19 February 2004, the United States subm itted a request for preliminary ruling from the 
Arbitrator applicable to all requests for arbitration.  Following consideration of the request, the 
Arbitrator informed all parties on 23 February that, having regard to the issues raised in the request, 
the Arbitrator deemed it more appropriate to addr ess the content of the United States' communication 
of 19 February together with all the other issues and arguments that might be raised throughout the 
                                                      
6 WT/DS234/28. 
7 Other complaining parties in the original pro ceedings had requested authorization to suspend 
concessions or other obligations vis-à-vis  the United States under Article 22.2  of the DSU.  The United States 
requested arbitration pursuant to Article 22.6 of the DSU with respect to each individual request.  However, it 
did not object to a joint review, provided the Arbitrator would issue a separate report in each case. The 
complaining parties, having requested authorization to suspend concessions or other obligations in this case, are 
hereafter referred to as the "Requesting Parties". 
8 Out of the ten complaining parties in the original proceedings, Brazil, Canada, Chile, the European 
Communities, India, Japan, Korea, Mexico requested aut horization to suspend concessions or other obligations, 
pursuant to Article 22.2 of the DSU. 
9 The Arbitrator's working procedures are found in Appendix 3 of the DSU and in Annex A to this 
Decision.  WT/DS234/ARB/MEX 
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 proceedings.  The Arbitrator added that parties should feel free to include comments on the 
United States' request in their submissions, as they saw fit. 
1.12 In accordance with the timetable, the Re questing Parties submitted communications 
concerning the methodology supporting their request s for authorization to suspend concessions or 
other obligations (hereafter the "m ethodology paper(s)") on 23 February.10  
1.13 The United States submitted a single written submission, applicable to all its requests for 
arbitration, on 12 March 2004. 
1.14 All the Requesting Parties filed thei r written submissions on 31 March 2004.11 
1.15 On 15 April 2004, the Arbitrator informed the pa rties that a single, joint substantive hearing 
with all parties present would be held.  However, if  a party so requested and if deemed necessary by 
the Arbitrator, special sessions on specific issues affecting that party might be organized, at which 
only the party concerned and the United States would be allowed to express their views. 
1.16 The joint substantive meeting with all parti es present was held on 19 April 2004 and written 
questions were submitted to the parties on 21 Apri l 2004.  The parties replied in writing on 28 April 
2004 and were given until 4 May 2004  to comment on each other's replies.  The Arbitrator submitted 
additional questions on 28 May 2004.  Parties rep lied on 7 June 2004 and were allowed to comment 
on each other's replies by 14 June 2004.  The Arb itrator circulated its Decisions to Members on 
31 August 2004.12 
C. ORDER FOLLOWED BY THE ARBITRATOR IN ITS ANALYSIS  
1.17 Section II of this Decision addresses the procedur al issues raised by th e United States, in 
particular the United States' claims as to lack of sp ecificity in the requests fo r authorization to suspend 
obligations made to the DSB, and in the methodology papers submitted by the Requesting Parties.  It 
also addresses the related question of the burde n of proof, as applicable to these proceedings. 
1.18 Pursuant to Article 22.7 of the DSU, our manda te is to "determine whether the level of  
suspension [of concessions or other obligations] is  equivalent to the level of nullification or 
impairment." To this end, the Decision first determin es, in Section III, what may be considered to be 
the correct level of nullification or impairment caus ed by the CDSOA.  This course of action is in 
conformity with previous arbitrations.13 Also in line with previous arbitrations, the decision first 
addresses the approach advocated by Mexico for the assessment of the level of nullification or 
impairment. 
1.19 Then, in Section IV, the Decision addresses the le vel of suspension of concessions or other 
obligations proposed by Mexico, and considers the co mpatibility with Article 22 of the DSU of: (a) a 
level of suspension of obligations expressed as a duty rather than as a total value of trade;  (b) an 
                                                      
10 Brazil, Canada, the European Communities, Indi a, Japan, Korea and Mexico submitted a joint 
communication.  Chile submitted its own communication. 
11 Brazil, the European Communities, India, Japa n, Korea and Mexico submitted a joint written 
submission.  Canada and Chile each su bmitted their own written submission. 
12 Circulation to all Members was deemed to comply with the requirement of Article 22.7 of the DSU 
that the DSB be informed prompt ly of the decision of the arb itrator, once it has been reached. 
13 See EC – Bananas III (US) (Article 22.6 – EC),  para. 4.2: 
 "… as a prerequisite for ensuring equivalence between the two levels at issue we have to 
determine the level of nullification or impairment." WT/DS234/ARB/MEX 
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 annual adjustment to the level of suspension;  and (c) the suspension of obligations by one WTO 
Member in relation to a measure also affecting other Members or non-Members. 
1.20 Section V of the Decision contains the award of the Arbitrator.  It is followed by some 
concluding remarks in relation to certain wider issues raised in the course of the arbitration. 
II. PRELIMINARY ISSUES 
A. R
EQUEST OF THE UNITED STATES FOR A PRELIMINARY RULING  
1. Summary of the United States' request 
2.1 As mentioned in the previous section, on 19 Febr uary 2004, the United States filed a request 
for a preliminary ruling from the Arbitrator that: 
(a) a Requesting Party cannot suspend concessi ons or other obligations based on the 
nullification or impairment suffered by other WTO Members; and consequently 
offset payments for products other than the Requesting Parties' products that are 
subject to anti-dumping or countervailing dut y orders are outside the scope of the 
arbitration proceeding with resp ect to that Requesting Party; 
(b) the Requesting Parties failed to specify the level of suspension and the level of 
nullification or impairment in such a way that allows the Arbitrator to determine 
equivalence; and consequently each party must provide the information necessary to 
enable the Arbitrator to make the determ inations called for under the DSU in relation 
to that party; and 
(c) the proposition that a Requesting Party may establish a new level of suspension each 
year is inconsistent with Article 22 of th e DSU;  and is consequently outside the 
scope of the arbitration proceeding for an y party requesting to proceed in that 
manner. 
2. Analysis of the Arbitrator 
2.2 On 23 February 2004, we informed the parties that, having regard to the issues raised in the 
United States' request for a preliminary ruling, they  would more appropriately be addressed together 
with all the issues and arguments that might be ra ised throughout the pro ceedings.  We added that 
parties should feel free to include comments on the Un ited States' request in their submissions, as they 
saw fit. 
2.3 The United States has reiterated the claims made in its request for a preliminary ruling in its 
subsequent submissions.  As a result, we deem it n ecessary for the clarity of our findings to describe 
how we dealt with these claims. 
2.4 First, we note that neither paragraph 6 nor pa ragraph 7 of Article 22 of the DSU provide for 
the possibility of a preliminary ruling and there is, strictly speaking, no practice of a preliminary 
ruling at the request of a party in past arbitrations. 
2.5 Second, some of the issues we were asked to rule upon by the United States were intimately 
linked to questions central to this dispute.  We c oncluded that the relatively expeditious process of a 
preliminary ruling was not appropriate to the matte rs the United States had raised.  The purpose of  WT/DS234/ARB/MEX 
 Page 5 
 
 
 that process is essentially to eliminate from an arb itration issues that could not be deemed to fall 
within the mandate of the Arbitrator.14 
2.6 Indeed, a core issue in this arbitration is wh ether the level of nullification or impairment 
suffered by the Requesting Parties can be determined  on the basis of the total disbursements made by 
the United States under the provisions of the CDSOA.  We address this question as part of our review 
of the substantive issue, in Section IV.B.2 below. 
2.7 Similarly, we concluded that consideration of whether the ability to set a new level of 
suspension each year is allowed under Article 22 of the DSU had to form part of our broader 
assessment of the level of nullification or impairment  and of the level of suspension of concessions or 
other obligations.  We address this question in Section IV.B.3 below. 
2.8 Finally, with respect to the alleged failure of  the Requesting Parties to specify the level of 
suspension and the level of nullification or impair ment sufficiently to enable the Arbitrator to 
determine equivalence, we note that the Unite d States did not seek an immediate ruling on the 
admissibility of the Requesting Parties' requests, but rather that the Arbitrator require the Requesting 
Parties to provide the necessary information in th e course of the proceedings. We recall that other 
arbitrators have reminded parties that they had an  obligation to provide evidence in support of their 
allegations and, more generally, a dut y to cooperate with the arbitrator.15  We assumed that all parties 
would cooperate in good faith and we did not deem  it necessary to make any specific request at that 
stage. 
2.9 As an additional consideration, we note that this particular claim of "specificity" by the 
United States is essentially based on the assumption th at the approach advocated by the United States 
to the determination of nullifica tion and impairment is the only co rrect one, and should have been 
followed by the Requesting Parties.  Since a central  question in this case is whether the Requesting 
Parties are entitled, under Article 22 of the DSU, to proceed on the basis of the level of nullification or impairment and the level of suspension they prop ose, it does not seem appropriate in our opinion to 
address this question as a matter for a preliminary ruling.  Rather, it should be addressed as part of the 
substance of the case. 
2.10 This said, we note that our decision not to issu e a preliminary ruling on the particular issues 
raised by the United States does not preclude us from ruling on procedural issues in the Decision. 
B. S
UFFICIENT SPECIFICITY OF MEXICO 'S REQUEST UNDER ARTICLE  22.2  OF THE DSU 
1. Preliminary remarks 
2.11 As mentioned above, some of the claims raised by the United States which could normally be 
considered as "procedural" were  essentially based on the assumption that the Requesting Parties ought 
to follow the approach advocated by the United States in their assessment of the level of nullification 
or impairment and of the level of suspension of c oncessions or other obligations.  This is for instance 
the case regarding the issue whethe r a single specific level of nullification or impairment and, 
correlatively, of suspension of obligations should be provided by the Requesting Parties.  This is also 
the case, in our opinion, with th e United States' claim regarding the type of measure which the 
                                                      
14 We noted that addressing these issues at a preliminary stage in a manner fully respecting due process 
would most probably involve an  amount of time close to the time nece ssary to review the case as a whole.  
Indeed, we would have had to give a sufficient amount of time to the Requesting Parties to address the US 
claims in writing and perhaps hold a specific hearing on these issues. 
15 See, e.g., EC – Hormones (Canada) (Article 22.6 – EC) , para. 11, Brazil – Aircraft (Article 22.6 – 
Brazil) , para. 2.9. WT/DS234/ARB/MEX 
Page 6  
 
 Requesting Parties plan to apply, if they are a llowed to suspend concessions or other obligations.
16  
We consider that such claims are more appropriately  addressed as part of our review of the substance 
of the case.  We nonetheless found that certain aspects  of these claims should be discussed separately 
to the extent that they relate to specific proce dural rights of the United States in these proceedings, 
which ought to be protected. 
2.12 We consider this to be the case in relation to the claim that there should be a minimum degree 
of specificity supporting any request for suspension of  concessions or other obligations so as to allow 
the respondent in the main dispute to exercise its right to request arbitration.17 
2. Main arguments of the parties 
(a) United States 
2.13 The United States claims that the Requesting Pa rties have failed to specify the level of 
suspension of concessions and the level of nullifi cation or impairment, both in their requests under 
Article 22.2 of the DSU and subsequently in the cour se of this arbitration, in a way that enables the 
Arbitrator to determine equivalence. The United Stat es presents this issue as one of specificity of the 
request under Article 22.2 of the DSU and, more gene rally as a question of duty to cooperate with the 
Arbitrator by providing information on th e level of nullification or impairment.18 
2.14 The United States contends that the Requesting Pa rties have failed to quantify either the level 
of suspension or the level of nullification or im pairment.  The Requesting Parties replace specific 
values with general concepts and ask the Arbitrator  to determine that two amounts are equivalent to 
one another without knowing what those amounts are.  The United States adds that the Requesting Parties decline to provide any information on the leve l of suspension requested or to base their request 
on trade effect.
19  
2.15 The United States notes that the Requesting Parties intend to impose a yet unidentified duty to 
an unspecified value of imports, thus failing to iden tify the amount of trade that would be covered by 
their request.  Without more information, it is impossible to "determine" the level of suspension 
proposed and the actual impact of the duty on imports from the United States.20 
(b) Mexico 
2.16 According to Mexico, the argument of the Unite d States that the Requesting Parties failed to 
identify a level of suspension or a level of nullifi cation or impairment, thus making it impossible for 
the Arbitrator to fulfil its mandate, is based  on the assumption that these levels can only be 
determined in terms of trade effect. Mexico cons iders that Article 22 of the DSU does not require a 
"trade effect" test.  In any event, Mexico' request for retaliation clearly sets out a quantifiable level of 
suspension of concessions and related obligations.  The Requesting Parties specified that the amount 
of the annual offset payments constitutes the leve l of nullification or impairment up to which each 
Requesting Party may suspend concessions or other ob ligations.  As the amount of disbursement is 
                                                      
16 The United States contests in substance the intention of the Requesting Parties to impose a tariff 
surcharge on a list of products to be calculated so as to generate, over a period of one year, an income equivalent to the offset payments made in the latest annual dist ribution under the CDSOA. The United States argues that 
this approach places no limit on the leve l of suspension th at will be effectively imposed and is contrary to past 
practice. 
17 We leave aside the question of the usefulness of a sufficiently specific request to allow the DSB to 
reach an informed decision. 
18 United States preliminary request, 19 February 2004, paras. 21-27. 
19 United States written submission, para. 25. 
20 United States written submission, para. 28.  WT/DS234/ARB/MEX 
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 published each year by the United States' authorities, the corresponding levels are clearly defined.   
Mexico adds that the arbitrator in US – 1916 Act (EC) (Article 22.6 – US)  acknowledged that the fact 
that the requested suspension had not been stated in  quantitative terms did not, in and of itself, render 
a request for suspension of concessions or othe r obligations inconsistent with Article 22.21  A fortiori , 
in this case, the level of nullification or impairme nt and the level of suspension are quantifiable and 
identified at each moment, thus allowing the Arbitrator to determine their equivalence.22 
2.17 Regarding the allegation according to which th e Requesting Parties failed to identify an 
amount of trade that would be covered by their re quest, Mexico argues that nothing in Article 22 of 
the DSU requires a "trade effect" test for determining the level of suspension.  Mexico further argues that it is hardly possible to predict the particular "trade effect" of a tariff increase.  In addition, 
arbitrators have never previously considered  the trade effect of a requested suspension.
23   
3. Does Mexico's request fail to meet the minimu m specificity standard applicable in an 
Article 22.6 arbitration? 
2.18 In EC – Bananas III (Ecuador) (Article 22.6 – EC) , the arbitrators stated that "the specificity 
standards, which are well established in WTO ju risprudence under Article 6.2 of the DSU were 
relevant for requests for authorization to suspe nd concessions under Article 22.2 and for requests for 
referral of such matter to arbitration under Article 22.6".24  More particularly, the arbitrator considered 
that: 
(a) the request under Article 22.2 must set out the specific level of suspension (i.e. a level 
deemed equivalent to the nullification or impairment caused by the WTO-inconsistent 
measure, pursuant to Article 22.4 of the DSU); and 
(b) the request must specify the agreement and sector(s) under which concessions or 
other obligations would be suspended, pursuant to Article 22.3 of the DSU. 
2.19 The specificity issue whether requirement (a) has been met by Mexico in its request, turns on 
whether the "specific level of suspension" should be  expressed "in dollars and cents", i.e. monetary 
terms.  This in turn depends on the determination of the substantive issue before the Arbitrator of 
whether the approach to nullification or impairme nt proposed by Mexico and the other Requesting 
Parties is compatible with Article 22 of the DSU.  We revert to this matter in Section III below. 
2.20 With regard to requirement (b) above, we not e that Mexico's request does not specify the 
obligations which it may suspend. However, Mexico specified in its request that the suspension would 
apply to its "obligations in th e trade in goods sector". Moreover, the joint written submission of 
Brazil, the European Communities, India, Japan, Ko rea and Mexico expressly refers to the imposition 
of a duty, thus implying that Mexico's suspension of obligations, if authorized, would take the form of 
suspension of concessions under the GATT 1994.25 
2.21 The question raised by the United States includes a second dimension if one applies mutatis 
mutandis  to this case the standards of specificity devel oped under Article 6.2 of the DSU.  This is 
                                                      
21 See US – 1916 Act (EC) (Article 22.6 – US), para. 5.21 . 
22 Written submission of Brazil, the European Co mmunities, India, Japan, Korea and Mexico, 
paras. 69-72. 
23 Written submission of Brazil, the European Co mmunities, India, Japan, Korea and Mexico, 
paras. 81-86. 
24 See EC – Bananas III (Ecuador) (Article 22.6 – EC) , paras. 20-29.  See also EC – Hormones 
(Canada) (Article 22.6 – EC) , para. 16. 
25 See WT/DS234/26. See also, e.g., paras. 83 and 84 of the written submission of Brazil, the European 
Communities, India, Japan, Korea and Mexico. WT/DS234/ARB/MEX 
Page 8  
 
 whether the information provided by Mexico on its  proposed level of suspension was such as to 
prejudice the ability of the United States to defend it self (i.e., in this case, to make an informed 
decision to request, or not, arbitration under Article  22.6 and to argue its case before the Arbitrator).
26 
This question may be answered by reviewing the United States' submissions in these proceedings.  
Having reviewed those submissions, we note that the degree of specification of the level of 
suspension proposed by Mexico in no way prejudice d the ability of the United States to exercise its 
rights under Article 22.6. 
2.22 We therefore conclude that the request of Mexi co for authorization to suspend concessions or 
other obligation, while it could have certainly been more informative, is acceptable in terms of the 
minimum specificity requirement a pplicable to Article 22.2 requests .  In this respect, we consider that 
the United States did not demonstrate that either its  ability to reach an informed decision to request 
arbitration, or its ability to defend itself in these proceedings had been prej udiced as a result of the 
way Mexico's request was formulated.  
C. BURDEN OF PROOF  
1. Main arguments of the parties 
2.23 The parties have repeatedly raised the questi on of the burden of proof in these proceedings.  
Mexico recalls that, according to the numerous pr ecedents in Article 22.6 proceedings, the United 
States has to prove that the requested level of suspen sion of obligations is not equivalent to the level 
of nullification or impairment.  As the United States asserts that the nullification or impairment of the 
CDSOA is "zero", it also bears the burden of proof for such an allegation.27 
2.24 The United States acknowledges that it bears th e burden of proof in these proceedings.  
However, it argues that it only has to submit eviden ce sufficient to establish a "presumption" that the 
level of suspension proposed is not equivalent to the level of nullification or impairment.  According 
to the United States, it does not bear the burden to show  that the level of nullification or impairment is 
"zero".  By contrast, the Requesting Parties failed to substantiate their claim that the level of 
nullification or impairment corresponds to the fu ll amount of disbursements made under the CDSOA, 
despite the fact that Mexico itself asserts that the level of nullification or impairment must be based to 
the extent possible, on credible, factual and verifiable information, and not on speculation.28 
2. Position of the Arbitrator   
2.25 Since burden of proof has been extensively addr essed in previous Article 22.6 arbitrations, we 
need not dwell on this matter.  Like the arbitrator in EC – Bananas III (Ecuador) (Article 22.6 – EC) , 
we simply note the considerations of the arbitrator in EC – Hormones  (Canada) (Article 22.6 – EC)  
on this matter and conclude that, while it is for th e United States to prove th at Mexico's request for 
suspension exceeds the level of nullification or impa irment, Mexico must also sufficiently support its 
allegations that its request meets the requirement  for equivalence of Article 22.4 of the DSU. 
2.26 We also note that, in EC – Hormones  (Canada) (Article 22.6 – EC) , the arbitrator recalled 
that:   
"11. The duty that rests on all parties to produce evidence and to collaborate in 
presenting evidence to the arbitrators – an i ssue to be distinguished from the question 
                                                      
26 See Appellate Body Report in Korea – Dairy , paras. 127-131. 
27 Written submission of Brazil, the European Co mmunities, India, Japan, Korea and Mexico, 
paras. 6-8. 
28 United States oral statement, paras. 5-6.  WT/DS234/ARB/MEX 
 Page 9 
 
 
 of who bears the burden of proof – is cruc ial in Article 22 arbitration proceedings.  
The EC is required to submit evidence showing that the proposal is not equivalent.  
However, at the same time and as soon as it can, Canada is required to come forward 
with evidence explaining how it arrived at its proposal and showing why its proposal 
is equivalent to the trade impairment it has suffered.  Some of the evidence – such as 
data on trade with third countries, export  capabilities and affected exporters – may, 
indeed, be in the sole possession of Canada , being the party that suffered the trade 
impairment.  This explains why we re quested Canada to submit a so-called 
methodology paper."29 
2.27 Having regard to the duty of the parties to s upply evidence and, more generally, to collaborate 
with the Arbitrator, and following the approach of the arbitrators in Brazil –  Aircraft (Article 22.6 – 
Brazil)30 and in Canada – Export Credit and G uarantees (Article 22.6 – Canada)31, we are of the 
view that if a party makes a particular claim but fails to cooperate and provi de evidence sufficiently 
supporting its claim, we may reach a conclusion on the basis of the eviden ce available, including 
evidence submitted by the other part y or data publicly available. 
III. DETERMINATION OF THE LEVEL OF NULLIFICATION OR IMPAIRMENT 
A. MAIN ARGUMENTS OF THE PARTIES  
1. United States 
3.1 The United States considers that the Requesting Pa rties, by arguing that a breach is itself a 
nullification or impairment ignore the critical distin ction that the drafters of the WTO agreements 
have drawn between, on the one hand, a breach of  a WTO commitment and, on the other hand, the 
economic impact that is "the result of" that br each.  The United States refers to Article XXIII of 
GATT 1994, but also to Article 22.8 of the DSU.32  The United States further claims that the level of 
nullification or impairment must be established on th e basis of the trade loss suffered directly by each 
Requesting Party.  The United States argues that an an alysis of the level of nullification or impairment 
must focus on the "benefit" allegedly nullified or im paired as a result of the failure of the responding 
party to bring the measure at issue into confor mity with the recommendations and rulings of the 
DSB.33 In previous cases, arbitrators have compared the actual amount of exports affected by the 
WTO-inconsistent measure to the amount of exports in a "counterfactual".34  The difference between 
the two values typically represented the level of nullification or impairment.  The United States is also of the view that the Appellate Body confirmed this  approach by focusing on the "trade effect" of the 
CDSOA, as a non-permissible specific action against dumping or a subsidy.  A change in the 
"conditions of competition" arising from a governme nt payment to producers is different from a 
subsidies analysis since there has been no finding ag ainst the CDSOA as an "actionable subsidy".   
The focus on trade effect is consistent with  past practice in Article 22.6 arbitrations.
35  Moreover, the 
level of nullification or impairment must be measured in terms of the effect the CDSOA has on producers/exporters subject to anti-du mping or countervailing duty orders. 
3.2 The United States also cl aims that, under the Appellate Body analysis, any effect that the 
CDSOA offset payments might have on competit ors that are not subject to anti-dumping or 
                                                     
 
29 See, e.g., EC – Hormones (Canada) (Article 22.6 – EC) , paras. 9-11. 
30 Paras. 2.9-2.11. 
31 Para. 3.76. 
32 United States oral statement, paras. 7-13. 
33 United States written submission, para. 40. 
34 i.e., the situation which would exist if the responding party had brought the WTO-inconsistent 
measure into conformity within the reasonable period of time (United States written submission, para. 41). 
35 United States written submission, para. 47. WT/DS234/ARB/MEX 
Page 10  
 
 countervailing duties (i.e. other United States' produ cers and foreign producers/exporters not subject 
to an anti-dumping or countervailing duty order) was not relevant to the findings of the Panel or the 
Appellate Body under Article 18.1 of the Anti- Dumping Agreement and Article 32.1 of the SCM 
Agreement. A Member cannot suffer nullification or impairment as a result of a non-permissible 
specific action against dumping or against a subsidy if no order is in place and if no duties can be 
collected on that Member's products.  The allocati on of the total annual disbursements advocated by 
the Requesting parties shows that the Requesting Parti es have not even attempted to relate the levels 
of suspension proposed to the level of  nullification or impairment suffered. 
3.3 In addition, the United States argues that speci al accounts relating to revoked orders should 
not be considered because, in the case of revoke d orders, a link does not exist between offset 
payments and an anti-dumping or countervailing duty order.  When there is no anti-dumping or 
countervailing duty order in place, any payment receiv ed by an affected domestic producer in 2003 
cannot nullify or impair any bene fits related to Article 18.1 of  the Anti-Dumping Agreement or 
Article 32.1 of the SCM Agreement.
36     
3.4 The United States further claims that disbur sements under the CDSOA,  i.e. the concrete 
application of the CDSOA, are not part of the m easure found inconsistent with the WTO Agreement.  
As a result, an examination of the actual dis bursements made under the CDSOA would go beyond the 
terms of reference of the original disputes.37 
3.5 Yet, even if one were to consider these pa yments, the United States recalls that the DSB 
found that the CDSOA offset payments caused no adverse effect38 and there is no evidence that 
CDSOA offset payments have in reality affected Requesting Parties' dumped or subsidized trade.  
There is no requirement under the CDSOA for how offset payments are to be used.  Likewise, a 
substantial share of the "qualifying expenditur es" reported reflect expenditures made after the 
issuance of the anti-dumping duty finding or order or countervailing duty order, but long before the 
US Congress even enacted the CDSOA.  It is al so impossible for affected domestic producers to 
predict whether they will receive offset payments an d, if so, how much they will receive in any given 
year.  Furthermore, in at least two instances, o ffset payments under the CDSOA flowed to companies 
not involved in the production or sale of products covered by an anti-dumping or countervailing duty 
order.  Finally, offset payments represent a small fraction i.e. in most cases less than 1 per cent and in 
no case more than 5 per cent of domestic producers' sales or production of the relevant product.  The 
United States deems it unlikely that such de minimis  disbursements would have any real impact on 
production and any discernible effect on trade.  The United States notes in this respect that for the 
purpose of Article 11.9 of the SCM Agreement, a subsidy is de minimis  if it is less than 1 per cent 
ad valorem .39 
3.6 Finally, the United States argues that there is no bar to a finding of "zero" nullification or 
impairment in an Article 22.6 proceeding.  Not ev ery violation will result in a measurable level of 
nullification or impairment and the United States considers that the presumption of nullification or 
impairment under Article 3.8 of the DSU can be  rebutted before an Article 22.6 arbitrator.40     
2. Mexico 
3.7 Mexico claims that the quantitative level of  nullification or impairment caused by the 
CDSOA can be determined by the disbursements made  under that Act.  Referring to the decision of 
                                                      
36 United States written submission, paras. 57-58. 
37 United States written submission, paras. 15-19. 
38 United States written submission, paras. 62-65. 
39 United States written submission, paras. 66-74. 
40 United States written submission, paras. 75-79.  WT/DS234/ARB/MEX 
 Page 11 
 
 
 the arbitrator in US – FSC (Article 22.6 – US) , Mexico considers that the concept of nullification or 
impairment relates to the measure that is in breach of the WTO obligations.  It cannot be restricted to 
its trade effect, which is neither referred to in the DSU or the GATT 1994.  Consequently, each single 
payment under the CDSOA violates the relevant WTO obligations and represents the quantitative 
level of nullification or impairment.41 
3.8 Mexico considers that a contextual analysis  of the DSU and the GATT 1994 reveals that the 
concept of nullification or impairme nt should be interpreted in the li ght of the violation and of the 
adverse impact on the affected "benefits".  Wh ile Article 22.4 does not qualify the concept of 
nullification or impairment or the term "level", Articles 3.8, 22.3 and 23.1 of the DSU provide some 
further guidance.  It follows from these provisions that the violation of obligations is the most 
prominent case of nullification or impairment.  The presumption of "adverse impact" of a breach 
under Article 3.8 of the DSU is not related to a ny trade effect, but to the balance of rights and 
obligations under the covered agreem ents. In case of violation, a Member assumes a right which is not 
conferred upon it by the covered ag reements, thus distorting the ba lance of rights and obligations 
under the WTO Agreement.  Mexico recalls that, in US – 1916 Act (Article 22.6 – US) , the arbitrator 
corroborated this interpretation by accepting that th e existence of a violating measure constitutes from 
the outset a case of nullification or impairment.  The fact that the arbitrator in this case only quantified 
the nullification or impairment in relation to the ap plication of the measure but  not in relation to the 
existence of the measure as such indicates that, in re spect of the latter, nullification or impairment is 
constituted by an adverse impact on the bala nce of rights and obligations of Members.42  
3.9 Mexico adds that, complementarily to the determ ination of nullification or impairment by the 
violating measure and its application, the GATT 1994 or the DSU refers to the notion of violated 
"benefits".  The terms used in Articles 22.8 and 3.3 of  the DSU indicate that the term "benefit" is to be 
understood in a very broad sense encompassing the respect of the rights and obligations under the 
WTO Agreement.  As a result, one may assume that a violation directly nullifies or impairs the benefit 
provided by the covered agreements.  Thus, a central  "benefit" is the expectation that WTO Members 
respect their obligations in order to keep a proper balance of rights and obligations.  If a Member fails 
to do so, the violating measure directly nullifies a nd impairs benefits of other Members. Finally, the 
concept of trade effect was, on purpose, not retained  by the negotiators of the DSU.  Trying to impose 
this concept as the sole criterion for imposing retaliato ry measures would be contrary to the intentions 
of the negotiators.43   
3.10 According to Mexico, the "level" of nullificati on or impairment caused by the CDSOA is to 
be quantified by the amount of CDSOA offset pa yments.  Since the concept of nullification or 
impairment is related to the violating measu re, it follows that that level encompasses all 
disbursements under the CDSOA.  As neither the A ppellate Body nor the Panel found that any of the 
CDSOA offset payments could be considered as legal, they constitute in toto  the quantitative level of 
nullification or impairment.  In line with the decision in US – 1916 Act (Article 22.6 – US) , the 
disbursements are the direct and immediate economic  consequence of the legislation.  They are 
published each year by the United States' authorities and they are, therefore, public information.  
Their determination is not "remote, spec ulative or not meaningfully quantified".44 
                                                      
41 Written submission of Brazil, the European Co mmunities, India, Japan, Korea and Mexico, 
paras. 13-19. 
42 Written submission of Brazil, the European Co mmunities, India, Japan, Korea and Mexico, 
paras. 20-27. 
43 Written submission of Brazil, the European Co mmunities, India, Japan, Korea and Mexico, 
paras. 28-34. 
44 Written submission of Brazil, the European Co mmunities, India, Japan, Korea and Mexico, 
paras. 41-44. WT/DS234/ARB/MEX 
Page 12  
 
 3.11 Mexico disagrees with the United States that previous arbitrations support the view that the 
level of nullification or impairment should be based  on the measure's trade effect.  The decisions in 
EC – Hormones (US) (Article 22.6 – EC)  and EC – Bananas III (Article 22.6 – EC)  dealt with 
traditional market access barriers such as tariffs, quotas and other import restrictions.  The situation is 
different in the case of the CDSOA.  Mexico also contests the argument of the United States that the 
CDSOA does not have any trade effect because th e use of the disbursements by the recipient 
companies is not pre-determined or the trade effect of such disbursements is de minimis .  It also 
contests the attempt of the United states to equate the findings of the Panel that the CDSOA causes no 
"adverse effects" under Article 5(b) of the SCM Agreement to an absence of "nullification or 
impairment".  The Panel explicitly drew a distinc tion between the two concepts.  Mexico also notes 
that the arbitrator in US – 1916 Act (Article 22.6 – US)  based its conclusion on the broader notion of 
"economic effects" of the measure at issue.  The arbitrator in that case did not examine the economic 
effect of the application or the economic consequen ce of the measure (i.e. the court judgements or the 
settlement agreements).  If the same  logic were to be applied in this case, it would ensue that only the 
economic effect of the CDSOA (i.e. the offset payments made there under) should be taken into 
account for determining the quantitative level of nulli fication or impairment of the CDSOA.  As for 
the relationship between offset payments and an ti-dumping and countervailing duty orders, Mexico 
recalls that neither the Appellate Body nor the Panel excluded any offset payments from their 
analysis.  Likewise, Mexico notes that, even in case of revoked orders, the United States domestic 
industry would still receive a disbursement as part of  the CDSOA offset paymen t.  The adverse effect 
on foreign producers/exporters would remain the same. 
3.12 Mexico also contests the fact that the level of  nullification or impairment could be "zero".  
The Panel concluded that nullification or impairme nt existed and the Appellate Body upheld this 
conclusion.  For Mexico, claiming that a level of nullification or impairment is "zero" amounts to 
saying that there is no nullification or impairment.  While the arbitrator in EC – Bananas III 
(Article 22.6 – EC)  stated that the presumption under Article 3.8 of the DSU cannot be taken as 
evidence of a particular level of nullification or im pairment, this does not mean that no nullification or 
impairment exists.  Mexico notes that the arbitrator in US – 1916 Act (Article 22.6 – US)  
acknowledged that any amount payable pursuant to c ourt judgements or settlement agreements would 
constitute nullification or impairment.  The issue in that case was one of proving the amount of those payments.  It had nothing to do with the substan tive determination of the level of nullification or 
impairment.  The arbitrator did not conclude th at the level of nullification or impairment was de facto  
"zero".
45 
3.13 Finally, regarding the risk alleged by the United States that the approach advocated by 
Mexico would lead to each Requesting Party suspen ding obligations in excess of its respective level 
of nullification or impairment, Mexico argues that this approach is based on an objective concept of 
nullification or impairment in relation to the viola ting measure as such, not in relation to individual 
nullifications or impairments.  As all offset pa yments constitute nullification or impairment, the 
suspension of obligations should be authorized to the same amount.46   
B. ANALYSIS OF THE ARBITRATOR  
1. Introduction 
3.14 The approaches of the parties are – in appear ance at least – based on diametrically opposed 
conceptions of "nullification or impairment".  Ho wever, while the United States' approach seems to 
                                                      
45 Written submission of Brazil, the European Co mmunities, India, Japan, Korea and Mexico, 
paras. 45-68. 
46 Written submission of Brazil, the European Co mmunities, India, Japan, Korea and Mexico, 
paras. 73-80.  WT/DS234/ARB/MEX 
 Page 13 
 
 
 rely largely on the practice of other arbitrations under Article 22.6 of the DSU, the approach defended 
by Mexico is, if one excludes the arbitrations carried out under Article 4.10 and 4.11 of the SCM 
Agreement, novel in the context of Article 22.6 of the DSU. 
3.15 Consistent with the practice of previous arbitrators47, we proceed with the review of the 
approach advocated by Mexico.  If we find it to be compatible with the DSU, we will proceed with a 
determination of the level of nullification or impair ment on that basis.  If we do not find it compatible 
with the DSU, we will determine the level of nullif ication or impairment by applying a methodology 
appropriate in this case.48    
3.16 Mexico' contention that the level of nullifica tion or impairment corresponds, at the minimum, 
to the total amount disbursed by the United States under the CDSOA seems, in our understanding, to 
be based essentially on the following premises: 
(a) a violation is a form of nullification or impairment; 
(b) the notion of "benefit" under Article XXIII of GATT 1994 and the DSU encompasses 
rights under the WTO Agreement; 
(c) Mexico has a right under the WTO Agreemen t to expect that the CDSOA should not 
exist.  As a result, Mexico, together with  the other Requesting Parties in this case, 
have the right to suspend concessions or ot her obligations up to the full amount of 
disbursements under the CDSOA. 
3.17 We will hereafter address these elements.  We w ill also subsequently address a core issue for 
our determination of the level of nullification or impairment, i.e. whether we can consider 
disbursements under the CDSOA in our calculation. 
2. Review of the approach proposed by Mexico 
(a) Article XXIII of GATT 1994 and the DSU 
3.18 After careful consideration we are not persuade d that the position of Mexico is supported by 
Article XXIII of GATT 1994 or the DSU, for the reasons stated below. 
3.19 First, in order to assess Mexico's arguments, it see ms appropriate to revisit the source of the 
concept of nullification or impairment, i.e., Article XXIII of GATT 1994, on which the DSU is 
based.49  Article XXIII:1 of GATT 1994 provides – in relevant parts – as follows: 
"If any contracting party should consider th at any benefit accruing to it directly or 
indirectly under this agreement is being nullified or impaired [...] as a result of 
(a) the failure of another contracting part y to carry out its obligations under this 
Agreement, or 
(b) the application by another contracting party of any measure, whether or not it 
conflicts with the provisions of this Agreement, or 
(c) the existence of any other situation, 
                                                      
47 See, e.g., Brazil – Aircraft (Article 22.6 – Brazil) , paras. 1.5 and 3.18. 
48 EC – Hormones (Canada) (Article 22.6 – EC) , para. 12. 
49 See Article 3.1 of the DSU.  This provision makes clear that the DSU must be applied in a manner 
consistent with the principles embodied in Article XXIII of GATT 1994. WT/DS234/ARB/MEX 
Page 14  
 
 The contracting party may, with a view to the satisfactory adjustment of the matter, 
make written representations or proposals to  the other contracti ng party or parties 
which it considers to be concerned."  
3.20 Considered in the context of Article XXIII of  GATT 1994, nullification or impairment and 
violation are clearly separate concepts.  Article XXIII:1 basically provides that nullification or 
impairment of benefits is what must be ultimately demonstrated.
50  Nullification or impairment may 
essentially exist "as a result of":  (a) a violation;  (b) a situation of non-viola tion;  or (c) "any other 
situation".  Therefore, violation is not to be conf used with nullification or impairment of a benefit. 
3.21 We find support for this position in Article  3.8 of the DSU, which reads as follows: 
"In cases where there is an infringement of the obligations assumed under a covered 
agreement, the action is considered prima facie  to constitute a case of nullification or 
impairment.  This means that there is normally a presumption that a breach of the rules has an adverse impact on other Members parties to that covered agreement, and in such cases, it shall be up to the Member  against whom the complaint has been 
brought to rebut the charge." 
3.22 A violation generates, pursuant to Article 3.8 of the DSU, a presumption  of nullification or 
impairment.  Article 3.8 does not treat violation as a form  of nullification or impairment.  Article 3.8 
merely exempts the party having demonstrated th e violation from also having to demonstrate 
nullification or impairment.  It does not modify the fundamental requirement that what is ultimately to 
be demonstrated is nullification or impairment.   
3.23 This is confirmed by the last sentence of Article 3.8, which provides the opportunity for the 
alleged violating party to rebut the presumption of nullification or impairment. If violation was 
conceptually equated by Article 3.8 to nullifica tion or impairment, there would be no reason to 
provide for a possibility to rebut the presumption.  The theoretical possibility to rebut the presumption 
established by Article 3.8 can only exist because vi olation and nullification or impairment are two 
different concepts. 
3.24 In fact, Article 3.8 deals with the establishment of the existence  of nullification or impairment 
during proceedings before a panel.  It does not address the valuation  or quantification  of such 
nullification or impairment. 
3.25 Referring to the arbitrator's decision in EC – Bananas III (US) (Article 22.6 – EC) , Mexico 
argues that, even though the presumption under Article 3.8 cannot be taken as evidence of a particular 
level of nullification or impairment, that nullificat ion or impairment exists and cannot be "zero".  
Mexico also cites the US – 1916 Act (EC) (Article 22.6 – US)  arbitration in support of its position. 
3.26 We accept the view that some nullification or impairment should exist if it has not been 
rebutted.  However, the quantification of the leve l of nullification or impairment remains to be 
established.  Article 3.8 does not address how nu llification or impairment should be valued. 
3.27 We note that Mexico refers to Articles 22.3(a) and 23.1 of the DSU in support of its position 
that violation is a form of nullification or impairment. 
                                                     
 
50 Since "impediment of the attainment  of an objective of th e Agreement" is not discussed in this case, 
we refrain from referring to it.  WT/DS234/ARB/MEX 
 Page 15 
 
 
 3.28 Article 22.3(a) reads as follows: 
"[T]he general principle is that the compla ining party should first seek to suspend 
concessions or other obligations with respect to the same sector(s) as that in which 
the panel or Appellate Body has found a violation or other nullification or 
impairment."  
3.29 Article 23.1 reads as follows: 
"When Members seek the redress of a violati on of obligations or other nullification or 
impairment of benefits unde r the covered agreements or an impediment to the 
attainment of any objective of the covered agreements, they shall have recourse to, 
and abide by, the rules and procedures of this Understanding." 
3.30 We are of the view that, taken in their c ontext, including Article XXIII of GATT 1994 and 
Article 3.8 of the DSU, those provisions simply deal with the principles to be applied in the 
suspension of concessions or more generally in di spute resolution. They reinforce, rather than 
contradict, the basic distinction between violation,  on the one hand, and nullification or impairment 
the result of a violation, on the other hand. 
3.31 Mexico considers that the concept of "ben efit" in the DSU encompasses the rights and 
obligations of Members under the WTO Agreement. 
3.32 As mentioned above, pursuant to Article XXIII of GATT 1994, nullification or impairment of 
a benefit may be "the result of" a violation of a ri ght, which implies that a violation is not to be 
confused with the nullification or impairme nt itself. Rather, the violation is the cause of a nullification 
or impairment of a benefit.  In other words, rights confer  benefits (e.g., predictable conditions of 
competition), they are not themselves  benefits within the meaning of Article XXIII of GATT 1994 
and the DSU.  
3.33 Mexico also argues that, since violation is a fo rm of nullification or impairment, and since a 
right generally applies erga omnes , each Member should be entitled to retaliate up to the full effect of 
the violation. 
3.34 Again, we consider that this argument fails to  recognize the distinction between the violation 
of a right and the consequence thereof, i.e., nu llification or impairment within the meaning of 
Article XXIII:1 of GATT 1994.  We therefore consid er that, while a violation of an obligation may 
affect all Members , this does not ipso facto  result in a nullification or im pairment of a given Member's 
benefits up to the "value" of the violation.     
(b) Previous arbitrations 
(i) Introduction 
3.35 We note that previous arbitrations (a) support our  approach regarding the interpretation to be 
given to the provisions relating to nullification or impairment and (b) more specifically, have 
concluded that the nullification or impairment of benefits resulting fro m a violation should be 
expressed in terms of trade or, in two instances, economic effects.51 
                                                      
51 See US – Section 110(5) Copyright Act (Article 25.3) , para. 3.18 and US – 1916 Act (EC) 
(Article 22.6 – US) , para. 5.23. WT/DS234/ARB/MEX 
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 (ii) Interpretation of the provisions relating to nul lification or impairment by  previous arbitrators  
3.36 Previous Article 22.6 arbitrators concluded, as we have, that violation and nullification or 
impairment are two different concepts.  The arbitrator in EC – Bananas III (US) (Article 22.6 – EC)  
stated that the presumption of nullification or impairment contained in Article 3.8 of the DSU could not, in and of itself, be taken simultaneously as evid ence proving a particular level of nullification or 
impairment allegedly suffered by a Member request ing authorization to suspend concessions or other 
obligations under Article 22 of the DSU.  Such aut horization would only arise at a much later stage of 
the dispute settlement process.  The arbitrator added that: 
"The review of the level of nullification or impairment by Arbitrators from the 
objective benchmark foreseen by Article 22 of the DSU, is a separate process that is 
independent from the finding of infringements of WTO rules by a panel or the 
Appellate Body.  As a result, a Member's potential interests in trade in goods or 
services and its interest in a determinati on of rights and obligations under the WTO 
Agreements are each sufficient to esta blish a right to pursue a WTO dispute 
settlement proceeding.  However, a Member 's legal interest in compliance by other 
Members does not, in our view, automatically imply that it is entitled to obtain 
authorization to suspend concessions under Article 22 of the DSU."
52 
(iii) Consideration of benefits nullified or impaired in terms of economic or trade effect 
3.37 As a preliminary observation, we note that all pa rties to these proceedings agree that the level 
of nullification or impairment must, in this case,  be monetarily quantifie d. Disagreement arises 
regarding whether this monetary quantification has to be based on some economic effect of the 
violation, or whether it can be directly b ased on the disbursements made under the CDSOA. 
3.38 We note that the arbitrators in US – Section 110(5) Copyright Act (Article 25.3)  considered 
that benefits for the purpose of Article XXIII of  the GATT 1994 and the DSU were of an economic 
nature: 
"If it is assumed, then, that copyright ho lders exploit their exclusive rights by 
granting licences for the use of their works,  one of the benefits which arises from 
those rights consists of the licensing royalties which right holders would receive.  Thus, exclusive rights such as those set forth in Articles 11 bis(1)(iii) and 11(1)(ii) 
will normally translate into economic benefits for copyright holders. 
In their submissions to the Arbitrators, the pa rties have focused on this type of benefit 
accruing to copyright holders.  The Arbitrators concur with the parties that, for 
purposes of these arbitration proceedings, the relevant benefits are those which are 
economic in nature.
53  This is consistent with previous decisions of arbitrators acting 
                                                      
52 EC – Bananas III (US) (Article 22.6 – EC) , para. 6.10. 
53 (footnote original)  This view is based on the object of th e present proceedings, which is to quantify 
the economic harm suffered by the European Communities  as a consequence of the continued application of 
Section 110(5)(B).  It does not necessarily follow that  Members having recourse to Article 64 of the TRIPS 
Agreement need to establish nullification or impairment of economic  benefits accruing to them under the TRIPS 
Agreement.  The Arbitrators find s upport for their view in the following statement by the arbitrators in 
European Communities – Regime for the Importation, Sale and Distribution of Bananas – Recourse to 
Arbitration by the European Communities under Article 22.6 of the DSU : "[A] Member's potential interests in 
trade in goods or services and its interest in a de termination of rights and obligations under the WTO 
Agreements are each sufficient to esta blish a right to pursue a WTO disput e settlement proceeding.  However, a 
Member's legal interest in compliance by other Members does not, in our view, automatically imply that it is 
entitled to obtain authorization to suspend concessions un der Article 22 of the DSU."  See the Decision of the  WT/DS234/ARB/MEX 
 Page 17 
 
 
 under Article 22.6 of the DSU.54  Moreover, like the parties to this dispute, the 
Arbitrators will proceed on the assumption th at the licensing royalties realizable by 
copyright holders constitute an adequate measure of the economic benefits arising 
from Articles 11 bis(1)(iii) and 11(1)(ii)." 
3.39 We further note that, with the exception of the arbitrations carried out under Article 4.11 of 
the SCM Agreement, previous arbitrators have relied on an approach based on the economic or trade 
effect of the violation.55  While most arbitrations have relied on the narrower concept of trade effect, 
we note that both the US – Section 110(5) Copyright Act (Article 25.3) arbitrator and the  US – 1916 
Act (EC) (Article 22.6 – US) arbitrators referred to economic effects.56  The use of direct trade effect 
in most case reflects the fact that trade loss is gene rally more directly identifiable and quantifiable and 
that, in such a context, arbitrators pr eferred to rely on verifiable figures. 
3.40 In both US – Section 110(5) Copyright Act (Article 25.3) and US – 1916 Act (EC) 
(Article 22.6 – US),  reliance on the broader concept of economic impact was dictated by the nature of 
the measures at issue.  In US – Section 110(5) Cop yright Act (Article 25.3) , no actual trade took place, 
but rights had been breached which conferred economic benefits to the holders of intellectual property 
rights in the form of royalties.  In US – 1916 Act (EC) (Article 22.6 – US) , the law at issue dealt with 
the possibility of civil and/or criminal proceedings being taken against companies importing dumped imports.  Since a judicial decision or settlement under the 1916 Act did not automatically restrict trade, the broader concept of econom ic effect was more appropriate.  
3.41 In the present case, we note that disbursements under the CDSOA operate, in economic terms, 
as subsidies that may generate im port substitution production.  Consid ering that the benefit nullified 
or impaired in this case corresponds to the va lue of exports from Mexico "replaced" by the 
United States' domestic production would be consiste nt with the approach followed by previous 
arbitrators.  As a result, it would be possible, in  theory, to rely on the effect of the CDSOA on 
Mexico's trade with the United States. 
                                                                                                                                                                    
 
Arbitrators on European Communities – Regime for the Importation, Sale and Distribution of Bananas – 
Recourse to Arbitration by the European Communities under Article 22.6 of the DSU  (hereafter " EC – 
Bananas III (22.6) (US) ", WT/DS27/ARB, 9 April 1999, para. 6.10. 
54 (footnote original)  See, e.g., the Decision s of the Arbitrators on EC – Bananas III (22.6) (US) , supra , 
para. 6.12 (benefits nullified or impair ed: losses in US exports of goods and losses by US service suppliers in 
services supply); European Communities – Regime for the Importation, Sale and Distribution of Bananas – 
Recourse to Arbitration by the European Communities under Article 22.6 of the DSU , WT/DS27/ARB/ECU, 
24 March 2000, footnote 52 (benefits nullified or impair ed: losses by Ecuador of actual trade and of potential 
trade opportunities in bananas and the loss of actual and potential distribution service supply); European 
Communities – Measures Concerning Meat and Meat Products  (Hormones ) – Original Complaint by the United 
States – Recourse to Arbitration by the European Communities under Article 22.6 of the DSU (hereafter " EC – 
Hormones (22.6) (US) "), WT/DS26/ARB, 12 July 1999, para. 41 (b enefits nullified or impaired: foregone US 
exports of hormone-treated beef and beef products); European Communities – Measures Concerning Meat and 
Meat Products  (Hormones ) – Original Complaint by Canada – Recourse to Arbitration by the European 
Communities under Article 22.6 of the DSU (hereafter " EC – Hormones (22.6) (Canada) "), WT/DS48/ARB, 
12 July 1999, para. 40 (benefits nullified or impaired: foregone Canadian exports of hormone-treated beef and 
beef products). 
55 See the list in footnote 54 above, as well as US – 1916 Act (EC) (Article 22.6 – US) , para. 5.23. 
56 See US – Section 110(5) Copyright Act (Article 25.3) , para. 3.18, US – 1916 Act (EC) (Article 22.6 – 
US), para.7.2. WT/DS234/ARB/MEX 
Page 18  
 
 3.42 This said, our task is not to determine whet her this is the only approach acceptable under 
Article 22.6 of the DSU.
57  On the contrary, it is to determin e whether the approach advocated by 
Mexico is compatible with the DSU.   
3.43 From a review of the arbitrations which w ould seem to support Mexico's approach, we note 
that the only arbitration decisions based on the valu e of violation itself were those under Article 4.10 
and 4.11 of the SCM Agreement. 
3.44 The position adopted by Mexico seems to be based essentially on the approach followed by 
the arbitrator in US – FSC (Article 22.6 – US),  who relied on the prohibited nature  of the subsidy 
concerned and the erga onmes  nature of the violation to conclude that "appropriate countermeasures" 
under Article 4.10 SCM could correspond to the fu ll amount of the subsidy illegally granted, 
irrespective of its trade effect. 
3.45 First, we note that disbursements under the CDSOA are different from the export subsidy 
addressed by the US – FSC (Article 22.6 – US)  arbitrator. 
3.46 Second, we consider that the reasoning underlying the US – FSC (Article 22.6 – US)  decision 
cannot be extended to the present case.  One r eason is that the mandate of arbitrators under 
Article 4.11 of the SCM agreement is different from th at of arbitrators under Article 22.7 of the DSU.  
In this regard, Article 4.11 reads as follows: 
"In the event a party to the dispute requests arbitration under paragraph 6 of 
Article 22 of the Dispute Settlement Unde rstanding ("DSU"), the arbitrator shall 
determine whether the countermeasures are appropriate."58 
3.47 The US – FSC (Article 22.6 – US)  arbitrator expressly differe ntiated the situation under 
Article 4.10 and 4.11 of the SCM Agreement and that under Article 22.4 of the DSU: 
"We recall that Article 22.4 of the DSU  provides as follows: 
'The level of the suspension of concessions or other obligations 
authorized by the DSB shall be equivalent to the level of the nullification or impairment.' 
The drafters have explicitly set a quantitativ e benchmark to the level of suspension of 
concessions or other obligations that might be authorized.  This is similarly reflected in Article 22.7, which defines the arbitrator s' mandate in such proceedings as follows: 
'The arbitrator acting pursuant to  paragraph 6 … shall determine 
whether the level of such suspensi on is equivalent to the level of 
nullification or impairment….'  (footnote omitted) 
As we have already noted in our analysis of the text of Article 4.10 of the SCM 
Agreement  above, there is, by contrast, no such  indication of an explicit quantitative 
benchmark in that provision.  It should be recalled here that Articles 4.10 and 4.11 of 
the SCM Agreement  are 'special or additional rules' under Appendix 2 of the DSU , 
and that in accordance with Article 1.2 of the DSU , it is possible for such rules or 
                                                     
 
57 As a matter of fact, we do not consider previous  arbitrations to be constitutive of "subsequent 
practice", within the meaning of that  concept under public international law (see Vienna Convention on the Law 
of Treaties, Article 31.3(b)). 
58 (footnote original)  This expression is not meant to allow co untermeasures that are disproportionate in 
light of the fact that the subsidies dealt with under these provisions are prohibited.  WT/DS234/ARB/MEX 
 Page 19 
 
 
 procedures to prevail over those of the DSU .  There can be no presumption, therefore, 
that the drafters intended the standa rd under Article 4.10 to be necessarily 
coextensive with that under Article 22. 4 so that the notion of 'appropriate 
countermeasures' under Article 4.10 would limit such countermeasures to an amount 
'equivalent to the level of nullification or impairment' suffered by the complaining 
Member.  Rather, Articles 4.10 and 4.11 of the SCM Agreement  use distinct language 
and that difference must be given meaning."59 
3.48 Like the US – FSC (Article 22.6 – US)  arbitrator, we consider that Article 4.11 of the SCM 
Agreement is a special or additional dis pute settlement provision which provides for a sui generis  
approach applicable to prohibited subsidies only.  Article 4.11 instructs arbitrators to determine 
"appropriate countermeasures" rather than whether the level of suspension of concessions or other 
obligations is equivalent to the level of nullifica tion or impairment. This would seem to leave more 
discretion to arbitrators in assessing the amount of countermeasures.  This was confirmed by the arbitrator in US – FSC (Article 22.6 – US) : 
"Thus, as we interpret Article 4.10 of the SCM Agreement , a Member is entitled to act 
with countermeasures that properly take into account the gravity of the breach and the 
nature of the upset in the balance of right s and obligations in question.  This cannot 
be reduced to a requirement that constrains  countermeasures to trade effects, for the 
reasons we have set out above." 
3.49 While the arbitrator in US – FSC (Article 22.6 – US)  did not exclude the application of a trade 
effect test under Article 4.11, it would be difficult, in situations other than those relating to prohibited 
subsidies, to conclude that any disbursement pursuant to an illegal measu re automatically causes 
nullification or impairment at least equivalent to the total amount disbursed. 
3.50 Mexico also relies on the arbitrator's decision in US – 1916 Act (EC) (Article 22.6 – US)  in 
support of its position.
60  We do not agree with Mexico that the passages it relies upon support the 
position that the violation resulting from the existen ce of an inconsistent measure itself nullified or 
impaired benefits accruing to the European Co mmunities.  We note that the arbitrator in US – 1916 
Act (EC) (Article 22.6 – US)  agreed with the arbitrators in EC – Bananas III (US) (Article 22.6 – EC) 
that: 
"[T]he presumption  of nullification or impairment, as provided in Article 3.8 of the 
DSU, by no means provides evidence of the level  of nullification or impairment 
sustained by the Member requesting au thorization to suspend obligations."61   
3.51 We further note that, in that case, the arbitrat or relied on the economic impact of the measure.  
The arbitrator refused to consider the "chilling effe ct" of the law as such, and it was determined that 
the costs attached to any settlement or judgement  under the 1916 Act – i.e., instances of application – 
could be considered to correspond to the econom ic effect of the 1916 Act on EC companies. 
3.52 Overall therefore, we conclude that the reasoni ng of previous arbitrators under Article 22.6 of 
the DSU does not seem to support the approach proposed by Mexico. 
                                                      
59 US – FSC (Article 22.6 –US) , paras. 5.45-5.47. 
60 US – 1916 Act (EC) (Article 22.6 – US) , paras. 6.14 and 7.8. 
61 US – 1916 Act (EC) (Article 22.6 – US) , para. 5.50, emphasis in the original. WT/DS234/ARB/MEX 
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 (c) Conclusion 
3.53 We conclude from the above that Article  XXIII of GATT 1994 and the DSU clearly 
differentiate between two stages in WTO dispute settlement: 
(a) one is the establishment of the existence  of nullification or impairment by panels and 
the Appellate Body.  This is where Article 3.8 of the DSU plays its role by providing 
that the existence of a violation creates a presumption of nullification or impairment 
of a benefit; and 
(b) a separate and subsequent process where a Member requests the authorization to 
suspend concessions or other obligations a nd an arbitrator, under Article 22.6 of the 
DSU, is requested to determine the level  of the benefit nullified or impaired. 
3.54 This implies, in our view, that no assimila tion can be made between, on the one hand, a 
violation or the right breached and, on the other ha nd, the benefit nullified or impaired as a result of 
that violation. Under the WTO dispute se ttlement mechanism, a violation is the precursor  to 
establishing the nullification or impairment of a benefit. 
3.55 In that context, the benefit nullified or impair ed must necessarily be something else. In this 
respect, we recall that past arbitrators under Article  22.6 of the DSU have deemed that benefit to 
correspond to the trade directly affected by  the maintenance of the illegal measure. 
3.56 For the reasons stated above, we reject the approach proposed by Mexico in this case. 
3. Reliance on specific instances of disburseme nts to assess nullification or impairment 
(a) Main arguments of the parties 
3.57 The United States claims that an examination of the actual disbursements made under the 
CDSOA would go beyond the terms of reference of the original disputes.  Disbursements are not part 
of the "measure found to be inconsistent with a c overed agreement" under Article 22.2 of the DSU.  In 
the absence of an actual finding, it is not permissi ble under the DSU to assume that any application 
breaches any WTO obligation or nullifies or impairs any benefit.
62  The United States adds that, since 
there are no recommendations or rulings concerning any payments made under the CDSOA, there is 
certainly no recommendation or ruling about future payments – i.e., there is no legal basis for the 
Arbitrator to make an award for alleged nullifi cation or impairment supposedly caused by measures 
not even in existence.63 
3.58 Mexico argues that, while the United States dir ectly nullifies or impairs benefits under the 
covered agreements by enacting the CDSOA, the Un ited States further nullifies or impairs benefits 
under the WTO Agreement with each disbursement to domestic producers.  These disbursements are 
the direct economic consequence of the violatin g measure and constitute the very essence of the 
CDSOA.  In the opinion of Mexico, the CDSOA is not conceivable without disbursements and the disbursements are not possible without the CDSOA.  Any attempt to draw a distinction between the 
existence of the CDSOA and its disbursements is impossible.  Mexico concludes from the approach of the arbitrator in US – 1916 Act (Article 22.6 – US)  that the existence of the CDSOA cannot be legally 
distinguished from its application when determini ng the nullification or impairment caused by this 
Act.  Following the United States approach woul d mean that, when a measure violates the WTO 
Agreement per se , the requesting party could not suspend c oncessions or other obligations. It would 
                                                     
 
62 United States written submission, paras. 15-19. 
63 United States oral statement, paras. 39-40.  WT/DS234/ARB/MEX 
 Page 21 
 
 
 have to bring a dispute against each specific app lication of a measure.  This would generate more 
disputes in disregard of the principle of "prompt se ttlement" of disputes expressed in Article 3.3 of the 
DSU.64 
(b) Analysis of the Arbitrator 
3.59 First, we recall that the Requesting Parties ha ve not identified nullification or impairment 
beyond that resulting from the instances of application of the CDSOA. 
3.60 Second, we note that the United States raised two separate questions regarding this issue: one 
is whether disbursements already made under the CD SOA can be considered by the Arbitrator, the 
other one is whether future disbursements may be considered.   
3.61 At this stage, the question before us is wh ether we may take into account the economic or 
trade effects resulting from the instances of appli cation of the CDSOA, give n the United States claim 
that the CDSOA was challenged as such, and, had not been applied when it was first challenged. 
3.62 We agree with the United States that the DSB never issued recommendations or rulings with 
respect to the application of the CDSOA.  We also  note the arguments of the Requesting Parties that 
once a measure has been found illegal, any instance of application of this measure is ipso facto  illegal.  
3.63 We take the view that the CDSOA mandates  disbursements whenever certain conditions are 
met;  that these disbursements have been found by the Panel and the Appellate Body to be a core 
element in their conclusion that the CDSOA violates the WTO Agreement65, and that there is no 
reason, for the purpose of assessing nullification or impairment , to exclude instances of the 
application of the CDSOA from our consideration. 
3.64 This approach is in line with the practice of ot her arbitrators. For instance, the arbitrator in 
US – 1916 Act (EC) (Article 22.6 – US)  considered that instances of application could be taken into 
account in assessing nullification or impairment by a law as such.66  
3.65 We also recall that, in reply to one of our questions67, the United States referred to two cases, 
US – Section 110(5) Copyright Act (Article 25.3) and EC – Hormones (US) (Article 22.6 – EC).   In 
those two cases, a law had been challenged as such.  Nevertheless, the arbitrators determined the level 
of nullification or impairment on the basis of an anal ysis of lost royalties in the first case and lost 
trade in the second case.  
3.66 We fail to see any meaningful difference between the US – Section 110(5) Copyright Act 
(Article 25.3), the EC – Hormones (US) (Article 22.6 – EC) arbitrations and this arbitration.  In these 
two cases, the arbitrators relied, for all practical purposes, on the economic result of the application  of 
the law.  In this case, Mexico requests us to re ly on disbursements made under the CDSOA to assess 
the level of nullification or impairment it suffered.   The only difference which may exist is that, under 
the CDSOA, the United States' authorities are expect ed to implement the law through the application 
                                                      
64 Written submission of Brazil, the European Co mmunities, India, Japan, Korea and Mexico, 
paras. 35-40. 
65 See Panel Report, paras. 7.35-7.39 and 8.1;  Appellate Body Report, para. 256. 
66 US – 1916 Act (EC) (Article 22.6 – US) , para. 7.8. 
67 Reply of the United States of 28 April 2004 (paras. 11 and 12) to question 12 of the Arbitrator of 
21 April 2004, which reads as follows: 
 
"Considering its reasoning in paragraphs 15 to 19  of its written submission and more generally its 
position on nullification or impairment, could the United States give an example of a situation where a law as 
such would cause more than "zero" nullification or impairment?" WT/DS234/ARB/MEX 
Page 22  
 
 of a number of administrative steps.  The Unite d States seems to claim that, as a result, these are 
"measures" separate from the CDSOA on which no fi nding was ever made.  The difference, in our 
view, is a matter of degree, not of nature. 
3.67 As a result, we conclude that we are entitled,  for the purpose of assessing the trade effect and, 
thus, the level of nullification caused by the CDSO A to Mexico, to take into account instances of 
application of the CDSOA. 
3.68 The second question raised by the United Stat es is addressed in Section IV.B.3 below. 
4. Approach to be followed by the Arbitrator in this case 
3.69 Given our conclusion that the approach advo cated by Mexico is not compatible with 
Article XXIII of GATT 1994 and Article 22 of the DSU, and consistent with past arbitrations, it falls 
to us to determine the approach we consider to be compatible. 
3.70 We do not agree with the United States that nullific ation or impairment is to be limited in all 
instances to the direct trade loss resulting from the violation.  We agree with the Requesting Parties 
that the term "trade effect" is found neither in Article XXIII of GATT 1994, nor in Article 22 of the 
DSU.  Previous arbitrators' decisions based on direct trade impact are not binding precedents. 
3.71 However, as already mentioned, the "trade ef fect" approach has been regularly applied in 
other Article 22.6 arbitrations and seems to be generally accepted by Members as a correct 
application of Article 22 of the DSU.   
3.72 On that basis, we conclude that we should a pply an approach based on determining the trade 
effect, on the Requesting Parties, of the violation by the United States of its WTO obligations through the application of the CDSOA.  Indeed, while the Requesting Parties contest the view of the United 
States that nullification or impairment may only be assessed in relation to the trade effect of the 
challenged measure and the conclusion that the actual trade effect of the CDSOA is "zero", they have 
not convincingly argued that an approach  based on the trade effect of the CDSOA could not be 
applicable in this case. 
3.73 In selecting the methodology to be applied in  determining the level of nullification or 
impairment suffered by Mexico in this case, we  noted the importance attached by the Requesting 
Parties to the view that suspension of concessi ons or other obligations is intended to induce 
compliance, and the view of the Requesting Parties that this purpose should gui de our determinations 
under Article 22.7 of the DSU. 
3.74 The concept of "inducing compliance" was first raised in the EC – Bananas III (US) 
(Article 22.6 – EC)
68 arbitration and has been referred to since in other arbitrations.  However, it is not 
expressly referred to in any part of the DSU and we  are not persuaded that the object and purpose of 
the DSU – or of the WTO Agreement – would suppor t an approach where the purpose of suspension 
of concessions or other obligations pursuant to Artic le 22 would be exclusively to induce compliance. 
Having regard to Articles 3.7 and 22.1 and 22.2 of the DSU as part of the context of Articles 22.4 and 22.7, we cannot exclude that inducing complian ce is part of the objectives behind suspension of 
concessions or other obligations, but at most it can be only one of a number of purposes in authorizing 
the suspension of concessions or other obligatio ns.  By relying on "inducing compliance" as the 
benchmark for the selection of the most appropriate a pproach we also run the risk of losing sight of 
the requirement of Article 22.4 that the level of suspension be equivalent  to the level of nullification 
or impairment. 
                                                     
 
68 EC – Bananas III (US) (Article 22.6 – US) , para. 6.3.  WT/DS234/ARB/MEX 
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 3.75 Moreover, we note from past arbitrations that, in  all instances, arbitrators have quantified or 
valued the benefit nullified or impaired. In the present case, both parties have also attempted to 
quantify the level of nullification or impairment.  Such quantification or valuation exercises show, in 
our view, that even though each party relies on a radically different legal approach, the economic 
rationales underlying these approaches seem to be ve ry close.  We consider that, beyond the legal 
argumentation of the Requesting Parties, their choice of the total disbursement made under the 
CDSOA is ultimately a benchmark, which they exp ect to yield a higher level of nullification or 
impairment than the more "classical" benchmark based  on lost trade.  All the more so as the United 
States has taken the view that the level of nullifi cation or impairment caused by the CDSOA was in 
fact "zero" in terms of direct trade loss.  As we  see it, the Requesting Parties in effect use the amount 
of disbursements under the CDSOA as simply a proxy for the conduct of an economic analysis of the 
impact of the CDSOA disbursements on their export s or, more generally, on the competitive situation 
of the businesses concerned. Under those circumstances,  we believe that our decision to rely on the 
trade effect resulting from the violation to determin e the level of nullification or impairment does not, 
in economic terms, significantly depart from th e rationale of the Requesting Parties' approach. 
3.76 We are also mindful that other arbitrators have  taken a prudent approach by avoiding claims 
that were "too remote", "too speculative" or "not meaningfully quantified".69 We recall that parties 
have also cautioned us against the risk of relying on overly speculative data.70 
3.77 For this reason, we considered it inappropriate  to try to apply a counterfactual based on a 
relatively simple equation and simple parameters, as in EC – Hormones (US) (Article 22.6 – EC), EC 
– Hormones (Canada) (Article 22.6 – EC) or EC – Bananas III (US) (Article 22.6 – EC).   R a t he r, 
given the number of factors potentially influenc ing the eventual trade effect of the CDSOA 
disbursements, it would be more a ppropriate to identify and apply an economic model reflecting those 
factors and allowing us, on the basis of a clearly identifiable amount – the disbursements made under 
the CDSOA – to assess the extent to which those payments could nu llify or impair benefits accruing 
to the Requesting Parties. 
3.78 To this end, we requested the parties to subm it data and relevant econom ic literature so as to 
assess the feasibility of an economic model that w ould measure the extent to which disbursements 
under the CDSOA affect exports from the Requesting Parties to the United States.71  On the basis of 
the elements available, we concluded that such  a model was feasible and produced more credible 
results than if we applied the tota l disbursement as a proxy for the le vel of nullification or impairment.  
Indeed, while the model we have chosen to apply is based on a number of assumptions, we also note 
that the evidence before us does not demonstrate th at using the total disbursement as a proxy for the 
level of nullification or impairment would produce a mo re credible result.  Our analysis is described 
in Section III.C below. 
3.79 We recognize that, in relying on an economic m odel in this arbitration, we may be breaking 
new grounds.  This impression may be correct to th e extent that we base our determinations on the 
results of this model.  However, we note that economic modelling has already been applied in the US 
– FSC (Article 22.6 – US)  arbitration. We are also mindful that applying economic models in 
arbitrations under Article 22.6 of the DSU may make  such proceedings more complex and costlier.  
We acknowledge that economic analysis requires expe rtise that may not be readily available to all 
WTO Members.  We do not believe, however, that this should be a reason to deprive ourselves of a 
means to reach a credible result through a transp arent process in complex cases such as this one.  
                                                      
69 See, e.g., EC – Hormones (US) (Article 22.6 – EC) , para. 77; US – 1916 Act (EC) (Article 22.6 – 
US), paras. 5.54 -5.57. 
70 See, e.g. United States written submission, para . 40;  written submission of Brazil, the European 
Communities, India, Japan, Korea and Mexico, para. 61.  
71 See paras. 3.128-3.129 below.   WT/DS234/ARB/MEX 
Page 24  
 
 Rather, we see the option of using economic mode ls in Article 22.6 arbitrations as creating an 
opportunity to ensure full cooperation from the parties and, hence, more precise and credible results 
where the alternative may be to choose between simplistic and perhaps irreconcilable approaches. 
C. C
ALCULATION OF THE LEVEL OF NULLIFICATION OR IMPAIRMENT THROUGH AN ECONOMIC 
MODEL  
1. Introduction 
3.80 As mentioned above, we consider that an appr opriate way to assess the trade effect of a law 
operating, in economic terms,  like a domestic subsidy72 was to endeavour to establish an economic 
model.  This model, when applied to the facts of  this case, would identify a coefficient which, when 
multiplied by the amount of disbursements over a gi ven period, would produce a figure corresponding 
to a trade effect which could reasonably be deemed  to correspond to the level of nullification or 
impairment for that period. 
3.81 We also noted that when establishing an economic model, we would need to address a 
number of arguments made by the United States in relation, inter alia ,  to the calculation proposed by 
the Requesting Parties: its own view that the level of nullification or impairment would, in fact, be 
"zero"; the combined effect of offset payments and an anti-dumpi ng or countervailing duty order; and 
the effect of CDSOA payments vi s-à-vis the United States or foreign competitors not subject to 
anti-dumping or countervailing duties.73  These arguments are addressed in the relevant parts of this 
section in relation to the determinati on of the amount of disbursements to  be used in the application of 
the model, together with the United States' argument s regarding the fact that the figures published by 
the United States' authorities may either  not be accurate or not definitive.74  
2. Review of the approaches of the parties regarding economic models 
(a) United States 
3.82 The United States originally took the view that  the trade effect of the CDSOA disbursements 
can be estimated to be zero.75  This position is grounded in the view that benefiting firms would not 
expend the CDSOA disbursements to enhance their co mmercial position.  Instead, the funds would be 
used elsewhere.  The United States did not disagre e that modelling was appropriate in this case, but 
because the input to the model would be zero, the output, or conclusion about trade effects would also necessarily be zero.
76  The United States added that even if the firms concerned did use the funds to 
enhance their competitive position, there would be a de minimis  effect on output and hence on trade.  
In other words, the United States considered that the pass-through effect of the government transfers, 
i.e. the ad valorem  effect of the transfers on the recipients' prices, would be zero or close to zero. 
                                                      
72 We are mindful of the United States' views that the CDSOA is a subsidy not found to cause any 
adverse trade effect (United States written submission, paras. 62-65).  We nonetheless note that the United 
States does not object to a model which would rely on the price effect of CDSOA disbursements (see, e.g., 
Exhibit US-18, p. 2). 
73 See United States written submission, para. 52.  
74 See United States written submission, paras. 13, 14, 26 and 27. 
75 The Arbitrator asked the United States to submit a model that would justify its claim that 
nullification and impairment is "zero".  The United States  did not submit a model in response to this question, 
but outlined the basic parameters of the Armington model, which was submitted at a later stage in the 
proceedings. Instead, the United States  argued that a formal m odel was not required, since in its view the facts 
are such that the CDSOA payments would not result in a ny increase in production. (United States replies to the 
Arbitrator's questions of 21 April 2004, paras. 16-26). 
76 United States replies to the Arbitrator's questions of 21 April 2004, para. 26.  WT/DS234/ARB/MEX 
 Page 25 
 
 
 3.83 However, the United States ultimately acknow ledged that modelling could actually be done 
with some precision and volunteered a possible model.77 
3.84 The model proposed by the United States adopts a disaggregated approach to estimating trade 
effects.  Instead of treating the United States' ec onomy as a whole and estimating a single trade effect 
number, it estimates the trade effect at the product level for each importer.  These individual values 
are then summed to obtain the total trade effect .  The model proposed by the United States also 
divides the countries in the world into three groups : the United States, WTO Members affected by the 
CDSOA disbursements and other exporters to the Un ited States, thereby isolating the effects of the 
CDSOA payments only on the WTO Members subj ect to active anti-dumping or countervailing duty 
orders.  The inputs required to run the model include:78 
• A current market value share for each source of the products; 
• An ad valorem  measure of the CDSOA distribution that actually affected production; 
• An estimate of the elasticity of substitutability as between products produced in the 
United States and imports (the  elasticity of substitution); 
• An estimate of the price sensitivity of supply for each product (the elasticity of the 
United States' supply, complaining party import supply, and rest-of-the-world import supply); and 
• An estimate of the market demand elasticity. 
 3.85 Estimates of the supply, demand and substitu tion elasticities were ta ken from various US 
International Trade Commission reports.  Suppl y elasticities for WTO Members with dumped or 
subsidized exports into the United States were arbitrar ily set at 100 to reflect that they would not be 
able to adjust the price of their product downwards.
79  Trade and production data for the model is 
sourced from the Bureau of the Census, US Depa rtment of Commerce, and USITC investigations.80  
3.86 The output of the model for each WTO Member affected by the CDSOA payments and each 
industry is as follows:81 
• "An estimate of the decrease in US domestic shipments"; and 
• "An estimate of changes in foreign trade part ner exports to the United States, specifically 
breaking out the gain to the individual complaining party, the exemption of whose duty payments from CDSOA served as the basis for the particular counter factual estimation."  
 3.87 While the model is straightforward and b ased on the standard literature in applied 
international economics, implementation of the mode l by the United States in this case was not.  The 
United States made a number of assumptions, which in  its view were specific to the current case.  
These assumptions affect the input of the model, the values of the elasticities and the treatment of 
unavailable data. 
                                                     
 
77 In commenting on the view of the Requesting Parties that modelling would be "complex and 
burdensome" and Chile's comment that modelling would be "tedious", the United States stated that: 
"The fact that an exercise is complex, tedious, or even burdensome does not mean it can be 
dispensed with." 
 
Comments of the United States of 4 May 2004 on answers of the Requesting Parties to the questions of 
the Arbitrator, para. 3. 
78 Exhibit US-18. 
79 Exhibit US-18. 
80 Exhibit US-18. 
81 Exhibit US-18. WT/DS234/ARB/MEX 
Page 26  
 
 3.88 These are: 
• ignoring cases that do not exceed the de minimis  threshold advocated by the United States 
in this arbitration;  
• making certain assumptions about which payments affect production; 
• making certain assumptions about the pass-through effect of payments. 
 3.89 The United States considers that only those payments that are above a de minimis  level should 
be analysed.  Citing Article 6.1(a) of the SCM Agreement  and Article 6.4(a) of the Agreement on  
Agriculture, the United States argues that a 5 per cent de minimis  threshold is appropriate.
82  I n  
implementing the model, however, the United States assumes a 1 per cent de minimis  level. 
3.90 The United States also deducts certain payments, which it assumed did not affect 
production.83 
3.91 The United States further deducts payments ma de in respect of products for which the 
anti-dumping or countervailing duty was revoked on the ground that the "nullification or impairment 
should be measured in terms of the effect th e CDSOA has on producers/exporters subject to 
antidumping or countervailing duty orders".84  This point is further clarified in the United States' 
statement that "a Member cannot suffer nullificatio n or impairment as a result of a non-permissible 
specific action against dumping (or against a subsidy) if no order is in place and no duties can be 
collected on that Member's products."85 
3.92 Only once the industries that meet the United States' definition of de minimis  are identified 
and the various deductions are calculated does the United States apply its assumption of the proportion of disbursements that affect production.  Its initial argument is that the pass-through figure 
should be "zero", which implies that none of the CDSOA disbursements would have an affect on 
trade.  The United States provides four reasons for this assumption: 
• the disbursements are untied, hence there is  no requirement to expand production with 
these payments
86; 
• there is no link between "qualifying expend itures" under the CDSOA and the expansion 
of production; 
• the unpredictability of the disbursements makes it difficult for beneficiary firms to rely on 
the expenditures in a commercially meaningful way; 
• offset payments reflect a small fraction of production, hence they cannot have a 
discernable impact on trade. 
 
3.93 However, in response to the Arbitrator's query  on the validity of a zero pass-through value, 
the United States indicated that a pass-throug h level of 25 per cent would be "reasonable".87  I t  
qualified this response by indicating that the econo mic literature did not point towards any specific 
value.  However, the United States cited a value of 75 per cent for a United States policy contingent 
on export (the Domestic International Sales Cor poration programme), which was reported in an 
                                                      
82 United States replies to the Arbitrator's second set of questions, para. 27.  
83 Citing the example of a company called Torrington, which was sold to another company (Timken) 
without the payments, the United States argues that these payments should be deducted, since they do not affect 
production. 
84 United States replies to the Arbitrator's second set of questions, para. 23. 
85 United States replies to the Arbitrator's second set of questions, para. 24.  
86 United States replies to the Arbitrator's  second set of questions, paras. 5-7. 
87 United States replies to the Arbitrator's second set of questions, para. 13.  WT/DS234/ARB/MEX 
 Page 27 
 
 
 academic study.88  The United States also cites a study that concludes that 60 per cent of an 
investment tax incentive was received by the recipients.89 
3.94 The results of the United States' model as app lied according to its assumptions are outlined in 
Table 1. 
(b) Requesting Parties 
3.95 The original position of the Requesting parties w as that modelling need not be considered by 
the Arbitrator to determine the award.  Inst ead, they argued that the value of the CDSOA 
disbursements was a proxy for the minimum level of nullification or impairment caused by the 
measure found to be illegal.  The position of the Reques ting Parties is that the level of nullification or 
impairment can be quantified on the basis of the va lue of the CDSOA payments; since their view is 
that economic modelling of the trade effects in this case would be too difficult.90   
3.96 However, in response to a question posed by th e Arbitrator regarding whether or not a model 
for estimating the trade effects that meets their crite ria exists, the Requesting Parties submitted such a 
model.  Their model is based on the level of CDSO A payments, a gross measure of the elasticity of 
substitution between domestic and imported products  and the ratio of US manufacturing imports to 
domestic shipments of US manufacturing industries.   
3.97 The formal specification of the model proposed by the Requesting Parties, as submitted to the 
Arbitrator, is:91  
Reduction in imports ()⎟⎟
⎠⎞
⎜⎜
⎝⎛
∆
⎟⎟⎟⎟
⎠⎞
⎜⎜⎜⎜
⎝⎛
∆∆∆
=QPMPQP
PPMMqm
q
qq** *  (1) 
 
where, M = volume of imports 
∆M = change in the volume of imports 
Pm = the price of imports  
Q = the volume of domestic shipments P
q = the price of domestic goods 
qP∆= change in the price of domestic goods 
 
 
                                                      
88 United States replies to the Arbitrator's second set of questions, para. 11. 
89 United States replies to the Arbitrator's second set of questions, para. 12. 
90 According to the Requesting Parties, "specific quantification of the trade effects of the CDSOA 
would be an extremely complex and bu rdensome exercise.  It would involve  taking into acco unt every payment 
to every US producer, in respect of every product, now and in the future".  
91 Box 1 of the joint replies of Brazil, Canada, th e European Communities, India, Japan, Korea and 
Mexico to the questions of the Arbitrator, dated 28 April 2004.  
 WT/DS234/ARB/MEX 
Page 28 Table 1:  Estimated Level of Nullification or Impairment Re vised Pursuant to the Model Proposed by the United States  
 
 2001 2002 2003 
Country    
 Model resultsNo production 
data 
adjustments Total 
nullification and 
impairment Model results No production 
data 
adjustments Total 
nullification 
and impairment  Model resultsNo production 
data 
adjustments Total 
nullification and 
impairment 
Brazil $0 $7 $7 $176,783 $0 $176,783 $124,264 $0 $124,264
Canada $342,357 $0 $342,357 $0 $0 $0 $0 $0 $0
Chile $0 $0 $0 $0 $0 $0 $0 $0 $0
EC $651,736 $147,474 $799,210 $154,538 $80,620 $235,158 $119,810 $102,176 $221,986
India $0 $336  $336 $85,584 $1,083 $86,667 $46,537 $935 $47,472
Japan $1,149,255 $23,442 $1,172,697 $1,061,395 $3 9,144  $1,100,539 $1,036,507 $46,484 $1,082,991
Korea $130,631 $6,684 $137,315 $52,041 $41,121 $93,162 $65,329 $31,461 $96,790
Mexico $0 $0 $0 $0 $0 $0 $0 $203 $203
   Total $2,273,979 $177,943 $2,451,922 $1,530,341 $161,968 $1,692,309 $1,392,447 $181,259 $1,573,706
 
Source: United States 
 
  WT/DS234/ARB/MEX 
 Page 29 
 
 
 3.98 The Requesting Parties further simplify this e xpression by reducing it to the following three 
components:  
• the elasticity of substitution ( η), which is the first term and can be expressed as: 
⎟⎟⎟⎟
⎠⎞
⎜⎜⎜⎜
⎝⎛
∆∆∆
=qq
PPMM
η  (2) 
 
• the total value of the payments expressed as a margin of the price reduction on domestic 
production financed by payments (S), the sec ond term in the equation and can be expressed 
as: QP Sq*∆=  (3) 
 
• the ratio of the value of imports to the value of  domestic shipments in the markets in question: 
(R), the third term in the equation and can be expressed as ⎟⎟
⎠⎞
⎜⎜
⎝⎛
=QPMPR
qm (4) 
 
3.99 Taken together, the model of the Requesting Parties as expressed by equation (1) can be 
presented as the product of the above three variables (equations (2)-(4)). 
 
Reduction in imports RS**η=  (5) 
 
3.100  The Requesting Parties operationalize their m odel for the year 2002 with data from public 
sources.  For the elasticity of substitution, they adopt the highest elasticity in the classification of 
sectors used by the Global Trade Analysis Project of 5.2.92  They argue that this is appropriate since 
"the kinds of products that are typically subject  to anti-dumping and countervailing duties tend to be 
commodities and commoditised manufactured goods th at compete under conditions much closer to 
perfect competition".93  They further argue that: 
"elasticities of substitution specific to the products benefiting from the CDSOA 
payments would be higher than the aggreg ated average GTAP or NAIC data because 
CDSOA disbursements typically relate to commodities and commoditised 
manufactured products, for which preference of buyers is largely determined by price.  
Moreover, it is generally acknowledged in the economic literature that the more 
disaggregate the sample the higher the estim ated substitution elasticity.  Therefore the 
Requesting Parties consider that an elastic ity drawn from the upper end of the GTAP 
range (5.2) is justified as typical degree of price sensitivity".94 
3.101  In addition to the homogeneity of products as implied by the assumption of commoditized 
manufactured products, the Requesting Parties s ubmit that elasticity values should be taken from 
                                                      
92 See joint replies of Brazil, Canada, the European  Communities, India, Japa n, Korea and Mexico to 
the questions of the Arbitrator of 21 April 2004, para. 36. 
93 Ibid. 
94 Joint replies of the Requesting Parties to the second  set of questions of the Arbitrator, 7 June 2004, 
para. 6.  WT/DS234/ARB/MEX 
Page 30  
 
 long-run estimates and not short-run estimates.  They  note that these estimates are "on average, twice 
as large as short-run elasticities".
95 
3.102  Data on domestic shipments are sourced fro m public sources.  The Requesting Parties 
estimate that in the year 2002 the ratio of imports to domestic production was 0.295. 
3.103  Using total payments for 2002 of US$329 million, the Requesting Parties, therefore, conclude 
that the total trade effect of the CDSOA progra mme is US$505 million.  In simple terms, they 
conclude that for the year 2002 the trade effect  coefficient would be 1.54 times the level of 
disbursements.  At this point we should note that this coefficient is independent of the value of 
disbursements.  It depends only on the assumed valu e of the elasticity of substitution and the import 
penetration ratio.  Changes in either one of these values will change the overall value of the 
coefficient. 
3.104  We also recall that, in commenting on the m odel submitted by the Requesting Parties, the 
United States observed that the Requesting Parties in clude the amount of all CDSOA offset payments.  
This is equivalent to assuming that every CD SOA dollar disbursed by the United States under the 
CDSOA would be put towards reducing the price of domestic products (i.e. pass-through effect).  The 
United States also notes that an aggregate measure  of import penetration is used as opposed to a 
measure specific to those industries where there is an incidence of CDSOA payments.  In addition to 
these criticisms, the United States not es that the Requesting Parties u sed the highest elasticity value 
available. 
3. Analysis of the Arbitrator 
(a) Comparison of the models 
3.105  We note at the outset that the modelling approaches of the parties differ in terms of their level 
of aggregation and also in terms of their specification. 
3.106  The model proposed by the Requesting Parties is aggregated and contains two terms in 
addition to the level of disbursements. Certai n known elements of the CDSOA programme are not 
taken into account, such as the industry distribution of  the payments and the fact that one variable in 
their computation, the import penetration ratio, can vary significantly across industries.   
3.107  We also note that the Requesting Parties have not explained the basis on which they chose the 
highest value for the elasticity of substitution.   
3.108  The model proposed by the United States, while qua litatively similar to that of the Requesting 
Parties, is slightly more sophisticated.  The e ffect of a CDSOA disbursement depends upon a number 
of parameters beyond the elastic ity of substitution between domest ic and imported products.  In 
particular, the response of domestic and foreign firms to any change in the domestic price plays a role 
in determining the overall trade effect. 
3.109  The level of sophistication and the heavy data  requirements of this model prevented the 
United States from applying it at the desired level of detail.  We note that of the 66 country-product-
year data points, the United States applied its model to 21 such points.96  This indicates, roughly, that 
                                                      
95 Comments of Brazil, Canada, the European Comm unities, India, Japan, Korea and Mexico on the 
responses of the United States to the second set of questions of the Arbitrator, page 14. 
96 An estimate for a given product, in a given year for a given exporter is considered to be one 
observation.  There are considerably more periods of  observations, however, the United States chose not to 
submit the data for those observations that did not meet its assumption of de minimis  effect.  WT/DS234/ARB/MEX 
 Page 31 
 
 
 estimation of the CDSOA disbursements could only be done for around a third of the cases.  The rest 
of the cases would require the use of proxy data.  In our view, such a heavy reliance on proxy data 
would cast doubt on the reliability of that model.  Furthermore, it would seem to us that the use of 
proxy data is open to the same criticisms as t hose made by the United States with respect to the 
Requesting Parties' model in term s of its degree of aggregation. 
3.110  Despite the differences between the parties as to  the appropriate model to be used, the two 
models submitted have qualitativel y similar characteristics.  Both multiply an assumed level of 
disbursements by a factor, or coefficient, to arri ve at the total trade effect.  In the case of the 
Requesting Parties, this factor is 1.54.  In the case of  the United States, this factor would appear to be 
on a product and importer basis for each year as illustrate d in Table 2.  The range of coefficients as 
estimated by the United States for the seven products  for which they have data is 0.27 to 1.41. 
3.111  Table 2 illustrates that, with product-specific data , the aggregate trade effect coefficient could 
exceed 1.  At the same time, it also highlights the different effects that one could obtain at different levels of disaggregation.  
Table 2:  Aggregate Trade Effect Coefficient for Products Estimated by the United States
 
 
Product Exporter Year Aggregate trade 
effect coefficient 
Alloy magnesium Canada 2001 1.24 
Ball bearings EC, Japan 2001 0.77 
Ball bearings EC, Japan 2002 0.74 
Ball bearings EC, Japan 2003 0.70 
Pasta EC, Japan 2001 0.27 
Preserved mushrooms India 2002 0.82 
Preserved mushrooms India 2003 0.86 
Silicon metal Brazil 2002 1.24 
Silicon metal Brazil 2003 1.24 
Stainless steel butt-welded pipe fittings EC, Japan, Republic of 
Korea 2002 0.67 
Stainless steel butt-welded pipe fittings EC, Japan, Republic of 
Korea 2003 0.91 
Top of the stove stainless steel cookware Republic of Korea 2001 1.39 
Top of the stove stainless steel cookware Republic of Korea 2002 1.40 
Top of the stove stainless steel cookware Republic of Korea 2003 1.41 
Source: Estimated using data supplied by the United Stat es.  The coefficient is calculated for each product, 
exporter and year by dividing the estimated total reduction in trade by the value of the disbursement.  The numerator is the sum of the loss in imports of exporters under active orders and those not under active orders. 
 
3.112  In reviewing the model proposed by the United Stat es, we note that in fact the coefficient is 
specific to each industry and is independent of th e level of the disbursement.  Hence, for the ball-
bearing industry the aggregate  trade effects for the European Communities and Japan are identical 
(Table 2).  The absolute amount of the trade effect  varies according to their share of exports to the 
United States in the ball-bearing industry. 
3.113  Thus, the differences in modelling have more to  do with differences in the assumptions about 
the values of the elasticities and the pass-through values used rather than with the model itself, or the 
level of aggregation.  For example, as illustrated by the Requesting Parties, a ceteris paribus  doubling 
of the elasticity of substitution can have a substantiv e impact on the overall trade effect.  Similarly, an WT/DS234/ARB/MEX 
Page 32  
 
 assumption that only 50 per cent of a given CDSOA di sbursement will have an impact on output, will 
necessarily reduce any estimate of the trade effect by 50 per cent.  
(b) Choosing an appropriate model 
3.114  The previous sections presented the appro aches to economic modelling submitted by the 
parties and a number of shortcomings we identified w ith both approaches.  In general, we considered 
the approach of the Requesting Parties to be too aggregated, hence not specific enough to this case.  
While the model specification proposed by the Unite d States is disaggregated and well specified, we 
concluded that there is insufficient data to  run that model with any degree of accuracy. 
3.115  Our preference would have been to employ a model endorsed by all parties, and we gave 
ample opportunity to the parties to try and find common ground on this ques tion.  Failing this, our 
preference would have been for the disaggregated mode l proposed by the United States.  However, as 
mentioned above, the United States failed to provide su fficient data to employ such a model, despite it 
being in the United States' inter est to do so.  Moreover, the United States decided to apply a 
de minimis  threshold for assessed trade impacts.  The result was that the United States' model could 
not be implemented independe ntly.  This left us with the option of either accepting or rejecting the 
United States' model in its entirety.  Our decision is  to reject the United States' model in favour of a 
modified version of the model proposed by the Requesting Parties. 
3.116  We have two principal reasons for taking this deci sion.  The first is the lack of available data 
to implement the United States' model.  As we have  noted before, relevant da ta was available for only 
a third of the samples proposed by the United St ates and the United States did not provide any 
indication as to whether or not additional data would be made available.  Our second reason is that the 
only objections the United States had about the Reques ting Parties' model concerned the value of the 
parameters used in the model and the level of aggr egation.  We agree with the Requesting Parties in 
their assessment of the United States' view on thei r submitted model that the United States "does not 
critique the economic theory supporting the model, but argues that the parame ter values used in the 
model are inappropriate".
97 This implies that if due account is taken of the legitimate concern of both 
sides regarding the variance in the values of the pa rameters, then the model of the Requesting Parties 
could be used to estimate the trade effect of the measure in question. 
3.117  A basic economic model to derive a coefficient for the trade effects of disbursements 
operating as subsidies can be described as the product of four variables: the value of the subsidy, a 
measure of the ad valorem  price reduction caused by the CDSOA disbursements (i.e., "pass-
through"), a substitution elasticity of imports, and im port penetration.  The b asic relationship of the 
trade effect can be expressed as follows: 
Trade effect = (value of disbursements)*[(p ass-through)*(import penetration)*(elasticity of 
substitution)] 
 
3.118  The term in the square brackets can be define d as a trade effect coefficient.  For a given 
expenditure of CDSOA disbursements that is deemed to affect trade, the product of that expenditure 
and the coefficient provides the overall trade effect. 
3.119  The above expression is identical to the m odel proposed by the Requesting Parties as 
presented in equation (5).98 It differs only in the addition of a separate multiplicative term to reflect 
                                                      
97 Comments of Brazil, Canada, the European Commun ities, India, Japan, Korea and Mexico of 14 
June 2004 on the United States replies to the second set of questions of the Arbitrator, para. 21. 
98 See Box 1 of the joint replies of Brazil, Canada, the European Communities, India, Japan, Korea and 
Mexico to questions of the Arbitrator, dated 28 April 2004.   WT/DS234/ARB/MEX 
 Page 33 
 
 
 the pass-through effect of the disbursements on produc tion.  In the Requesting Parties' model, this 
term was implicitly assigned a value of one. It can be rewritten as: 
Reduction in imports RS***ηα=  (6) 
 
Where, α, is a parameter which reflect the value of the pass through effect of the disbursement. 
 3.120  As noted earlier and as pointed out by the United States, the model as specified in 
equation (5) and the variant as specified in equation (6 ) is too aggregated to take into account some of 
the specific aspects of the CDSOA scheme.   Chart 1 illustrates how the payments vary across 
industries at the 3-digit level of the North American Industry Classification.  The issue more generally is that while the CDSOA programme is technica lly open to any sector, and hence potentially has 
economy-wide effects, in practice the use of the programme, and hence the disbursements, are quite 
concentrated.  While 67 per cent of the CDSOA dis bursements in 2002 have been identified by the 
United States as either being miscellaneous manufactur ing or non-classifiable, in fact a review of the 
specific recipient industries identified allows a more  precise breakout.  In particular, the majority of 
the disbursements to "miscellaneous  manufacturing" went to producer s of ball and roller bearings, and 
the majority of the disbursements identified by  the United States as "non-classifiable" went to 
companies in the electronics, machinery and primary a nd fabricated metals industr ies.  In addition, the 
United States identifies a further 21 per cent of 2002 disbursements as going to the primary and 
fabricated metal industries.  The comparable  figures for 2001 are 66 per cent for "miscellaneous 
manufacturing and not elsewhere specified" (with a si milar distribution to that in 2002) and 20 per 
cent classified as primary and fabricated metal.  Ch art 1 also highlights the fact that the inter-industry 
distribution of payments can also vary over time.  
Chart 1: Distribution of CDSOA Disbursements by 3-Digit
 
North American Industry Classification, 2001-2003  
 
0%10%20%30%40%50%60%
Misc. manufactures
n.e.s.
Primary metal Food
Fabricated metalChemicals
Non metallic mineral
Transport equipment
Plastics and rubber Paper
Fish products
Non electrical machinaryAgriculture
Textiles mill products
Textiles and fabrics
Wood products
Furniture and fixturesPer cent of annual payment2001
2002
2003
 
 WT/DS234/ARB/MEX 
Page 34  
 
 3.121  We account for the industry distribution variation of the CDSOA payments by calculating the 
trade effects at the industry level and then aggregati ng the result.  This approach is broadly similar to 
the approach of the United States, which is to calculate the trade effects at th e detailed product level. 
Even though this approach is a practical way to  proceed, we did not use the United States approach 
due to some shortcomings in the implementation of the model.  The United States identified only 
18 product categories out of 71 that met their criteria for a de minimis  trade effect.  Of these 
18 categories, complete data was available for only  7 of the categories. In essence, the United States 
made assumptions in addition to those required to mode l the trade effects in order to arrive at a result. 
3.122  While it may be that, had the United States modelled all 71 industries by not introducing the 
de minimis  threshold, a more reliable estimate could have been put forward, we are not, however, 
convinced by that argument.  When the 18 categorie s analysed by the United States are multiplied by 
the relevant year and the relevant requesting party,  we obtain 66 country-year-product data points that 
are analysed.  Of these 66, complete data to r un the fully specified model proposed by the United 
States was available for only 21 points.  This imp lies that the United States fully specified model 
could only be used for a third of the ov erall cases that needed to be estimated. 
3.123  The approach we are adopting, while disaggreg ated compared to the Requesting Parties' 
approach, but aggregated when compared to the United States' approach, has less intensive data 
requirements.  Instead of using the detailed product level data, we adopt the 3-digit North American 
Industry Classification for our model.  Therefore, eac h of the parameters of the model requires data at 
that level and both parties were able to submit all the data necessary to run the model.  The trade effect expression is, therefore, applied at each industr y level for each year to estimate the trade effect 
of each industry.  The sum of these trade effects is then divided by the total annual disbursements for 
the year to arrive at a trade effect coefficient for that year.  This coefficient, by definition, is a 
weighted average of the CDSOA payments. 
3.124  We have also taken into account the reservati ons of the United States in adopting this 
approach.  The United States under lines four reservations towards th is approach:  (i) the total 
payments should not be used;  (ii) the total price reduction should not be equiva lent to the size of the 
payments;  (iii) industry-specific data should be u sed;  and (iv) greater care should be taken in 
choosing appropriate elasticity values instead of arb itrarily choosing the highest value.  The manner in 
which these are taken into account is explained later in  this section.  At this point, we wish simply to 
recall that the United States' reservations are w ith how the model is implemented, not with the 
specification of the model per se .  
3.125  Our approach is not immune from data difficulti es.  We are in agreement with the views of 
the arbitrators in US – FSC (Article 22.6 – US)  regarding the reliability of economic modelling when 
they stated that they were "mindful that the task  of evaluating the trade effects of the scheme cannot 
be accomplished with mathematical precision".
99  Their statement reflects the fact that there can be a 
genuine debate about an appropria te model to be adopted and about  the various assumptions required 
to implement any particular model.  We are also  in agreement with them when they state that 
"economic science does allow us to consider a range of possible trade effects with a certain degree of 
confidence".100  We would like to make it clear that we also share the reservations expressed by the 
parties to this arbitration about the degree of precisi on that may be attached to the results of economic 
modelling.  The next section addresses some of these concerns and also presents the various parameters that we must consider.    
3.126  However, before moving on, we would like to re iterate that, as Arbitrator, we have been 
obliged to accept the intrinsic difficu lties attached to the use of an economic model.  However, such 
                                                     
 
99 US – FSC (Article 22.6 – US) , para. 6.49. 
100 Ibid.  WT/DS234/ARB/MEX 
 Page 35 
 
 
 difficulties should not be confused with those resulti ng from the failure of the parties to supply data, 
where those parties are generally the source of the relevant information.  While the first type of 
difficulty (the intrinsic difficulties attached to the use of an economic model) is one of the elements 
arbitrators must consider in deciding whether to apply an economic model, the second type of difficulty (that resulting from the failure of the par ties to supply data) should not be part of that 
consideration.  We therefore re main convinced that it is appropr iate to rely on the information 
available when the arbitrator is of the view that an economic mode l would be the most effective way 
of calculating the level of nullification or impairme nt and one or more par ties do not fully cooperate 
with the arbitrator in providing data and do not s ubmit convincing reasons for not doing so.  In other 
words, we consider that we are expected to produ ce, at a minimum, an outcome which is robust in a 
lowest common denominator sense, but which is none theless, in our opinion, a fair measure of the 
level of nullification or impairment.  
4. Data issues 
(a) Introduction 
3.127  A complete explanation of the approach we have adopted is appended as Annex B.  This 
section addresses the data issues related to economic modelling in this case.  It discusses the value of 
the payments, the pass-through effect and the elastic ity of substitution.  It does not discuss import 
penetration, since there is only one source for this data, the United States' Government.  We therefore 
used the figures provided by the United States regarding import penetration. 
3.128  Another issue that needs to be addressed in advance of parameterizing the model is the 
relevant market to be examined.  The Requesting Parties claim that the CDSOA disbursements have 
an impact on their exports to the United Stat es and also their exports to other markets.
101  Hence, in 
their view, any analysis of trade effects should take into account the trade effects on the world  
market. 
3.129  We consider that neither the approach advocat ed by the Requesting Parties, nor the model 
they proposed would allow us to assess the trade impact of CDSOA disbursements on markets outside 
the United States.  In our opinion, any quantification of this effect would have to heavily rely on  
speculations and we recall that parties agree that we  should not address effects that are too remote or 
speculative.  We are also of the view that, having re gard to the nature of the measure at issue, the 
trade effect of any disbursement to US companies that have supported an anti-dumping or countervailing duty investigation agai nst imports into the United States is more likely to be on the US 
market than abroad.  We therefore limit our analys is to the imports into the United States that are 
displaced as a result of CDSOA disbursements. 
(b) Value of payments  
3.130  The Requesting Parties have claimed that, when modelling the trade effects of the 
disbursements, the total value of all disbursements should be used.  In contrast, the United States 
claims that certain deductions must be applie d prior to determining the relevant value of 
disbursements for modelling purposes.  
3.131  In our view, a decision on this issue is not required for modelling purposes.  The reason for 
this is based on the difference between the absolute  trade effect and the relative trade effect of a 
CDSOA disbursement. Unquestionably, a higher va lue of disbursements used to model the trade 
effect will yield a higher absolute trade effect valu e.  However, the model we propose is based on the 
                                                     
 
101 Joint replies of the Requesting Parties to the second  set of written questions of the Arbitrator, 7 June 
2004, paras. 13-14. WT/DS234/ARB/MEX 
Page 36  
 
 concept of a trade effect coefficient (square brackets in our expression),
102 which is independent of the 
value of the disbursement. 
3.132  In fact, the model proposed by the United Stat es, the so called Armington model, has a similar 
characteristic.  As noted above, the United States has only furnished the Arbitrator with a fully specified model for seven product categories.  Howeve r, in cases where the model is applied in the 
same industry to different WTO Members, the rela tive trade effect is always identical. Only the 
absolute trade effect varies.  For example, take  the impact of CDSOA payments on ball bearing 
imports from the European Communities and Japan in the year 2001.  In both cases the aggregate 
trade effect, according to the United States' model, is 0.77.
103  Similarly, for the years 2002 and 2003 
the aggregate trade effects are, respectively, 0.74 and 0.7.  Therefore, despite the fact that the 
payments attributable to the European Communities and Japan are different, the total trade effect in 
relative terms is identical. 
3.133  We recall the United States' arguments that the value of disbursements should be adjusted to 
take into account administrative errors, reimburse ments, revoked anti-dumping or countervailing duty 
orders.  We consider that we should, as a matter  of transparency, rely on figures published by the 
United States' authorities when it comes to assess the value of CDSOA disbursements.  As a result, 
we will disregard administrative errors that have not  been corrected at the ti me of the publication of 
the relevant figures.104  Likewise, we see no reason to adjust the figures published by the 
United States' authorities because reimbursements ha ve been requested but the requests have not yet 
been finally settled.105 
3.134  With respect to the United States' argument that disbursements relating to revoked orders 
should be deducted, we note that, under the CDS OA, payments made in, say, 2004, actually 
correspond to revenue collected in 2003.  If an or der was revoked on imports from a given Requesting 
Party in 2004, this has no influence on the fact th at offset payments in 2003 corresponded to duties 
collected at the time when the order was in place.  Under these circumstances, we see no reason to 
exclude payments made in a given year, even though in that year no duty may have been collected due 
to the revocation of an existing order, if the pa yments are based on duties collected while the order 
was in place. We believe this interpretation to be consistent with the Panel and Appellate Body 
findings in this case. 
3.135  As a result, we decide to use the amount of  disbursements published by the United States, 
without any adjustment. 
3.136  The United States has also  raised the issue of de minimis  deductions.  We do not have any 
legal guidance as to why such deductions should be made in these proceedings.  In making the 
deductions, the United States referred to two prov isions of the Anti-Dumping Agreement and the 
SCM Agreement that we do not consider relevant in  an arbitration pursuant to Article 22.6 of the 
DSU.  Furthermore, we do not see any rationa le for making the deducti ons on economic grounds. The 
purpose of an economic model is to estimate the trad e effect of the measure.  Any result derived from 
that model should then be assessed in terms of its relevance.  Any methodology that a priori  excludes 
certain industries will automatically bias the end resu lt.  In any case, assuming that the final result of 
any economic model is that the total trade effe ct is 1 per cent of the value of the CDSOA 
                                                      
102 See para. 3.117 above. 
103 Aggregate trade effects are defined as the to tal imports reduced as a result of the CDSOA 
disbursements.   
104 We also note the possibility that such correction may be reflected in the figures subsequently 
published. 
105 See United States written submission, para. 13.  WT/DS234/ARB/MEX 
 Page 37 
 
 
 disbursement, then we do not see any grounds, lega l or economic, to round that value down to zero 
and issue an award of "zero".  
(c) Elasticity of substitution 
3.137  The views of the parties also differ on the appr opriate value of the elasticity of substitution to 
be used in modelling, although they are all in agr eement that it is possible to calculate values at the 
3-digit NAIC level.106  The Requesting Parties submitted a set of  elasticities at that level.  The United 
States did not submit these elasticities when requested , and failed to convincingly contest the validity 
of the values submitted by the Requesting Parties. As a result, we used in our model the values 
submitted by the Requesting Parties. 
3.138  In recognition of the fact that different aggreg ation methodologies exist, we decided to vary 
the elasticity values submitted by the Requesting Parties by 20 per cent.  Therefore, three different 
sets of simulations are performed; one using the su bmitted elasticities and one each for values that are 
20 per cent lower and 20 per cent higher than these elasticities.  
(d) Pass-through 
3.139  While the concept of pass-through is generally  referred to in the economic literature as the 
extent to which exchange rate changes affect dom estic prices, in this case we use the concept in a 
similar fashion to that used by the arbitrator in the US – FSC (Article 22.6 – US)  case.  The arbitrator 
in that case noted, in the context of an export subsidy that: 
"[P]ass through relates to the degree to wh ich a company uses a subsidy it receives to 
lower the price of the product that it exports.  At one extreme the company may choose to apply the full amount of the subs idy to the price of its products, thereby 
lowering its price.  At the other, it may choose not to lower the price of the 
product."
107 
3.140  Therefore, pass-through, in the context of the case before us, is the extent to which a CDSOA 
disbursement will be applied to reducing the price of a beneficiary firm's products.  A 100 per cent 
pass-through assumption implies an application of the total amount, whereas a zero assumption 
implies that none will be so employed. 
3.141  The United States' position that the pass-through f actor is zero is highly unrealistic.  A factor 
of zero would presume that no recipient of a CDSO A payment would ever use the funds in any way 
that could have a price effect.  While this may be the case for some firms, it would seem impossible that it would always and inevitably be the case for al l firms, since as a basic rationale of economics, 
firms are expected to use their money efficiently, an d at least some will use that money to lower their 
prices.   
3.142  The Requesting Parties' argument of full pass-th rough is based on the presumption that every 
firm receiving CDSOA payments in every case woul d fully use those payments to finance price 
reductions on the products subject to the anti-dumping or countervailing duty order in question.  This 
would seem to be quite unlikely in reality.  In particular, while some firms may use CDSOA receipts 
in this way, the progamme leaves re cipients free to use the funds as they wish.  Furthermore, many or 
most firms producing a product that is subject to an anti-dumping or countervailing duty order also 
produce other products (often, many other products).  Thus, it is possible for CDSOA benefits to be 
applied to products that are not subject to orders.  In addition, some recipient firms may use their 
                                                     
 
106 Exhibit JR-15.  
107 US – FSC (Article 22.6 – US) , footnote 97. WT/DS234/ARB/MEX 
Page 38  
 
 payments to train their workers, to upgrade their t echnology or machinery, or to expand their capacity 
and/or production.  While using the funds in these so rts of ways clearly will have supply side effects 
that may have eventual consequential effects on pr ices, these price effects will be inter-temporal.  
Finally, some firms may, as the United States argues,  not use the funds in any way that would have 
price effects. 
3.143  In order to identify a suitable value for the pass-through coefficient we sought supplemental 
submissions and guidance from the parties.
108  On the one hand, the United States responded that a 
study of their Domestic International Sales Cor poration programme had iden tified a pass-through of 
that export subsidy of 75 per cent of the payment, but expressed the belief that "a pass-through of 25 
per cent is reasonable".109   This statement was not supported by any methodology or based on any 
factual evidence. On the other hand, the Requesti ng Parties did not alter their position that the only 
reliable pass-through is 100 per cent.   
3.144  In the absence of precise information on the va lue of the pass-through, we adopt the same 
approach as we adopted for the value of the elastic ity of substitution; instead of using one specific 
value we have used the range of 25 per cent to 100 per cent derived from the comments of the parties.  
The lower point of the range is provided by the United States, whereas the 100 per cent assumption is 
based, as we stated above, on the assumption that a firm has every incentive to use the funds in a 
commercially meaningful way. We acknowledge that  100 per cent pass-through is, in practice, not 
realistic for the reasons mentioned above, and we do not wish to give any credit to the Requesting 
Parties for not having justified their position that th e pass-through is 100 per cent.  However, we were 
not provided with any better information allowing us  to apply another percentage as the upper end of 
our range and we are intuitively of the view that, if  the upper end of the range is not 100 per cent, it is 
probably very close to that percentage.   
5. Application of the model 
3.145  We now proceed to apply the model.  Tabl e 3 summarizes our results for the range of 
assumed elasticities of substitution and for a range  of assumed pass-through values for 2001, 2002 
and 2003.  For each year we have 12 values, giving us  36 values in all.  At the outset we note that the 
range for 2003 differs from the ranges for the other tw o years.  This arises due to the change in the 
industry distributions for that year (see Chart 1 above).  The yearly change in the industry distribution is also one of the reasons why we use an averag e based on 2001-2003, even though the United States 
was not required to bring its legislation into  conformity with its WTO obligations until 
27 December 2003. 
3.146  Since our approach is based on assigning a single value of a trade effect coefficient we need a 
methodology to reduce the 36 estimates to a single value.  Since we have no guidance from the 
literature or from the submissions of the parties, we have decided to take for each year, the average of 
the middle two rows and the middle column and aver age these three values.  In doing so, we obtain a 
value of 0.68 for 2001, 0.78 for 2002 and 0.70 for 2003 and an overall value of 0.72. 
3.147  The United States contests the right of the Reques ting Parties to "retaliate on behalf of other 
Members" and we now proceed to address how this point is taken into account in our modelling. Our 
core rationale is that the trade effect of the CDSO A measure can be estimated to be the nullification or 
impairment that the Requesting Parties have suffe red as a result of the measure having not been 
withdrawn. Based on our analysis, we have estimat ed that the trade effect coefficient of the 
disbursements can be estimated to be 0.72.  Th erefore, the total annual trade effect of the 
disbursements, taking an average of the disbur sements over the years 2001-2003, is US$136,943,784 
                                                     
 
108 Second set of questions of the Arbitrator, dated 28 May 2004.  
109 United States replies to the second set of questions of the Arbitrator, para. 13.  WT/DS234/ARB/MEX 
 Page 39 
 
 
 based on total disbursements on Requesting Par ties products of US$190,199, 701.02. Our remaining 
task is to allocate this total trade effect amongst th e Requesting Parties.  One possibility is to use the 
aggregate share of total imports for each Request ing Party.  This, however, has an obvious bias, 
especially due to the industry concentration of the di sbursements as discussed earlier.  More detailed 
trade data could circumvent the problem of industr y concentration, but, in our view, this is also 
problematic, due to the fact that the trade data w ould be biased since they reflect import values when 
the anti-dumping and countervaili ng duties were in place.  
3.148  In our view, a better measure is based on the distribution of CDSOA payments, which is in 
turn based on aggregate duty collections on impor ts of products subject to anti-dumping duty or 
countervailing duty orders, but which can be analysed  to determine the distribution of those imports 
amongst the various exporting countries.  From this we may conclude that a WTO Member's share of 
the total disbursements is a better indicator of th e share of their exports that will be lost in 
consequence of the disbursement than the aggregat e share of imports.  Therefore, we decide to 
allocate the total trade effect amongst the Request ing Parties on the basis of the share of CDSOA 
disbursements attributable to duties collected on thei r respective exports.  In doing so, we note that the 
level of nullification or impairment will not ex ceed, for each Requesting Party, the level of 
nullification or impairment that results from the disb ursements relating to that party's exports subject 
to anti-dumping or countervailing duty orders.   
Table 3:  Summary of Trade Effect Coefficient Values by Elasticity  
and Pass-Through, 2001-2003  
 
2001 
 Elasticity value s 
Pass through Low Medium High 
25 0.22 0.27 0.33 
50 0.43 0.54 0.65 
75 0.65 0.81 0.98 
100 0.87 1.09 1.30 
2002 
 Elasticity values 
Pass through Low Medium High 
25 0.25 0.31 0.37 
50 0.50 0.62 0.74 
75 0.74 0.93 1.12 
100 0.99 1.24 1.49 
2003 
 Elasticity values 
Pass through Low Medium High 
25 0.22 0.28 0.34 
50 0.45 0.56 0.67 
75 0.67 0.84 1.01 
100 0.89 1.12 1.34 
 
D. CONCLUSION : LEVEL OF NULLIFICATION OR IMPAIRMENT  
3.149  As mentioned above, the purpose of the developm ent of an economic model in this case was 
to define a coefficient by which future disbur sements under the CDSOA would be multiplied to reach 
a value of trade effect.  In line with past arbitra tions, we consider this trade effect to represent the 
level of nullification or impairment suffered by Mexico. WT/DS234/ARB/MEX 
Page 40  
 
 3.150  We note that this solution is hybrid to the exte nt that it combines a fixed coefficient calculated 
on the basis of actual disbursement patterns over a particular period of time – in this case 3 years
110, 
with variable amounts of future disbursements.  We also acknowledge that this coefficient is based on 
past disbursements (2001-2003) which may reflect ne ither the amount nor the categories of products 
which will be subject to anti-dumping or co untervailing duty orders and lead to CDSOA 
disbursements in the future.  We nevertheless note  that this approach is consistent with past 
arbitrations where representative periods where used to determine volumes and prices of exports111 in 
order to calculate levels of nullification or impairme nt and levels of suspension fixed once and for all.  
It is also consistent with the practice under Ar ticle XIII of GATT 1947 an d 1994 for allocation of 
quotas or tariff quotas. 
3.151  As a result we conclude that: the level of nu llification or impairment in this case may be 
deemed to correspond, for Mexico and for a given year, to the following: 
Amount of disbursements under CDSOA for the most recent year112 for which data are 
available relating to anti-dumping or countervailing duties paid on imports from Mexico at that time, as published by the United States' authorities.  
multiplied by 
0.72  
IV. EQUIVALENCE OF THE LEVEL OF SUSPENSION OF CONCESSIONS OR 
OTHER OBLIGATIONS WITH THE LEVEL OF NULLIFICATION OR IMPAIRMENT 
A. I
SSUES RAISED BY THE UNITED STATES IN RELATION TO THE LEVEL OF SUSPENSION OF 
CONCESSIONS OR OTHER OBLIGATIONS PROPOSED BY MEXICO  
4.1 The United States has argued, in relati on to Mexico's request for suspension113, that Mexico 
has failed to specify the level of suspension of con cessions or other obligations  in a way that allows 
the Arbitrator to determine equivalence. The United States also claims that other features of Mexico's 
request are not compatible with Article 22 of th e DSU. The United States considers that Mexico's 
request to collect additional duties based on o ffset payments places no limits on the level of 
suspension proposed.  It also considers that Mexico  should not be allowed to, as the United States puts 
it, "retaliate for other Members". Finally, Mexico s hould not be allowed to impose a variable level of 
suspension each year.  
4.2 We have already addressed the question of whet her Mexico's request was sufficiently specific 
in order to allow the United Stat es to fully exercise its rights unde r Article 22.6 of the DSU.  Our 
conclusions are found in Section II.B above. 
4.3 In the previous section, we concluded that Me xico's approach based on the premise that a 
violation is the most prominent case of nullificatio n or impairment – thus justifying countermeasures 
equivalent to the amount of disbursements under the CDSOA – was not supported by the DSU.  
However, this does not ipso facto  render Mexico's proposed suspensi on invalid.  The issue before us 
now is to what extent Mexico's request for suspen sion remains equivalent to the level of nullification 
                                                      
110 The reasons for using a three-year period are explained in more detail in Annex B, para. 38. 
111 EC – Hormones (Canada) (Article 22.6 – EC) , paras. 57-61. 
112 We assume that the United States will continue  to publish the amount of disbursements under the 
CDSOA on a yearly basis. 
113 Mexico's request is described in paras. 1.4-1.6 above.  WT/DS234/ARB/MEX 
 Page 41 
 
 
 or impairment as we have decided to determine it (i .e., in terms of trade effect).  This issue is 
addressed in relation to the following features of  Mexico's request, which are challenged by the 
United States: 
(a) Suspension of concessions or other obligations expressed as a duty on an 
undetermined quantity of trade rather than as a suspension of concessions and tariff 
surcharges on a determined value of trade;      
(b) Suspension of concessions or other obligations  by some of the Requesting Parties so 
as to cover the total amount of disbursements under the CDSOA; and 
(c) Determination of a variable level of susp ension of concessions or other obligations. 
4.4 In doing so, we are mindful that, pursuant to Article 22.7 of the DSU, we should not examine 
the nature of the concessions to be suspended.   
B. THE LEVEL OF SUSPENSION OF CONCESSIONS OR OTHER OBLIGATIONS DETERMINED BY THE 
ARBITRATOR TO BE EQUIVALENT TO THE LEVEL OF NULLIFICATION OR IMPAIRMENT  
1. Suspension of concessions or other obligatio ns expressed as a duty on an undetermined 
quantity of trade rather than as a suspension  of concessions on a determined value of 
trade 
(a) Arguments of the parties 
(i) United States 
4.5 The United States contests the Requesting Par ties' intention to impose additional import 
duties on US products which rate will be set so  as to collect, over one year, additional duties 
equivalent to certain offset payments under th e CDSOA.  The United States contends that the 
Requesting Parties set no limits on the amount of tr ade that would be covered by their request.  
Depending on the amount of duty, the impact on United States exports could exceed by many multiples any impact that the CDSOA may have on exports from the Requesting Parties.  The 
Requesting Parties' suspension proposal stands in star k contrast to the proposals that arbitrators have 
approved in previous Ar ticle 22.6 proceedings.
114  Since equivalence between the amount of 
disbursement and the duty that the Requesting Parti es intend to collect does not, in the view of the 
United States, ensure a level of suspension equivalent  to the level of nullification or impairment, the 
United States considers that it has established a prima facie  case that the level of suspension is not 
equivalent to the level of nullification or impairment.115  
(ii) Mexico 
4.6 Mexico argues that the United States tries to in troduce a "trade effect" test not only for the 
determination of nullification or impairment but also for the suspension of concessions or other 
obligations.  Nothing in Article 22 of the DSU requir es a trade effect test for determining the level of 
suspension.  In any event, the test suggested by the United States would be unworkable in practice, 
since it is impossible to predict the particular trade e ffect of a tariff increase.  In the view of Mexico, 
arbitrators have never previously considered the trad e effect of the requested suspension.  Rather, they 
                                                      
114 United States written submission, paras. 28-30. 
115 United States oral statement, paras. 16-17. WT/DS234/ARB/MEX 
Page 42  
 
 considered the amount of additional duty as related to the nature  of the envisaged suspension, which 
falls outside the mandate of arbitrators under Article 22.7 of the DSU.
116 
(b) Analysis of the Arbitrator 
4.7 In the approach we decided to follow in orde r to determine the level of nullification or 
impairment, disbursements made under the CDSOA were only a starting point in assessing the trade 
effect  of the CDSOA on each Requesting Party.  The fi gure reached as a result of the application of an 
economic model by the Arbitrator is, consequently, a value of trade . 
4.8 Comparatively, Mexico's proposed suspension of concessions or othe r obligations is not 
based on a value of trade but aims at equating the amount disbursed by the United States under the CDSOA in relation to imports from Mexico and "a pr oportionate amount of the balance of total offset 
payments minus the offset payments on products fro m other Members that are authorized by the DSB 
to suspend concessions or other obligations in this dispute."
117 
4.9 With the exception of its link with the amount  of disbursements under the CDSOA, nothing in 
Mexico's proposal enables us to conclude at this  stage that the suspension of concessions or other 
obligations proposed by Mexico will or will not be  equivalent to the level of nullification or 
impairment in terms of affected trade determined according to this Decision.  We are nonetheless 
concerned that the total impact on trade of additi onal duties – the type of measure to which Mexico 
refers in the joint submission it made with other Requesting Parties – may not only be difficult to 
predict in general, but also may vary on the basis of  the rates applied and the products subject to those 
additional duties. 
4.10 We are therefore of the view that, in order for the level of suspension of concessions or other 
obligations proposed by Mexico to be equivalent  to the level of nullification or impairment 
determined by this Decision: 
(a) either Mexico will have to ta ke appropriate steps to ensure that the total value of 
United States trade subject to the prop osed additional duties does not exceed the total 
value of trade  determined to constitute the level of nullification or impairment, or 
(b) if and when it submits a revised request fo r authorization to suspend concessions or 
other obligations to the DSB further to this  arbitration, Mexico will have to propose 
other forms of suspension of concessions or obligations that are less likely to have 
effects on trade exceeding the identified level of nullification or impairment in terms 
of value of United States exports to Mexico. 
4.11 It does not fall within our mandate to recomme nd the suspension of specific obligations or the 
adoption of specific measures by Mexico.118  We therefore refrain from taking a decision on this 
matter.  We nonetheless note that the imposition of a 100 per cent ad valorem  duty on imports of 
certain goods from the United States, as proposed by requesting parties in other arbitrations, would be a relatively transparent way of a ddressing the concern expressed above. 
                                                     
 
116 Written submission of Brazil, the European Co mmunities, India, Japan, Korea and Mexico, 
paras. 81-86. 
117 See para. 1.5(b) above. 
118 See, e.g., EC – Hormones (US) (Article 22.6 – EC) , para. 19.  We note in this respect that no claim 
was raised in relation to Article 22.3 of the DSU.  WT/DS234/ARB/MEX 
 Page 43 
 
 
 2. Suspension of concessions or other obligations by Mexico and other Requesting Parties 
so as to cover the total amount of disbursements made under the CDSOA 
(a) Main arguments of the parties 
(i) United States 
4.12 The United States notes that all the Requesting Par ties, except Chile, include in their requests, 
authorization to impose countermeasures in an amou nt that corresponds to duties collected on dumped 
and subsidized products from all other countri es, including non-WTO Members and WTO Members 
who either were not complainants in the original dispute or were complainants but did not request 
authorization to suspend obligations under Article 22. 2 of the DSU.  The United States is of the view 
that a Member cannot suffer nullification or impair ment as a result of the CDSOA if no order is in 
place and no duty can be collected on that Memb er's products.  The United States notes that, 
according to the methodology paper submitted by th e seven Requesting Parties concerned, each 
Requesting Party would assume 1/7th of the remaining annual disbursement under the CDSOA, no 
matter what level of exports each of thes e parties has with the United States. 
(ii) Mexico 
4.13 According to Mexico, the approach pursuant to which all the disbursements under the 
CDSOA are WTO-inconsistent, constitute in their to tality the "level of nullification or impairment" 
and may be allocated between the Requesting Parties is based on an objective concept of nullification 
or impairment in relation to the violating measure as such.  Article 22.4 of the DSU only mandates the 
equivalence between two objective levels in relati on to the measure.  Thus, as all offset payments 
constitute "nullification or impair ment", the suspension of obligations should be authorized in the 
same amount.  Contrary to the arbitrator in US – FSC (Article 22.6 – US) , the Arbitrator is confronted 
with a multiple request. Since the question of allo cation arises, most Requesting Parties, including 
Mexico, have proposed the allocation descr ibed in their joint methodology paper.119  
                                                      
119 Written submission of Brazil, the European Co mmunities, India, Japan, Korea and Mexico, 
paras. 73-80.  The relevant part of the methodology paper submitted by the Requesting Parties (except Chile) on 23 February 2004 read as follows:  
 
"4. Each of the requesting parties intends to impose additional import duties on products 
originating in the United States and suspend the application of obligations to the United States 
up to an amount corresponding to an appropri ate share for each requesting party of the total 
annual disbursements under the CDSOA. For each requesting party, the annual level of 
suspension would be fixed on the basis of tw o elements, one specific to the requesting party 
and one shared among the requesting parties: 
 
- First, each requesting party would include in its level of suspension the total share of 
illegal disbursements attributable to antidumping and countervailing duties imposed on products of its origin.  
 
- Second, Brazil, Canada, the EC, India, Japan Korea and Mexico would add to this 
first element a share of the remaining annual illegal disbursements. Those requesting 
parties consider that this share should be 1/7 for each of them. (footnote omitted)  
 
5. The level of suspension for each requesting party would be determined annually in accordance 
with the above methodology and on the basis of information published by the U.S. Bureau of Customs 
and Border Protection or any successor entity.  As these levels would be fixed in relation to the 
disbursements made by the United States in the latest annual distribution, each year the requesting 
parties would inform the DSB as to their respective levels of suspension and the products concerned." WT/DS234/ARB/MEX 
Page 44  
 
 (b) Position of the Arbitrator 
4.14 For reasons already stated above, we are of the view that the reasoning applied in the context 
of arbitrations pursuant to Article 4.10 and 4. 11 of the SCM Agreement is not automatically 
applicable to arbitrations under Article 22.6 of the DSU, inter alia  because the test applied under 
Article 4.10 and 4.11 of the SCM Agreement is not the same – the terms of Article 4.10 and 4.11 and 
Article 22.6 are different – and relates to th e specific context of prohibited subsidies. 
4.15 We have already mentioned in Section III.B above , in the context of the determination of the 
level of nullification or impairment, that we ar e not convinced by the reasoning of the Requesting 
Parties in support of authorizations based on the full amount of CDSOA disbursements without 
further assessment of the economic or trade effect of the measure. 
4.16 Since the Requesting Parties' approach to shar ing the disbursements relating to orders on 
imports from other Members and non-WTO Members is based on the same premise of an objective violation erga omnes,  which we have already rejected in Section III.B.2 above, we come to the 
conclusion that a Requesting Party may only request suspension of concessions or other obligations 
with respect to the trade effect caused by disbursements under the CDSOA relating to its own 
exports.
120 
3. Determination of a variable level of suspension of concessions or other obligations 
(a) Main arguments of the parties 
(i) United States 
4.17 The United States considers that the Arbitrator  should establish a single level of suspension 
for each Requesting Party, and that the DSU does not  permit a requesting party to alter the level of 
suspension in the future. It is of the view that, in  this case, it would be impossible to create a formula 
that would equate allowable levels of suspension in  the future to varying levels of nullification or 
impairment. The level of nullification or impairment, it is argued, must be determined at the time the 
matter is referred to arbitration pur suant to Article 22.6 of the DSU.   Articles 22 and 23 only refer to 
"the level", which is a single and definite amount.  There is no basis in the DSU for multiple, varying 
and indefinite "levels" of suspension.  All request ing parties in prior arbitrations have requested a 
single amount. Articles 22.6 and 22.7 also provide a single opportunity to adjudicate the question of equivalence between the level of nullification or im pairment and the level of suspension.  The United 
States notes that, in US – 1916 Act (EC) (Article 22.6 – US) , the arbitrator found that the European 
Communities' right need not be frozen in time as of the date it made its request under Article 22.2 of the DSU.  It also note that the arbitrat or did not cite any authority other than Canada – Aircraft 
Credits and Guarantees (Article 22.6 – Canada) , in which the arbitrator d eclined to consider future 
applications of the illegal subsid y.  One difference between the US – 1916 Act (EC) (Article 22.6 – 
US) arbitration and this case is that, as of the date of the Article 22.2 request in US – 1916 Act (EC) 
(Article 22.6 – US) , there was no quantifiable level of nullifica tion or impairment.  This is not the case 
in these proceedings.  The difference between the ch allenge of a measure "as such" rather than "as 
applied" does not justify alterations in the level of suspension from year to year. Setting a single, 
unalterable annual level of suspension is consistent with the text of the DSU and with past practice.
121 
4.18 Even if an alterable level were permitted unde r the DSU, no alteration would be appropriate 
in this case.  First the challenge relates to the CD SOA "as such", not to the payments made under the 
CDSOA.  The United States considers that it is not po ssible to specify in advance the trade effect of 
                                                      
120 See also our comments in para. 6.7 below. 
121 United States written submission, paras. 80-90.  WT/DS234/ARB/MEX 
 Page 45 
 
 
 the CDSOA in the future. It is not even possible to specify the level of payments under the CDSOA 
given the uncertainties attached to its calculation.   The United States concludes that if requesting 
parties were permitted to refigure and revise their ow n level of suspension on an annual basis, these 
arbitrations would generate, rather th an resolve, disputes between parties.122  
(ii) Mexico 
4.19 Mexico argues that the purpose of Article 22.4 of  the DSU is to ensure equivalence between 
the level of suspension and the level of nullificati on or impairment so as to ensure that no punitive 
measures are taken against a Member found in violat ion of its WTO obligations. This does not mean, 
however, that a level may not vary depending on th e variations of the level of nullification or 
impairment.  The Requesting Parties fixed one single level of suspension which is identifiable at each 
point in time during the application of the susp ension.  Mexico refers to the decision in US – 1916 Act 
(EC) (Article 22.6 – US), where the arbitrator took into account the objective of Article 22.4, which is 
to ensure equivalence between two levels in the c ourse of the application of retaliatory measures.  
Mexico considers that it would be speculative to  extrapolate a fixed level of nullification or 
impairment and suspension for the future, given the wide variance among the annual CDSOA offset 
payments so far.  This result is fully justified by  the purpose of the retaliatory system, which is to 
induce compliance. If, in the case of a legislation deemed WTO-inconsistent as such, the suspension 
of obligations were determined at one point in tim e, the violating Member could further increase the 
nullification or impairment after the arbitrati on in total impunity.  The United States' position 
frustrates the objective of the retaliation.  Mexico adds  that a variable level could even be favourable 
to the United States because it could reduce the le vel of suspension by reducing the level of 
nullification or impairment through CDSOA disbursements.123 
(b) Analysis of the Arbitrator 
4.20 We first address the textual arguments.  While we note that Article 22.4 refers to "the level" 
(singular) of nullification or impairment and to "the  level" (singular) of suspension of concessions or 
other obligations, we are not persuaded that these terms impose an obligation to identify a single and 
enduring level of nullification or impairment.  The re quirement of Article 22.4 is simply that the two 
levels be equivalent.  As long as the two levels are equivalent, we do not see any reason why these 
levels may not be adjusted from time to time, provided such adjustments are justified and unpredictability is not increased as a result.  In f act, we see no limitation in the DSU to the possibility 
of providing for a variable level of suspension if th e level of nullification or impairment also varies. 
4.21 Most previous arbitrators have established one single level of nullification or impairment at 
the level that existed at the end of the reasonabl e period of time granted to the responding party to 
bring its legislation into conformity.
124  We do not disagree that this a pproach is, in the large majority 
of cases, the most appropriate.  However, we do not read anything in Article 22 of the DSU that would preclude us from following a different path if th e circumstances of this case clearly required it.  
4.22 The economic analysis carried out above suggest s that the value and industry distribution of 
the trade impact of the CDSOA could vary widely fr om one year to the next, because of the numerous 
factors affecting the amounts that may be disburse d, the nature of the recipients and how each 
category of recipient is likely to use the monetary  amounts awarded to them under the CDSOA.  This 
                                                     
 
122 United States written submission, para. 91. 
123 Written submission of Brazil, the European Co mmunities, India, Japan, Korea and Mexico, 
paras. 87-93. 
124 See, e.g., EC – Hormones (Canada) (Article 22.6 – EC) , para. 37; Brazil – Aircraft (Article 22.6 – 
Brazil) , paras. 3.63-3.65; US – FSC (Article 22.6 – US) , paras. 2.12-2.15; Canada – Aircraft Credits and 
Guarantees (Article 22.6 – Canada) , paras.  3.67-3.73. WT/DS234/ARB/MEX 
Page 46  
 
 variability is, in our opinion, very different in natu re and degree from the more steady evolution of 
exports recorded in other cases where counterfactuals
125 were applied, such as EC – Bananas III (US) 
(Article 22.6 – EC)  or EC – Hormones (US) (Article 22.6 – EC).   In those cases, the trade loss 
identified on the basis of a counterfactual was artific ially fixed once for all.  In the present case, there 
is an economic justification for allowing a variab le level of nullificati on or impairment and, 
correlatively, a variable level of suspen sion of concessions or  other obligations. 
4.23 We are mindful of the United States' arguments that the ability to vary the level of 
suspensions could make the level of countermeasur es applied unpredictable from one year to the next, 
and that no formula could be developed to introduc e sufficient predictability.  We do not find these 
arguments compelling.  Indeed, the level of nullifica tion or impairment in terms of the trade effect 
that we have calculated above is based on th e CDSOA, a law designed and adopted by the 
United States' authorities, which disbursements are al so determined by the United States' authorities.  
It should be straightforward for the United States' authorities to apply the formula developed in this 
Decision to find the amount of United States trade that may be subject to the suspension of concessions or other obligations in each following year.  Any unpredictab ility ought correspondingly 
to be minimal. 
4.24 Moreover, in this case, the United States would cont rol the levers to make the actual level of 
suspension of concessions or other obl igations go down.  Indeed, in ot her arbitrations where the level 
of nullification or impairment was set once and for all, the responding party could not influence the level of countermeasures applied to its trade, unless th e requesting party agreed to  modify it.  In this 
case, the level of suspension of concessions will automatically depend on the amount of 
disbursements made under the CDSOA in a given year .  If this amount decreases, so will the level of 
suspension of concessions or other obligations that the Requesting Parties will be entitled to impose.  
If no disbursements are made, the level of  suspension will have to be "zero". 
4.25 Finally, while we have expressed some re servations about the notion of "inducing 
compliance", we note that variable levels coul d achieve this objective without affecting the 
requirement of "equivalence" between the level of  nullification or impairment and the level of 
suspension under Article 22.4 of th e DSU.  We have been presented with convincing evidence that, if 
the CDSOA remains in force, the amount of disbursem ents is likely to increase in the coming years.  
We are conscious of the fact that higher counter measures may not actually induce compliance in all 
instances.  However, if we were to decide on a le vel of suspension fixed once for all on the basis of 
the first years of application of the CDSOA, it is possible that the level of suspension of concessions 
or other obligations would become, as time goe s by, significantly less than the actual level of 
nullification or impairment resulting from the continue d application of the CDSOA.  In other words, 
the cost of the violation for the United States could decrease.  In such a case,  the incentive to comply 
would most probably decrease too. We believe that su ch a risk exists in the present case and justifies 
that we determine a variable level of nullification or  impairment and, consequently, a variable level of 
suspension of concessions or other obligations.  
4.26 We also consider this approach to be consiste nt with the principle of prompt and effective 
resolution of disputes, contained in Article 3.3 and 3.4 of the DSU.
126  
4.27 Finally, like the arbitrators in EC – Hormones (US) (Article 22.6 – EC)127 and US – 1916 Act 
(EC) (Article 22.6 – US)128, we note that the United States may have recourse to the appropriate 
dispute settlement procedures in the event that it co nsiders that the application of the suspension by 
                                                      
125 For a definition of "counterfactual", see footnote 34 above. 
126 See EC – Hormones (Canada) (Article 22.6 – EC) , para. 38. 
127 See para. 82. 
128 See para. 9.2.  WT/DS234/ARB/MEX 
 Page 47 
 
 
 Mexico exceeds, for a given period, the level of nulli fication or impairment that Mexico has sustained 
as a result of the violation of the United States' ob ligations by the CDSOA, as calculated using the 
formula developed above.129  
V. AWARD OF THE ARBITRATOR 
5.1 For the reasons set out above, we determine that, in the matter United States – Continued 
Dumping and Subsidy Offset Act of 2000 (Original Complaint by Mexico) , the level of nullification or 
impairment suffered by Mexico in a particular year can be deemed  to be equal to the total of 
disbursements made under the CDSOA for the preceding year relating to anti-dumping or countervailing duties paid on imports from Mexico , multiplied by the coefficient identified in 
Section III.D above. 
5.2 Accordingly, we decide that the suspension by Mexico of concessions or other obligations on 
products originating in the United States covering, on a yearly basis, a total value of trade  not 
exceeding, in US dollars, the amount resulting from the following equation: 
 Amount of disbursements under CDSOA for the most recent year for which data are available 
relating to anti-dumping or countervailing duties paid  on imports from Mexico at that time, as 
published by the United States' authorities. 
 
multiplied by: 
 
 0.72    
would be consistent with Article 22.4 of the DSU. 
 5.3 In this respect, we note that Mexico will notify each year to the DSB, as soon as the amount 
of the offset payments that have been made is known, the details concerning the corresponding 
suspension of obligations.  
5.4 In that context, we suggest that Mexico notif y to the DSB, every year, prior to the imposition 
of new measures, a detailed description of the measures it plans to impose in suspension of its 
obligations, indicating where applicable the level of  the additional duties and the goods concerned, as 
well as the amount of trade that will be subject to the above-mentioned measure. 
5.5 Finally, we remind that Article 22.8 of the DSU provides that: 
"The suspension of concessions or other ob ligations shall be temporary and shall only 
be applied until such time as the measure f ound to be inconsiste nt with a covered 
agreement has been removed, or the Member that must implement recommendations or rulings provides a solution to the nullifi cation or impairment of benefits, or a 
mutually satisfactory solution is reached. …" 
VI. CONCLUDING REMARKS 
6.1 Some of the issues raised in these proceedings lead us to make the following remarks for 
wider consideration. 
6.2 As mentioned above, the DSU does not expressly explain the purpose behind the 
authorization of the suspension of concessions or other obligations.  On th e one hand, the general 
                                                     
 
129 See also Panel and Appellate Body Reports on US – Certain EC Products . WT/DS234/ARB/MEX 
Page 48  
 
 obligation to comply with DSB recommendations a nd rulings seems to impl y that suspension of 
concessions or other obligations is intended to  induce compliance, as has been acknowledged by 
previous arbitrators.
130 However, exactly what may induce comp liance is likely to vary in each case, 
in the light of a number of factors including, but not  limited to, the level of suspension of obligations 
authorized.131 
6.3 On the other hand, the requirement that the level of such suspensions remain equivalent to the 
level of nullification or impairment suffered by th e complaining party seems to imply that suspension 
of concessions or other obligations is only a means of obtaining some form of temporary compensation, even when the negotia tion of compensations has failed. 
6.4 In other words, it is not completely clear what  role is to be played by the suspension of 
obligations in the DSU and a large part of the c onceptual debate that took place in these proceedings 
could have been avoided if a clear "object and purpose" were identified. 
6.5 The WTO dispute settlement system authorizes Members to challenge a law as such, i.e. 
irrespective of whether it has been applied or not.  The "classical" approach based on an assessment of 
the trade effect of a given measure may not always contribute to the identification of the actual level 
of nullification or impairment , in particular if no instances of app lication had arisen at the time.  This 
may be because the trade effect of a measure may be difficult to assess due to the lack of verifiable 
figures.  We are of the view that, while parties sh are a duty to cooperate with the Arbitrator in the 
establishment of the facts, there is no reason a priori  to sanction the requesting party or the 
respondent if supporting figures are difficult or impossible to find.  We believe that this is a situation 
that has to be addressed in order to reach a deci sion on what may be achievable through recourse to 
suspension of obligations in such cases. 
6.6 In this arbitration, we have interpreted the concept of nullification or impairment, inter alia , 
from the terms of Article XXIII of GATT 1994 and Ar ticle 3.8 of the DSU.  We believe, however, 
from the extensive discussion of this concept by the parties, that the actual meaning of this provision 
is disputed and needs to be addressed in the appropriate forum. 
6.7 Finally, we note that an issue that arose as a consequence of following the approach whereby 
each party would be granted the right to suspend oblig ations exclusively in relation to its own exports 
is that there will remain disbursements under th e CDSOA in respect of goods from other Members 
and non-WTO Members for which no suspension of concessions or other obligations have been 
authorized. 
                                                     
 
130 EC – Bananas III (US) (Article 22.6 – EC) , para. 6.3. 
131 While the value of the suspension or concessions  or other obligations easily comes to mind as a 
relevant factor in inducing compliance, it must also be acknowledged that the actual role of the value of such 
suspension in securing compliance or no t may vary from one case to the next.   In some cases, even a very high 
amount of countermeasures may not achieve compliance, whereas in some others a limited amount may.  WT/DS234/ARB/MEX 
 Page 49 
 
 
 ANNEX A  
 
WORKING PROCEDURES OF THE ARBITRATOR 
 
 
 The Arbitrator will follow the normal working procedures of the DSU where relevant and as 
adapted to the circumstances of the present pro ceedings, in accordance with the timetable it has 
adopted.  In this regard,--  
(a) the Arbitrator will meet in closed session; 
(b) the deliberations of the Arbitrator and th e documents submitted to it shall be kept 
confidential. However, this is without prejudice to the parties' disclosure of 
statements of their own positions to the pub lic, in accordance with Article 18.2 of the 
DSU; 
(c) at any substantive meeting with the parties,  the Arbitrator will ask the United States 
to present orally its views first, followed by the party(ies) having requested 
authorization to suspend concessions or other obligations; 
(d) each party shall submit all factual evidence to the Arbitrator no later than in its 
written submission to the Arbitrator, except with respect to evidence necessary during 
the hearing or for answers to questions.  De rogations to this procedure will be granted 
upon a showing of good cause, in which case th e other party(ies) shall be accorded a 
period of time for comments, as appropriate; 
(e) the parties shall provide an electronic copy (on a computer format compatible with 
the Secretariat's programmes) together with the printed version (6 copies) of their submissions, including the methodology paper,  on the due date. All these copies must 
be filed with the Dispute Settlement Registrar, [...]. Electronic copies may be sent by 
e-mail to [...]. Parties shall provide 6 copi es and an electronic version of their oral 
statements during any meeting with the Ar bitrator or no later than noon on the day 
following any such meeting. 
(f) except as otherwise indicated in the timetable , submissions should be provided at the 
latest by 5.00 p.m. on the due date so that there is a possibility to send them to the Arbitrator on that date. As is customary, distribution of submissions to the other 
party(ies) shall be made by the parties themselves; 
(g) if necessary, and at any time during the proceedings, the Arbitrator may put questions 
to any  party to clarify any point that is  unclear.  Whenever appropriate, a right to 
comment on the responses will be granted to the other party(ies); 
(h) any material submitted shall be concise and li mited to questions of relevance in this 
particular procedure. 
(i) Parties have the right to determine th e composition of their own delegations.  
Delegations may include, as representatives of the government concerned, private 
counsel and advisers.  Parties shall have  responsibility for all members of their 
delegations and shall ensure that all memb ers of their delegations act in accordance 
with the rules of the DSU and these Working Procedures, particularly in regard to 
confidentiality of the proceedings.  Parties sh all provide a list of the participants of 
their delegation prior to, or at the beginning of, any meeting with the Arbitrator. WT/DS234/ARB/MEX 
Page 50  
 
 (j) to facilitate the maintenance of the record of the arbitration, and to maximize the 
clarity of submissions and other documents, in particular the references to exhibits 
submitted by parties, parties shall sequentia lly number their exhibits throughout the 
course of the arbitration. 
  WT/DS234/ARB/MEX 
 Page 51 
 
 
 ANNEX B  
 
METHODOLOGY FOR CALCULATI NG THE TRADE EFFECT 
OF CDSOA DISBURSEMENTS 
  
A. I
NTRODUCTION  
1. Section III.C.2 of this Decision outlines the proposed approaches of the parties to estimating 
the decline in imports arising from the disbursement  of funds as part of the United States Continued 
Dumping and Subsidy Offset Act.  The purpose of th is Annex is to explain the methodology used to 
calculate the values in Table 3 in the main text .  Section B outlines this methodology.  This is 
followed, in Section C, by an explanation of the ch anges made to the Requesting Parties' model by the 
Arbitrator in its application of this model.  S ection D discusses the issue of the values to be assigned 
to the various parameters. The last section presents the overall results.  
B. M
ETHODOLOGY  
2. The role of economic modelling of trade effects is discussed at length in the US – FSC 
(Article 22.6 – US)  Arbitration decision.132  The arbitrator in that case f aced an issue similar to that 
faced by us, which is the selection of an appropriate  model.  Its approach, however, differs from the 
one we have taken, since the arbitrator decided to use, in its entirety, the model proposed by one of 
the parties.  In support of its decision, the arbitrator  in that case pointed to the fact that the model it 
used, although proposed by the European Commun ities, had actually been developed by the United 
States Government to explain the trade effects of the FSC programme to the United States Congress.  
Hence, the arbitrator concluded that, if the m odel was suitable for the United States Congress, it 
would be suitable for the arbitration.133   
 
3. In this case, we received two models in res ponse to our request to all parties to submit what 
they viewed as suitable models to simulate the trad e impact of the CDSOA disbursements.  However, 
as explained in Section III.C.2, the models proposed  by the Requesting Parties and the United States, 
although broadly similar, differed in their level of a ggregation and, to some extent, in the variety of 
parameters that estimate the counterfactual dec line in the value of imports arising from CDSOA 
payments. 134  The model of the Requesting Parties relied on aggregate numbers for each of the three 
parameters, whereas the model of the United Stat es calculated results at the product level for each 
                                                      
132 Section VI.B of WT/DS108/ARB.  
133 On this point the arbitrator in the US – FSC  (Article 22.6 – US)  case states:  "In this regard, the very 
fact that the US Treasury report was su bmitted to Congress is, in our view, of considerable weight.  That report 
did suggest that it may have somewhat overstated the results.  Indeed, it may not be absolutely exact.  
Nonetheless, the US Treasury obviously made the judgement that, in the context of presenting the effects of the 
FSC scheme to US Congress (the authors, we note, of the legislation concerned), this report, including the modelling assumptions on which it is based, had sufficient  credibility to represent a  reliable reflection of the 
impact of the scheme when it came to the matter of informing the US Congress on its operation and effects.  
That was presumably not undertaken lightly and, at th e very least, it was presumably considered to be not 
manifestly misleading." Para 6.48.   
134 The US model, although based on the same basic economic framework as the model proposed by 
the Requesting Parties, is specified diff erently, since it includes separate parameters for the supply elasticity and 
the own-price elasticity of demand.  It is based on Fr ancois and Hall (1997), "Partial Equilibrium Modelling" in 
Francois, J. and Rennert, K. (eds.), Applied Methods for Trade Policy Analysis: A Handbook , Cambridge: 
Cambridge University Press. By similar framework  we mean that the m echanism by which CDSOA 
disbursements affect imports is the same. Imports are di splaced due to an increase in their price relative to 
domestic goods sold by US firms benefiting from CDSOA disbursements. WT/DS234/ARB/MEX 
Page 52  
 
 affected WTO Member.  The aggregate estimate using this approach was obtained by summing the 
individual estimates for each product.    4. Despite the relative merits of the proposed  models, as presented in these proceedings, each 
possessed fundamental flaws that made them unworkabl e for this case.  The model of the Requesting 
Parties required economy wide values.  Hence, a si ngle elasticity parameter was used to capture the 
substitutability between domestic a nd imported goods.  Similarly, the im port penetration value in this 
model was assumed to be the economy-wide average.  The difficulty with this approach is that it 
ignores the substantial industry variation in CDSOA disbursements.  Intuitively, one would expect the 
values for the elasticity of substitution and import pe netration for industries with relatively larger 
shares of CDSOA disbursements to have a greater weight in the overall number.  
 5. The US model, although well accepted in the lite rature, could not be applied to all products 
for which there are CDSOA disbursements.  This  meant that, for these products, an assumption was 
required to proxy the trade effect.  This raised th e question whether or not the greater complexity of 
the US model would be warranted if, in the end, assumptions about key parameters would have to be 
made in a seemingly ad hoc fashion.  6. Furthermore, precise estimates for each of the elasticity parameters were not available.  Hence, a range of values would have been required for the own-price elasticity of demand, elasticity 
of substitution and the supply elasticities of domes tic and foreign producers.  As stated by the 
Requesting Parties this introduces "greater parame ter shortcomings than the Requesting Parties' 
proposed model".
135 
 7. Since it is difficult, technically, to run the US model on an independent basis we have opted for a modified version of the model proposed by the Requesting Parties.  In particular, we adjusted it 
to take into account technical concerns identified by the United States.  While the principal reason for 
using the model of the Requesting Parties is the ease with which it can be employed, we also take note 
of the fact that the United States did not criticise th e specification of the Requesting Parties' model.  
Thus criticisms were focussed predominantly on  the values assigned to the various parameters.
136   
 8. The basic model of the Requesting Parties is specified below as equation (A1).  This equation 
is identical to equation (5) in the main text: 
 
Reduction in imports from CDSOA Disbursements 
RS**η=  (A1) 
 
Where137,  
• η is the elasticity of substitution 
⎟⎟⎟⎟
⎠⎞
⎜⎜⎜⎜
⎝⎛
∆∆∆
=qq
PPMM
η  
 
• S is the total value of the payments expressed as a margin of the price reduction on domestic 
production financed by payments and can be expressed as QP Sq*∆=  
 
                                                      
135 Comments of the Requesting Parties to addi tional questions of the Arbitrator, para. 23. 
136 "The United States does not critique the economic theory supporting the model, but argues that the 
parameter values used in the model are inappropriate", Comments of the Requesting Parties to additional questions of the Arbitrator, para. 21. 
137 All the variables are explained in paragraph 3.96.  WT/DS234/ARB/MEX 
 Page 53 
 
 
 • R is the ratio of the value of imports to the value of domestic shipments in the markets in 
question and can be expressed as ⎟⎟
⎠⎞
⎜⎜
⎝⎛
=QPMPR
qm 
 
9. Turning first to the specification of the model and concerns about its robustness.  In the first 
instance, we share the view of the United States th at one cannot be 100 per cent certain that the entire 
disbursement given to a firm will be expended to reduce imports .  While the economic rationale 
behind a 100 per cent pass-through is strong, the mo del specification needs to be adjusted to account 
for cases where the pass-through effect will be less th an 100 per cent.  Accordingly, we can include a 
fourth multiplicative term to equation A1 to account  for less than 100 per cent pass through and re-
specify equation A1 as equation A2 (equation (6) in the main text): 
 
Reduction in imports RS***ηα=  (A2) 
 
Where, α is the pass-through factor and takes on a values: 0 < α < 1. 
 
10. A value of zero for α implies no expenditure is used to reduce price, therefore the estimated 
trade effect would be zero.  This is the case pres ented by the United States.  The opposite case, 
presented by the Requesting Parties is that α takes on a value of 1, which represents a 100 per cent 
pass-through. 
 11. The principal focus of our appr oach to analysing trade effect is the determination of a trade 
effect coefficient, which is defined as a number th at can be multiplied by the applicable level of 
disbursements to estimate the total trade effect.  By focussing on the coefficient as the basis of our 
award, it is easier to simplify and bridge the diffe rences in the models that have been proposed by the 
Requesting Parties.  In expression A2 above, the coefficient can be defined as the product of α, η 
and R.  Accordingly, equation A2 can be reduced to A3: 
 
Reduction in imports = 
β*S  (A3) 
 
Where β is the trade effect coefficient and can take on a va lue greater than or equal to zero.  It is also 
important to note that this coefficient does not assign specific values to the elasticity of substitution or 
pass-through values.  Different combinations of the values of these variables could be used to 
determine a single value for β. 
 
12. The second issue is the level at which to im plement the model.  Technically, the model could 
be implemented at the product level as suggested by the United States.  Or, as suggested by the 
Requesting Parties, implemented at th e national, or aggregate level.  
 13. For the task at hand, there is no question that  a disaggregated approach would be preferable.  
The CDSOA scheme collects duties at the product le vel and disburses them to petitioning firms.  
However, as pointed out by the United States, production data, which is key to implementing any 
economic model, is not available for some products.  If a higher degree of aggregation is used, it is 
more likely that data will be available, albeit at the expense of greater precision.  14. In order to examine the feasibility of implem enting a model at a leve l of aggregation above 
the product level and below the national level, we re quested the United States to provide us with data 
for each of the parameters of equation A2.
138  Although the request was for the 2-digit level of the 
                                                      
138 Question 16 of first set of questions of the Arbitrator. WT/DS234/ARB/MEX 
Page 54  
 
 Standard Industrial Classification, the United States provided the necessary data at the 3-digit level of 
the North American Industrial Classification ("NAIC"), which is more appropriate.  15. In a subsequent set of questi ons, we requested each of the par ties to submit the additional data 
required to run an economic model at the 3-digit level of the NAIC system.
139  In responding to these 
questions, both the Requesting Parties and the Un ited States expressed concern about conducting a 
counterfactual trade effects analysis at the 3-dig it NAIC level. Consequently, before proceeding we 
should state and address these concerns.  16. The Requesting Parties' view was that:  
 
"3-digit NAIC levels cannot accurately re present substitution elasticities for products 
receiving CDSOA payments.  The 3-digit NAIC level is not at a sufficiently disaggregated level and covers too broad a range of products.  In fact, most products 
under dumping orders are specified at a hi ghly disaggregated level.  The use of 
aggregate estimates of substitution elasticities for disaggregated products would result 
in biased results for the calculated trade effects."
140 
17. They further submitted that this bias is lik ely to be downward, since the product specific 
elasticities are likely to be highe r than the aggregate elasticities.141  This assertion is substantiated 
through the example of pasta.  This product would be included with breakfast cereals and candy bars, 
which tend to be branded produc ts.  The Requesting Parties also highlighted a similar problem 
associated with various categories of bearings by distinguishing between high-precision bearings used 
in aircraft and those used in the au tomotive industries and home appliances.  
 18. The United States shared the same view as th e Requesting Parties that a 3-digit analysis 
would necessarily be biased.  They stated, "all of th e parties agree that any model based on data from 
the three-digit North American Industry Classification or from the Global Trade Analysis Project 
(GTAP) would result in a relatively imprecise estimat e of the effect the CDSOA has on the trade of 
the Requesting Parties".
142  
 19. The parties have placed us in a difficult positi on with respect to choosing an appropriate level 
of aggregation.  We agree with the United St ates that a more product specific methodology is 
preferable to an aggregate methodology.  Howeve r, given that if the product-specific methodology 
lacks the appropriate data, we do not see how a di saggregated methodology would be more accurate 
than an aggregate methodology.  Furthermore, we note that the solution of the United States for cases 
where necessary data was missing was to assume the results of their analysis with available data 
applied to those products for which data was not available.
143  The United States, in effect, assumes 
that the analysis for one set of products could au tomatically be applied to  another set of products, 
which must implicitly introduce the very same sorts of biases and inaccuracies that the United States 
argued against.  
                                                     
 
139 Question 1 of the second set of  questions of the Arbitrator.  
140 Replies of the Requesting Parties to the second set of questions of the Arbitrator. 
141 Replies of the Requesting Parties to the second  set of questions of the Arbitrator, para. 6. 
142 Comments of the United States to replies of the Requesting Parties to the second set of questions of 
the Arbitrator, para. 1. 
143 See footnote 6 of US Exhibit 18.  The United States adopts the same approach that we adopt, which 
is to assume a trade effect coefficient.  It defines the level for these products for which information is not 
available by the product of the offset payments and th e ratio of the modelled trade impact for all complaining 
parties in the given year and the total modelled offset payments for all complaining parties in the given year.  WT/DS234/ARB/MEX 
 Page 55 
 
 
 20. While reiterating that economic modelling is not always precise, we consider that the issue is 
whether or not the broad parameters of an outc ome derived through a trade-effects analysis is 
"unreasonable".144  In this context, our assessment is that an  analysis at the 3-digit level effectively 
bridges the problems of a too highly aggregated model that assumes single values for each variable 
and a disaggregated analysis, which does not have all the required data. 
 
21. Therefore, the adopted approach is to estimate  the trade effect, for a given year, at the 3-digit 
level and then sum these values to obtain a total trade effect.145 This total trade effect is subsequently 
divided by the level of disbursements to obtain the trade effect coefficient ( β in equation A3).  This is 
done for each of the years 2001 through to 2003.  The final value of the coefficient is then calculated 
as the simple average of these three numbers.  The results arising from the implementation of this 
approach are explained and presented in the last section of this Annex.    C. V
ALUES ASSIGNED TO PARAMETERS  
1. Pass-through 
22. The positions of the parties with respect to pass-through are completely opposite.  The United 
States asserts that the value is zero, whereas the Requesting Parties assert that it is 100 per cent. 
Section III.4(d) presents the rationale of the parties'  positions and our views on the appropriate values.  
In summary, we have opted for a range of pass-th rough values of between 25 and 100 per cent.  We 
were not persuaded by the US argument that the value should be zero.  Although they identified 
certain cases where firms that benefited from CD SOA disbursements did not utilize the funds, the 
United States was not convincing in establishing that this would arise for every single dollar disbursed 
under the CDSOA programme.146 
 23. Similarly, the fact that the United States was ab le to identify at least one firm that did not use 
the funds to divert imports suggests that an ab solute 100 per cent pass-th rough would be unrealistic. 
The problem we face, however, is that there is  no evidence to suggest what the upper-bound value 
might be if it is not 100 per cent.  The weight of economic theory and commercial pressures point to 
100 per cent, but not any other specific number.  As we state in paragraph 3.144 we are intuitively of 
the view that the upper end of the range would be close to 100 per cent.  2. Elasticities 
24. As the parties have pointed out, the debate over the appropriate  values to assign to the various 
elasticities used in modelling is intense.  Not only are there differences at the specific product level, 
but, as the United States has pointed out, there woul d be differences about the relevant aggregation 
methodology to be employed if calculations  are not done at the product level. 
 
25. The model of the Requesting Parties relies on a single elasticity value – the elasticity of 
substitution.  In contrast, the model of the United States employs three elasticity values in addition to 
the elasticity of substitution.  We agree with the Requesting Parties that any avenue to minimize the 
                                                     
 
144 See US – FSC (Article 22.6 – US)  para. 6.49. 
145 Aggregating the individual industries to get the total value should not be confused with analysing 
the effects in the United States market using general equilibrium analysis.  Each estimate at the individual level is done assuming no changes in any other industry. 
146 The United States provided anecdot al evidence of a few firms that did not use the funds to expand 
output on pages 30-34 of its written submission.  When asked (Question 13 of the Arbitrator) to provide 
additional evidence, the United States responded that it has "been unable to determine how affected domestic 
producers use CDSOA payments, beyond the information provided on pages 30-34 of [its] written submission". WT/DS234/ARB/MEX 
Page 56  
 
 variance in values should be explored. In this rega rd, the model of the Requesting Parties narrows the 
debate over relevant elasticity values to  only the elasticity of substitution.  
 26. The Requesting Parties themselves acknowledge the difficulties in obtaining precise estimates.  They submitted two sets of elasticities as evidence of possible values that could be used to 
model the trade effect.   One set was sourced from the Global Trade Analysis Project ("GTAP") based 
on the sectors within their basic model.  The sec ond submitted set for the same sectors was sourced 
from United States International Trade Commission ("USITC") researchers.  The two sets differed 
considerably (Annex Table 1).  The standard GTAP  range has a lower mean  (2.7) than the USITC 
estimates (3.1), smaller range (4 compared to 3.4), but both have the same median (2.8).  The USITC 
has higher values in 22 of the categories and the same value in eight of the categories.   
 27. In an attempt to develop a workable framewo rk for modelling, the parties were requested to 
submit elasticities of substitution at the 3-digit NAIC level.
147  The Requesting Parties, while 
expressing some reservations, responded positively to th is request and provided the data.  The United 
States did not, but stated many of the difficulties confronting any methodology to concord data from 
one classification to another.  It  also offered to  respond positively to the request, but only at a later 
stage.148  As a result, we did not have any choice, but to proceed with the elasticity estimates provided 
by the Requesting Parties.  However, before doi ng so, we reviewed the estimates submitted by the 
United States according to the product categories fo r which CDSOA disbursements were made.  Basic 
summary statistics are presented in Annex Table 1 for each of the four sets of elasticity values:  
GTAP, USITC estimates of GTAP, US submitted elasticities (low, high and mid-point) by CDSOA 
product categories and NAIC 3-digit industry cate gory as submitted by the Requesting Parties.   
 
Annex Table 1: Summary Statistics of Sets of Elasticities of Substitution  
 
  
GTAP USITC 
GTAP Requesting 
Parties NAIC US Product 
Low* US Product 
Mid-Point* US Product 
High* 
Mean 2.68 3.09 2.67 2.83 3.99 5.17 
Median 2.8 2.80 2.8 3 4 5 
Std. Deviation 0.8 1.18 0.79 0.87 0.92 1.12 
Minimum 1.8 1 1.8 1 2 3 
Maximum 5.2 5 5.2 5 6.5 8 
Count 41 41 31 65 65 65 
 
* Does not include values for seamless pipe and sugar, since specific values for these products were not 
provided. They were only listed as "h igh" and "perfect" respectively.  
 
28. The table confirms the view of the Requesti ng Parties that aggregate elasticities tend to be 
lower.  The first three columns reflect the va lues from the GTAP classification, including the 
concorded classification into the NAIC category.  The median for all three sets is 2.8 and the mean ranges from 2.67 to 3.09.  In contrast, the mean of the mid-point values of the US product elasticity estimates is 3.99 and the median value is 4.  The highest value for this category is 6.5, whereas the highest value for the aggregated values is 6.2. In  general terms the descriptive statistics of the low 
category proposed by the United States corresponds to the statistics of the first three columns. 
 29. The table also confirms that the issue of wh at values to assign to the various elasticities of 
substitution that a modeller may use is far from bei ng resolved.  Our case is complicated by the fact 
                                                     
 
147 Question 1 of the additional set of questions of the Arbitrator. 
148 "If the Arbitrators so request, the United States could calculate such concorded elasticity estimates 
using where necessary, either simple averages or trade- weighted averages." Replie s of the United States to 
additional questions of the Arbitrator, para. 2.  WT/DS234/ARB/MEX 
 Page 57 
 
 
 that, despite asking specifically for values that we could use, we only have one set of values for the 
3-digit NAIC level.  In order to account for measure ment error and, of course, aggregation bias, we 
propose to use the Requesting Parties' set of elasticity estimates, but vary them by 20 per cent in order to have a range of effects.  That is, the calcula tions will be done using elasticity values that are both 
20 per cent above the submitted elasticities and 20 pe r cent below.  The figure of 20 per cent was 
chosen as a conservative adjustment, given that the differences between the means of the US low and 
medium and US medium and high valu es is approximately 25 per cent. 
 
3. Import penetration 
30. The import penetration values were calculated using data provided by the United States.  
They are defined by the Requesting Parties as the "ra tio of imports to domestic shipments".  The latter 
is defined as total shipments less exports.  31. The figures reported in the table correspond to what might intuitively be expected, with the 
exception of the very high figure for fish and fish products.  The reported production figures for the 
years 2000 through to 2002 are respectively: US$3.5 5 billion, US$3.23 billion and US$3.09 billion.  
The respective export figures were: US$2.66 billion,  US$2.85 billion and US$2.8 billion.  When these 
figures are combined with the import figures of US$8 .12 billion, US$7.71 billion, and US$7.8 billion 
for the respective years, the resulting import penetration figures are very high relative to those calculated for the other industries.
149 
 
                                                      
149 Imports divided by the residual of production minus exports. WT/DS234/ARB/MEX 
Page 58  
 
 Annex Table 2:  Import Penetration Ra tios by 3-digit NAIC Industry, 2001-2003
 
 
Industry NAIC 
Code 2001 2002 2003 
Agricultural products 111 0.16 0.16 0.17 
Livestock and livestock products 112 0.03 0.04 0.03 
Fish, fresh, chilled, or frozen and other marine products 114 20.60 26.89 23.79* 
Food manufacturing 311 0.05 0.05 0.05 
Beverages and tobacco pr oducts 312 0.08 0.09 0.11 
Textiles and fabrics 313 0.16 0.19 0.21 
Textile mill products 314 0.25 0.27 0.30 
Apparel and accessories 315 1.30 1.29 1.38 
Leather and allied prod ucts 316 3.34 2.64 2.55 
Wood products 321 0.18 0.19 0.19 
Paper 322 0.13 0.13 0.13 
Printing, publishing and sim ilar products 323 0.04 0.05 0.05 
Petroleum and coal products 324 0.17 0.16 0.17 
Chemicals 325 0.22 0.25 0.28 
Plastics and rubber products 326 0.11 0.11 0.12 
Non-metallic mineral pr oducts 327 0.15 0.16 0.18 
Primary metal manufacturing 331 0.30 0.28 0.30 
Fabricated metal products, n.e.s 332 0.11 0.12 0.13 
Machinery, except electrical 333 0.38 0.37 0.42 
Computer and electronic products 334 0.69 0.75 0.70 
Electrical equipment, appliances and components 335 0.43 0.48 0.52 
Transportation equipment 336 0.44 0.44 0.45 
Furniture and fixtures 337 0.22 0.26 0.29 
Miscellaneous manufactured commodities 339 0.59 0.61 0.60  
Source: Calculated from data provided by the United States. Only those industries for which there is a non-zero 
CDSOA payment in any year between 2001 and 2003 are included. 
 * Average of 2001 and 2002.  
 
4. Value of disbursements 
32. The data on the level of the CDSOA disburseme nts at the 3-digit NAIC level was provided by 
the United States in response to a request for this info rmation.  In providing the data, the United States 
noted that it was unable to classify 17 products.  Th e total of these unclassified disbursements is not 
insignificant and presents a problem with respect to estimating the total effect.  Upon reviewing these 
disbursements, it would appear that some of the paym ents could be classified into relevant categories.  
However, since the United States chose not to cl assify these disbursements, we can only assume that 
some information relevant to the classification of th e disbursements is not known to us.  Accordingly, 
these payments will be listed as "Not Elsewhe re Classified" and without an NAIC code. 
 33. Unclassified disbursement data creates a problem of assigning values of elasticities and value 
of import penetration.  Our solutio n to this problem, in this case, is to assume an elasticity of 
substitution of 2.8, which is the median value, and an import penetration value, which is the average 
of the relevant NAIC categories for the given year.
150  In calculating the latter value, we exclude fish 
and fish products, since it is clear from the da ta presented by the United States that none of the 
unclassified fish products would fall under this cat egory.  Furthermore, we note that the resulting 
                                                      
150 Relevant categories in this context are NAIC  categories for which there were positive CDSOA 
disbursements in any of the years 2001, 2002 or 2003.  WT/DS234/ARB/MEX 
 Page 59 
 
 
 values for each of the years are not too dissimila r from the overall value of 0.295 presented by the 
Requesting Parties, which could also be used as a proxy.  D. I
MPLEMENTING THE MODEL  
34. Having dealt with the specification and various parameters of the model, we turn now to its 
implementation.  The adopted aggregation methodology for the results at the 3-digit industry level is 
similar to that of the United St ates.  Each counterfactual estimat ion of the trade loss arising from 
CDSOA disbursements at the 3-digit industry level is  summed to obtain the total trade effect.  This 
total trade effect is then divided by the total CDSO A disbursements for that year to obtain a value of 
the trade effect coefficient.  This  value, by definition, would be specific to the assumptions about the 
values of the elasticities of substitution and the pass- through effect.  Changes in the assumptions of 
these variables will necessarily alter the final result.  As explained previously, the approach with 
respect to the values of the elasticities of substitutio n is to vary the values by 20 per cent below and 
above the submitted values.    
35. This process is repeated for each ye ar from 2001 through to 2003, assuming a value of 
100 per cent pass-through.  Annex Tables 3-5 present the results of these simulations.  In these tables, 
the relevant NAIC industry and code is presented fi rst.  After this, the CDSOA disbursement for the 
industry, as submitted by the United States, is liste d.  The fourth column is the elasticity of 
substitution followed by the market  penetration variable. As indicated above, three values of 
elasticities are used.  The resulting tr ade effect from each of  these assumptions is listed in the last 
three columns as low, mid-point and high.   
 36. The second last row in the tables entitled "Totals" is the sum, where relevant, of all of the preceding rows.  Therefore, the simulated reducti ons are found under "Reduction in Imports".  The 
last row entitled "Trade Effect Coefficient" is th e value obtained by dividing the total trade effect 
(from the row above) by the total CDSOA disburse ments.  For 2001, these values (listed in Annex 
Table 3) are 1.09 for the mid-point range, 0.87 fo r the low value and 1.30 for the high values.  
Similarly, the results for 2002 and 2003 are listed in Annex Tables 4 and 5 respectively. 
 37. In order to adjust the simulation results fo r various assumptions of pass-through, as proposed 
by the United States, we simply reduce the valu e of the disbursements. For example, for an 
assumption of a 25 per cent pass-through, only 25 per cen t of the applicable disbursement is used to 
calculate the trade effect.  With respect to equation A3, this would imply an assumption of 0.25 for 
the value of α.  Annex Table 6, which is also Table 3 in the main text, presents the various results for 
the different assumptions about the values of the elasticity of substitution and pass-through. 
 
38. What remains to calculate is th e final trade coefficient.  In doi ng so, we have decided to take a 
sample average of the trade coeffi cients for the three years (2001-2003) .  The reason for this choice is 
the changing values and distribution of the payments.  A broader time period is more reflective of the 
value and type of distribution one could expect from the operation of the programme over time.  As 
stated in paragraph 3.146, we take for each year  the middle two rows and the middle column and 
average these three values. In doing so, we obtain 0.68 for 2001, 0.78 for 2002 and 0.70 for 2003.  A simple average of these three values is 0.72.  Accord ingly, the value for B in equation A3, or the trade 
effect coefficient, is 0.72.  
 WT/DS234/ARB/MEX 
Page 60 
Annex Table 3:  Counterfactual Trade Effect of CDSOA Disbursements  
Assuming 100 per cent Pass-through by 3-digit NAIC, 2001  
 
 
 Reduction in imports 
(US dollars) 
NAIC 
Code Industry Disbursements 
(US dollars) Elasticity Market 
Penetration Low Mid-point High 
111 Agriculture 25251.96 2.2 0.16 7111 8889 10666
114 Fish products 63576.45 2.8 20.60 2933672 3667090 4400508
311 Food 22086937.38 2.2 0.05 1943650 2429563 2915476
313 Textiles and fabrics 0 2.2 0.18 0 0 0
314 Textiles mill products 2167 3.08 2.2 0.25 9536 11920 14304
321 Wood products 0 2.8 0.18 0 0 0
322 Paper 413729.38 1.8 0.13 77450 96813 116175
325 Chemicals 5444564.42 1.9 0.22 1820662 2275828 2730994
326 Plastics and rubber 694385.83 1.9 0.11 116101 145127 174152
327 Non metallic mineral 3253 894.67 2.8 0.15 1093309 1366636 1639963
331 Primary metal  31938114.29 2.8 0.30 21462413 26828016 32193619
332 Fabricated metal 13801060.19 2.8 0.11 3400581 4250727 5100872
333 Machinery, except electrical 27551.75 2.8 0.38 23452 29315 35178
336 Transportation equipment 714537.7 5.2 0.44 1307890 1634862 1961835
337 Furniture and fixtures 0 2.8 0.22 0 0 0
339 Misc. manufactures 108862859.3 2.8 0.59 143873155 179841444 215809732
Not elsewhere classified 43853754.39 2.8 0.23 22724431 28405539 34086646
Total 231201890.8 200793413 250991767 301190120
Trade Effect Coefficient 0.87 1.09 1.30 
 
  
  WT/DS234/ARB/MEX
 Page 61Annex Table 4:  Counterfactual Trade Effect of CDSOA Disbursements  
Assuming 100 per cent Pass-through by 3-digit NAIC, 2002  
 
  Reduction in imports 
(US dollars) 
NAIC 
Code Industry Disbursements 
(US dollars) Elasticity Market 
Penetration Low Mid-point High 
111 Agriculture 535685.42 2.2 0.16 150849 188561 226274
114 Fish products 261675.49 2.8 26.89 15761657 19702071 23642485
311 Food 18886033.44 2.2 0.05 1661971 2077464 2492956
313 Textiles and fabrics 0 2.2 0.19 0 0 0
314 Textiles mill products 6734 180.07 2.2 0.27 3200082 4000103 4800124
321 Wood products 0 2.8 0.19 0 0 0
322 Paper 128975.29 1.8 0.13 24144 30180 36216
325 Chemicals 5463401.14 1.9 0.25 2076092 2595116 3114139
326 Plastics and rubber 1091701.37 1.9 0.11 182532 228166 273799
327 Non metallic minera l 3564.22 2.8 0.16 1277 1597 1916
331 Primary metal  36423770.47 2.8 0.28 22844989 28556236 34267483
332 Fabricated metal 27606835.88 2.8 0.12 7420717 9275897 11131076
333 Machinery, except electrical 1970105.76 2.8 0.37 1632824 2041030 2449235
336 Transportation equipment 2094362.23 5.2 0.44 3833521 4791901 5750281
337 Furniture and fixtures 0 2.8 0.26 0 0 0
339 Misc. manufactures 168327408 2.8 0.60 226232036 282790045 339348055
 Not elsewhere classified 37935918.13 2.8 0.24 20281048 25351310 30421571
 Totals 307463616.9 305303740 381629675 457955610
 Trade Effect Coefficient 0.99 1.24 1.49
 
  
 WT/DS234/ARB/MEX 
Page 62 
Annex Table 5:  Counterfactual Trade Effect of CDSOA Disbursements  
Assuming 100 per cent Pass-through by 3-digit NAIC, 2003  
 
 Estimated Reduction in Imports 
(US dollars) 
NAIC 
Code  Disbursements 
(US dollars) Elasticity Market 
Penetration Low Mid-point High 
111 Agriculture 417142.63 2.2 0.17 124809.1 156011 187214
114 Fish products 668638.52 2.8 23.75 35571569.3 44464462 53357354
311 Food 19378335.76 2.2 0.05 1705293.5 2131617 2557940
313 Textiles and fabrics 92126.35 2.2 0.21 34049.9 42562 51075
314 Textiles mill products 4153133 .37 2.2 0.30 2192854.4 2741068 3289282
321 Wood products 71164.16 2.8 0.19 30287.5 37859 45431
322 Paper 354593.19 1.8 0.13 66379.8 82975 99570
325 Chemicals 1185138.69 1.9 0.25 450352.7 562941 675529
326 Plastics and rubber 17779.87 1.9 0.12 3243.0 4054 4865
327 Non metallic mineral 160876. 92 2.8 0.18 64865.6 81082 97298
331 Primary metal  37658237.68 2.8 0.30 25306335.7 31632920 37959504
332 Fabricated metal 58308377.14 2.8 0.13 16979399.4 21224249 25469099
333 Machinery, except electrical 303535.69 2.8 0.42 285566.4 356958 428350
336 Transportation equipment 47777.55 5.2 0.45 89439.6 111799 134159
337 Furniture and fixtures 347.89 2.8 0.29 226.0 282 339
339 Miscellaneous manufactures 63033167.58 2.8 0.60 84716577.2 105895722 127074866
Not elsewhere classified 4397052.27 2.8 0.25 2488614.3 3110768 3732921
Totals 190247425.3 170109863.5 212637329 255164795
 Trade Effect Coefficient    0.89 1.12 1.34  WT/DS234/ARB/MEX 
 Page 63 
 
 
 Annex Table 6:  Summary of Results for Various Values  
for Substitution Elasticity and Pass-through, 2001-2003  
  
2001 
 
 Low Medium High 
25 per cent 0.22 0.27 0.33 
50 per cent 0.43 0.54 0.65 
75 per cent 0.65 0.81 0.98 
100 per cent 0.87 1.09 1.30 
  
   
2002 
 
 Low Medium High 
25 per cent 0.25 0.31 0.37 
50 per cent 0.50 0.62 0.74 
75 per cent 0.74 0.93 1.12 
100 per cent 0.99 1.24 1.49 
  
   
2003 
 
 Low Medium High 
25 per cent 0.22 0.28 0.34 
50 per cent 0.45 0.56 0.67 
75 per cent 0.67 0.84 1.01 
100 per cent 0.89 1.12 1.34 
    
 
 
__________