WORLD TRADE  
ORGANIZATION  WT/DS108/RW2 
30 September 2005 
 (05-4147) 
 Original:   English 
  
 
  
 
UNITED STATES - TAX TREATMENT FOR  
"FOREIGN SALES CORPORATIONS" 
 
 
 
Second recourse to Artic le 21.5 of the DSU  
by the European Communities  
 
 
 
 
Report of the Panel 
 
 
 
 
    WT/DS108/RW2 
 Page i 
 
 
TABLE OF CONTENTS 
 
Page  
I. PROCEDURAL BACKGROUND ..........................................................................................1  
II. FACTUAL ASPECTS ..............................................................................................................3  
A. INTRODUCTION ............................................................................................................................3  
B. THE ORIGINAL FSC  SCHEME .......................................................................................................3  
C. THE ETI  ACT ............................................................................................................................... 4 
D. THE JOBS ACT.............................................................................................................................5  
III. REQUESTS BY THE PARTIES.............................................................................................6  
IV. ARGUMENTS OF THE PARTIES ........................................................................................7  
V. ARGUMENTS OF THE THIRD PARTIES ..........................................................................7  
VI. INTERIM REVIEW................................................................................................................. 7 
A. COMMENTS BY THE EUROPEAN COMMUNITIES ..........................................................................7  
B. COMMENTS BY THE UNITED STATES ...........................................................................................8  
VII. FINDINGS....................................................................................................................... ........12  
A. INTRODUCTION ..........................................................................................................................12  
B. ARGUMENTS OF THE PARTIES ....................................................................................................12  
1. European Communities..........................................................................................................1 2 
2. United States.................................................................................................................. ..........13  
C. ARGUMENTS OF THE THIRD PARTIES .........................................................................................14  
1. Australia ...................................................................................................................... ............14  
2. Brazil......................................................................................................................... ...............14  
3. China.......................................................................................................................... ..............14  
D. EVALUATION BY THE PANEL .....................................................................................................15  
1. Introduction................................................................................................................... ..........15  
2. Guiding principles under Article 21.5 of the DSU ...............................................................15  
(a) Relevant treaty text ........................................................................................................... ........15  
(b) "existence or consistency w ith a covered agreement" ..............................................................16  
(c) "measures taken to comply"..................................................................................................... .17 
(d) "recommendations and rulings"................................................................................................17  
(e) Does Article 21.5 of the DSU  require a new recommendation?...............................................19  
3. Panel's application of guiding principles ..............................................................................21  
(a) Panel's task under Article 21.5 of the DSU ...............................................................................21  
(b) "measures taken to comply with" "t he recommendations and rulings" ....................................21  
(c) Article 4.7 of the SCM Agreement  in the 2002 Article 21.5 proceedings.................................22  
(d) existence or consistency of th e measures taken to comply.......................................................23  
4. Panel's terms of reference ..................................................................................................... .24 
VIII.  CONCLUSION ..................................................................................................................... ..28 WT/DS108/RW2   
Page ii  
 
 
TABLE OF CASES CITED IN THIS REPORT 
 
Short Title Full Case Title and Citation 
Australia – Salmon  
(Article 21.5 – Canada)  Panel Report, Australia – Measures Affecting Importation of Salmon – 
Recourse to Article 21.5 of the DSU by Canada , WT/DS18/RW, adopted 
20 March 2000, DSR 2000:IV, 2031 
Brazil – Desiccated Coconut  Appellate Body Report, Brazil – Measures Affe cting Desiccated Coconut , 
WT/DS22/AB/R, adopted 20 March 1997, DSR 1997:I, 167 
Canada – Aircraft  
(Article 21.5 – Brazil)  Appellate Body Report, Canada – Measures Affecting the Export of Civilian 
Aircraft – Recourse by Brazil to Article 21.5 of the DSU , WT/DS70/AB/RW, 
adopted 4 August 2000, DSR 2000:IX, 4299 
EC – Bananas III  Appellate Body Report, European Communities – Regime for the Importation, 
Sale and Distribution of Bananas , WT/DS27/AB/R, adopted 
25 September 1997, DSR 1997:II, 591 
EC – Bananas III   
(Article 21.5 – Ecuador)  Panel Report, European Communities – Regime for the Importation, Sale and 
Distribution of Bananas – Recourse to Article 21.5 of the DSU by Ecuador , 
WT/DS27/RW/ECU, adopted 6 May 1999, DSR 1999:II, 803 
EC – Bed Linen  (Article 21.5 – India)
  Appellate Body Report, European Communities – Anti-Dumping Duties on 
Imports of Cotton-Type Bed Linen from I ndia – Recourse to Article 21.5 of the 
DSU  by India , WT/DS141/AB/RW, adopted 24 April 2003 
EC – Export Subsidies on Sugar Appellate Body Report, European Communities – Export Subsidies on Sugar , 
WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R, adopted 19 May 2005 
EC – Trademarks and Geographical Indications (US) Panel Report,  European Communities – Protection of Trademarks and 
Geographical Indications for Agricultural Products and Foodstuffs, 
Complaint by the United States , WT/DS174/R, adopted 20 April 2005 
Guatemala – Cement I  Appellate Body Report, Guatemala – Anti-Dumping Investigation Regarding 
Portland Cement from Mexico , WT/DS60/AB/R, adopted 25 November 1998, 
DSR 1998:IX, 3767 
Japan – Alcoholic Beverages II  Appellate Body Report, Japan – Taxes on Alcoholic Beverages , 
WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 
1 November 1996, DSR 1996:I, 97  
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 
Mexico – Corn Syrup  
(Article 21.5 – US)  Appellate Body Report, Mexico – Anti-Dumping Investigation of High Fructose 
Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the 
DSU  by the United States , WT/DS132/AB/RW, adopted 21 November 2001, 
DSR 2001:XIII, 6675 
Thailand – H-Beams  Appellate Body Report, Thailand – Anti-Dumping Duties on Angles, Shapes 
and Sections of Iron or Non-Alloy Steel and H-Beams from Poland , 
WT/DS122/AB/R, adopted 5 April 2001, DSR 2001:VII, 2701 
US – Carbon Steel  Appellate Body Report, United States – Countervailing Duties on Certain 
Corrosion-Resistant Carbon Steel Flat Products from Germany , 
WT/DS213/AB/R and Corr.1, adopted 19 December 2002, DSR 2002:IX, 3779  WT/DS108/RW2 
 Page iii 
 
 
Short Title Full Case Title and Citation 
US – Corrosion-Resistant Steel 
Sunset Review  Appellate Body Report, United States – Sunset Review of Anti-Dumping 
Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan , 
WT/DS244/AB/R, adopted 9 January 2004 
US – Shrimp Appellate Body Report, United States – Import Prohibition of Certain Shrimp 
and Shrimp Products , WT/DS58/AB/R, adopted 6 November 1998, 
DSR 1998:VII, 2755 
US – Shrimp  
(Article 21.5 – Malaysia)  Appellate Body Report, United States – Import Prohibition of Certain Shrimp 
and Shrimp Products – Recourse to Article 21.5 of the DSU by Malaysia , 
WT/DS58/AB/RW, adopted 21 November 2001, DSR 2001:XIII, 6481 
US – FSC  Appellate Body Report, United States – Tax Treatment for "Foreign Sales 
Corporations" , WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619 
(Original Appellate Body Report") 
US – FSC  Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" , 
WT/DS108/R, adopted 20 March 2000, as modified by the Appellate Body Report, WT/DS108/AB/R, DSR 2000:IV, 1675 ("Original Panel Report") 
US – FSC  
(Article 21.5 – EC)  Appellate Body Report, United States – Tax Treatment for "Foreign Sales 
Corporations" – Recourse to Articl e 21.5 of the DSU by the European 
Communities , WT/DS108/AB/RW, adopted 29 January 2002, DSR 2002:I, 55 
("Article 21.5 Appellate Body Report") 
US – FSC  
(Article 21.5 – EC)  Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" 
– Recourse to Article 21.5 of the DSU by the European Communities , 
WT/DS108/RW, adopted 29 January 2002, as modified by the Appellate Body Report, WT/DS108/AB/RW, DSR 2002:I, 119 ("Article 21.5 Panel Report") 
 
 
  WT/DS108/RW2   
Page iv  
 
LIST OF ANNEXES 
  
ANNEX A 
 
FIRST SUBMISSIONS OF THE PARTIES 
 
Contents Page 
Annex A-1 First Written Submission of the European Communities A-2 
Annex A-2 First Written Submission of the United States A-18 
 
 
ANNEX B 
 
SECOND SUBMISSIONS OF THE PARTIES 
 
Contents Page 
Annex B-1 Second Written Submission of the European Communities B-2 
Annex B-2 Second Written Submission of the United States B-8 
 
 
ANNEX C 
 
THIRD PARTY SUBMISSIONS 
 
Contents Page 
Annex C-1 Third Party Submission of Australia C-2 
Annex C-2 Third Party Submission of Brazil C-6 
Annex C-3 Third Party Submission of The People's Republic of China C-11 
  
ANNEX D 
 
ORAL STATEMENTS, MEETING WITH THE PANEL 
 
Contents Page 
Annex D-1 Oral Statement of the European Communities D-2 
Annex D-2 Oral Statement of the United States D-4 
Annex D-3 Third Party Oral Statement of Australia D-9 
Annex D-4 Third Party Oral Statement of Brazil D-10 
Annex D-5 Third Party Oral Statement of the People's Republic of China D-12 
 
 
ANNEX E 
 
REQUEST FOR THE ESTABLISHMENT 
OF A PANEL 
 
Contents Page 
Annex E Request for the Establishment of  a Panel – Document WT/DS108/29 E-2 
 
  WT/DS108/RW2 
 Page 1 
 
 
I. PROCEDURAL BACKGROUND 
1.1 The original Panel and Appellate Body Reports in this dispute were adopted by the Dispute 
Settlement Body (the "DSB”) on 20 March 2000.  In its recommendations and rulings, the DSB 
requested the United States to bring the FSC measure  that was found, in the Panel and Appellate Body 
Reports, to be inconsistent with its obliga tions under Articles 3.1(a) and 3.2 of the Agreement on 
Subsidies and Countervailing Measures  (the " SCM Agreement ") and under Articles 10.1 and 8 of the 
Agreement on Agriculture , into conformity with its oblig ations under those Agreements.1  Adopting 
the recommendation of the original Panel made under Article 4.7 of the SCM Agreement , the DSB 
specified that the prohibited FSC subsidies had to  be withdrawn “at the latest with effect from 
1 October 2000”.  On 12 October 2000, at a special session, the DSB agreed to the United States' 
request to allow it a time period expiring on 1 November 2000 to implement the DSB 
recommendations and rulings.2  
1.2 On 15 November 2000, the Unit ed States enacted the “ FSC Repeal and Extraterritorial Income 
Exclusion Act of 2000 ”3 (the “ETI Act").  With the enactment of this legislation, the United States 
considered that it had implemented the DSB's recomme ndations and rulings in the dispute and that the 
legislation was consistent with the United States' WTO obligations.4 
1.3 Following consultations requested by the European Communities on 17 November 2000, the 
DSB, acting under Article 21.5 of the DSU , referred the matter back to the original Panel on 
20 December 2000.  On 29 January 2002, the DSB a dopted the Article 21.5 Pa nel and Appellate Body 
reports.  The Article 21.5 Panel found the ETI Act to be inconsistent with Articles 3.1(a), 3.2 of the 
SCM Agreement , 10.1 and 8 of the Agreement on Agriculture  and III:4 of the GATT 1994.  It further 
found:   
"the United States has not fully withdrawn the FSC subsidies found to be prohibited 
export subsidies inconsistent with Article 3.1(a) of the SCM Agreement  and has 
therefore failed to implement the reco mmendations and rulings of the DSB made 
pursuant to Article 4.7 SCM Agreement ."   
                                                      
1 Original Panel and Appellate Body Reports, US – FSC , para. 178. The original Panel concluded that 
the FSC scheme was inconsistent with the obligations  of the United States under Article 3.1(a) of the SCM 
Agreement and under Articles 3.3 and 8 of the  Agreement on Agriculture .  The original Panel recommended at 
paras. 8.3-8.4:   
"With respect to our conclusions regarding the SCM Agreement, we recommend,  pursuant to 
Article 4.7 of that Agreement, that the DSB request the United States to withdraw the FSC 
subsidies without delay."  [i.e. by 1 October 2000 – see para. 8.8]. "With respect to our conclusions regarding the Agreement on Agriculture, we recommend  that 
the United States bring the FSC scheme into co nformity with its obligations in respect of 
export subsidies under that Agreement....". 
The Appellate Body upheld the Panel's SCM Agreement  finding and modified the Panel's findings under the 
 Agreement on Agriculture  to find a violation of Articles 10.1 and 8.  The original Appellate Body 
recommendation read:  
"The Appellate Body recommends  that the DSB request the United States to bring the FSC 
measure that has been found, in this Report and in the Panel Report as modified by this Report, to be inconsistent with its obligations under Articles 3.1(a) and 3.2 of the 
SCM Agreement  and under Articles 10.1 and 8 of the Agreement on Agriculture , into 
conformity with its obligations under those Agreements." (para. 178). 
2 See Minutes of the DSB meeting held on 12  October 2000, WT/DSB/M/90, paras. 6-7. 
3 United States Public Law 106-519, 114 Stat. 2423 (2000), Exhibit EC-2. 
4 Minutes of the DSB meeting held on 17 November 2000, WT/DSB/M/92, para. 143. WT/DS108/RW2   
Page 2  
 
1.4 The 2002 Article 21.5 Panel Report contained no  explicit new "withdrawal without delay" 
recommendation pursuant to Article 4.7 of the SCM Agreement , opining that the original DSB 
recommendation "remained operative".
5   
1.5 The Appellate Body upheld the 2002 Article 21.5 Panel’s substantive findings (with modified 
reasoning).  The 2002 Article 21.5 Appellate Body Report read, in part:  
"The Appellate Body  recommends  that the DSB request the United States to bring 
the ETI measure, found in this Report, and in the Panel Report as modified by this 
Report, to be inconsistent with its obligations under Article 3.1(a) of the 
 SCM Agreement ,  under Articles 3.3, 8 and 10.1 of the Agreement on Agriculture ,  
and under Article III:4 of the GATT 1994, into  conformity with its obligations under 
those Agreements, and that the DSB request the United States to implement fully the 
recommendations and rulings of the DSB in  US – FSC ,  made pursuant to Article 4.7 
of the SCM Agreement ." 
1.6 On 22 October 2004, the United States enacted th e "the American Jobs Creation Act of 2004" 
(the "Jobs Act").6  The United States made the following statement in the DSB in November 2004: 
"...on 22 October 2004, President Bush had signed into law the American Jobs 
Creation Act of 2004 ("AJCA").  The AJCA had repealed the tax exclusion of the "FSC Repeal and Extraterritorial Income Exclusion Act of 2000" ("ETI Act").  It had thereby withdrawn the subsidy found to exist and brought the measure in question 
into conformity with US WTO obligations."
7   
1.7 On 5 November 2004, the European Communities requested consultations with the 
United States.8  Consultations, held on 11 January 2005 in  Geneva, did not lead to a satisfactory 
resolution of the matter.   
1.8 On 14 January 2005, the European Communiti es requested the establishment of another 
Article 21.5 DSU  Panel as there continued to be "a disag reement as to the existence or consistency 
with a covered agreement of measures taken to co mply with the recommendations and rulings" of the 
DSB between the United States and the European Comm unities, within the meaning of Article 21.5 of 
the DSU .9  The European Communities made this requ est pursuant to Articles 6 and 21.5 of the DSU , 
Article 4 of the SCM Agreement , Article 19 of the Agreement on Agriculture  and Article XXIII of the 
GATT 1994.   
                                                      
 5 The interim review section of the 2002 Article 21.5 Panel Report, US – FSC (Article 21.5 –EC) , at 
para. 7.5, states: 
"The European Communities  submits that it is not appropriate fo r us to make a recommendation in this 
case, as our mandate under Article 21.5 DSU  is to decide a disagreement.  In the EC view, this replaces 
the normal rule in Articles 7 and 11 DSU  that a panel makes findings so as to assist the DSB in making 
recommendations and rulings.  The European Communities argues that we have already made the 
recommendation referred to in Article 19 DSU  in our original Report.  The Panel , noting that the 
United States did not respond to this EC comment and that  practice in this area has not been entirely 
consistent in Article 21.5 DSU  proceedings44, is of the view that the orig inal recommendation adopted by 
the DSB on 20 March 2000 remains operative.  We ha ve therefore deleted what was originally 
paragraph 9.3 of the interim report (and made a consequentia l change in the title of Section IX of the 
Report)." 
_______________________________ 
44 Certain Article 21.5 DSU  panels have made recommendations ... while others have not ....".  
6 Text of the Jobs Act is in Exhibit EC-1.  
7 WT/DSB/M/178, para. 38. 
8 The consultation request was circulated in document WT/DS108/27, dated 10 November 2004.   
9 The Panel request was circulated in document WT/DS108/29, dated 14 January 2005.   WT/DS108/RW2 
 Page 3 
 
 
1.9 At its meeting on 17 February 2005, the DSB referred  this dispute, if possible, to the original 
Panel in accordance with Article 21.5 of the DSU  to examine the matter referred to the DSB by the 
European Communities in document WT/DS108/29.  At that DSB meeting, it also was agreed that the 
Panel should have standard te rms of reference, as follows:10   
“To examine, in the light of the relevant provisions of the covered agreements cited 
by the European Communities in document WT/DS108/29 the matter referred by the 
European Communities to the DSB in that document, and to make such findings as 
will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements.” 
1.10 The Panel was composed on 2 May 2005 as follows:
11 
 Chairman: Mr. Germain Denis 
  Members: Mr. Didier Chambovey 
Professor Seung Wha Chang 
1.11 Australia, Brazil and China reserved their rights to participate in the Panel proceedings as 
third parties. 
1.12 The Panel met with the parties on 30 June-1 July  2005 and with third parties on 1 July 2005. 
1.13 The Panel submitted its interim report to the par ties on 22 July 2005.  On 1 August 2005, both 
parties submitted written requests that the Panel review  certain specific aspects of the interim report.  
On 5 August 2005, each party submitted written comme nts on the other party's written request.  The 
Panel submitted its final report to the parties on 10 August 2005.  
II. FACTUAL ASPECTS 
A. 
INTRODUCTION  
2.1 These proceedings of this Article 21.5 complia nce panel follow the United States enactment 
of the Jobs Act in late 2004.   
2.2 Before briefly describing the Jobs Act, we reca ll the relevant provisions of the original FSC 
and ETI subsidy measures.   
B. THE ORIGINAL FSC  SCHEME  
2.3 A detailed description of the original FSC scheme was contained in paragraphs 2.1-2.8 of the 
original Panel Report.12   
2.4 Briefly, Sections 921-927 of the US Internal Revenue Code provided for a US tax exemption 
on a portion of a FSC's earnings.  This was "foreign trade income", the gross income of a FSC 
attributable to "foreign trading gross receipts".  Foreign trading gross receipts meant the gross receipts 
of any FSC generated by qualifying transactions, whic h generally involved the sale or lease of certain 
                                                      
10 See document WT/DS108/30. 
11 Ibid.  
12 Original Panel Report, US – FSC, paras. 2.1-2.8. WT/DS108/RW2   
Page 4  
 
“export property”.
13  A FSC had to meet certain requirements of foreign presence and foreign 
economic processes.14 
2.5 A portion of the “foreign trade income” was deemed to be “foreign source income not 
effectively connected with a trade or business in th e United States” and was therefore not taxed in the 
United States.15  This untaxed portion was “exempt foreign trade income”.16  The remaining portion 
was taxable to the FSC.  Dividends paid by the FSC out of exempt and non-exempt income to the 
shareholder (ordinarily, the “related supplier”) generally qualified for a full dividends-received 
deduction.17  Special rules applied for agricultural cooperatives.18  The FSC scheme also contained 
certain income allocation (including two administrative pricing) rules in the case of a sale of export property to a FSC by a person described in Section 482 of the Internal Revenue Code ( i.e., by a 
related supplier).  There were also certain requireme nts relating to distribution activities attributable to 
the export transaction.
19 
C. THE ETI  ACT 
2.6 A detailed description of the ETI Act was contai ned in paragraphs 2.2 to 2.8 of the 2002 
Article 21.5 Panel Report.20   
2.7 Briefly, the ETI Act consisted of five sections .  Aspects of sections 2, 3 and 5 are most 
relevant.21   
2.8 Section 3, entitled "Treatment of Extraterrito rial Income", amended the Internal Revenue 
Code by inserting a new section 114, as well as a new Subpart E, which was in turn composed of new 
sections 941, 942 and 943.  The ETI Act permitted certain US and forei gn taxpayers to elect to have 
qualifying income taxed in accordance with the ETI provisions on a transaction-by-transaction basis. 
2.9 Subject to certain exceptions, income from speci fic transactions would qualify for ETI fiscal 
treatment if it was attributable to "foreign trading gross receipts":22  (i) from specific types of 
                                                      
 13 With certain exceptions, export property is: 
• property held for sale or lease; 
• manufactured, produced, grown, or extracted in the United States; 
• by a person other than a FSC; 
• sold, leased, or rented for us e, consumption, or disposition outside the United States; and 
• with no more than 50 per cent of its fair market value attributable to imports."  
14 Section 922(a) and Section 924(b) of the Internal Revenue Code. 
15 Such income is generally exempt from tax under section 882 of the Internal Revenue Code, if it is 
earned by a corporation resident outside the United States. 
16 See Section 923(a) of the Internal Revenue Code. 
17 Section 926(a) and 245(c) Internal Revenue Code. 
18 See Section 923(a)(4) and Section 245( c)(2)(B) of the Internal Revenue Code. 
19  See Section 925(c) and Section 924 (d) and (e) of the Internal Revenue Code. 
  20 2002 Article 21.5 Panel Report, US – FSC (Article 21.5 – EC) . 
21The remaining provisions of the ETI Act consist of section 1 containing the short title of the ETI Act 
and section 4 which sets forth a number of "technical and conforming" amendments.  
22 Section 942(a) of the Internal Revenue Code de signated as "foreign trad ing gross receipts" the 
receipts generated in transactions satisfying all three of these conditions.  Under sectio n 114(e) of the Internal 
Revenue Code, "extraterritorial income" was the gross income  attributable to foreign trading gross receipts and, 
under section 941(b) of the Internal Revenue Code, "foreign trade income" was the taxable income attributable 
to foreign tradin g gross receipts.  WT/DS108/RW2 
 Page 5 
 
 
transactions;23  (ii) involving "qualifying foreign trade property";24  and (iii) if the "foreign economic 
process requirement" was fulfilled.25   
2.10 Section 114(a) of the Internal Revenue Code provided that a taxpayer's gross income "does 
not include extraterritorial income".  Section 114( b) added that this exclusion of extraterritorial 
income from gross income "shall not apply" to that  portion of extraterritorial income which is not 
"qualifying foreign trade income".  Accordingly, the portion of extraterritorial income which was 
excluded from gross income – and, thereby, fro m United States taxation – was an amount which 
would result in a reduction of the taxable inco me of the taxpayer from the qualifying transaction.26   
2.11 Section 2 of the ETI Act repealed the provisions  of the Internal Revenue Code relating to 
FSCs.27  Section 5(b) prohibited foreign corporatio ns from electing to be treated as FSCs after 
30 September 2000 and provided for the termination of inactive FSCs.   
2.12 However, section 5(c) created a “transition pe riod” and a “grandfathering clause” for certain 
transactions of existing FSCs.  Specifically, section 5(c )(1) of the ETI Act stipulated that the repeal of 
the provisions of the Internal Revenue Code rela ting to FSCs "shall not apply" to transactions of 
existing FSCs which occur before 1 January 2002 or  to any other transactions of such FSCs which 
occur after 31 December 2001, pursuant to a binding contract between the FSCs and an unrelated 
person which is in effect on 30 September 2000.  
D. THE JOBS ACT 
2.13 The Jobs Act applied from 1 January 2005 (secti on 101(c) of the Jobs Act).  Thus, the ETI 
scheme continued until th e end of 2004.   
2.14 Section 101 of the Jobs Act is entitled "Repeal of  exclusion for extraterritorial income".  
Section 101(a) of the Jobs Act stipulates:  "Secti on 114 [of the Internal Revenue Code] is hereby 
repealed."   Section 101(b), entitled "conforming amen dments", provides, in its sub-paragraph (1): 
“Subpart E of Part III of subchapter N of chapte r 1 (relating to qualifying foreign trade income) is 
hereby repealed".28  
                                                      
23Foreign trading gross receipts coul d be earned through (i) any sale, exchange, or othe r disposition of 
qualifying foreign trade property;  (ii) any lease or rental of qualifying fore ign trade property;  (iii) any services 
which are related and subsidiary to (i ) and (ii);  (iv) for engineering or architectural services for construction 
projects located (or proposed for location) outside the United States;  and (v) for the performance of managerial 
services for a person other than a related person in furthe rance of activities under (i), (ii) or (iii). (section 3 of the 
ETI Act, section 942(a) of the Internal Revenue Code).  
24 Qualifying foreign trade property was property: (A) manufactured, produced, grown or extracted 
within or outside the United States;  (B) held primarily for sale, lease or rental, in  the ordinary course of 
business, for direct use, consumption, or disposition outside the United States;  and (C) not more than 50 per 
cent of the fair market value of which is attributable to :  (i) articles manufactured, pr oduced, grown, or extracted 
outside the United States;  and (ii) direct costs for labour performed outside the United States.  Section 3 of the ETI Act, section 943(a)(1) of the Internal Revenue Code.  Section 943(a)(3) and (4) of the Internal Revenue 
Code set forth specific exclusions from this general definition.  
25 Section 3 of the ETI Act, section 942(b), (b)(2)(A)(ii), (b)(2)(B) and (b)(3) of the Internal Revenue 
Code.  
26 Pursuant to section 941(a)(1) and (2) of the Internal Revenue Code, qualifying foreign trade income 
would be calculated as the greatest of, or the taxpayer's choice of, the following three options:  (i) 30 per cent of 
the foreign sale and leasing income derived by the taxpayer from such transaction; (ii) 1.2 per cent of the foreign 
trading gross receipts derived by the ta xpayer from the transaction; or ( iii) 15 per cent of the foreign trade 
income derived by the taxp ayer from the transaction.  
 27Subpart C of part III of Subchapter N of chapter 1, consisting of sections 921-927 of the Internal 
Revenue Code.  
28 Section 101(b)(2) also contains other “conforming amendments”, Exhibit EC-1. WT/DS108/RW2   
Page 6  
 
2.15 However, pursuant to the "transition provision" in  section 101(d) of the Jobs Act, for certain 
transactions in the period between 1 January 200 5 and 31 December 2006, the ETI scheme remains 
available on a reduced basis.  That is, a percentage of ETI benefits remain available in respect of each 
qualifying transaction (80 per cent in 2005 and 60 per cent in 2006). 
2.16 In addition to that time-limited transition provisi on, section 101(f) of the Jobs Act indefinitely 
grandfathers the ETI scheme in respect of certain transactions.
29 
2.17 Moreover, Section 101 of the Jobs Act does not  repeal section 5(c)(1) of the ETI Act, 
indefinitely grandfathering FSC subsidies in respect of certain transactions.30  Nothing in the 
legislative language of the Jobs Act modifies, explic itly or implicitly, the tr ansition rules for the FSC 
subsidies.31   
III. REQUESTS BY THE PARTIES 
3.1 In its request for establishment of the Panel,  the European Communities asks the Panel to 
find: 
 "– that the United States has failed to wit hdraw its prohibited subsidies as required by 
Article 4.7 of the SCM Agreement , has failed to bring its scheme into conformity with 
its WTO obligations and has thus failed to implement the DSB's recommendations 
and rulings, as specified by the DSB on 20 March 2000 and on 29 January 2002, as required by Articles 19.1 and 21.1 of the DSU .   
  – that the United States continues to violate Articles 3.1(a) and 3.2 of the SCM 
Agreement,  Articles 10.1, 8 and 3.3 of the Agreement on Agriculture  and Article III:4 
of the GATT 1994."
32 
 3.2 In response to Panel questioning, the European  Communities clarified that it "is not seeking 
repetition of" the findings, recommendations and ruli ngs "already made in pr evious Reports and by 
the DSB in this dispute".
33  Rather, the European Communities seeks a finding that by promulgating 
the Jobs Act, "the United States has not fully co mplied with the findings and recommendations made 
by the Panel and the Appellate Body in the origin al proceeding and in the Article 21.5 proceeding, as 
adopted by the DSB."34  The European Communities also clarifie d that we might legitimately exercise 
judicial economy with respect to the "claims" of  the European Communities under Articles 19.1 and 
21.1 of the DSU .35 
3.3 The United States requests that "the Panel reject the EC claims" .36 
                                                      
29 The amendments made by section 101 of the Jobs Act do not apply to any transaction in the ordinary 
course of a trade or business which occurs pursuant to a binding contract (1) which is between the taxpayer and 
an unrelated person, and (2) which was already in effect on 17 September 2003 (the last day prior to the 
introduction of the bill before the US Senate) and at all times thereafter.   
30 See, for example, US response to Panel Question 1. 
31 See, for example, US response to Panel Question 2.  
32 WT/DS108/29.  
33 See EC response to Panel Question 8.  Although the European Communities, in its first written 
submission, requested that we make a further recomme ndation, it subsequently asserted that such a further 
recommendation was not necessary.  According to the European Communities:  "The Panel can confirm that 
[the] Article 4.7 recommendation made in the original pr oceedings remains operative and unsatisfied".  See EC 
response to Panel Questions 8, 27 and 28.  
34 See EC response to Panel Question 8. 
35 See EC response to Panel Question 10.   
36 US first written submission, para. 21.   WT/DS108/RW2 
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IV. ARGUMENTS OF THE PARTIES 
4.1 The arguments of the parties are set out in th eir submissions to the Panel.  The parties' 
submissions are attached to this Report as Annexes (see List of Annexes, page iv). 
V. ARGUMENTS OF THE THIRD PARTIES 
5.1 The arguments of the third parties -- Austra lia, Brazil and China -- are set out in their 
submissions to the Panel and are attached to this Re port as Annexes (see List of Annexes, page iv).   
VI. INTERIM REVIEW 
6.1 The Panel submitted its interim report to the par ties on 22 July 2005.  On 1 August 2005, both 
parties submitted written requests that the Panel review  certain specific aspects of the interim report.  
On 5 August 2005, each party submitted written co mments on the other party's written request. 
A. COMMENTS BY THE EUROPEAN COMMUNITIES  
6.2 The European Communities  requested changes in the terminology or formatting in 
paragraphs 1.4, 7.35, 7.37 (f ootnote 65), 7.43 and 7.47.   
6.3 The United States  submitted no comments in respect of  the EC comments on paragraphs 1.4 
and 7.37.   
6.4 However, in respect of paragraph 7.35, the United States asserts that the EC’s suggested 
textual changes are designed to equate the "findings " of a panel with the "rulings" of the Dispute 
Settlement Body ("DSB").  Indeed, this same assu mption appears to underlie the Panel’s draft of 
paragraph 7.35.  In the view of the United Stat es, however, "findings" are distinct from both 
"recommendations" and "rulings".  According to th e United States, the EC’s proposed approach is 
contradicted by the text of the DSU  (e.g. Articles 7.1 and 11).  At the same time, the United States 
agrees with the essence of the paragraph, that is, that a panel or Appellate  Body recommendation only 
has effect when adopted by the DS B.  The third sentence of this paragraph raises the question of how 
the recommendations in a single report could "mel d" into DSB recommendations.  This may have 
been meant to refer to the effect of an Appellate  Body report on a panel report where the panel report 
may be modified.  Furthermore, in reviewing the EC comments, the United States noted that the first 
sentence of paragraph 7.35 refers to "object and purpose considerations" but the remainder of the 
paragraph does not address "object and purpose."  This first sentence would appear unnecessary and, 
to avoid confusion, may better be deleted.  Accordingly, the United States would agree with the EC that paragraph 7.35 should be revised for greater accuracy, but the United States does not agree with 
the EC’s proposed revisions and offers one of its own.   
6.5 In respect of paragraph 7.43, the United States as serts that the first change suggested by the 
EC highlights the fact that the interim report has created the notion of "rulings" under Article 19 of 
the DSU.  Article 19, however, does not use that te rm.  Accordingly, the United States requests that 
the third sentence of paragraph 7.41 be revised to de lete "and rulings".  The United States recalls that 
the second change suggested by the EC regarding this paragraph would be to italicize the word 
"requirement" in line 5.  The United States opposes this change, because it would suggest that an 
Article 21.5 panel would have the discretionary  authority to make new recommendations.  As 
previously explained by the United States, an Artic le 21.5 panel does not have the mandate to make 
recommendations.   
6.6 With respect to paragraph 7.47, the United Stat es disagrees with the EC proposal to add, at 
the end of the first sentence, the following phrase:  "and the relevant recomme ndations and rulings."  
The United States asserts that this would be inco nsistent with the text of Article 21.5 of the DSU , WT/DS108/RW2   
Page 8  
 
which says nothing about consistency with "the  relevant recommendations and rulings."  DSB 
recommendations and rulings are themselves required to  be consistent with th e covered agreements.  
DSB recommendations and rulings do not – indeed cannot – amend the covered agreements nor can 
they "add to or diminish" the rights and obligations  under the covered agreements.  Accordingly, the 
question of "consistency" remains a question of co nsistency with the covere d agreements, not with 
recommendations and rulings. 
6.7 In considering the parties' comments, the Panel  has remained mindful that:  Article 19.1 of 
the DSU  states that a panel "shall recommend"; Article 4.7 of the SCM Agreement  states that "the 
panel shall recommend..."; and a pa nel report must be adopted by the DSB to produce operative DSB 
rulings and recommendations.  We have  made certain changes in paragr aphs 1.4 and 7.43.  For greater 
clarity, and noting that we address the issue of whether Article 21.5 requires  a new recommendation , 
we have made certain changes in paragraph 7.35 and in paragraph 7.37 (footnote 65).  Mindful of the 
text of Article 21.5 of the DSU , and observing that the covered agre ements also subsume, and govern, 
recommendations and rulings, we d eclined to alter paragraph 7.47. 
6.8 In line with the European Communities ' request, and noting that the United States  made no 
reply, we have also supplemented the references to the relevant Panel and Appe llate Body reports in 
paragraphs 7.56 (footnotes 75 and 76) and 7.60 and footnote 79. 
B. 
COMMENTS BY THE UNITED STATES  
6.9 The United States  requests changes in footnote 29.  The European Communities  agrees.  
We have made changes in that footnote to reflect more accurately the text of section 101(f) of the 
Jobs Act.  
6.10 Taking note of the United States  statement that it never argued that de minimis  adverse 
effects are relevant to the required withdraw al of a prohibited subsidy, and noting the European 
Communities  suggestion that the United Stat es does not argue that they are, we have deleted what 
was footnote 73 of the interim report. 
6.11 According to the United States , in paragraphs 7.42 and 7.46, th e Panel refers to the "object 
and purpose" of various provisions of the DSU  and the SCM Agreement .  The United States asserts 
that this appears to reflect an incorrect applica tion of customary rules of interpretation of public 
international law.  Article 31(1) of the Vienna Convention on the Law of Treaties , which is generally 
regarded as reflecting such rules, provides that a treaty is to be "interpreted in good faith in 
accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the 
light of its object and purpose" (emphasis added).  T hus, according to the United States, it is the 
object and purpose of the treaty  that is to be considered.  The European Communities  suggests that 
we could take into account the US comments by referring to the object and purpose of the DSU , 
which includes the prompt and effective resolution of disputes.   
6.12 The Panel  is well aware of the principles of treaty  interpretation cited by the United States, 
which are already cited in paragraph 7.21 of this  Panel Report and which have, indeed, guided the 
Panel's examination.  In respect of object and purpose of treaty terms, we recall the following 
statement of the Appellate Body in US-Shrimp :   
"A treaty interpreter must begin with, a nd focus upon, the text of the particular 
provision to be interpreted. It is in the words constituting that provision, read in their 
context, that the object and purpose  of the states parties  to the treaty  must first be 
sought. Where the meaning imparted by the text  itself is equivocal or inconclusive, or 
where confirmation of the correctness of the re ading of the text itself is desired, light  WT/DS108/RW2 
 Page 9 
 
 
from the object and purpose of the treaty as a whole  may usefully be sought."37 
(emphasis added) 
6.13 We believe that Article 3.2 of the DSU  articulates a fundamental tenet relating to the object 
and purpose of the DSU , including its special and additional pr ovisions, such as Article 4.7 of the 
SCM Agreement :  "The dispute settlement system of the WTO is a central element in providing 
security and predictability to the multilateral trading system."  The DSU  aims to achieve the fair, 
prompt and effective resolution of trade disputes.38  In respect of our interpretation of the terms of the 
SCM Agreement , we further recall and endorse the view of  the 2002 Article 21.5 Panel that we must 
avoid an interpretation that "... is inherently contradictory to what may be viewed as the object and purpose of the SCM Agreement  in terms of disciplining trade-distorting subsidies in a way that 
provides legally binding security of expectations  to Members." (para. 8.39)  In our view, our 
interpretation of the text of the relevant treaty provi sions, in their context, is reflective of their object 
and purpose.  Moreover, this interpretation is entirel y consistent with, reflec tive of, and confirmed by, 
the object and purpose of the DSU  (and the SCM Agreement ), as a whole.  We have slightly altered 
paragraphs 7.42 and 7.46, by, among othe r things, inserting footnotes 66 and 69. 
6.14 The United States  asserts that the European Communities made three primary claims in this 
proceeding:  under Article 4.7 of the SCM Agreement  and Articles 19.1 and 21.1 of the DSU .  The EC 
also made some "consequential" claims that flowed  from the supposed breaches of these three articles.  
According to the United States, none of these three ar ticles appropriately serves as the basis for claims 
in this proceeding.  As a result, those primary clai ms fail and, because they are "consequential," the 
EC’s consequential claims fail as well.  According to  the United States, the US arguments need to be 
viewed in this context, but the interim report does no t appear to reflect this.  For example, continues 
the United States, paragraph 7.37 misstates the US argument and makes it broader than it is.  The US 
argument is that the EC erred in claiming that the United States had breached Article 4.7 of the SCM 
Agreement  with respect to the ETI Act.  There wa s no Article 4.7 recommendation, nor, for the 
reasons found by the Panel, would it have been appr opriate for there to have been one.  The United 
States asserts that paragraph 7.51 similarly misstates the US argument.  The United States was not 
taking a position in the abstract rega rding Members’ obligations under the SCM Agreement  (indeed, 
even aside from the question of whet her a party could ever ask a panel to undertake such a discussion, 
given the terms of reference for this proceeding, that issue is not one that the Panel needs to 
undertake), but rather was responding to the EC claim of a breach of Article 4.7.  For the reasons set forth in the US submissions, including the fact that Ar ticle 4.7 is not directed to Members but rather to 
panels, the US asserts that the EC failed to meet its  burden of proving a breach of Article 4.7.  The 
United States requests that the interim report, in cluding these paragraphs, be modified accordingly.  
For example, the US asserts, the first sentence of  paragraph 7.37 would more accurately read:  
"Before us, the United States asserts that in order fo r the EC to establish a breach of Article 4.7 of the 
SCM Agreement, the EC would first need to establi sh that there was a recommendation under Article 
4.7 that the United States withdraw the ETI Act. "  Similarly, the US asserts, paragraph 7.51 would 
more accurately read:  "We recall the United States argument that, in order for the EC to establish a 
breach of Article 4.7 of the SCM Agreement the EC would first need to establish the existence of a 
recommendation under Article 4.7 of the SCM Agre ement that the United States withdraw the ETI 
Act."  According to the United States, footnotes 65  and 74 also reflect the same misunderstanding, 
and the United States requests that they be deleted.  In particular, footnote 65 ascribes an argument to 
the United States that the United States did not make, in that the issue was not presented to this Panel 
in the abstract of what obligations attach in the event a Member were to adopt a new prohibited 
subsidy, and the United States did not opine on that issue. 
6.15 According to the European Communities , the United States draws an unwarranted 
distinction between the different EC claims in this proceeding, which in the US view are “primary” or 
                                                     
 
37 Appellate Body Report, US-Shrimp , para. 114. 
38 See, for example, Original  Appellate Body Report, US – FSC , para. 166.   WT/DS108/RW2   
Page 10  
 
“consequential”.  The United States does not furt her clarify what would be in its view the 
“consequential” claims of the European Communiti es.  Given that the United States designates as 
“primary” the claims relating to Article 4.7 of the SCM Agreement  and to Articles 19.1 and 21.1 of the 
DSU , the European Communities infers that the “con sequential claims” would be the other claims 
contained in its request for establishment of a pane l.  According to the Eu ropean Communities, this 
would however be a gross misrepresentation of th e European Communities’ position (and one that the 
United States is making for the first time).  There is no basis in the European Communities’ request 
for the establishment of the Panel for this c ontention by the United States.  The European 
Communities asserts that the word “consequential” is  put by the United States in quotation marks but 
with no indication of from where it is quoted.  And for good reason because the claims of violation of 
Articles 3.1(a) and 3.2 of the SCM Agreement,  Articles 10.1, 8 and 3.3 of the Agreement on 
Agriculture and Article III:4 of the GATT 1994  were never described as “consequential” to any others.  
They are a consequence of the US having failed to  withdraw the prohibited subsidies – not of the 
violations of Article 4.7 of the SCM Agreement  or Articles 19.1 and 21.1 of the DSU.   
6.16 The European Communities asserts that each clai m listed in the EC re quest for establishment 
of the panel in this proceeding has its own merit and is grounded in a self-standing provision of the 
WTO.
39  In particular, the claims based on provisions other than Articles 4.7 of the SCM Agreement  
and 19.1 and 21.1 of the DSU  are claims that the United States  continues to violate certain WTO 
provisions because the measures found to be in violation of those provisions have not been fully removed or brought into compliance.  As for the Pa nel’s summary of the US argument in para. 7.37, 
the European Communities notes that it is very close to the title of section III.A of the US first written 
submission, reading:  
"A. In the Absence of Any Recommendation of Withdrawal under 
Article 4.7, this Panel Cannot Fi nd that the United States Has Failed 
to Withdraw Its Prohibited Subsidies Within the Meaning of Article 4.7 of the SCM Agreement" 
6.17 The European Communities asserts that it is also ve ry close to the first part of paragraph 19 of 
the US first written submission, reading: 
"Any obligation to withdraw the ETI Act tax exclusion, or to 
withdraw it within a particular peri od of time, had to be triggered by 
a recommendation under Article 4.7.  Because no such recommendation was made, the United States was not under an 
obligation to withdraw the ETI Act tax exclusion."  
6.18 The European Communities asserts that, as for paragraph 7.51, the Panel does not seem to 
attribute to the United States a position “in the abstract ”, but rather in respect of the present dispute.  
The European Communities further notes that ne ither the distinction between “primary” and 
“consequential” claims, nor the alternative formula tions suggested by the United States for paras. 7.37 
and 7.51 of the Interim Report appear to find corres pondence in the submissions of the United States, 
unlike the current drafting of the said two paragra phs.  The United States has referred to no passage of 
its own submissions where the points it makes in its comments would be reflected.  Accordingly, 
should the Panel consider that some modifications  of paras. 7.37 and/or 7.51 are in order, the 
European Communities respectfully submits that they should be limited to adding references to, e.g., 
paragraph 19 of the US first written submission. 
6.19 We are confident that our original formulations  of the US arguments were faithful to the 
arguments of the United States as articulated, inter alia , in its first written submission
40 and its oral 
                                                      
39 [Footnote reference not used.] 
40 In its first written submission, para. 2, the United States asserted:     WT/DS108/RW2 
 Page 11 
 
 
statement.41  We note that the United States did not specifically identify any perceived inaccuracy in 
our description of its arguments in Section VII.B.2 of  this Report.  We have nevertheless clarified the 
US arguments in paragraphs 7.37 - 7.39 and 7.51 for greater certainty.  To the extent that the United 
States is suggesting that it is not possible to establish a Member's breach of Article 4.7 (which, according to the United States, is not directed to Memb ers but rather to panels), we recall that an issue 
before us is whether there is an operative DSB recommendation that the United States withdraw the 
prohibited subsidy.  A key point for us is that  the operative recommendations and rulings are those 
flowing from the original proceedings; these re mained operative through the 2002 compliance 
proceedings.  Arising therefrom is an operative DS B recommendation, rooted in Article 4.7 of the 
SCM Agreement , that the United States withdraw the prohi bited ETI subsidies.  For the reasons we 
have given, we find that the US has not yet fully done so.   
6.20 We declined, however, to make the requested de letions of footnotes 65 and 74.  In our view, 
these footnotes accurately depict a logical extensio n of the United States argument.  While that 
hypothetical scenario is not before us, we neverthe less believe it serves as a useful aid in analyzing 
the merits of the United States argument.  
6.21 To eliminate any possibility that paragraph 7.47 could, as suggested by the United States , be 
misread as implying that the task of the Panel is to  be determined without regard to its terms of 
reference, and noting no disagreement on the part of the European Communities , we have inserted 
footnote 71, cross-referencing earlier footnotes 47 and 48. 
6.22 The United States asserts that, in footnote 77, we appear to "conflate" the two standards 
under Article 21.5 of the DSU  of "existence" and "consistency".  According to the United States, the 
question of whether a measure "exists" is distinct  from the question of whether a measure that does 
exist is "consistent with" a cove red agreement.  Given that, in the United States' view, the two 
standards clearly are different, the United States requests that this foot note be deleted.  The European 
                                                                                                                                                                    
 
"...the transition provisions of the AJCA ar e not inconsistent with Article 4.7 of the Agreement 
on Subsidies and Countervailing Measures  ("SCM Agreement") because, in the prior 
proceeding under Article 4 of the SC M Agreement and Article 21.5 of the Understanding on 
Rules and Procedures Governing the Settlement of Disputes  ("DSU"), there was no 
recommendation or ruling, pursuant to Article 4.7, by the Dispute Settlement Body ("DSB") 
that the ETI Act tax exclusion should be withdrawn.  Thus, while the United States has 
repealed the ETI Act tax exclusion, in the absence of any recommendation or ruling of withdrawal under Article  4.7, this Panel cannot find that the United States has failed to 
comply with a DSB recommendation or ruling to withdraw its prohibited subsidies within the 
meaning of Article 4.7 of the SCM Agreement." 
 
At para. 19 of its first written submission, the United States asserted:  
 "Any obligation to withdraw the ETI Act tax excl usion, or to withdraw it within a particular 
period of time, had to be triggered by a reco mmendation under Article 4. 7.  Because no such 
recommendation was made, the United States was not under an obligation to withdraw the ETI Act tax exclusion....Furthermore, there is no basis for an Article 21.5 panel to make a 
finding of compliance or noncompliance with a DSB recommendation or ruling under 
Article 4.7 of the SCM Agreement in this dispute, and thus the Panel should reject the EC's 
claims under Article 4.7 of the SCM Agreement." 
 
 41 See United States oral statement at Panel meeting, para. 5:  
 
"...the EC’s claim that the transition provisions of the AJCA are inconsis tent with Article 4.7 
is premised on the notion that the ETI Act tax exclusion was found to be inconsistent with the DSB recommendation under Article 4.7 to withdr aw the FSC subsidies.  The US response to 
this claim is straightforward:  no such finding was ever made, nor did the DSB make a 
recommendation under Article 4.7 that th e ETI Act tax exclusion be withdrawn." WT/DS108/RW2   
Page 12  
 
Communities  disagrees that there is necessarily a diffe rence in standards between “existence” and 
“consistency” of a measure taken to comply.  Acco rding to the European Co mmunities, in the case of 
partial compliance such as exists in this case the s ituation can be described as inconsistency or partial 
non-existence of the measure taken to comply.  Wh ere, as in the present case, a measure “taken to 
comply” has been adopted and the measure achieves partial compliance, there is a measure taken to 
comply for the part for which compliance is achieved ; for the remainder, there is no measure.  For the 
European Communities, there is no reason why the form ulation that is chosen to describe the situation 
(non-existence or inconsistency) should lead to a difference in outcome.  We have made certain 
changes in footnote 77 to better reflect our view. 
6.23 In response to the United States  request that we clarify the "alternative" to which we referred 
in paragraph 7.69, and noting the European Communities  suggestion that this is, in fact, "in 
addition" rather than "in the alternative", we have modified that paragraph.  
6.24 The United States  submits that the second sentence of paragraph 7.80 is inaccurate in 
describing the scope of section 101 of the Jobs Act.  The European Communities  suggests a certain 
re-formulation of this paragraph.  We have made clarifying changes in paragraph 7.80. 
VII. FINDINGS 
A. 
INTRODUCTION  
7.1 This is the second time that the European Communities has asked a Panel to rule on the 
WTO-consistency of measures take n by the United States to comply with DSB recommendations and 
rulings in this dispute.   
7.2 The original WTO dispute settlement proceedings resulted in DSB recommendations and 
rulings, in 2000, that the United States withdraw the prohibited FSC subsidies and bring itself into 
conformity with its obligations under the releva nt covered agreements.  The time period for 
withdrawal of the prohibited subsid ies pursuant to Article 4.7 of the SCM Agreement  expired on 
1 November 2000.   
7.3 Subsequently, the 2002 Article 21.5 DSU compliance proceedings established that the ETI 
Act42 had failed to withdraw completely the prohib ited FSC subsidy and to bring the United States 
fully into conformity with its WTO obligations.   
7.4 Since that time, the United St ates has enacted the Jobs Act.43 
7.5 We now turn to the parties' main claims  and arguments before this Article 21.5 DSU  
compliance Panel. 
B. ARGUMENTS OF THE PARTIES  
1. European Communities 
7.6 Before this Article 21.5  compliance  Panel, the European Communities asserts that two 
provisions of the Jobs Act conti nue inconsistencies with the Unite d States' WTO obligations.  These 
two provisions are:   
• the "transition provision"44, which provides for a two-year continuation of a percentage of 
ETI benefits (80 per cent in 2005 and 60 per cent in 2006); and  
                                                      
42 Text of the ETI Act is in Exhibit EC-2.  
 43 Text of the Jobs Act is in Exhibit EC-1.   WT/DS108/RW2 
 Page 13 
 
 
• the "grandfathering provision"45, which exempts certain transactions indefinitely from the 
repeal of the ETI scheme.   
7.7 Moreover, the European Communities submits th at, as the Jobs Act is silent as to the 
prohibited FSC subsidies grandfathered through section 5 of the ETI Act, the United States persists in 
failing to withdraw fully these prohibited subsidies.   
7.8 According to the European Communities, by not entirely withdrawing FSC and ETI 
subsidies, the United States has failed to impl ement the DSB recommendations and rulings of 
March 2000 and January 2002 and is in violation of Article 4.7 of the SCM Agreement  and 
Articles 19.1 and 21.1 of the DSU .  The European Communities argues that the violations of 
Articles 3.1(a) and 3.2 of the SCM Agreement,  Articles 10.1, 8 and 3.3 of the Agreement on 
Agriculture and Article III:4 of the GATT 1994 persist.   
7.9 The European Communities asserts that the United States has sought to reduce unduly the 
content of the Panel's terms of reference as set out in  the EC Panel request.  When read as a whole, the 
EC Panel request contains a clear reference to th e original recommendation under Article 4.7 of the 
SCM Agreement  and to the findings in the 2002 Article 21.5 proceedings (including with respect to 
the FSC grandfathering provisions in section 5 of the ETI Act).  
2. United States 
7.10 According to the United States, the purpose of  fiscal transition provisions contained in 
sections 101(d) and (f) of the Jobs Ac t is to provide a smooth and orderl y transition in order to prevent 
the repeal of tax legislation from having a retr oactive effect on taxpaye rs who entered into 
arrangements in reliance on pre-repeal law.  Such transition rules are typically included in major US 
tax legislation.  
7.11 The United States does not directly contest th e substantive arguments of the European 
Communities stated supra , paras. 7.6-7.9.  Rather, the Unite d States makes the following arguments: 
• there is no recommendation or ruling under Article 4.7 of the SCM Agreement  resulting from 
the 2002 Article 21.5 compliance proceedings to withdraw the ETI subsidy "without delay".  
The Appellate Body recommendations in th e 2002 compliance proceeding relating to 
Article 4.7 do not pertain to the ETI Act, as the Appellate Body in the 2002 compliance report 
referenced the recommendations and rulings in the original proceedings, which were made 
before  the ETI Act tax exclusion even existed.  Consequently, the United States has not failed 
to comply with the DSB’s recommendations and rulings, and the transition provisions of the Jobs Act are not inconsistent  with Article 4.7 of the SCM Agreement ; and  
• this Panel's terms of refere nce do not include section 5 of the ETI Act, indefinitely 
grandfathering original FSC subsidies for certa in transactions.  The measures before the Panel 
are sections 101(d) and (f) of the Jobs Act, c oncerning the ETI Act tax exclusion, and the EC 
Panel request does not refer to any other provi sion of the Jobs Act.  While the European 
Communities makes references in its first writte n submission to section 5 of the ETI Act, 
section 5 is not mentioned in the EC Panel request , and, thus, is not within the Panel’s terms 
of reference.  
                                                                                                                                                                    
 
44 Section 101(d) of the Jobs Act. 
45 Section 101(f) of the Jobs Act.  
 WT/DS108/RW2   
Page 14  
 
C. A
RGUMENTS OF THE THIRD PARTIES  
1. Australia 
7.12 Australia  submits that the pertinent Article 21.5 of the DSU “recommendations and rulings” 
are those made by the original Panel and Appellate  Body, as adopted by the DSB in 2000.  Hence, the 
purpose of the current Article 21.5 proceeding is to decide whether certain measures that the 
United States has taken to comply with these reco mmendations and rulings ar e consistent with the 
covered agreements.   
7.13 According to Australia, the United States does not contest that the grandfathering of the FSC 
scheme and the transition and grandfathering provisions of the ETI scheme are measures taken to comply with the DSB's original recommendations  and rulings.  Under those circumstances, the 
measures at issue come within the mandate of an Article 21.5 proceeding.   
7.14 Australia asserts that, given the absence of an y substantive defence from the United States, 
the Panel should uphold the EC’s arguments that  the grandfathering of the FSC scheme and the 
transition and grandfathering provisions of the ETI scheme are inconsistent with Articles 3.1(a) and 
3.2 of the SCM Agreement , Articles 10.1, 8 and 3.3 of the Agreement on Agriculture  and Article III:4 
of the GATT 1994.  The obligation to withdraw the ETI scheme arises from the fact that the 2002 
Article 21.5 Panel and Appellate Body Reports, as adopted by the DSB, found that the ETI scheme 
violated the covered agreements. 
7.15 With respect to the Panel's terms of reference, Australia notes that section 5 of the ETI Act  
sets up, amongst other things, the grandfathering of the FSC scheme.  The 2002 Article 21.5 Panel and Appellate Body Reports have al ready found this grandfathering to  be a violation of the covered 
agreements.  Australia also notes that it is section 101 of  the Jobs Act that fails to repeal section 5 of 
the ETI Act .  The former section was mentioned in the EC’s Panel request. 
2. Brazil 
7.16 Citing Articles 3.3, 3.7, 21.1 and 21.3 of the DSU , Brazil  asserts that prompt compliance and 
immediate withdrawal of WTO-inconsistent measure s are core principles of WTO dispute settlement.  
The SCM Agreement  (particularly Article 4.7) is even more stringent than the DSU .  
7.17 According to Brazil, the transition and “grandfat hering” provisions in the Jobs Act are an 
extension of a non-compliance situa tion.  The United States attemp ts erroneously to split into two 
completely separate cases a situation where the fact s and circumstances show that the cases are part of 
one same continuum (FSC – ETI – Jobs Act).  Both the ETI Act and, now, the Jobs Act are measures 
taken to comply with the DSB’s rulings and reco mmendations concerning the original proceedings.  
3. China 
7.18 Recalling the terms of Article 4.7 of the SCM Agreement , China  submits that the obligation 
to withdraw prohibited subsidies without delay is not released simply because the 2002 compliance 
Panel did not specify a time-period in its conclusion.   According to China, the party concerned failed 
to fully implement the DSB recommendations and rulings by introducing the transition period and 
grandfathering provisions for the FSC scheme, an export subsidy measure.   
7.19 China also submits that a Member's  obligation under Article 4.7 of the SCM Agreement  to 
withdraw prohibited subsidies "without delay" is unaffected by contractual obligations that the 
Member itself may have assumed under municipal law.   Likewise, a Member's obligation to withdraw 
prohibited export subsidies, under Article 4.7 of the SCM Agreement ,  cannot be affected by 
contractual obligations which private parties may have assumed  inter se   in reliance on laws  WT/DS108/RW2 
 Page 15 
 
 
conferring prohibited export subsidies.  China que stions how transition period and grandfathering 
provisions for another prohibited subs idy measure can be justified.  
D. EVALUATION BY THE PANEL  
1. Introduction 
7.20 We structure our evaluation as follows.  First, we identify the relevant guiding principles in 
Article 21.5 proceedings in light of the text of Article 21.5 of the DSU .  Second, we apply these 
guiding principles to the case before us.  In so doing,  we identify the "measures taken to comply with 
the recommendations and rulings" within the meaning of Article 21.5 of the DSU  and consider 
whether those measures are consistent with the Un ited States' obligations under the relevant covered 
agreements.  Third, we consider our terms of reference.  Finally, we state our conclusions.  
7.21 We are guided by Article 3.2 of the DSU , which provides that Members recognise that the 
dispute settlement system serves to clarify the prov isions of the covered agreements "in accordance 
with customary rules of interpretation of public intern ational law."  In this regard, Article 31.1 of the 
Vienna Convention on the Law of Treaties  ("Vienna Convention ")46 provides: 
"A treaty shall be interpreted in good faith  in accordance with the ordinary meaning 
to be given to the terms of the treaty in their context and in the light of its object and 
purpose." 
2. Guiding principles under Article 21.5 of the DSU  
(a) Relevant treaty text 
7.22 Article 21.5 of the DSU  governs the proceedings of this Panel.47  It states: 
"Where there is disagreement as to the existence or consistency with a covered 
agreement of measures taken to comply with the recommendations and rulings such 
dispute shall be decided through recourse to these dispute settlement procedures, 
including wherever possible resort to the orig inal panel.  The panel shall circulate its 
report within 90 days after the date of refe rral of the matter to it.  When the panel 
considers that it cannot provide its report within this time frame, it shall inform the 
DSB in writing of the reasons for the delay together with an estimate of the period 
within which it will submit its report." 
7.23 Article 21.5 of the DSU  operates in circumstances where th ere is a “disagreement as to the 
existence or consistency with a covered agre ement of measures taken to comply with the 
recommendations and rulings”.   
                                                      
46 (1969) 8 International Legal Materials  679.   
Article 32 of the Vienna Convention  is also generally accepted as such a customary rule (see, for 
example, Appellate Body Report, Japan – Alcoholic Beverages II , p. 11).  It provides:   
"Recourse may be had to supplementary means of interpretation, including the preparatory 
work of the treaty and the circumstances of its  conclusion, in order to confirm the meaning 
resulting from the application of article 31 , or to determine the meaning when the 
interpretation according to article 31:  
(a)leaves the meaning ambiguous or obscure; or (b)leads to a result which is manifestly absurd or unreasonable." 
47 These proceedings are also framed by our terms of reference.  We address our terms of reference, 
infra.   WT/DS108/RW2   
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7.24 For the purposes of this case, we see three relevant textual elements in Article 21.5 of the 
DSU : i) "the existence or consiste ncy with a covered agreement of..." ; ii) "measures taken to comply 
with"; and iii) "the recommendations and ru lings”.  We examine each in turn.  
(b) "existence or consistency with a covered agreement" 
7.25 An Article 21.5 panel adjudicates on disputes “as to the existence or consistency with a 
covered agreement of measures taken to comp ly with the recommendations and rulings ...”.
48  
Article 21.5 panels may assess whether "measures taken to comply" implement specific "recommendations and rulings" adopted by the DSB in the original dispute
49,but must also examine 
either the "existence" of "measures taken to comply " or the "consistency with a covered agreement" of 
implementing measures.50 
7.26 We also note that the expedited procedure in Article 21.5 of the DSU  reinforces the principle 
of "withdrawal" of an inconsistent measure51 and the requirement of “prompt compliance”52 with 
recommendations and rulings, ma de under Article 19 of the DSU , as well as recommendations of 
"withdrawal" of prohibited subsidies under Article 4.7 of the SCM Agreement.53   
                                                      
48 As already mentioned, this is also informed by  the Panel's terms of reference, which we discuss 
below. 
49Appellate Body Report, Canada – Aircraft (Article 21.5 – Brazil) , para. 40. 
50Ibid., paras. 40-41.  The panels in  EC – Bananas III (Article 21.5 – Ecuador)  (paras. 6.8-6.9) and 
Australia – Salmon (Article 21.5 – Canada) (para. 7.10, subparagraph 9) reached essentially the same 
conclusion.  
51 See, e.g., Article 3.7 of the DSU , which states:   
"In the absence of a mutually agreed solution, the first objective of the dispute settlement 
mechanism is usually to secure the withdrawal of  the measures concerned if these are found to 
be inconsistent with the provisions of any of the covered agreements.  The provision of compensation should be resorted to only if the immediate withdrawal  of the measure is 
impracticable and as a temporary measure pending  the withdrawal of th e measure which is  
inconsistent with a covered agreement." 
52 This is expressed in both Article 3.3 and Article 21.1 of the DSU .  Article 3.3 of the DSU  states:   
 
"The prompt settlement of situations in which a Member considers that any benefits accruing 
to it directly or indirectly under the covered agreements are being impaired by measures taken 
by another Member is essential to the effect ive functioning of the WTO and the maintenance 
of a proper balance between the rights and obligations of Members."   
 
Article 21.1 provides:   
 
"Prompt compliance with recommendations or rulings of the DSB is essential in order to ensure effective resolution of disput es to the benefit of all Members." 
 
See, for example, Panel Report, Australia – Salmon (Article 21.5 – Canada),  paragraph 7.10, 
subparagraph 9. 
 53 That special and additional dispute settlement rule reads:  
 
"If the measure in question is found to be a pr ohibited subsidy, the panel shall recommend that 
the subsidizing Member withdraw the subsidy without delay.  In this regard, the panel shall 
specify in its recommendation the time-period w ithin which the measure must be withdrawn." 
 
Article 1.1 of the DSU  applies the rules and procedures contained in the DSU  to “disputes brought 
pursuant to the consultation and dispute settlement provisions of the agreements listed in Appendix 1”.  This general rule is, under Article 1.2 of the DSU , subject to the special or additional rules and procedures on dispute 
settlement identified in Appendix 2 to the DSU .  See, for example, Appellate Body Report, US — Corrosion-
Resistant Steel Sunset Review , footnote 82 to para. 83.  It is only where the provisions of the DSU  and the  WT/DS108/RW2 
 Page 17 
 
 
(c) "measures taken to comply" 
7.27 We turn to the second textual element in Article 21.5 of the DSU : "measures taken to 
comply".   
7.28 Article 21.5 of the DSU  does not refer to just any measure54 of a WTO Member, but rather to 
a "measure taken to comply".  However, it does not further define what a "measure taken to comply" 
may be.   
7.29 Read in its context, this term "measure taken to comply" is clearly informed by the particular 
"recommendations and rulings" which it implemen ts.  We discuss this further below.  
7.30 At this point, however, we observe that a "measure taken to comply" within the meaning of 
Article 21.5 of the DSU  may be different from the original me asure and  inconsistent  with WTO 
obligations in ways different from the original measure.55   
7.31 While the measures  may change from the original to the compliance proceedings, the 
obligation to implement DSB recommendations and rulings does not .  A "measure taken to comply" 
should be  fully consistent  with a Member's WTO obligations.  In terms of prohibited subsidy 
disputes, this requires the withdrawal of the prohibi ted subsidy.  A Member's obligation to withdraw a 
prohibited subsidy is a c onstant.  It remains until full implementation of DSB recommendations and 
rulings is achieved.   
(d) "recommendations and rulings" 
7.32 We turn to the third textual element we  have identified in Article 21.5 of the DSU :  the 
"recommendations and rulings".   
7.33 "Recommendations and rulings" are at the core of WTO dispute settlement.56  As the title of 
Article 21 of the DSU  makes clear, panel proceedings under Article 21.5 form part of the process of 
the “Surveillance of Implementation of the Recommendations and Rulings”.   
                                                                                                                                                                     
special or additional rules and procedures of a covered agreement cannot  be read as complementing  each other 
that the special or additional provisions are to prevail .  See, for example, Appellate Body Report, Guatemala – 
Cement I , para. 65.   
54In US – Corrosion-Resistant  Steel Sunset Review , para. 81, the Appellate Body addressed the concept 
of "measure".  It stated:    
"... we start with the concept of  "measure".  Article 3.3 of the  DSU refers to "situations in 
which a Member consider s that any benefits accruing to it directly or indirectly under the 
covered agreements are being impaired by  measures  taken by another Member ". (emphasis 
added)  This phrase identifies the relevant nexus, for purposes of dispute settlement proceedings, between the "measure" and a "Mem ber".  In principle, any act or omission 
attributable to a WTO Member can be a measur e of that Member for purposes of dispute 
settlement proceedings."   
55 Appellate Body Report, Canada-Aircraft (Article 21.5 – Brazil), para. 36.  The claims, arguments, 
and factual circumstances relating to the "measure taken to  comply" may thus not, necessarily, be identical to 
those relating to the measure in the original dispute.   
56 Article 19.1 of the DSU provides: "Where a panel or the Appellate Body concludes that a measure is 
inconsistent with a covered agreement, it shall recomme nd that the Member concerned bring the measure into 
conformity with that agreement". Article 19.2 DSU  emphasizes that: "In accordance with paragraph 2 of 
Article 3, in their findings and recommendations, the panel and Appellate Body cannot add to or diminish the 
rights and obligations provided in the covered agreements".   The special or additional rule in Article 4.7 of the 
SCM Agreement  requires that, upon finding a prohibited subsidy, the "panel shall recommend" that the 
subsidizing Member withdraw the subsidy without delay.   WT/DS108/RW2   
Page 18  
 
7.34 The text of Article 21.5 of the DSU  does not itself indicate which are the relevant 
"recommendations and rulings".  Several provisions of  the covered agreements indicate that panels 
and/or the Appellate Body  make "recommendations".
57  We believe that, in its context58, the text of 
Article 21.5 of the DSU , refers to "recommendations and rulings" emanating from the DSB59, as the 
authority to articulate operative WTO recommendations and rulings.60  
7.35 Recommendations by a panel and/or the A ppellate Body under Article 19 of the DSU  (or 
Article 4.7 of the SCM Agreement ) become effective only upon their adoption by the DSB.  Once the 
DSB adopts a dispute settlement report, the findi ngs and recommendations in that report become 
collective, operative DSB rulings and recommendati ons.  The very notion of "measures taken to 
comply with the recommendations and rulings" in the text of Article 21.5 of the DSU  is predicated 
upon DSB adoption of a panel/Appellate Body report.  No compliance obligation would arise unless 
and until panel and Appellate Body recommendations and rulings are adopted by the DSB to become 
DSB recommendations and rulings. 61  
                                                      
57 For example: the title of Article 19 and Articles 19.1, 19.2 of the DSU , addressing "Panel and 
Appellate Body Recommendations"; and the stipulation in Article 4.7 of the SCM Agreement  that the " panel  
shall recommend" (emphasis added).  As mentioned, the latter is a special and additional rule in Appendix 2 of 
the DSU .  See supra , note 53 .  All such panel and Appellate Body  "recommendations" are conditional upon a 
finding of inconsistency with an obligation in the covered agreements.  We do not consider that any of these 
provisions conflict with the general proposition that it is  the DSB that is the authority to articulate operative 
WTO recommendations and rulings.  We thus need not entertain the notion that the special or additional dispute 
settlement provision in Article 4.7 of the SCM Agreement  could prevail over the general dispute settlement 
arrangements to the extent of obviating the need for DSB endorsement of any panel finding (or, where it exists, 
recommendation), or, conversely, entirely undermin ing the ability of the DSB to adopt operative 
recommendations and rulings in prohibited subsidy disputes.  We recall the following statement in Appellate Body Report, EC – Export Subsidies on Sugar , para. 334: "Upon adoption, this additional [panel Article 4.7 
SCM] recommendation — that the subsidizing Member "w ithdraw the subsidy without delay" — will become a 
recommendation or ruling of the DSB."
   
 58 We find contextual support in the covered agr eements for our view that recommendations and 
rulings emanate from the DSB after their adoption.  Fo r example:  the reference in Article 4.10 of the SCM 
Agreement  to "...the recommendation of the DSB...";  the reference in Article 3.4 of the DSU  to:  
"Recommendations and rulings made by the DSB..."; the reference in Article 7.1 of the DSU  stipulating the 
standard terms of reference of panels to examine "the  matter referred to the DSB by" the complaining party's 
panel request and "to make such findings as will assist the DSB in making the recommendations or in giving the 
rulings provided for in those agreements”;  the reference in Article 11 of the DSU  that panels should, inter alia  
"make such other findings as will assist the DSB in making the recommendations or in giving the rulings  
provided for in the covered agreements" (emphasis added);the DSU Article 21.1 statement: "Prompt compliance 
with recommendations or rulings of the DSB is essential in order to ensure effective resolution of disputes to the 
benefit of all Members" (emphasis added); and the DSU  Article 21.3 reference to "intentions in respect of 
implementation of the recommendations and rulings of the DSB "(emphasis added). 
59 See, for example, Article 2.1 of the DSU .   
60 We find further support for our view that the operative recommendations and rulings flow from the 
DSB in prior (adopted) dispute settlement reports.  For example, the Appellate Body has clarified that: 
"Proceedings under Article 21.5 do not concern just any measure of a Member of the WTO; rather, Article 21.5 
proceedings are limited to those “measures taken to comply with the recommendations and rulings” of the DSB " 
(emphasis added) (Appellate Body Report, Canada — Aircraft (Article 21.5 — Brazil) , para. 36); and "As the 
title of Article 21 makes clear, the task of panels un der Article 21.5 forms part of the process of the 
“Surveillance of Implementation of the Recommendations and Rulings” of the DSB ."  (emphasis added) 
(Appellate Body Report, US — Shrimp (Article 21.5 — Malaysia) , paras. 86–88).  
 61 This view is consistent with the letter and spirit of the original GATT dispute settlement provision, 
Article XXIII:2 of the GATT 1947/1994 .  We are well aware that the WTO Agreement  is different from the 
GATT system which preceded it, but that it contains many  elements of continuity.  The previous system was 
made up of several agreements, understandings and legal instruments, the most significant of which were the 
GATT 1947 and the nine Tokyo Round Agreements, including the Tokyo Round SCM Code .  Each of these 
major agreements was a treaty with different membership, an independent governing body and a separate  WT/DS108/RW2 
 Page 19 
 
 
7.36 Article 21.5 compliance proceedings form part of a continuum of events62 flowing from the 
various steps in dispute settlement proceedings, w ith the operative recommendations and rulings for 
the purposes of Article 21.5 compliance proceedi ngs being those adopted by the DSB in the original  
proceedings.  These remain operative through complian ce panel proceedings under Article 21.5 of the 
DSU  until the "problem" is entirely "fixed", in terms of full withdrawal of the prohibited subsidy.  
(e) Does Article 21.5 of the DSU  require a new recommendation? 
7.37 Before us, the United States asserts: 
"Any obligation to withdraw the ETI Act ta x exclusion, or to withdraw it within a 
particular period of time, had to be tri ggered by a recommendation under Article 4.7.  
Because no such recommendation was made, the United States was not under an 
obligation to withdraw the ETI Act tax excl usion....Furthermore, there is no basis for 
an Article 21.5 panel to make a finding of  compliance or noncompliance with a DSB 
recommendation or ruling under Article 4.7 of  the SCM Agreement in this dispute, 
and thus the Panel should reject the EC 's claims under Article 4.7 of the SCM 
Agreement."63 
 
7.38 The United States also asserts th at its answer to "...the EC’s claim that the transition 
provisions of the [Jobs Act] are inconsistent with Article 4.7 is premised on the notion that the ETI 
Act tax exclusion was found to be inconsistent with the DSB recommendation under Article 4.7 to 
withdraw the FSC subsidies .... is straightforward:   no such finding was ever made, nor did the DSB 
make a recommendation under Article 4.7 that the ETI Act tax exclusion be withdrawn."64   
7.39 We understand the United States to argue that , in order for the European Communities' 
Article 4.7 claim to prevail, and/or for the Unite d States to be under any obligation to withdraw the 
relevant parts of the ETI Act, it would have been  necessary for the 2002 Article 21.5 Panel to make a 
new recommendation under Article 4.7 of the SCM Agreement  that the United States withdraw the 
ETI Act.65  Recalling that an issue before us is whether there is an operative Article 4.7 
recommendation in respect of a measure taken to comp ly, we therefore consider the issue whether an 
Article 21.5 Panel is required to make a new recommendation under Article 19 of the DSU  and/or 
Article 4.7 of the SCM Agreement .   
7.40 We note that the focus of Article 21.5 of the DSU  is helping parties to resolve a dispute.  
Article 21.5 of the DSU  does not contain the terms "make recommendations".  Nor, beyond the 
reference to monitoring compliance with existi ng recommendations and rulings, does it contain an 
                                                                                                                                                                     
dispute settlement mechanism.  See, for example, Appellate Body Report, Brazil – Desiccated Coconut , p. 11. 
The GATT 1947  was administered by the CONTRACTING PARTIES (acting collectively).  The Tokyo Round 
SCM Code  was administered by the Tokyo Round SCM Committee, comprised of the signatories to that Code .  
The GATT-era dispute settlement arrangements made it clear that the collectivity of the relevant Committee, 
rather than the panel, was responsible for formulati ng operative recommendations.  In the current institutional 
framework of the WTO, the corresponding "collective" entity would be the DSB. 
62 Appellate Body Report, Mexico – Corn Syrup (Article 21.5 – US) , para. 121. 
63 United States first written submission, para. 19.  
64 See United States oral statemen t at Panel meeting, para. 5:  
65 We note with some surprise the additional United States view that an Article 21.5 panel does not 
have any mandate to make a recommendation under Article 4.7 of the SCM Agreement .  See US response to 
Panel Question 24.  The United States appears to be asser ting that it is not under any obligation to withdraw the 
prohibited ETI subsidies because of the purported lack of a recommendation by the first compliance Panel that, 
in the United States view, it had no mandate to make in the first place.  We note that  a logical extension of the 
United States arguments would be that, in such a situa tion, a Member could enact a new prohibited subsidy as a 
"measure taken to comply" and then never  be under an obligation to withdraw that subsidy.  We cannot 
subscribe to these views of the United States. WT/DS108/RW2   
Page 20  
 
explicit reference to the "recommendation"  provisions of Article 19 of the DSU , or to Article 4.7 of 
the SCM Agreement .  We see no express requirement in the text of Article 21.5 of the DSU  that a 
compliance panel must formulate recommendations upon finding an inconsistency with a covered 
agreement, including a recommendation under Article  4.7 upon a finding of inconsistency with 
Article 3 of the SCM Agreement .   
7.41 In particular, we see nothing in Article 21.5 of the DSU requiring a panel to make a 
recommendation under Article 19 of the DSU  or Article 4.7 of the SCM Agreement .  
7.42 This flows from both the text a nd context of Article 21.5, in vi ew of the object and purpose of 
the DSU .
66  In particular, Article 21.5 comes after the "recommendation" provision in Article 19 of the 
DSU , and the principle of "prompt compliance" in Ar ticle 21.1, as part of the WTO dispute settlement 
process.  The title of Article 21 --  "Surveillance of recommendations and rulings "-- is telling.  It 
informs us that the proceedings ar e to follow the implementation of recommendations and rulings that 
have been made.  This finds further suppor t in the particular nature and purpose of compliance  panel 
proceedings.  
7.43 In this respect, an Article 21.5 compliance procedure occurs after the DSB has already made 
recommendations and rulings based on Article 19.1 of the DSU  (and/or Article 4.7 of the SCM 
Agreement ).  It is linked to the post-recommenda tion implementation period envisaged in 
Articles 21.1 and 21.3 of the DSU .  This necessarily implies that th e textual reference in Article 21.5 
of the DSU  to have "recourse to these dispute settlement procedures" cannot  include the requirement 
to, once again, formulate additional  recommendations under Article 19 of the DSU  (and/or Article 4.7 
of the SCM Agreement ).67  Why would it be necessary for a pane l to again tell a Member to remove a 
situation of WTO-inconsistency that it has already been told to remove?   
7.44 If an Article 21.5 panel made a new reco mmendation under Article 19 which, upon adoption 
by the DSB, required an additional time peri od for implementation, this would give an additional  
period of time for the Member concerned to bring itsel f into conformity with the covered agreements.  
Similarly, in a dispute involving a subsidy already found to be prohibited, if an Article 21.5 panel 
made a recommendation under the first sentence of Article 4.7 of the SCM Agreement  to withdraw the 
prohibited subsidy "without delay", the panel woul d also presumably be required to “specify … the 
time-period within which the measure must be withdrawn”.68  This would, in effect, amount to giving 
an additional  period of time for the Member concerned to withdraw the prohibited subsidies.  
                                                      
66 We recall the principles of treaty interpretation, supra , para. 7.21, and incorporate our comments, 
supra , paras. 6.11 - 6.13.  In particular, we believe that Article 3.2 of the DSU  articulates a fundamental tenet 
relating to the object and purpose of the DSU , including its special and additional provisions, such as Article 4.7 
of the SCM Agreement :  "The dispute settlement system of the WTO is a central element in providing security 
and predictability to the multilateral trading system."  The DSU  aims to achieve the fair, prompt and effective 
resolution of trade disputes.  See, for ex ample, Original Appellate Body Report, US – FSC , para. 166.  In respect 
of the SCM Agreement , we recall and endorse the view of the 2002 Article 21.5 Panel that we must avoid an 
interpretation that "is inherently contradictory to wh at may be viewed as the object and purpose of the SCM 
Agreement  in terms of disciplining trade-distorting subsidies in a way that provides legally binding security of 
expectations to Members."  (para. 8.39)  We consider th at our interpretation of the text of the relevant treaty 
provisions, in their context, is reflective of their object  and purpose.  Moreover, this interpretation is entirely 
consistent with, reflective of, and conf irmed by, the object and purpose of the DSU  (and the SCM Agreement ), 
as a whole.   
67 We disagree with the United States assertion that Article 4.7 of the SCM Agreement  would not be 
available to an Article 21.5 panel by virtue of the reference in Article 21.5 to "recourse to these dispute 
settlement procedures", which the United States appears to  understand refers only to the provisions of the DSU .  
As already mentioned, Article 4.7 of the SCM Agreement  is a special and additional dispute settlement rule in 
Appendix 2 of the DSU .  It applies as articulated in Article 1.2 of the DSU .  See supra , note 53.    
68 Pursuant to the second sentence of Article 4.7 of the SCM Agreement .  WT/DS108/RW2 
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7.45 This would mean that Article 21.5 compliance proceedings should result in adding  to the 
"non-implementing" Member's rights under the covere d agreements through an extension of the time-
period for implementation.  The Article 21.5 proceeding would thus risk undermining the 
recommendations and rulings adopted by the DSB,  by revisiting an issue already addressed and 
definitively resolved by the DSB.  We are also mi ndful that a compliance panel must take what has 
been decided by the DSB as a given.   
7.46 Nowhere do we find any indication in the text or context of Article 21.1/21.5 of the DSU  or of 
Article 4.7 of the SCM Agreement , nor in the object or purpose of the DSU  (nor, for that matter, the 
SCM Agreement )69 that would require repeated extens ions of the implementation period in 
Article 21.5 DSU compliance proceedings.  Indeed, such an  interpretation would reduce the textual 
treaty terms "prompt compliance" and "without delay" to redundancy and inutility.  We are not 
permitted to adopt such an interpretation.  Such an  approach might lead to a potentially never-ending 
cycle, whereby a Member continues to adopt non-co mpliant measures in order to win more time to 
comply with adopted DSB recommendations and rulings.  This would entirely undermine the effective operation of the WTO dispute settlement system.
70 
3. Panel's application of guiding principles 
(a) Panel's task under Article 21.5 of the DSU  
7.47 The task of this Article 21.5 compliance Pane l is to examine whether measures that the 
United States has taken to comply with the reco mmendations and rulings are consistent with the 
relevant covered agreements.71  For this purpose, we first iden tify the "measures taken to comply" and 
the "recommendations and rulings" at issue.   
(b) "measures taken to comply with" "the recommendations and rulings" 
7.48 The "measures taken to comply with" "the r ecommendations and rulings" for the purposes of 
Article 21.5 of the DSU  necessarily flow from the particul ar "recommendations and rulings" in 
question.   
7.49 As in the 2002 Article 21.5 case, we take th e view that the operative "recommendations and 
rulings" within the meaning of Article 21.5 of the DSU  are those adopted by the DSB in the original  
dispute settlement proceedings, that is, the recommend ations and rulings adopted by the DSB in 2000.  
These remained operative through the findings of inconsistency established in the Article 21.5 
compliance proceedings, as adopted by the DSB in  2002.  These findings confirmed that the United 
States had not "fixed the problem" of WTO-inconsis tency identified in the original proceedings by 
withdrawing fully the prohibited subsidies.    
7.50 The "measures taken to comply" with these recommendations and rulings are the ETI Act and 
the subsequent Jobs Act.72  In particular, pursuant to the "transition provision" in section 101(d) of the 
Jobs Act, for certain transactions in the pe riod between 1 January 2005 and 31 December 2006, a 
percentage of ETI benefits remain available (80 per cent in 2005 and 60 per cent in 2006).  In 
addition, section 101(f) of the Jobs Act indefinitely grandfathers the ETI scheme in respect of certain 
                                                      
69 See supra , footnote  66.  
70 By this, we do not mean to suggest that other elements outlined in the DSU , such as the possibility of 
an appeal, would not apply in compliance proceedings under Ar ticle 21.5 of the DSU . 
71 As indicated supra , footnotes 47 and 48, this task is also governed by our terms of reference.  We 
address our terms of reference below.  
72 Neither party disagreed that the ETI Act and th e Jobs Act are "measures taken to comply with" 
"recommendations and rulings" for the purposes of Article 21.5 of the DSU .  See EC and US responses to Panel 
Questions 16 and 17.  WT/DS108/RW2   
Page 22  
 
transactions.
73  Furthermore, Section 101 of the Jobs Ac t does not repeal section 5(c)(1) of the ETI 
Act, indefinitely grandfathering FSC subs idies in respect of certain transactions. 
(c) Article 4.7 of the SCM Agreement  in the 2002 Article 21.5 proceedings 
7.51 We recall our understanding of the United Stat es argument:  in order for the European 
Communities' Article 4.7 claim to prevail, and/or for the United States to be under any obligation to 
withdraw the prohibited ETI scheme, it would have been necessary for the 2002 Article 21.5 Panel to 
make a new recommendation under Article 4.7 of the SCM Agreement  that the United States 
withdraw the ETI Act.74 
7.52 We disagree with the United States.  This is  simply because the operative “recommendations 
and rulings” remain those adopted by the DSB in th e original proceedings in 2000.  The purpose of 
the 2002 Article 21.5 compliance proceeding was to  decide whether the measures taken by the 
United States to comply with these recommendations and rulings did, in fact, bring the United States into a situation of consistency with  its WTO obligations.  The DSB found, inter alia , that the 
United States had not fully withdrawn the prohibited subsidies.   
7.53 This Panel is of the view that the United Stat es' obligation to withdraw the ETI scheme arises 
from the fact that the original recommendations  and rulings adopted by the DSB recommended 
withdrawal without delay of the prohibited subsidies pursuant to Article 4.7 of the SCM Agreement ; 
and the 2002 Article 21.5 Panel and Appellate Body  reports, as adopted by the DSB, found that the 
ETI scheme was WTO-inconsistent in that, inter alia , it failed to fully withdraw the prohibited 
subsidies.   
7.54 Article 21.5 of the DSU  indicates that there is a procedure to decide a disagreement as to 
whether a Member has implemented DSB recommendati ons and rulings and "fixed the problem".  It 
seems to us that an Article 21.5 compliance panel in  a prohibited subsidies dispute may basically find 
one of two things.  It may find that a Member has indeed "fixed the problem", as it has withdrawn the 
prohibited subsidy.  Or, it may decide that the Member has not withdrawn, or fully withdrawn, the prohibited subsidy.  We believe that either of th ese findings mark the completion of the task of an 
Article 21.5 panel.   
7.55 Thus, we see no material significance in the pu rported lack of an explicit "new" Panel 
recommendation under Article 4.7 of the SCM Agreement  in the first compliance proceeding.  
7.56 In any event, the 2002 Article 21.5 Panel expres sly indicated the view that the original 
Article 4.7 recommendation "remain[ed] operative".  For its part, the Appellate Body recommended 
"that the DSB request the United States to implem ent fully the recommendations and rulings of the 
DSB in  US – FSC ,  made pursuant to Article 4.7 of the SCM Agreement ."
75  Furthermore, the 
Appellate Body recommended that the United States bring the ETI measure into conformity with its 
obligations under the rele vant covered agreements, including the SCM Agreement .76  These adopted 
recommendations and rulings recognize the continui ng non-withdrawal of the prohibited subsidies 
and the continuing obligation on the United States to w ithdraw them fully pursuant to Article 4.7 of 
the SCM Agreement  and to bring itself into conformity with the relevant covered agreements, 
including the SCM Agreement .  Thus, with our finding that Article 21.5 proceedings need not produce 
new recommendations and rulings, we observe th at operative recommendations nonetheless persist.  
                                                      
73 We recall and incorporate our description of the factual aspects of these measures, supra .  
74 We recall and incorporate our discussion of the US arguments, supra , paras. 7.37-7.39.  We further 
recall our view supra , note 65, that it is difficult to reconcile this  United States argument with the United States 
argument that the Article 21.5 panel had no mandate to make such a recommendation.   
75 2002 Article 21.5 Appellate Body Report,  US – FSC (Article 21.5 – EC) , para.257.  
76 2002 Article 21.5 Appellate Body Report,  US – FSC (Article 21.5 – EC) , para.257.   WT/DS108/RW2 
 Page 23 
 
 
In light of the Panel's clear expression in the first compliance proceedings that the original 
recommendation remained operative, the United States could not reasonably have been unaware that 
operative withdrawal recommendations persisted.   
7.57 The United States also asserts that the Appe llate Body recommendations in the first 
compliance proceeding relating to Article 4.7 do not pertain to the ETI Act, as the Appellate Body in 
the first compliance report referenced the recommenda tions and rulings in the original proceedings, 
which were made before the ETI Ac t tax exclusion even existed.   
7.58 We agree that the original  recommendations and rulings predated the United States enactment 
of the ETI Act, which was, indeed, a measure "taken to comply" with these recommendations and 
rulings.  However, we do not believe that this has the consequences advocated by the United States.  
In a prohibited subsidies case, the obligation up on a WTO Member to implement original DSB 
recommendations and rulings does not disappear un til that Member has fulfilled the obligation by 
fully withdrawing a prohibited subsidy. 
(d) existence or consistency of the measures taken to comply 
7.59 We now address the existence or consistency of the identified "measures taken to comply".  
We turn first to the provisions of the Jobs Act continuing for a transition period and indefinitely 
grandfathering the ETI scheme in respect of certain transactions.77   
7.60 The panel and Appellate Body findings in th e first 21.5 compliance proceedings, as adopted 
by the DSB, established that the ETI scheme was in violation of Articles 3.1(a) and 3.2 of the SCM 
Agreement,  Articles 10.1, 8 and 3.3 of the Agreement on Agriculture and Article III:4 of the GATT 
1994.  Pursuant to Articles 101(d) and (f) of the Jobs Act, the ETI bene fits remain available 
throughout 2005 and 2006 (albeit at reduced percentages78), and indefinitely (in the case of certain 
transactions).  The inconsistencies w ith Articles 3.1(a) and 3.2 of the SCM Agreement , Articles 10.1, 8 
and 3.3 of the Agreement on Agriculture  and Article III:4 of GATT 1994 remain.79   
7.61 We further note the indefinite grandfathering of the original FSC subsidies for certain 
transactions, through the continued opera tion of section 5(c)(1) of the ETI Act.80  As confirmed by the 
United States in response to Panel questioning, noth ing in the legislative language of the Jobs Act 
modifies, implicitly or explicitly, these transition rules for the FSC subsidies.81   
                                                      
77 This dispute may be viewed as one on the "exist ence" of a measure which in its substance complies 
with prior recommendations and rulings.  Nevertheless,  this clearly can also be framed in terms of 
"consistency".  We recall that we have before us clai ms regarding a measure that does certain things (repeals 
e.g. Sections 3 and 4 of the ETI Act, subject to transition and grandfatheri ng provisions) and omits to do other 
things (i.e. affect the operation of the grandfathering of the original FSC).  In any event, the result is unchanged 
whether we frame this in terms of  "existence" or "consistency".  
78 Although the phased reduction in amount of subsidy available in 2005 and 2006 may be relevant in 
another type of proceeding, such as an arbitration under Article 22.6 of the DSU  or Article 4.10 and 4.11 of the 
SCM Agreement , the fact that, in 2005 and 2006, the percentage of subsidy available is less than the entire 
amount that was available under the ETI  Act before 2005 is not material to  our inquiry unde r the Article 21.5 
DSU  proceeding.  The conditions and circumstances surrounding the granting of this subsidy remain otherwise 
unaffected.    
79 See 2002 Article 21.5 Panel and Appellate Body Reports,  US – FSC (Article 21.5 – EC) , paras. 
8.168, 8.170 and 9.1; and paras. 229-231 and 256-257, respectively. 
80 In substance, these are the very same prohib ited export FSC subsidies already found to be 
inconsistent with the United Stat es WTO obligations in the original  dispute settlement proceedings.  
Furthermore, in both substance and form, these are the very same ETI Act provisions grandfathering the original prohibited export FSC subsidies already found to be inco nsistent with the United States WTO obligations in the 
2002 Article 21.5 compliance proceedings. 
81 See, for example, US response to Panel Question 2.  WT/DS108/RW2   
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7.62 It is clear that continuing to grant subsidies f ound to be prohibited is not consistent with the 
obligation to "withdraw" prohibited export subsidi es, in the sense of "removing" or "taking away".
82   
7.63 As stated in the prior Article 21.5 proceedings in this dispute83, this WTO obligation to 
withdraw prohibited subsidies is unaffected by c ontractual obligations that the Member itself may 
have assumed under its applicable dom estic legislation or regulation.  Similarly, this obligation cannot 
be affected by contractual arrangements which priv ate parties may have ma de in reliance on laws 
conferring prohibited export subsidies.   
7.64 Therefore, the United States obligation to implement the operative DSB recommendations 
and rulings to withdraw fully the prohib ited subsidies under Article 4.7 of the SCM Agreement  and to 
bring its measures fully into conformity with the obligations under the releva nt covered agreements 
remains.84 
7.65 Accordingly, we find that, to the extent that the United States, by enacting Section 101 of the 
Jobs Act, maintains prohibited FSC and ETI subs idies through these transitional and grandfathering 
measures, it continues to fail to implement fully  the operative DSB recommendations and rulings to 
withdraw the prohibited subsidies and to bring its measures into conformity with its obligations under 
the relevant covered agreements.   
4. Panel's terms of reference 
7.66 The United States alleges that Section 5 of the ETI Act, indefinitely grandfathering the 
original  FSC scheme in respect of certain transactions, is not within this Panel's terms of reference.  
The European Communities disagrees.  
7.67 We recall that the terms of reference dictate th e scope of a panel's ma ndate and determine its 
task.  This obviously holds true in these Article 21.5 compliance proceedings.85   
7.68 We first observe that, irrespective of whether or not section 5 of the ETI Act is within our 
terms of reference, it is a matter of fact that the Jobs Act neither repeals nor explicitly or implicitly 
affects the operation of section 5 of the ETI Act in any way.  The United States remains under an 
                                                      
82 See, for example, Appellate Body Report, EC – Export Subsidies on Sugar , paras. 333-335. 
83 See 2002 Article 21.5 Panel Report, US – FSC (Article 21.5 – EC) , para. 8.168, and 2002 
Article 21.5 Appellate Body Report, US – FSC (Article 21.5 – EC) , para. 230. 
84 Having made these findings, it is not necessary for us, for the purposes of resolving this dispute, to 
consider whether or not Articles 19.1 and 21.1 of the DSU  embody implicit obligations on Members.  
Accordingly, we exercise judicial economy with resp ect to the "claims" of the European Communities under 
those provisions.  We note that the European Communities  conceded that such an ex ercise of judicial economy 
would be appropriate.  See EC response to Panel Question 10.   
 85 We find support for this proposition in, inter alia , the following Appellate Body statements: 
 
"the task of a panel under Article 21.5 is  to examine the “consistency with a covered 
agreement of measures taken to comply with  the recommendations and rulings” of the DSB. 
That task is circumscribed by the specific clai ms made by the complainant when the matter is 
referred by the DSB for an Article 21.5 proceeding." 
 
Appellate Body Report, US — Shrimp (Article 21.5 — Malaysia) , paras. 86–88. 
 
"As in  original   dispute settlement proceedings, the "matter" in Article 21.5 proceedings 
consists of two elements:  the specific  measures  at issue and the legal basis of the complaint 
(that is, the  claims ). " 
 
Appellate Body Report, EC – Bed Linen (Article 21.5 – India), para. 78.  WT/DS108/RW2 
 Page 25 
 
 
obligation to withdraw the prohibited subsidi es without delay as a result of the original 
recommendations and rulings and the first co mpliance proceedings in this dispute. 
7.69 In addition, and in any event, we examin e whether or not section 5 of the ETI Act, 
grandfathering the original FSC subsidies,  is within our terms of reference.   
7.70 It is well established that a panel's terms of reference are governed by a complainant's panel 
request, and that a panel request must satisfy Article 6.2 of the DSU .  Article 6.2 of the DSU  reads:  
"The request for the establishment of a pane l shall be made in writing.  It shall 
indicate whether consultations were held, identify the specific measures at issue and 
provide a brief summary of the legal basis of the complaint sufficient to present the 
problem clearly.  In case the applicant re quests the establishment of a panel with 
other than standard terms of reference, th e written request shall include the proposed 
text of special terms of reference." 
7.71 There are two distinct requirements in this provision, namely identification of the specific 
measures at issue , and the provision of a brief summary of the  legal basis of the complaint .  Together, 
they comprise the “matter referred to the DSB”, whic h forms the basis for a panel’s terms of reference 
under Article 7.1 of the DSU .  
7.72 The issue before us does not involve the omissi on of a legal basis for a claim.  Rather, it 
concerns an alleged failure to identify a measure at issue  (Section 5 of the ETI Act, grandfathering 
original FSC subsidies).   
7.73 This measure would be within our terms of reference to the extent that it is adequately 
identified  in the EC request for the establishment of the Panel, as required by Article 6.2 of the DSU .   
7.74 In general, when faced with a question relating to  the scope of its terms of reference, a panel 
must "examine the request for the establishment of the panel very carefully to ensure its compliance 
with both the letter and the spirit of Article 6.2 of the DSU."86  The task of assessing the sufficiency of 
a panel request for the purpose of Article 6.2 may be undertaken on a case-by-case basis, in 
consideration of the panel request as a whole, a nd in the light of the attendant circumstances.87  There 
may be a need to consider whether the defendant's  ability to defend itself was prejudiced in light of 
the text of the panel request.88 
7.75 We thus begin our analysis by closely examining the text of the EC Panel request.89   
7.76 First, we consider that the EC Panel request should be read as a whole.90 
                                                      
86 Appellate Body Report, EC – Bananas III , para. 142. 
87 Appellate Body Report, US – Carbon Steel , para. 127.   
88 A defending party is entitled to know what case it must answer and what violations have been 
alleged in order that it may begin preparing its defence.  This fundamental due process requirement ensures a 
fair and orderly conduct of dispute settleme nt proceedings.  Appellate Body Report, Thailand-H-Beams , 
para. 88.  An inadequate panel request may prejudice a defendant's ability to defend itself, given the actual 
course of the panel proceedings.  This consideration may be among the attendant circumstances entering into a 
panel's inquiry under Article 6.2 of the DSU .  See for example, Appellate Body Report, Korea-Dairy , para. 127.    
89 The text of the EC Panel request, document WT/DS 108/29, is attached to this report (Annex E).  
90 The EC Panel request contains three sections:  "The history of the dispute"; "The subject of the 
dispute"; and "Request for establishment of a Panel".  Given that there are no requirements as to the precise formatting  (as opposed to the content) of Panel requests, we  do not consider that these titles are dispositive.  
Thus, we reject the United States argument that our terms of reference should be limited to that part of the 
document entitled "subject of the dispute".   WT/DS108/RW2   
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7.77 It begins with an overview of developments  in this dispute since the original panel 
proceedings (including the DSB recommendations a nd rulings arising from the original proceedings 
and the 2002 Article 21.5 proceedings, and the enact ment of the Jobs Act).  This includes the 
following statements:   
"On 15 November 2000, the President of the United States signed into law the FSC 
Repeal and Extraterritorial Income Exclusion Act of 2000, US Public law No 106-
519 (the "ETI Act")."  
"On 20 December 2000, the matter was referre d back to the Panel under Article 21.5 
of the DSU  and on 29 January 2002 the DSB adopted the Panel [WT/DS108/RW] and 
Appellate Body [WT/DS108/AB/RW] reports declaring that the ETI Act violates 
Articles 3.1(a), 3.2 and 4.7 of the SCM Agreement,  Articles 8, 10.1 and 3.3 of the 
Agreement on Agriculture and Article III:4 of the General Agreement on Tariffs and 
Trade 1994 (the "GATT 1994"), so that the US had failed to fully withdraw its prohibited subsidy scheme and failed to  implement DSB recommendations and 
rulings in this dispute." 
7.78 Therefore, the text of the Panel request refers to  the ETI Act in its entirety, and to the original 
DSB recommendations and rulings and the DSB adoption of the 2002 Article 21.5 panel and 
Appellate Body reports containing, inter alia , findings of inconsistency of  Article 5 of the ETI Act.  
7.79 As to the subject of the dispute, the EC Panel request states: 
"Section 101 of the JOBS Act purports to  repeal the ETI Act (Section 101 (a)).  
However, at the same time, it effectiv ely maintains part of the ETI Act tax 
exemptions for a transitional period up to the end of 2006 (Section 101 (d)).  
Furthermore, the repeal of the ETI Act do es not apply to certain contracts, without 
any time limits (Section 101(f))." 
It continues: 
"In the light of the above, the European Co mmunities considers that Section 101 of the 
JOBS Act contains provisions which will a llow US exporters to continue benefiting 
from the tax exemptions already found to be WTO incompatible (a) in the years 2005 
and 2006 with respect to all transactions, and (b) for an indefinite period with respect 
to certain contracts.  Thus, the United States has failed to implement the DSB's 
recommendations and rulings by failing to withdraw without delay schemes found to 
be prohibited subsidies under the SCM Agreement  and to bring its legislation into 
conformity with its obligations under the SCM Agreement , the Agreement on 
Agriculture and the GATT 1994." 
7.80 The EC Panel request thus presents the "subject" of the dispute as Section 101 of the Jobs 
Act.  That provision repeals the ETI scheme, except those transactions falling within the ETI 
transition and grandfathering provisions expressly c ited, and the FSC grandf athering provisions in 
section 5 of the ETI Act.  Thus, we reject the US  argument that our terms of reference should be 
interpreted as excluding Section 5 of the ETI Act because this provision bears on the scope of effective repeal of the ETI Act:  section 101 does not repeal the FSC grandfathering provisions in 
section 5 of the ETI Act.     
7.81 The EC Panel request further refers to the procedural circumstances of this Article 21.5 
proceeding and requests the Panel to find the following:   WT/DS108/RW2 
 Page 27 
 
 
 – "that the United States has failed to wit hdraw its prohibited subsidies as required by 
Article 4.7 of the SCM Agreement , has failed to bring its scheme into conformity with 
its WTO obligations and has thus failed to implement the DSB's recommendations 
and rulings, as specified by the DSB on 20 March 2000 and on 29 January 2002, as required by Articles 19.1 and 21.1 of the DSU .   
 
 – that the United States continues to violate Articles 3.1(a) and 3.2 of the SCM 
Agreement,  Articles 10.1, 8 and 3.3 of the Agreement on Agriculture  and Article III:4 
of the GATT 1994." 
 
7.82 On a holistic basis, the text of the EC Panel requ est cites the ETI Act, in its entirety, as well as 
both the 2000 and 2002 (Article 21.5) panel and Ap pellate Body reports, in cluding recommendations 
and rulings adopted by the DSB.  Th e Panel request also refers to a failure  to withdraw prohibited 
subsidies and a failure  to implement DSB recommendations and rulings from the original and first 
compliance proceedings.  Article 6.2 of the DSU  requires identification of the specific measure at 
issue, but not specific aspec ts of a specific measure.
91  We find no specific requirement in Article 6.2 
concerning the manner or method for identifying a specific measure at issue.  If its content is adequately described in the Panel request, then the particular measure may be adequately identified.  
Together, we believe that the text ual references in the EC Panel request embrace the ETI provisions 
grandfathering the original FSC scheme, as well as Panel and Appellate Body findings of 
inconsistency of Article 5 of the ETI Act, as adopted by the DSB.  In our view, this clearly meets the 
requirements of Article 6.2 of the DSU .  
7.83 In assessing whether the United States may be prejudiced by any apparent defects in the EC's 
panel request, we consider whether the EC Pane l request identified the measures with sufficient 
clarity to allow the United States to defend itself.
92  In this regard, we are mindful that defects in a 
panel request cannot be "cured" in a subsequent submission of a complainant during a panel 
proceeding.93  Nevertheless, a complainant's first written submission may confirm the meaning of the 
words used in the panel request.94   
7.84 In its first written submission, the European Communities states:  
"the grandfathering clause for FSC subsidies contained in section 5(c)(1)(B) of the 
ETI Act is still in force and so this violation [of] Article 4.7 of the SCM Agreement  
subsists....the transitional and grandfathering clauses in the Jobs Act are identical in 
all material respects to those in the ETI Ac t, except that they provide for continued 
availability of ETI subsidies rather than FSC subsidies."   
7.85 We are satisfied that the European Communiti es clearly made the distinction between the 
grandfathering of the FSC scheme for certain transa ctions by the ETI Act and the grandfathering of 
ETI subsidies for certain transactions by the Jobs  Act, and that it wishes to challenge both.  
7.86 In this connection, we recall that the or iginal recommendations and rulings required 
withdrawal of the prohibited subsidies by 1 October 2000.95  The United States was well aware of its 
obligations since at least that point in time.  While it is clear to us that we , as an Article 21.5 panel, 
may not address claims that are not in the Panel requ est, we recall that the prohibited, grandfathered, 
                                                      
91 Panel Report, EC – Trade Marks and Geographical Indications (US) , p. 14, para. 11 of the 
Preliminary Ruling. 
92 Appellate Body Report, Thailand – H-Beams , para. 95. 
93 Appellate Body Report, EC – Bananas III , para. 143. 
94 Appellate Body Report, US –Carbon Steel , para. 127. 
95 As indicated in para. 1, supra , on 12 October 2000, at a special  session, the DSB agreed to the 
United States' request to allow it a time period expiring on 1 November 2000 to implement the DSB 
recommendations and rulings. WT/DS108/RW2   
Page 28  
 
FSC subsidies are before us for a second  Article 21.5 Panel proceedings as part of a continuum of 
events  flowing from the original and subsequent co mpliance proceedings.  Consequently, we do not 
believe that the United States has been prejudiced  in its ability to defend itself before us.   
7.87 For these reasons, we find that section 5 of the ETI Act, grandfathering prohibited FSC 
subsidies, is within the terms of reference of this second Article 21.5 compliance Panel.    
VIII.  CONCLUSION 
8.1 In light of the findings contained in Section VII above, we conclude  that, to the extent that the 
United States, by enacting Section 101 of the Jobs  Act, maintains prohibited FSC and ETI subsidies 
through the transition and grandfathering measures at issue, it continues to fail to implement fully the 
operative DSB recommendations and rulings to wit hdraw the prohibited subsidies and to bring its 
measures into conformity with its obligati ons under the relevant covered agreements. 
8.2 Since the original DSB recommendations and ru lings in 2000 remain operative through the 
results of the compliance proceedings in 2002, we make no new recommendation.   
_______________